Ukraine’s uncertain future

Thursday, 27 February, 2014
by Simon Baptist

Markets this week have been fixated by Ukraine, where long-simmering economic problems have turned into a political crisis. There is a real risk of a disorderly devaluation of the currency, with a resulting spiral driven by the subsequent increase in the foreign-currency denominated debts of local banks and companies. Ukraine’s weak external position has been a concern for some time now, but the collapse of the government has increased outflows of already scarce foreign capital. The sequence of events highlights the tight nexus between politics and economics, and why it is important for investors to understand both. Fundamentally, Ukraine’s political divisions are driven by unresolved questions about national identity – east or west - and institutional location of power – parliament or presidency. Ukraine is not the only country with such divisions, with Thailand and Nigeria other obvious examples, both with a rich south chafing against supporting a poorer north.

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