Recent statements by the European Union (EU) and the International Monetary Fund (IMF) give the impression that Ukraine is making significant steps toward stabilisation and normalisation. There has been much praise for the administration of Petro Poroshenko, especially for the nationalisation of the heavily indebted PrivatBank, and a recognition that reforms such as this would be sufficient to unlock the next USD 1.7bn tranche of IMF assistance from its USD 17.5bn rescue fund.

If one were to only look at macro-economic indicators, Ukraine appears to have made some progress. After a fall in real GDP of over 15% since the Maidan revolution in 2013, the economy returned to growth of 1.5% in 2016 and is expected to expand a further 2.5% in 2017. Likewise, the deficit has been brought down to 1.6% of GDP and tighter monetary policy at the Bank of Ukraine has seen inflation brought down to 9.8% from a high of close to 50% in 2015.

Despite which, foreign direct investment (FDI), the major measure of foreign capital’s confidence in Ukraine’s medium to long term trajectory has failed to recover; falling from USD 8.5bn in 2012 to only USD 484mn in 2015, the most recent year for which complete figures exist. While that have been some notable exceptions in the fields of agriculture and information technology, to meet the government’s ambitious growth targets and provide meaningful recovery, Ukraine would require FDI of USD 6bn to USD 7bn per year. How can this hesitancy be explained?  

The reason can traced to Ukraine’s elevated and persisting political and geopolitical risks. Judged on a combination of public satisfaction, government stability, policy certainty and national security, Ukraine’s position remains extremely precarious, despite its increasingly positive qualitative indicators.      

While the much touted headline figures used to substantiate stabilisation may impress Ukraine’s western partners and the international financial institutions, they have had less of an impact on regular citizens. Unemployment remains over 9% and income per capita has declined from USD 3,878 in 2012 to an estimated USD 1,988 in 2017. Moreover, despite billions of dollars in support from the EU and IMF for economic reform, few of those reforms have had a positive impact for consumers. Transparency and price liberalisation in the energy sector having seen household bills rise an estimated 450% between 2014 and 2015, there has been major disruption to health and welfare services, and plans for a rise in the pension age in 2017 are sure to provoke public anger.

The government has also struggled to address the pervasive issue of corruption, which recent surveys have revealed average citizens see as a high priority and perceptions of which have worsened since the Maidan.  Few have confidence in the government of Volodymyr Groysman, which is supported in the Verkhovna Rada by a number of oligarch-aligned parties, to tackle this issue. Reform of the judicial branch, key to prosecuting major violators, remains stymied by vested interests, and anti-corruption legislation and institutions lack the authority and budgetary capacity to fight back.   

Geopolitically, Ukraine’s position also remains extremely precarious, as evidenced by the flare up in violence between Ukrainian troops and Russian supported separatist forces in January 2017. Although low level fighting has persisted regularly beyond the Minsk II agreement, signed in early 2015, this was the first time in months that heavy weaponry, prohibited under the agreement, were used by both sides. This included artillery and saturation Grad rocket systems resulting in numerous civilian deaths and widespread property damage.

Russia’s determination to ensure that Ukraine is prevented from further integration into Atlantic economic and security structures means it has little incentive to implement the Minsk agreement and the simmering conflict in the east is a useful lever with which to destabilise Kiev. The occupation of the Donbas, a major centre of coal mining and industry, affects 16% of Ukraine’s pre-conflict output while the cost of maintaining an army of 280,000 troops and carrying out a major re-armament programme, estimated at 3.1% of GDP, is a major drain on Kiev’s resources.

Ukraine also has little incentive to enforce Minsk, as it would involve giving considerable powers to the separatists, including a veto over NATO and EU membership. To attempt this would precipitate a major domestic crisis given that it would be unacceptable to nationalist parties, but its abandonment will make the prospect of EU integration even more remote, fuelling public anger.

The stage is therefore set for a turbulent medium term outlook in Ukraine, with near constant political instability, domestic squabbles over reform, an increase in the potential for public demonstrations and greater geopolitical risk as anti-Russian sentiment potentially becomes the unifying focus of the country. In such an environment is seems likely foreign capital will continue to avoid the country, or at best return slowly.    

This article originally appeared in the magazine Emerging Europe - February 2017