Currently, Ukraine is in the early stages of the reforms process. Since the election of the pro-European parliament and the formation of the professional government in late 2014, there have been several initiatives, mostly in the sphere of taxes, energy efficiency and deregulation. The empty coffers of the Ukrainian treasury forced the parliament to pass a series of changes to the tax code. As a result, the tax on all passive income to 20% and introduced some new taxes on property and excisable goods. However, the overall number of taxes was decreased to 11 from 22, which should ease the tax management for enterprises. As a result, we have seen a positive balance of the central government budget in 1H2015, and the Ministry of Finance indicated that they are ready to present a new vision for tax reform in autumn of 2015. We believe that for the tax reform to be successful, the government will need to decrease the overall tax burden on business and put a ban on any changes to the tax system for at least 5-10 years.

Over the past month and a half, the Ukrainian authorities made significant efforts towards implementing a set of key reforms, which resulted in a successful decision of the IMF board on approval of the USD 17.5 bn loan package. The most important initiatives were observed in the banking sector, judicial system and public sector. However, we note that some of the initiatives and policies were clearly intended to   “fight fires” and were not reforms in a general sense. We find that much work remains to be done. Nevertheless, we believe that the package of laws approved by the Parliament will form a solid base for further reforms.

The successful talks in Minsk should lead to a de-escalation of the situation in Eastern Ukraine, which will remove some of the pressure on the national currency and ease access to capital markets for Ukraine. Coupled with a staff-level agreement of the Ukrainian government with the IMF on the new program, envisioning USD 17.5 bn of funding over the next four years, we believe that this could move the Ukrainian equities and bonds higher. However, we are not out of the woods yet, as parties are likely to disagree on the specific details of the implementation of the new ceasefire.

In general, the Ukrainian government is moving in the right direction, with varying success in implementing reforms due to some political and financial factors. We have the impression that the state authorities are trying to find a balance between decreasing the budget deficit and making progress in key reforms, which is why we would not expect major improvements this year. However, we believe that as soon as financing the deficit is out of the question (which implies some help from the IMF and other IFIs), the Ukrainian government can concentrate on meaningful reforms that would really change the system.