Saber Rattling and Political Conflict
August was a turbulent month. First came the disturbing news of Russia’s buildup of military forces on the borders of mainland Ukraine. The Kremlin also officially blamed the Ukrainian military for organizing a terrorist attack in Crimea, which added to the frayed nerves of the international community. Several senior officials discussed a scenario of a potential major Russian assault, making the threat of a further escalation of the conflict feel much likelier. While there is still a good chance that Russia will push for further military gains on the ground in Ukraine, it should be noted that, unlike in 2014, the Ukrainian Army is now much more prepared to meet any Russian forces that venture further into its territory.
Ukrainians also witnessed an outrageous fight between two powerful state law enforcement bodies -- the Chief Prosecutor’s Office and the new National Anti-Corruption Bureau of Ukraine (NABU). The NABU was pursuing several prosecutors, suspecting them of participating in corrupt practices; the prosecutors responded by arresting several NABU officers. Tensions eased only after the heads of the two agencies met. This may signal a turning point in the war on corruption, as the prosecutors’ office personnel are accustomed to belonging to a regime of impunity. An even more serious scandal erupted on August 15th, when Ukraine failed to launch its long-awaited e-declaration system. This database is designed to gather all information about the official income of state officials in the unified system. The system envisages criminal prosecution for any serious inconsistencies in officials’ reporting, and is expected to generate a real revolution in Ukraine’s anti-corruption efforts. The EU’s mission to Ukraine reacted very harshly to the delay, urging it be launched according to plan. Civil activists blamed the authorities for sabotaging the system’s launch, and there were also rumors that even the IMF expressed concerns. Luckily, after substantial pressure from abroad, the system started working properly on September 1st.
The economy remains volatile. Industrial output was still reportedly decreasing in July (-0.2% y/y vs. -3.4% y/y in June) due to machinery’s poor performance. Retail trade was in the black (+4.5% y/y vs/ +5.0% y/y in June) following a revival of real incomes. Consumer prices continued to fall (-0.1% m/m vs. -0.2% m/m June) due to a dip in food prices, while the hryvnia started depreciating (it lost 7.5% as of this writing, falling to 26.78 hryvnia per $1) in line with strengthened energy imports and increased concerns of yet another delay in the pending loan from the IMF. We remain optimistic about the outlook for fiscal accounts, and expect budget revenues to grow more than 10% y/y in 2016, which should be enough to meet this year’s revenue targets.
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