A woman enters a bank which re-opened near a barricade in central Kiev on 25 February, 2014. Photograph: Getty Images.
Show Hide image

Investors hesitate as Ukraine teeters on the precipice

In recent days Ukrainian bonds suffered the worst selloff on record and the stock index fell 2.8 per cent

As central Kiev has descended further into violence, the complexity of the divisions - beyond a simple fissure between east and west - have become apparent.

The focal point of the Orange Revolution of 2004-05 was simple: Viktor Yushchenko was the legitimate winner of the presidential election and the people went onto the street to protest the rigged ballot that gave Yanukovych the presidency. Protests were peaceful, the movement had a single figurehead and the objective was clear.

The situation in 2014 is far more complex. Demonstrations were triggered by Yanukovych’s decision not to sign a wide-ranging association agreement with the European Union - a decision the western media attributed to pressure from Russia.

This obviates the role ill-informed EU policy played. In demanding a final, all or nothing, response from Ukraine, a country in need of emergency funding, Yanukovych was left with little room for manoeuvre. President Vladimir Putin was offering cash. The EU was making promises and in so doing, Brussels misplayed its hand.

Branding Yanukovych as "pro-Russia" ignores the competing pressures within Ukrainian politics, particularly when he has taken significant steps to strengthen relations with the west. Ukraine is one of Europe’s most promising energy frontiers and hosts Europe’s third largest shale gas reserves. In November 2013 Kiev signed a production sharing agreement (PSA) with Chevron of the US, worth up to USD 10 billion, to explore for and produce shale gas in the Oleska field in western Ukraine. This was followed in January 2014, with the signing of a similar deal with Royal Dutch Shell for the Yuzivska field in the east of the country.

Conventional oil and gas exploration deals are also being signed. Ukraine agreed a PSA with an ExxonMobil-led consortium to exploit a field of the western coast of the Black Sea.

The signing of such deals with western oil majors is a significant departure from what has gone before. Even under Yushchenko’s pro-western leadership after the Orange Revolution, western companies were largely shut out the country’s energy sector, or put off by uncertain legislation.

Yanukovych, who became president in 2010, in contrast, has been more pragmatic in terms of opening the hydrocarbons production to the west. Efforts have also been made to significantly improve the legislative environment.

Despite this evolution, Ukraine has limited room for political and economic manoeuvre, a fact the EU appears to have ignored during negotiations. Irrespective of the international orientation of its leaders, the Ukraine remains heavily dependent on Moscow for its gas supply, with Russian imports accounting for 60 per cent of consumption. In retaliation for the Orange Revolution, Moscow raised gas prices and cut off supplies in 2006 and 2009, amid pricing disputes. The agreement that ended the 2009 cut-off left Ukraine paying some of the highest prices in Europe.

Unless Ukraine is able to develop its shale gas reserves and wean itself off dependence on Russian energy this cycle of economic vulnerability will continue.

Investors are ditching assets; punishing Ukraine for the protests. In recent days Ukrainian bonds suffered the worst selloff on record and the stock index fell 2.8 per cent. Yields on government bonds maturing in June reached an all-time high of 34 per cent, trading a yield on the 2014 note traded a record 23 per cent about the rate on debt maturing in April 2023.

Ukraine is grappling with a record current-account deficit and foreign reserves are at the lowest level since 2006. The country has USD17 billion of liabilities coming due, excluding interest, through the end of 2015 and at the time of writing Moscow has delayed a USD2 billion purchase of Eurobonds citing "technical delays".

The EU is threatening sanctions, a move that will have limited short-term impact and will do little to end the bloodshed, particularly if Putin opens his cheque book.

In the medium term, Ukraine’s gas reserves and agricultural output have the potential to make it a relatively wealthy country. In the short term, investors are panicking, sending the economy to the brink of a precipice.

The insurance market has all but closed its books to new Ukrainian risk. While there is relative optimism around Ukraine’s prospects over a six month time horizon, in the immediate term underwriters and investors want to minimise their exposures.

It is unclear where the protests go from here. Yanukovych won a relatively free and fair election and it could be considered a loss for democracy if he is forced from office. If he succumbs to pressure who should replace him? The opposition, unlike 2004-05, cannot offer an undisputed successor. It is a disparate grouping with several figureheads, radical elements and no clear leadership.

The departure of Yanuckovych does not provide a viable solution. There is widespread concern in Ukraine about the level of corruption in government. Even if Yanukovych is removed from office corruption will not necessarily diminish. A big question is how intrinsically entrenched Russian business interests are within Ukrainian politics and commerce, as these systemic flaws pose the greatest threat to the development of a democratic system.

JLT Head of Credit & Political Risk Advisory

Getty
Show Hide image

Benn vs McDonnell: how Brexit has exposed the fight over Labour's party machine

In the wake of Brexit, should Labour MPs listen more closely to voters, or their own party members?

Two Labour MPs on primetime TV. Two prominent politicians ruling themselves out of a Labour leadership contest. But that was as far as the similarity went.

Hilary Benn was speaking hours after he resigned - or was sacked - from the Shadow Cabinet. He described Jeremy Corbyn as a "good and decent man" but not a leader.

Framing his overnight removal as a matter of conscience, Benn told the BBC's Andrew Marr: "I no longer have confidence in him [Corbyn] and I think the right thing to do would be for him to take that decision."

In Benn's view, diehard leftie pin ups do not go down well in the real world, or on the ballot papers of middle England. 

But while Benn may be drawing on a New Labour truism, this in turn rests on the assumption that voters matter more than the party members when it comes to winning elections.

That assumption was contested moments later by Shadow Chancellor John McDonnell.

Dismissive of the personal appeal of Shadow Cabinet ministers - "we can replace them" - McDonnell's message was that Labour under Corbyn had rejuvenated its electoral machine.

Pointing to success in by-elections and the London mayoral election, McDonnell warned would-be rebels: "Who is sovereign in our party? The people who are soverign are the party members. 

"I'm saying respect the party members. And in that way we can hold together and win the next election."

Indeed, nearly a year on from Corbyn's surprise election to the Labour leadership, it is worth remembering he captured nearly 60% of the 400,000 votes cast. Momentum, the grassroots organisation formed in the wake of his success, now has more than 50 branches around the country.

Come the next election, it will be these grassroots members who will knock on doors, hand out leaflets and perhaps even threaten to deselect MPs.

The question for wavering Labour MPs will be whether what they trust more - their own connection with voters, or this potentially unbiddable party machine.