A new wave of optimism has engulfed Ukraine since Volodymyr Zelensky, a former actor and political novice, was elected president in May with 70% of the vote on a platform to revive economic growth, fight corruption and make peace with Russia. Ukrainians were so fed up with the ruling elite that they massively voted for Mr. Zelensky’s party, Servant of the People (named after the TV comedy in which the former actor plays a history teacher who becomes president of Ukraine), in parliamentary elections in July of this year, delivering him a majority in parliament (the Rada), the first time a party achieved this since Ukraine’s independence in 1991. Mr. Zelensky appointed his own man, Oleksiy Honcharuk, a young technocratic lawyer, as prime minister. Messrs. Zelensky and Honcharuk have announced an ambitious reform agenda that should deliver the goodies. Mr. Honcharuk leisurely suggested that the economy will grow by a gravity-defying 40% over the next 5 years.

Can I take the stage now…?

Zelensky’s team pursues a market-oriented reform agenda. This includes privatization of state-owned enterprises, granting foreigners access to mining, liberalizing labour laws and permitting the sale of agricultural land. The government wants to attract foreign investment by improving governance and establishing the (long-absent) rule of law. Erosion of productivity due to migration of young and educated workers to Poland may reverse now the economic outlook in Ukraine improves and Poland’s economy is slowing down. The IMF recently announced its willingness to approve an US$ 5.5 billion 3-year Extended Fund Facility, which also could unlock further funding sources from the EU and World Bank. Ukraine has been running primary fiscal surpluses for the last 5 years, which has resulted in a significant drop in its public debt-to-GDP ratio from the peak of 80% in 2016 to a more sustainable 60% now. FX reserves have increased thanks to balance of payments surpluses whilst at the same time the country has been honouring high debt repayments. Inflation has declined from 14% in 2017 to 6.5% now, allowing for some monetary easing. The economic performance allowed Ukraine to issue local currency debt, which is gobbled up by yield-hungry international investors. Of course, these achievements are largely down to IMF guidance (and a big pile of money) and the previous government but the reform agenda should make higher growth possible. Honcharuk’s target of 7% annual growth may be a stretch, but 4% should be achievable in the coming years. 

Not all reforms are popular, like, for example, the lifting of the moratorium on land sales. Ukraine’s agri-business, accounting for about 40% of the country’s exports, already is quite competitive with strong private operators like Kernel and MHP. In our view, the lifting of the moratorium on land sales is more of an IMF dogma than a real game changer. Two other agricultural powerhouses, Argentina and Brazil, also have land ownership restrictions, which can be dealt with by leasing land. And lease rates in Ukraine are ridiculously low anyway. What could be a game changer is Ukraine’s relationship with Russia. Mr. Zelensky, who speaks Russian, has done a good job in de-escalating tensions between the two countries. Obviously, resolution of the conflict with Russia over the Donbas region, an industrialized area in the southeast of the country, and a renewal of a gas transit agreement, expiring this year, could spur growth (forget about Crimea, which will remain in Russian hands for military reasons). However, making peace with Russia is not easy as many Ukrainians are afraid that Zelensky will be too soft on the issue to regain sovereign control over the region whereas Putin is likely to seek special status (i.e. political autonomy) for both Donetsk and Luhansk. With many Ukrainians being suspicious about Putin’s intentions, probably rightly so, Mr. Zelensky has a difficult balancing act to perform.

The fight against corruption, the other main theme, got wings after parliament voted to remove parliamentary immunity from MPs and reinstated a law to criminalize illegal enrichment by state officials. The government reduced the number of Rada deputies from an unwieldy 450 to a still ample 300 and abolished a much abused single-majority district voting system. Zelensky also established the Supreme Anti-Corruption Court, although some appointments raised eyebrows. However, the big question is whether Mr. Zelensky is beholden to a quid pro quo. We then are not referring to Donald Trump, who asked Ukraine’s president to investigate business relations of the son of his main opponent in next year’s U.S. presidential elections, Joe Biden, in exchange for military support, an impeachable act as it turned out to be. Hunter, Joe’s troubled son, took a lavishly paid job at Burisma, a gas company led by a former ecology minister, who whilst in office from 2010 to 2012 awarded himself gas exploration licenses. Papa Joe, whilst serving at the White House as vice-president, forced Petro Poroshenko, Ukraine’s former president and chocolate oligarch, to fire a prosecutor who was investigating Burisma at the time whereas his successor, conveniently, chose not to pursue the case any further. 

Laughing all the way to the bank…?

The quid pro quo we are talking about has to do with a colourful Ukrainian businessman, Ihor Kolomoisky. Mr. Kolomoisky owns the TV channel 1+1 that broadcasted Mr. Zelensky’s popular “presidential” show. In the early 90s, Kolomoisky co-founded Privatbank, Ukraine’s largest bank until it was forcibly nationalized in 2016 after the central bank unearthed a hole in its balance sheet of about US$ 5.6 billion (a significant part of the money probably ended up in Komoisky-controlled companies or bank accounts). The bank was used to raid companies, whereby Ihor did not shy away from using unorthodox tools (including bribery of courts and, some say, contract killings) to win business deals while feeding his 5-meter long shark in his office to intimidate unsuspecting visitors. Ihor has declared that he wants his Privatbank back or, at least, be paid US$ 2 billion as compensation. To make his point clear, the former central bank head, Valeria Gontareva, who was instrumental in nationalizing the bank, received death threats whereas her house was set on fire and she was hit by a car in her new residency, London (although there is no irrefutable proof that Ihor was behind all this). Kolomoisky’s private lawyer, Andriy Bohdan, became Zelensky’s chief of staff and might argue Kolomoisky’s case for the return of Privatbank. An Ukrainian court already ruled that the nationalization was illegal and Zelensky has had multiple meetings with Kolomoisky and these meetings most likely were not about organizing joint fishing expeditions. However, so far Zelensky has held his own (encouraged by the IMF) and, for now, seems to resist giving in to Kolomoisky.

We are cautiously optimistic about Ukraine, although the ambitious reform agenda easily can falter given the many political novices in both government and parliament who have the difficult task to implement far-reaching reforms that inevitably will hurt vested (oligarch) interests. And we still are not convinced whether Volodymyr Zelensky, the servant of the people, is ready to feed Kolomoisky to the sharks instead of becoming fodder himself…