While Ukraine's political situation remains uncertain, its economy teeters on the brink

If the political instability is not reined in soon enough, the currency will spiral out of control.

As the protests in Ukraine have escalated over the last three months, President Viktor Yanukovych has appeared progressively weaker. The timing of his sick leave last week could not have been more apt. The president has now offered a raft of substantive concessions in a bid to appease the protesters, not least the chance to lead a new cabinet, but in every instance he has been rebuffed. His subsequent decision to take leave was a signal that his options have rapidly reduced.

The government’s resignation was a serious blow to Yanukovych’s legitimacy. Without a cabinet underneath him he has become an isolated figure. The opposition recognises this and in the ensuing negotiations will maintain their stance of demanding early presidential and parliamentary elections.

As a western observer, one could be forgiven for thinking that there is an overwhelming majority of Ukrainians in favour of EU integration, with Vladmir Putin and Yanukovych the only figures standing in their way. But in reality the country is bitterly divided: Western Ukraine has very strong cultural and linguistic ties with Russia, and its inhabitants are deeply concerned about the impact of competition from the EU on its dilapidated, yet important industrial sector. Even the opposition is not unified, and it is difficult to reconcile the views held by the far-right nationalist party, Svoboda (which is at the vanguard of the current movement), with the EU’s supranational mantra. In any case, an election held in the current atmosphere would surely serve as a de facto referendum on EU integration, but it would undoubtedly be a close-run contest.

While Ukraine’s future continues to be contested, its economy teeters on the brink. So far Russian bond purchases and gas price concessions have provided a financial buffer, but if Yanukovych’s grip on power is eroded further and an opposition-led government becomes more likely, this support could be revised and potentially withdrawn. The EU would not be able to step in without major political reforms inside the country and in the meantime bond yields would rise amid sustained downward pressure on the currency.

Moody’s have already downgraded Ukraine’s sovereign rating to Caa2 with a negative outlook, citing growing strains on liquidity caused by the surging demand for dollars as the domestic population seek to convert their savings. On 31 January the hryvnia fell 2.5 per cent against the dollar – the largest single-day loss in almost five years. This is of significant concern, as with a USD15 billion loan from Russia, the government had spent several weeks using its financial reserves to prop up the country.

As the central bank has scaled back its commitment to maintaining a dollar-peg, this downward pressure is manageable in the short-term. Within the context of low inflation and slow export growth, it could even provide a boost. The danger, however, is that if the political instability is not reined in soon enough, the currency will spiral out of control, placing increased pressure on the corporate and financial sectors so as to impinge on their ability to service foreign debt.

The insurance market is acutely aware of this risk, and accordingly, capacity for credit cover on Ukrainian counterparties is exceedingly tight. It is set to remain so for the rest of Q1 and beyond.

Anti-government protesters on a barricade in Kiev on 7 February, 2014. Photograph: Getty Images.

JLT Head of Credit & Political Risk Advisory

Getty
Show Hide image

Jeremy Corbyn fans are getting extremely angry at the wrong Michael Foster

He didn't try to block the Labour leader off a ballot. He's just against hunting with dogs. 

Michael Foster was a Labour MP for Worcester from 1997 to 2010, where he was best known for trying to ban hunting with dogs. After losing his seat to Tory Robin Walker, he settled back into private life.

He quietly worked for a charity, and then a trade association. That is, until his doppelganger tried to get Jeremy Corbyn struck off the ballot paper. 

The Labour donor Michael Foster challenged Labour's National Executive Committee's decision to let Corbyn automatically run for leadership in court. He lost his bid, and Corbyn supporters celebrated.

And some of the most jubilant decided to tell Foster where to go. 

Foster told The Staggers he had received aggressive tweets: "I have had my photograph in the online edition of The Sun with the story. I had to ring them up and suggest they take it down. It is quite a common name."

Indeed, Michael Foster is such a common name that there were two Labour MPs with that name between 1997 and 2010. The other was Michael Jabez Foster, MP for Hastings and Rye. 

One senior Labour MP rang the Worcester Michael Foster up this week, believing he was the donor. 

Foster explained: "When I said I wasn't him, then he began to talk about the time he spent in Hastings with me which was the other Michael Foster."

Having two Michael Fosters in Parliament at the same time (the donor Michael Foster was never an MP) could sometimes prove useful. 

Foster said: "When I took the bill forward to ban hunting, he used to get quite a few of my death threats.

"Once I paid his pension - it came out of my salary."

Foster has never met the donor Michael Foster. An Owen Smith supporter, he admits "part of me" would have been pleased if he had managed to block Corbyn from the ballot paper, but believes it could have caused problems down the line.

He does however have a warning for Corbyn supporters: "If Jeremy wins, a place like Worcester will never have a Labour MP.

"I say that having years of working in the constituency. And Worcester has to be won by Labour as part of that tranche of seats to enable it to form a government."