D&B has downgraded Ukraine’s country risk rating to DB6c (in our "very high risk" category) from its already poor score of DB6b (on a scale of 1-7, with 7 being the highest possible level of operational risk). The downgrade stems from the significant recent deterioration in the country’s business operating environment. This article gives more insight into the current situation in Ukraine and why their risk rating was downgraded.

1. Special BriefingSpecial BriefingSpecial BriefingSpecial Briefing
TTTThehehehe EEEEconomic andconomic andconomic andconomic and PPPPoliticaloliticaloliticalolitical SSSSituation inituation inituation inituation in
UkraineUkraineUkraineUkraine –––– 7777thththth March 2014March 2014March 2014March 2014
SummarySummarySummarySummary
D&BD&BD&BD&B hashashashas downgraded Ukraine’sdowngraded Ukraine’sdowngraded Ukraine’sdowngraded Ukraine’s country riskcountry riskcountry riskcountry risk rating to DB6crating to DB6crating to DB6crating to DB6c ((((in our ‘in our ‘in our ‘in our ‘very high riskvery high riskvery high riskvery high risk’’’’
category)category)category)category) from itsfrom itsfrom itsfrom its alreadyalreadyalreadyalready poorpoorpoorpoor score ofscore ofscore ofscore of DB6b (DB6b (DB6b (DB6b (on aon aon aon a scale of 1scale of 1scale of 1scale of 1----7777,,,, with 7with 7with 7with 7 beingbeingbeingbeing thethethethe
highest possiblehighest possiblehighest possiblehighest possible level oflevel oflevel oflevel of operational risk)operational risk)operational risk)operational risk). The downgrade stems from. The downgrade stems from. The downgrade stems from. The downgrade stems from the significantthe significantthe significantthe significant
recentrecentrecentrecent deteriorationdeteriorationdeteriorationdeterioration inininin thethethethe country’scountry’scountry’scountry’s businessbusinessbusinessbusiness operating environment.operating environment.operating environment.operating environment. IIIIn late Februaryn late Februaryn late Februaryn late February
tttthehehehe ppppolitical standoff between theolitical standoff between theolitical standoff between theolitical standoff between the country’s politicalcountry’s politicalcountry’s politicalcountry’s political opposition and theopposition and theopposition and theopposition and the governmentgovernmentgovernmentgovernment
resulted in the ousting of the presidentresulted in the ousting of the presidentresulted in the ousting of the presidentresulted in the ousting of the president,,,, ViktorViktorViktorViktor YanukovychYanukovychYanukovychYanukovych.... The newlyThe newlyThe newlyThe newly----formed successorformed successorformed successorformed successor governmentgovernmentgovernmentgovernment
hashashashas struggled to extend itsstruggled to extend itsstruggled to extend itsstruggled to extend its fullfullfullfull authorityauthorityauthorityauthority ((((and seemingly its legitimacyand seemingly its legitimacyand seemingly its legitimacyand seemingly its legitimacy)))) totototo the Crimea peninsula andthe Crimea peninsula andthe Crimea peninsula andthe Crimea peninsula and
some eastern provinces.some eastern provinces.some eastern provinces.some eastern provinces. The G7 joint statemeThe G7 joint statemeThe G7 joint statemeThe G7 joint statementntntnt on 2on 2on 2on 2ndndndnd MarchMarchMarchMarch 2014201420142014 condemned the Russiancondemned the Russiancondemned the Russiancondemned the Russian
occupationoccupationoccupationoccupation of Crimeaof Crimeaof Crimeaof Crimea and threatenedand threatenedand threatenedand threatened the Russian governmentthe Russian governmentthe Russian governmentthe Russian government withwithwithwith ((((as yet undefinedas yet undefinedas yet undefinedas yet undefined)))) economiceconomiceconomiceconomic
sanctions.sanctions.sanctions.sanctions. The current political uncertainty has undermined what we already considered to be aThe current political uncertainty has undermined what we already considered to be aThe current political uncertainty has undermined what we already considered to be aThe current political uncertainty has undermined what we already considered to be a
troubledtroubledtroubledtroubled economyeconomyeconomyeconomy,,,, whichwhichwhichwhich isisisis suffering fromsuffering fromsuffering fromsuffering from wideningwideningwideningwidening twintwintwintwin (fiscal and current account) deficit(fiscal and current account) deficit(fiscal and current account) deficit(fiscal and current account) deficitssss andandandand
acceleratingacceleratingacceleratingaccelerating inflationinflationinflationinflation. We expect that. We expect that. We expect that. We expect that thethethethe bailbailbailbail----out package from international donors will facilitateout package from international donors will facilitateout package from international donors will facilitateout package from international donors will facilitate
the muchthe muchthe muchthe much----needed financialneeded financialneeded financialneeded financial stabilizationstabilizationstabilizationstabilization that Ukraine needs tothat Ukraine needs tothat Ukraine needs tothat Ukraine needs to supportsupportsupportsupport itsitsitsits fiscal afiscal afiscal afiscal and externalnd externalnd externalnd external
imbalancesimbalancesimbalancesimbalances,,,, but implementation of the IMF structural reforms programbut implementation of the IMF structural reforms programbut implementation of the IMF structural reforms programbut implementation of the IMF structural reforms programmemememe isisisis far fromfar fromfar fromfar from guaranteed.guaranteed.guaranteed.guaranteed.
