Page 38 - Eastern Europe Outlook 2020

While the talks between Putin and Zelenskiy caught the headlines, it is highly likely that a broader deal was cut between Russia, France, Germany and Ukraine that laid out a road map for removing sanctions. The outgoing US ambassador to Ukraine William Taylor, Jr. speculated in an interview just before New Year’s Eve that a peace deal could be agreed over the next two years. And there is a possibility of some easing of sanctions in the summer of 2020 when the current sanctions regime expires.
At that meeting the tougher nuts need to be cracked: when will control of the border be returned to Kyiv (Zelenskiy: before elections in Donbas; Putin: after elections), changes to the Ukrainian constitution (what sort of special status will be granted to Donbas); an amnesty for everyone involved in the conflict; and the details of the​ ​Steinmeier Formula​, which is the mechanism that will be used to deescalate the fighting.
By putting these questions Zelenskiy has bought time for his diplomats to work on all these difficult issues. Going up against the Russian diplomatic corps would be a daunting task for any country, but Zelenskiy faces Putin with the weight of the German and French diplomatic corps at his side, which is more than the equal of the Russian service so a deal is possible and even likely.
One of the biggest political issue facing Ukraine was solved in December when Kyiv and Moscow agreed a new gas transit deal. Russia agreed to send 65bcm over Ukraine in 2020 falling to 45bcm after that. This is about half the 90bcm Russia has been sending in recent years. The revenue Ukraine earns from transit will fall from $3bn a year to $2bn. However, as Gazprom intends to increase exports to Europe by 70bcm in the medium term and the new pipeline’s it has built are already fully utilized there is scope for the transit volumes across Ukraine, which can cope with a maximum of 140bcm a year, to grow.
Ukraine transited 87bn cubic metres (bcm) of gas to Europe in 2018 and is on course to send 90bcm in 2019. The combined capacity of Nord Stream 2 and Turkish Stream (aka TurkStream) is 85bcm so Russia needs some Ukraine capacity.
On the economic front things are looking much better. The economy has been stabilised, inflation is falling fast and incomes are starting to rise, albeit from a very low base. If anything the National Bank of Ukraine (NBU) has been too successful with bringing down inflation as the over the course of 2019 the hryvnia strengthened by some 17% making it one of the best performing currencies in the world. By the end of the year the strong hryvnia was starting to hurt exporters and the NBU began to intervene in the market to restrain the currency’s appreciation and the regulator made a series of very big rate cuts, but thanks to the rapid fall in inflation Ukraine still had one of the highest real interest rates in the world.
The falling rates and inflation, and the strong currency, proved irresistible to bond investors who in 2019 were given direct access to the Ukrainian capital market after it was hooked up to Clearstream. Foreign investors poured some $4.5bn into the domestic bond market as a new source of funding became available to the government.
Ukraine’s debt profile changed as the five year delays on Ukraine’s external debt negotiated by former finance minister Natalie Jaresko expired and debt
38​ EASTERN EUROPE Outlook 2020​ ​ ​www.intellinews.com