Moody s Caa2 / S&P B- / Fitch B- 1 Economy: Agriculture 14%, Industry 27%, Services 60%

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1 Ukraine Summary Moody s Caa2 / S&P B- / Fitch B- 1 Economy: Agriculture 14%, Industry 27%, Services 60% Ukraine is in a difficult economic, social, and political situation that has been exacerbated by the conflicts in Eastern Ukraine, although conditions stabilized in 2016 and improved in The economy contracted 15.8% in , but posted positive growth of 2.3% in 2016 and is expected to grow 1.9% in Inflation is on a downward trend, after surpassing 60% in March 2015, while the exchange rate has stabilized and foreign reserves have close to tripled to US$16 billion. The fiscal deficit is improving, but debt levels remain high, close to 85%. The government remains committed to the International Monetary Fund s (IMF) program and integrating into the European Union (EU), although the population is losing patience as economic conditions remain difficult, corruption remains high, and the popularity of the government is low. The two-party coalition has a small majority in the parliament; thus, there is a risk that elections are moved forward. Economic Indicators F 2018F Population (Millions) GDP per Capita (USD) 3,941 3,088 2,129 2,195 2,478 2,364 Nominal GDP (USD Billions) Real GDP (%) Year-End CPI (%) Fiscal Balance (% of GDP) Interest (% of Revenues) FC Debt/Public Debt (%) Government Debt (% of GDP) Government Debt (% of Revenue) Current Account (% of GDP) FDI (% of GDP) External Debt (% of GDP) Foreign Reserves/External Debt (%) Foreign Reserves (Mo. of imports) Foreign Reserves (% of GDP) As of November 2017 Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: Lazard, Central Bank, Haver Analytics, IMF 173

2 Lazard Emerging Markets Debt Rating History Below is a history of the country s foreign and local currency ratings by the major agencies dating back to We have also included a chart of the country s hard currency external debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison. Rating History Hard Currency Local Currency BB- BB+ B+ B B- BB BB- B+ B CCC+ CCC CCC- B- CCC+ CCC CCC- CC CC Moody s S&P Fitch Moody s S&P Fitch As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Bloomberg, Fitch, Moody s, Standard and Poor s Bond Spreads Ukraine 2010 EMBIGD 2017 As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan 174

3 Ukraine Strengths Positive Reform Momentum Despite internal struggles, the government that replaced President Viktor Yanukovych has made major reforms in a short period of time, although it is hard to measure how much more political capital remains to continue with these long-overdue reforms. Among the most important measures already adopted by the current government are a gas price increase, exchange-rate devaluation, and the approval of the pension reform in These measures were taken without triggering major protests, which is a positive surprise as the population is giving the government some room to maneuver. The government does not have much choice in continuing to move forward with reforms, as otherwise it might compromise the agreements reached with the IMF and bilateral entities, such as the World Bank. Uncertainty remains as to whether the population and the political class will continue to support the government in moving forward with its economic agenda. Multilateral/Bilateral Support One of Ukraine s key strengths is its good relationship with the international community and the support of the EU and the United States. The country was able to avoid a complete economic collapse in 2014 and 2015 thanks to multilateral and bilateral lending, which provided well over US$10 billion in financial assistance. The last agreement with the IMF in March 2015 was for a four-year program totaling US$17.5 billion. 2 The government is moving forward with the IMF agreement but at a slower pace than anticipated, with the approval of the second disbursement in September 2016, almost one year behind schedule. The government will need to tackle corruption and privatize some of the state-owned enterprises, which are all necessary to move forward with the IMF program. Economic Potential Ukraine has a large domestic market that makes it a potentially attractive place to invest. The economy is large at US$105 billion, and the population is sizable, totaling 42.4 million. 3 Ukraine s population is well educated as indicated by its high rank across a number of indices. For example, in the UNESCO Education for All Development Index, Ukraine ranks 14th out of 113 countries. 4 In the World Economic Forum s Higher Education and Training Index, it ranks 40th out of 144 countries. 5 Labor costs in Ukraine are relatively low when compared to other countries in the region, such as Bulgaria, Romania, Croatia, and Russia. 6 These factors have helped some high-tech industries, such as defense, to prosper. In different education indices, Ukraine ranks relatively high. The country also has abundant fertile land that can be used for agriculture. Ukraine is currently among the top 10 agricultural producers in the world, and it ranks among the top five countries in the world in share of arable land. 7 Ukraine is currently an important producer of sunflower oil, grain, and sugar. Finally, the country has the fourth-largest shale gas reserves in Europe. 8 Improving Economic Growth Ukraine s economic performance is expected to improve substantially in the medium term as it emerges from crisis. The economy is estimated to have contracted 15.8% in , but it posted a small growth rate of 2.3% in 2016 and 1.9% in Inflation is on a downward trend after peaking at 60.9% in April 2015 and falling to 16.4% in September The exchange rate has stabilized allowing the government to begin gradually removing capital controls. On the external front, the current account deficit is around 4% of GDP after posting a deficit close to 10% of GDP in On the fiscal side, the government aims 175

