Rough Start For Ukraine’s New President

Ukraine's comedian-turned-president adds coronavirus to the list of challenges his war-weary country has to deal with.

Ukrainian president Volodymyr Zelensky shuffled his cabinet deck but still holds a weak hand as COVID-19 and associated financial panic wreak havoc around the world.

The 42-year-old actor-turned-chief-executive axed Prime Minister Oleksiy Honcharuk and most of his ministers March 4, a move that caused panic given that Zelensky has only been in office half a year. “This was just a rookie mistake,” says Tim Ash, emerging markets sovereign strategist at BlueBay Asset Management in London.

The new government under Denis Shmygal presents a similar, fresh-faced profile compared to the past one. “Zelensky goes for people who were mid-level managers at Western companies,” says Mykhailo Minakov, senior adviser on Ukraine at the Kennan Institute in Washington.

Zelensky and his government back two key measures demanded by the International Monetary Fund in exchange for much-needed budgetary support. The first would make irrevocable all bank nationalizations conducted under Zelensky’s predecessor, Petro Poroshenko. That would nix the campaign of Zelensky’s one-time boss, billionaire Ihor Kolomoisky, to win back number one Privatbank, and similar machinations by numerous smaller oligarchs. The second would free up the sale of farmland, which the World Bank calls “the most powerful measure the government can take to boost economic growth.”

But both efforts are bottled up in Parliament, and time is not on the side of reform, Minakov reckons. “After each Ukrainian revolution, the authorities had 12–18 months before the natural forces of oligarchic control reasserted themselves,” he says.

The pandemic may be quickly closing that window as private investors lose confidence in Ukraine and other frontier credits.  Yields on three-year bonds more than doubled in the beginning of the  month to March 19, to a punishing 23% as of March 19. The hryvnia currency dropped 12% against the dollar. That doubles the bailout needed from the IMF to around $10 billion, Ash calculates.

No amount of heroics from government will save Ukraine from its second debt restructuring in as many years, predicts Alison Graham, chief investment officer at frontier investment fund Voltan Capital Management. “There’s a whole slew of countries that will have to restructure their debt now,” she says. “Ukraine may be well down the list, but they’re on it.”