Background andBackground andBackground andBackground and CCCContextontextontextontext
Clashes between opposition groups and the police in the Ukrainian capital, Kiev, were initially sparked in
November 2013 by the refusal of President Viktor Yanukovych to sign a free-trade agreement with the
EU. These clashes degenerated into violent confrontations by mid-February, culminating in the loss of
nearly 80 lives. Following the ousting of President Viktor Yanukovych, Ukraine’s parliament quickly
passed a new set of laws. Among these were acts to free Yulia Tymoshenko (co-leader of Ukraine’s 2004
Orange Revolution, who had been imprisoned in 2011), and a return to the 2004 Constitution, which
limits the powers of the president in favour of the parliament. Ukraine’s parliament also abolished the
law on dual official languages (Ukrainian and Russian) and granted amnesty to the protestors. In
addition, parliament approved a new government, in which the majority of seats (including the prime
minister), were given to members of the ‘Fatherland’ organisation (led by former Prime Minister
Tymoshenko), one of the main opposition parties. Neither UDAR nor ‘Freedom’– two other opposition
parties – have so far been granted any representation. The leaders of the original uprising seem to be
heavily divided, which is adding to the current political uncertainty. Mainstream opposition leaders such
as Arseniy Yatsenyuk, (the former economy minister appointed as prime minister), and Vitali Klitschko, a
former boxing champion, seem to have little control over the country’s right-wing nationalist militant
groups, which were instrumental in obtaining the opposition’s victory. New presidential elections have
been set for 25th May.
Meanwhile, having gained power in the capital and western regions of the country, the new
government has experienced difficulties in securing support in some southern and eastern provinces of
Ukraine. The most extreme case is in the Crimea peninsular. On 6th March Crimea’s parliament
announced its intention to break away from Ukraine and formally become a part of Russia. A proposed
referendum in Crimea, which was planned for 30th March and was supposed to ask voters if they want
more autonomy from Kiev, will now take place on 16th March and will include a question on whether or
not the electorate wants to formally become part of Russia. In the wake of the Russian parliament’s
authorization for President Putin to use troops in Crimea in case of an emergency, and in light of
unidentified armed groups taking control of regional parliamentary buildings and regional government

2. offices, the G7 has issued a joint statement condemning the occupation. The statement also suggested
some form of future economic sanctions against Russia.
Meanwhile, the escalation of the political crisis has had a severe impact on the Ukrainian economy.
Since the beginning of the year the hryvnya has lost 18% of its nominal value relative to the US dollar
(based on the exchange rate announced by the National Bank of Ukraine, NBU). After spending USD2-
3bn on supporting the local currency in February, and reducing its FX reserves to USD15bn (equivalent to
just 1.5 months of import cover, well below the 3.0 months recommended for developing countries by
the IMF), the NBU stopped supporting the currency and effectively sent the hryvnya into a free float. The
sharp depreciation reflects the inappropriateness of the old currency peg, which was maintained by the
previous authorities despite the ballooning current account deficit. The current account deficit
amounted to 9% of GDP in 2013, compared to just 2.2% as recently as 2010.
