Along with the rest of the world, Ukraine watched the US presidential elections closely. Now that Donald Trump has won, we have a few observations on the likely impact that his policies will have on global trade, which could negatively affect emerging economies such as Ukraine.
There is also great concern about the stance the Trump administration will take with the Kremlin in resolving the occupation of Crimea and eastern Donbass, and lifting sanctions.
There is near universal agreement that Trump's campaign rhetoric of criticising existing trade deals, now expected to become policy, will hurt international trade. Witness the spectacular decline of the Mexican peso, which fluctuated in step with Trump's progress towards the White House.
Markets singled out Mexico as the main victim of the new administration's stance on trade relations, since renegotiating Nafta is high on Trump's agenda. Other likely targets for renegotiated deals are the large economies with which the US has sizeable trade deficits, in particular China. In our view, these policies will cast deflationary expectations on already-depressed global demand.
The global economy still has not fully recovered from the financial crisis of 2008–2009. Many countries have been devastated by a continuing series of crises that effectively lowered aggregate demand and, hence, their imports, which, of course, are other country's exports.
Several economies in the Eurozone have been hard hit, and two once-proud BRICS, Brazil and Russia, experienced currency devaluations as recently as 2014-15. Authorities reacted with harsh fiscal austerity measures in the form of freezing state expenditures for 20 years in real terms in Brazil, and for three years in nominal terms in Russia.
This cuts domestic demand for goods, which spills over into neighbouring smaller economies, which also shrink. Ukraine, too, experienced a sizeable currency devaluation in 2014–15, which resulted in a 17% contraction in GDP.
We find it somewhat disturbing that an economic superpower like the US, which was the chief architect of the international trade system, would now negatively impact global trade by its own policies. We also fear that if this shift is triggered by the Trump administration – which was sold to voters as putting America first to bring back jobs – the world economy will be thrown into an extended period of trade stagnation.
We expect the Trump–Putin honeymoon to last until the US administration realises that Kremlin's meddling in US affairs will not stop with the presidential elections.
There is an important issue we haven't seen Trump address, which is a major mis-allocation in the value of the US dollar, the strongest among the major global currencies since at least 2015. This dislocation developed partially as a result of a promise of interest-rate increases by the Fed, which have not happened. Moreover, we don't see this changing with Trump's proposed economic policy mix, which we don't agree is aggressive enough, particularly with regards to domestic spending. The Republican Party controls both houses of congress, and they have a profound aversion to big government and increasing public debt.
Moreover, Trump's foreign policy stance that puts American interests first will not help should the time come for coordination with other economic powers for forex adjustment to make the US dollar less dear, which we see as a distinct possibility.
It is widely expected that Trump will be accommodative to the Kremlin. In our view, this move may prove naïve. And for Ukraine and Eastern Europe, possibly dangerous. President Obama initiated a Russia reset policy at the beginning of his presidency, and we see where that has led. It is possible that Trump may misread geopolitics the same way the outgoing president did.
We expect the US State Department to double down on bringing about a peaceful solution to Crimea and eastern Donbass, Ukraine's territories affected by Russian military aggression. The Kremlin wants sanctions to be lifted and an official recognition by the US that Crimea is legitimately part of Russia.
We are greatly concerned that these solutions will be sold to the West and Ukraine based on an ill-informed assumption that after a Crimea and eastern Donbas settlement, Ukraine–Russia trade flows will be restored to pre-war volumes, i.e. Russian imports from Ukraine will be restored. In our view, this is a wrong approach, and would benefit Russia's economy not Ukraine's.
Russia's aggregate demand was cut by a macroeconomic adjustment that was long overdue. This contraction was sizeable, and since Russia is by far the largest economy in the region by many measures, it collapsed imports in the smaller countries. It was not the result of Western sanctions, which were secondary. If anything, the sanctions helped Putin convince the general population that Russia's economic woes were the result of unfriendly Western powers and not domestic policy failures.
Ukraine's best advice to President-elect Trump is "Do not take Russia at face value."
We expect the Trump–Putin honeymoon to last until the US administration realises that Kremlin's meddling in US affairs will not stop with the presidential elections. Kremlin will win an even bigger prize through the furthering of internal political polarisation in the Western world, particularly in the US and EU.
The key here, not always recognised by the West, is that modern authoritarian regimes long for foreign instability. It pays off by strengthening their positions domestically as nationalism flourishes, despite their own economies floundering.
We noted that Russia has committed to fiscal austerity despite its public debt being low by international standards. A DC-based, economic policy think-tank analyst recently acknowledged there is much "more Washington consensus in Moscow than in Washington" itself.
This is a striking reference to restrictive policies adopted by Russia against the backdrop of possibly shifting from monetary to fiscal stimulus in the West. In our view, Russia's economy is headed for increased volatility. Fiscal austerity is unlikely to survive long even in Russia, which is why heightened geopolitical risk will remain despite another reset attempt by a new US president.
Ukraine's best advice to President-elect Trump is: "Do not take Russia at face value."
Alexander Valchyshen is the Head of Research and Member of the Investment Committee of Investment Capital Ukraine, a Kiev-based financial services group. In 2014, ICU's former Chairman, Valeria Gontareva, became the head of Ukraine's central bank.