The Ukrainian economy is entering a period of painful adjustment following the historical change in the political landscape and against the backdrop of the Russian military intervention. Economic activities will slow and we expect GDP to decline 3-4% in 2014, an unpleasant fall, but still a far cry from 2009's 14.8% drop. The current recession is mainly the result of accumulated structural flaws and uncertainties related to the Russian military threat. That it is happening against a backdrop of accelerating global growth offers hope that the recovery will be swift and pronounced once Ukraine returns to the path of reforms and if fears of a full-fledged military invasion fade. A new IMF-Ukraine program with severe strings attached will be launched in the coming weeks. The recent hryvnia depreciation will drive a swift adjustment in the C/A gap to some 3.5-4.5% of GDP from last year's 8.9%. We now expect an average exchange rate of UAH 10.1/USD in 2014. The government will be forced to narrow the state budget deficit to 3.0-3.5% of GDP and we expect it will service all sovereign debt without disruption thanks to international financial support.

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