We do not expect any improvement in Ukraine’s external position in 2014, as its exports are likely to be
depressed by still-sliding metal prices (especially steel) and volatile conditions for its agricultural
exports. The tense confrontation with Russia, by far Ukraine’s major export market, will not help. In fact,
from April 2014 Ukraine’s import bill, mostly composed of Russian gas supplies, will go up, as Gazprom,
the Russian gas supplier, has already announced a lifting of the gas discount granted to Ukraine as a
part of the wider bail-out package in December 2013. Ukraine’s external financial needs also include
around USD13bn of scheduled external debt repayments in 2014, which might be increased by the
necessity to support its domestic banks. We think the risk of a run on the country’s banks is high given
the sharp depreciation of the currency and the expected surge in inflation (which was already hovering
around 1% in 2012-13). In our view, a stabilization of Ukraine’s external position can only be achieved
with external financial support. The new Ukrainian government has stated that it requires around
USD35bn to stabilize the situation. Possible international donors, including the European Union, have
announced a bail-out package of USD11bn to date. The US administration has so far committed itself to
providing USD1bn in loan guarantees. A full IMF programme, however, is unlikely to be feasible before
the presidential elections in May. At this stage it is difficult to estimate the full financing requirement,
as there are many variables in play. We have further revised downwards our expectations for economic
growth in 2014, mostly due to depressed prospects for household consumption and weakened exports.
OOOOutlineutlineutlineutline SSSScenarioscenarioscenarioscenarios for thefor thefor thefor the NNNNextextextext FFFFewewewew MMMMonthsonthsonthsonths
1. The worstThe worstThe worstThe worst----casecasecasecase scenario:scenario:scenario:scenario: civil war within the country between
the western provinces and Kiev, on one side, and the eastern
provinces and Crimea, on the other. We assign a low (10%-15%)
probability to this scenario. This form of confrontation would
inevitably draw in Russia and Western actors, who, in our
opinion, have little appetite for such military action.
2. The bestThe bestThe bestThe best----casecasecasecase scenario:scenario:scenario:scenario: a quick economic recovery and political stability in Ukraine following
substantial emergency financial support from international donors. We also assign a low probability
(10%-15%) to this scenario due to the unfavourable global environment (the end of the
commodities super cycle and the prevalence of risk-aversion on global markets) and the deep
structural economic and political problems in Ukraine.
3. The most probable scenarioThe most probable scenarioThe most probable scenarioThe most probable scenario:::: a shaky and bumpy process of slowly resolving the troubled political
and economic issues facing the country; we assign this a 70%-80% probability. The new government
will continue to face difficulties in extending its authority and recognition to eastern and southern
provinces, and it is looking increasingly likely that Crimea will gain some form of autonomy or
accede to Russia. Any future Ukrainian government will not be able to sustain its substantial budget
on subsidies to households and businesses for energy use (which have resulted in Ukraine being one
of the most inefficient users of energy in Europe). This will prove to be highly unpopular politically,
but will also feature as a key condition of any IMF rescue programme in order to get the fiscal deficit
under control. The Ukrainian economy (close to Poland’s in size 20 years ago, now less than half
Poland’s size) is still highly dependent on a narrow set of industries (such as steel production and
agricultural products) and will face a painful period of restructuring. The economy may benefit from
a more formal trading agreement with the European Union in the medium to long term, but it could
create further economic stresses in the short term.

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MacroMacroMacroMacro MMMMarket Insightarket Insightarket Insightarket Insight capabilitiescapabilitiescapabilitiescapabilities....
Contact:
Country Insight Team
E: CountryInsight@dnb.com
Tel: +44 (0)1628 49 2700
CommercialCommercialCommercialCommercial IIIImplicationsmplicationsmplicationsmplications
We expect payment and credit risk (and by extension bankruptcy risk) to escalate in the short to
medium term, especially for businesses that are particularly dependent on imports. Some relief will be
felt by exporters with the depreciation of the hryvnya, but the currently unfavourable commodity prices
for Ukraine’s major exports might limit this advantage. Transfer risk will be very high. Capital control
measures are already in place and are likely to stay for the foreseeable future. Among these are: an order
for domestic companies to surrender half of their FX profits; a ban on buying FX for early repayments of
FX loans and investments abroad; and an instruction to banks to buy or transfer FX for their clients only
within the FX limits with a cap (around UAH50,000 per month, the equivalent of about USD5,000) on FX
purchases by individuals (residents and non-residents) for transfer abroad. We expect more restrictions
to follow, including a potential moratorium on FX deposit withdrawals given that recent developments
have fuelled demand for FX and deposit withdrawals.
RecommendationsRecommendationsRecommendationsRecommendations
• Be prepared to experience extended payment terms, if not complete disruption of foreign trade
operations, due to existing capital control measures and expected additional ones.
• Factor in a potential run on the banks, especially ones largely dependent on Ukrainian capital.
Consider using international banks (where possible) when dealing with companies in Ukraine.
• Expect long delays in payments on government contracts and/or their cancellation.
• Consider introducing CiA terms, as least in the short term, if you have not done so already.
• Closely monitor counter-parties for signs of deteriorating payment performance, which may be
an indication of the viability of the company.