Event

In early February, violence flared up near the government-held town of Avdiyivka. Since 20 February, violence has lessened as a ceasefire is broadly holding. However, the recent violence highlights again that there is no long-lasting solution for the conflict in Eastern Ukraine. Indeed, the Minsk agreement is still not fully implemented by Ukraine and Russia. What is more, Russia decided to recognise administrative documents issued by separatists in Eastern Ukraine. Moreover, Ukraine is taking Russia to the International Court of Justice over rebel funding. Last but not least, since mid-January, Ukrainian nationalist groups have blockaded rail transports, a move – opposed by Kiev authorities – that halted coal produced in separatist territory from reaching power plants and steel industry in government-controlled territory. In retaliation, the separatists took control of companies registered in Ukraine's jurisdiction, demanded companies to register and pay taxes in their territory and claimed it would break economic ties between both territories. Both parts of the country are likely to suffer from the economic fallouts of blockage given their strong economic interdependence. Indeed, large companies often operate on both sides and the industrial production chain is closely integrated. The central bank already warned that if the blockage continues, this would harm the 2017 economic prospects.

Impact on country risk

Tensions remain high between the separatists and the government. The longer the rail blockade persists, the more it would weaken the economic links between both sides of the country. This might have long-lasting consequences for the future of Ukraine. On the economic front, if the rail blockage remains in place, it could weaken economic prospects. On the positive side, the IMF announced that its staff reached an agreement with Ukrainian authorities. This paves the way for consideration of the third review of the arrangement under the Extended Fund Facility (EFF). In this context, the commercial risk and short-term political risk remain elevated (in category C and 6/7 respectively).

Analyst: Pascaline della Faille, p.dellafaille@credendo.com