What do markets make of the weekend’s events in Kiev? Here’s what: the price of insuring against a default on Ukrainian debt in the next five years surged almost 100 basis points on Monday morning, while the price of the country’s benchmark 2020 dollar bond fell more than 2 percentage points to a two-month low of 85 cents on the dollar.

An estimated 350,000 people demonstrated in Kiev at the weekend, protesting against the government’s decision not, after all, to sign association and free trade agreements at last week’s long-awaited EU Eastern Partnership summit in Vilnius. In a reminder of the Orange Revolution that toppled the government in 2004, opposition leaders called for the prime minister and president to resign.

Reuters quoted data provider Markit as saying the cost of a five-year credit default swap on Ukrainian debt rose to 1067 basis points on Monday, up from Friday’s close of 972 bp. The price of Ukraine’s dollar bond maturing on September 23, 2020 fell to $85.84 as the yield rose to 10.73 per cent.

The scale of the weekend’s protests – which threatened to turn violent after a crackdown on Saturday morning – seems to have taken the government by surprise.

President Viktor Yanukovich was due to fly to China on Tuesday to drum up support for his cash-strapped administration. But that trip seems in jeopardy given the dramatic turn of events. The government threatened to impose a state of emergency on Monday but may be unable to do so – the move could be imposed by presidential decree but would require approval by parliament. Reports say members of Yanukovich’s ruling Regions party have been breaking away as the chances of regime change increase.

Here is an eight-point summary of the implications from Timothy Ash at Standard Bank, sent to clients on Monday morning:

First, while many doubted the possibility of an Orange Revolution II (ORII) before the 2015 presidential elections, the shear scale of the demonstrations over the weekend suggests that history is beginning to repeat itself. Again, the Ukrainian population have shown that while disillusion with the political class is intense, they have limits in terms of tolerance and especially when it comes to excessive police violence, and government stalling in their aspiration for Europe and European values. The Yanukovych administration cannot ignore this ground swell of opinion.

Second, one striking difference this time around with the protests during ORI, is the level of violence. Violence was largely absent from ORI, whereas with ORII there has been evidence of violence used at the margin by both sides. Perhaps this reflects the fact that the stakes are so high. In the case of the Ukrainian authorities, experience of ORI, perhaps ensured much more preparation for street demonstrations and the application of a huge police presence this time around.

Third, the Yanukovych administration seems much more unpopular than in 2004/05. Remember in the repeat 2004/05 presidential election, Yanukovych still managed to secure a 40-odd per cent poll rating, but ultimately lost out to Viktor Yushchenko. However, a KMIS poll this week put support for Yanukovych at just 17 per cent and Regions at 16 per cent. Indeed, he appears to have even lost support amongst Regions’ prior heartland in Eastern Ukraine as perceptions of graft and the over-centralisation of power around the family seem to grate with the electorate. That said, the opposition are not doing that much better in polls, with Vitaly Klitchko polling 16 per cent and Arseniy Yatseniuk at 8 per cent, with Oleh Tyhnybok on 4 per cent. That said, the polls show that almost any contender would beat Yanukovych in a run off presidential contest. The same KMIS poll had support for Klitchko’s Udar at 14 per cent, Fatherland (Yetseniuk and Tymoshenko) at 10 per cent, the Communists at 7 per cent and Freedom at 5 per cent. Still this suggests that the opposition would still beat Regions by some margin if repeat parliamentary elections were held – and they would have probably won the 2011 parliamentary elections if electoral rules were not changed in the run up to the vote to introduce a joint PR/constituency system which favoured Regions.

Fourth, a difference this time, as compared to 2004/05 is that the economy is now in a much weaker position. Indeed, in the run up to the 2004/5 presidential election, the economy boomed, posting real GDP growth of 12.1 per cent YOY in 2004, and the current account was running a surplus of 10.6 per cent of GDP that year. This time around the economy has been mired in an 18-month long recession, and is expected to see a real GDP contraction of 1-2 per cent this year. The current account, meanwhile, is running a deficit of around 8 per cent of GDP, and the budget is running a deficit of 5-6 per cent of GDP; albeit the budget was also running a deficit of 4.4 per cent of GDP in 2004. In 2004/05 the economy dipped after the ORI after Russia imposed a range of trade sanctions. At present it seems that the economy is on the edge with dwindling FX reserves (just over 2 months of import cover) and a close to zero Treasury cash balance. The danger is that street unrest/strikes tips the economy over the edge, and the UAH takes the strain as supporters and opponents of the Yanukovych regime build up FX cash balances to take them through an increasingly uncertain period on the political front.

Fifth, the stakes are very high for both sides at present. Opposition leaders have called for “revolution” while violence used by police/security services risks legal action in the future. Indeed, defeat for either side could see imprisonment, and confiscation of assets; this would suggest that room for compromise is in fact limited.

Sixth, momentum seems to be behind the opposition, and the government is on the back foot. As the Arab spring demonstrations proved, momentum is all important. The government will no doubt hope that the recent Gezi Park demonstrations in Turkey are a better comparable and that protests will eventually peter out. However, Yanukovych has a much lower core support base than did/has PM Erdogan in Turkey , and Yanukovych’s track record in office is much weaker. Erdogan in Turkey managed to get his own supporters out on the streets in mass, exceeding the scale of the Gezi protests by some margin – but for Yanukovych it seems his core support is so low that he would struggle to rally more than a few thousand of his supporters on the streets. Yanukovych might though take some heart from the fact that he survived through a very difficult weekend, when his administration appeared to be teetering on the brink. The police/security services held firm – unlike in 2004/05 when many appeared to switch sides.

Seventh, a key question for the Yanukovych administration is how it proposes to clear the streets, and return the country to a state of some normality – essential to get the economy back on track. It does appear evident that the opposition have their bit between their teeth, and now have clear demands – the resignation of the Yanukovych administration and a return to signing the AA/DCFTA. As was seen over the weekend, use of force to clear the demonstrators has proven counter-productive. Any attempt to ratchet this up would also leave the regime vulnerable to the application of sanctions by the West – given Regions supporters live/travel frequently in Western capitals, and have significant assets in the EU, this would be deeply unpopular with the oligarchs who support the regime. Negotiations have been called for, but at the minimum the opposition are likely to demand the ousting of the Azarov government, signing of the AA/DCFTA, prosecution of those responsible for police violence, and the release of the leader of the opposition, Yulia Tymoshenko. These conditions will be difficult for the Yanukovych regime to accept.

Eighth, perhaps one way forward is for the formation of a government of national unity, spanning the current ruling party, and the opposition. The problem at the moment though is that the economic challenges facing Ukraine are so extreme that I think the opposition would be loathed to enter government at this stage without securing a fresh mandate first through fresh elections.

Related reading:
Ukraine parliament speaker calls for talks, FT
Protesters in Ukraine call for revolution, FT
Guest post: EU bail out Ukraine? If only it were that simple… beyondbrics

Get alerts on Emerging markets when a new story is published

Copyright The Financial Times Limited 2018. All rights reserved.

Follow the topics in this article