4 Lazard Emerging Markets Debt to significantly reduce the deficit to 2.4% of GDP, once transfers from national oil and gas company Naftogaz are included. Weaknesses Internal Division The internal conflict between the East and West of Ukraine has major social, economic, and political impacts on the country. Historically, the eastern part of the country has been in favor of closer ties with Russia and the western part in favor of closer ties with the EU. This tension escalated in late 2013 when then-president Yanukovych, signed an economic agreement with Russia, which included a US$15 billion aid package while abandoning talks of a free-trade agreement with the EU. This was a source of discontent in Kiev, where the population is more pro-european, and triggered social unrest that ultimately led to the removal of Yanukovych in early 2014, and his replacement with a pro-european government. Russia, fearing the new government was moving closer to Europe, decided to retaliate by annexing Crimea in eastern Ukraine; Russia also removed some of the economic benefits it provided Ukraine, such as low gas prices; and provided support for some of the Eastern cities to rise up against the government. This eventually resulted in an armed conflict and the deaths of hundreds. Both sides reached a peace agreement in September 2014, giving more autonomy to some eastern cities, including Donetsk and Luhansk. 9 However, the armed conflict resumed a couple weeks later until a new peace agreement was reached in February Since then, the violence has declined but has the potential to again escalate. Geopolitical Risks The recent conflict in Ukraine was not only fomented internally, but also by other countries. Ukraine is in a strategic location, with both Russia and the EU jockeying for economic and political influence. Russia fears the expansion of the EU and NATO into neighboring countries. On the other hand, since the fall of the Soviet Union, the EU has expanded gradually toward the east with the support of the United States. Both sides have supported their interests in Ukraine, although Russia has been more actively involved as it has significant leverage over Ukraine, given its close economic ties. Europe and the United States have tried to counter-balance Russia s influence mainly by providing financial support to the government. Oligarchs Oligarchs have dominated both the political and economic arenas in Ukraine. Their popularity is low as most are considered corrupt and contributors to the economic and political crisis. After the protests in early 2014, the oligarchs kept a lower profile as they feared they could be the focus of an attack by the population. However, the oligarchs are now attempting to re-establish their power which could pose challenges for the government to move forward with muchneeded reforms, as the oligarchs may seek to maintain economic control of key industries. Corruption Ukraine has high levels of corruption within its institutions. The government has passed anti-corruption laws, but enforcement remains a challenge. The laws seek to improve transparency, especially with respect to the sources of politicians wealth. International agencies note that one of the major economic constraints is the high corruption level, especially in the judiciary system, where judges are often bribed. In the Corruption Perception Index: 2015, Ukraine ranked 131th out of 176 countries

5 Ukraine Country Background Size Capital Population 603,550 KM 2 (46th) Kiev 44.0 Million Religion Ukranian Orthodox 66.7%, Catholic 10.0%, Other 23.3% Median Age 40.6 Years Literacy Rate 99.8% Independence 24 August 1991 Political System Government Leadership Next Election 2019 Legislative Branch Semi-Presidential Republic President Petro Poroshenko; Prime Minister Volodymyr Groysman Unicameral Supreme Council Economy Agriculture 13.8%, Industry 27.3%, Services 59.5% Labor Force Agriculture 5.8%, Industry 26.5%, Services 67.8% Merchandise Exports Export Partners Currency As of November 2017 Source: CIA Ferrous and Nonferrous Metals, Fuel and Petroleum Products, Chemicals, Machinery and Transport Equipment, Foodstuffs Russia 9.9%, Egypt 6.2%, Poland 6.1%, Turkey 5.7%, Italy 5.3%, India 5.2%, China 5.1% Ukrainian Hryvnia (UAH) 177

