Ukraine Politics


Ukraine: Renewed fighting jeopardizes Ukrainian ceasefire

September 10, 2014

Violent clashes in eastern Ukraine on 7 September have threatened the recent ceasefire agreement. The Ukrainian government and pro-Russia separatist rebels had agreed to a ceasefire on 5 September during peace talks in Minsk. The announcement was largely expected after Russian President Vladimir Putin proposed a seven-point peace plan on 3 September before the talks began and Ukrainian President Petro Poroshenko expressed ‘cautious optimism’ regarding the agreement. The ceasefire is promising news for Ukraine, whose political stability has been threatened by ongoing violent clashes in the eastern parts of the country. However, renewed fighting has called into question whether the peace talks will proceed.

If the agreement does hold, the resolution of the conflict is still unclear. The Ukrainian government and the rebels remain deeply divided on the territorial future of the country. The rebels have stated that they will continue to push for independence while Poroshenko maintains that Ukraine’s territorial boundaries are not up for negotiation. Further, Poroshenko must face the challenge of selling the ceasefire and any additional peace agreements to Ukrainians, many of whom believe that the government is conceding to Russian terms. However, the government of Ukraine is in a tough negotiating situation: the army had been losing ground recently as rebel groups advanced forward from strongholds Donetsk and Luhansk and the costs of the conflict have taken a toll on government purse strings.

The conflict already had a devastating impact on the country’s economic performance. The majority of fighting has taken place in the eastern regions of Luhansk and Donetsk, Ukraine’s industrial heartland, which combined represent over 15% of the nation’s GDP. Furthermore, the conflict has weighed on consumer and business confidence and economic activity has declined in other areas of the country. In addition, tax revenues have fallen and the Ukrainian government has had to turn to the IMF to prevent default. On 29 August, the IMF unlocked the second tranche of its USD 17.1 billion bailout program that was agreed in April, which brings total disbursements under the arrangement to USD 4.51 billion.

In the first review of the Stand-By Arrangement (SBA) released on 2 September, the IMF announced that it had revised down its 2014 and 2015 GDP growth projections for Ukraine. The Fund now expects GDP to contract 6.5% in 2014, before rebounding to 1.0% growth in 2015. However, the IMF estimates that a prolonged conflict in eastern Ukraine would cause GDP to contract 7.25% in 2014 and 4.25% in 2015. Regarding the financial side, the IMF stated:

Notwithstanding a more favorable current account deficit path, the balance of payments is weaker than projected at the time of the program request-–by over US$7.5 billion in 2014 and US$11.5 billion in 2015—reflecting reduced FDI, higher outflows from the banking system, much lower liability rollover rates for banks and corporates (and no external market access for the sovereign), and substantial capital flight. Meeting these external pressures while maintaining the programmed central bank gross international reserves would require an additional external financing of about US$19 billion by end-2015 relative to the baseline.

On 30 July, the State Statistics Service of Ukraine released a preliminary estimate of Q2 GDP. According to the estimate, the economy contracted 4.7% over the same quarter last year (Q1: -1.1% year-on-year) and fell a seasonally-adjusted 2.3% on a quarterly basis. More detailed data on Q2 GDP is due to be released on 10 September. If the ceasefire does not hold and peace talks falter, it is unlikely that Ukraine’s outlook will improve in the near term.

At this stage of the conflict, with the impact of peace talks unclear, FocusEconomics Consensus Forecast panelists cut their growth expectations for the seventh consecutive month. The panel expects the contraction to last until the beginning of 2015. Panelists see the economy contracting 5.9% this year, which is down 0.6 percentage points over the previous month’s estimate. However, panelists expect the Ukrainian economy to rebound to a 0.8% expansion in 2015.

Author: Angela Bouzanis, Senior Economist

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