The landmark Ukraine-Russia deal in late December has substantially changed our expectations on key economic indicators. The USD 15 bln loan and a hefty gas price reduction fully enable the NBU and the government to keep the hryvnia stable through to the presidential elections in March 2015. With this loan the government has also secured a much-needed inflow of funds to cover the fiscal deficit. Unlike the offered IMF loan, Russia's money comes with no economic reform requirements. This will have a substantial adverse longer-term effect on the economy – the C/A gap will stay at an unacceptably high 8% of GDP and the central budget gap will exceed 4.5% of GDP. The current year will therefore see fundamental problems mount, albeit no major shocks should occur in the next 15 months. However, the hangover will be harsh when Russia's loan comes due in December 2015 (against unaddressed fundamental challenges) but this doesn't seem to be a consideration for the current government.

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