6 Lazard Emerging Markets Debt Country Timeline 1991 Ukraine declares independence following attempted coup in Moscow: 90% vote for independence in nationwide referendum in December. early to mid 1990s About 250,000 Crimean Tatars and their descendants return to Crimea following collapse of Soviet Union New, democratic constitution adopted. New currency, the hryvnia, introduced Friendship treaty signed with Russia. Ukraine and Russia also reach agreement on the Black Sea fleet Chernobyl nuclear power plant is shut down, 14 years after the accident. Well over ten thousand people have died as a direct result of the explosion, the health of millions more has been affected Viktor Yushchenko government dismissed following no-confidence vote in parliament. Mr Yushchenko was respected in the West for fighting corruption, pushing ahead with economic reforms and working to attract investment, but was unpopular with powerful Ukrainian businessmen. Ukrainian military accidentally shoot down Russian air liner over the Black Sea, killing all 78 on board. Defence Minister Olexander Kuzmuk resigns General election results in hung parliament. Parties opposed to President Kuchma allege widespread electoral fraud. Leadership announces decision to launch formal bid to join NATO. President Kuchma sacks Prime Minister Kinakh. Viktor Yanukovych, governor of Donetsk region, appointed to replace him. He promises to fight poverty and work for integration into Europe Official count indicates presidential election victory for Prime Minister Viktor Yanukovych. Western and other independent observers report widespread vote rigging. Opposition candidate Viktor Yushchenko launches campaign of mass street protest and civil disobedience. Supreme Court later annuls result of poll. Opposition candidate Viktor Yushchenko tops poll in election re-run. Rival candidate Viktor Yanukovych challenges result but resigns as prime minister Viktor Yushchenko sworn in as president after Supreme Court rejects challenge by losing candidate Mr. Yanukovych Russia briefly cuts supply of gas for Ukrainian use in row over prices. Moscow says its reasons are purely economic but Kiev says they are political. Previously agreed changes to constitution shift some significant powers from the president to parliament. The trial of three former policemen charged with killing opposition journalist Georgiy Gongadze begins in Kiev. Faced with a deadline to accept Viktor Yanukovych s nomination or call new elections, President Yushchenko agrees that his rival can become prime minister Russia's state-owned company, Gazprom, agrees new contract to supply Ukraine s industrial consumers directly, ending row over gas supply. Global financial crisis leads to decline in demand for steel, causing price of one of the country's main exports to collapse. Value of Ukrainian currency falls sharply and investors pull out. The International Monetary Fund (IMF) offers Ukraine a loan of $16.5bn to help it weather the storm Russia stops all gas supplies to Ukraine after collapse of talks to end row over unpaid bills and prices, leading to shortages in southeast Europe. Supplies are restored a week later when Ukraine and Russia sign a 10-year deal on gas transit Viktor Yanukovych is declared winner of second round of presidential election. His main rival, Prime Minister Yulia Tymoshenko, refuses to accept the result, alleging fraud. Parliament votes to abandon NATO membership aspirations. President Yanukovych vetoes a tax reform that had prompted thousands of business owners and opposition activists to protest in city centers nationwide. The reform aimed to plug the gap in Ukraine s finances demanded by the terms of an IMF loan. 178

7 Ukraine 2013 Tens of thousands of protesters take to the streets of central Kiev and other cities to protest at the government's sudden decision to abandon plans to sign an association agreement with the EU. They accuse the government of bowing to Russian pressure, as well as being corrupt and unaccountable Security forces kill at least 77 protesters in Kiev. President Yanukovych flees to Russia, opposition takes over. Russian forces help separatists seize power in Crimea, which Russia then annexes, prompting the biggest East-West showdown since the Cold War. United States and its European allies impose sanctions on Russia. Pro-Russian armed groups seize parts of eastern Donetsk and Luhansk regions on Russian border. Government launches military operation in response. Leading businessman Petro Poroshenko wins presidential election on pro-western platform. Signs delayed EU association accord in July. Pro-Russian forces shoot down Malaysian airliner over eastern Ukraine conflict zone, killing all 298 people on board. Government signs Minsk peace plan ceasefire with Russian-backed groups in eastern Ukraine. Parliamentary elections produce convincing majority for pro-western parties. Donetsk and Luhansk pro-russian groups hold elections not provided for by Minsk plan. Ukraine rescinds pledge for regional autonomy in response Germany and France broker new ceasefire deal at talks in Belarus, resulting in a tenuous ceasefire Ukraine s association agreement with the European Union is ratified by all signatories, to enter into force on 1 September. Source: BBC Notes 1 As of December IMF Executive Board Approves 4-Year US$17.5 Billion Extended Fund Facility for Ukraine, US$5 Billion for Immediate Disbursement, International Monetary Fund, IMF Press Release No. 15/107, 11 March 2015, accessed on November 30, 2015, 3 As of November 2017, Source: CIA, IMF, and Lazard. 4 Education for All : Achievements and Challenges, UNESCO, EFA Global Monitoring Report 2015, accessed on 30 November 2015, 5 The Global Competitiveness Report World Economic Forum, 2015, docs/gcr /ukraine.pdf. 6 Where are you on the global pay scale? BBC, 29 March 2012, accessed on 18 December 2013, World Agricultural Production, USDA, 10 December 2013, worldag-production//2010s/2013/worldag-production pdf and Data: Arable land (% of land area), World Bank, accessed on 30 November 2015, 8 Technically Recoverable Shale Oil and Shale Gas Resources: An Assessment of 137 Share Formations in 41 countries Outside the United States U.S. Energy Information Administration, June 2013, gov/analysis/studies/worldshalegas/pdf/fullreport.pdf. 9 Ukraine and pro-russia rebels sign ceasefire deal, BBC, 5 September 2014, accessed on 20 October 2014, 10 Corruptions Perceptions Index: 2016, Transparency.org, accessed on 10 October 2017, transparency.org/news/feature/corruption_perceptions_index_

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