A few thoughts around ongoing developments in Ukraine.

First things first, on “Ukrainegate” it’s hard to have any positive spin here for Ukraine, as Ukraine comes out poorly.

I think President Volodymyr Zelensky can be forgiven for his fawning phone call with Trump on July 25, as I am sure he is likely not alone amongst global leaders in playing up to President Donald Trump’s ego in the best interests of their respective countries. True, Zelensky does not come out looking great – but if such transcripts were released for other world leaders, they would not come out any better.

And breaking down the transcript, Zelensky hints that he might pander to Trump’s suggestion of an “investigation” – presumably into ex-U.S. Vice President Joseph Biden, his son, Hunter, and Burisma – but appears suitably vague, which I guess was diplomatic. But then it appears as though the Zelensky team subsequently bowed to Trump’s demands, with the Prosecutor General’s Office announcing that they will review the Burisma case.

Now this does appear a risky strategy, as it would risk the perception that Ukraine is indeed taking sides with Trump against Biden and the Democrats in the 2020 US elections – dangerous for Ukraine if Trump loses those elections. Perhaps you could argue that Ukraine had no choice, given that it is fighting an existential threat in the East, and desperately needs the military assistance that had seemingly been held back by Trump. Needs must, as they say.

More worrying for Ukraine were Trump’s comments that “Ukraine is a terrible place, and Ukrainians are terrible people,” and it’s just full of corruption. True Ukraine has challenges, but its certainly not a terrible place and Ukrainians are wonderful. Corruption is a problem in Ukraine, for sure, reflected in Ukraine’s lowly position in Transparency International’s Corruption Perception Index – and I, like many other people, have been continually making the point that more action needs to be taken. But I think the whole Ukrainegate saga reflects even more badly on the U.S. in terms of corruption than it does Ukraine.

Perhaps it just shows that Ukraine, and indeed many emerging markets, are not that different from developed countries. In developed markets often corruption is masked as in terminology such as “consultancies,” or board “directorships,” but which really are all about buying influence. And herein some things might not be legally wrong, but they might not stand the moral test of time.

But unfortunately for Ukraine, it will have to bear the costs, again, has been tarred as a difficult/risky place to do business, and at the margin, the affair will cost the country foreign investment inflows.

Let’s hope that Trump’s comments on Ukraine are taken in the same spirit as Trump’s criticism of crime in the United Kingdom and Sweden, Baltimore, and parts of Africa.

Beyond perceptions, the loss now of Kurt Volker, as U.S. special representative for Donbas, is a significant loss. Whatever Volker did or did not do around the Burisma case, and the information flow there is hardly inspiring, Volker was a known voice in support of Ukraine in Washington, D.C., and from Ukraine. He was instrumental I think in securing the provision of defensive weaponry to Ukraine – specifically javelin missiles.

This is why it is incomprehensible to me why the provision of those weapons was even in the mix in the conversations now revealed in text messages between Volker, Trump lawyer Rudolph Giuliani, and U.S. Ambassador to the European Union Gordon Sondlund. History will judge all this. But Ukraine has lost an experienced ally in Washington, D.C., and in Ukraine given he was often present in Ukraine. Worryingly, perhaps the position of the existing acting U.S. ambassador to Kyiv, William Taylor, must also be somewhat in doubt – given his commentary in texts seems to fly against that of the White House, where loyalty is a requirement for job retention. The worry now must be that Taylor suffers a similar fate to Masha Yovanovitch. Again this would risk the loss of another experienced Ukraine hand and friend of Ukraine.

Putting all that together, the loss of Volker, ex-U.S. Ambassador Marie L. Yovanovitch, Biden’s problems, now Perry’s revelations around Naftogaz, and then Manafort et al’s demise around Ukraine-related business sends a narrative that Ukraine is toxic, and the risk is that US politicians and officials steer clear of the country. That cannot be positive.

Second, demonstrations across Ukraine over the weekend against the Zelensky administration’s support now, seemingly, for the Steinmeier formula in Donbas peace efforts, just underlines the difficulties for Zelensky in delivering on his electoral promise to bring peace to the Donbas.

Zelensky’s opponents would argue that the Steinmeier formula risks a sell-out to Russia, as it offers the prospect of autonomy/special status for the Kremlin-occupied areas of the Donbas, which could risk a veto on Ukraine’s geopolitical orientation.

Zelensky has argued that he is not going to compromise over fundamental principles, which would limit any special status concessions to separatist areas and certainly not surrendering Ukraine’s geopolitical orientation to a veto from the separatist areas.

But Moscow has very different interpretations of the Steinmeier formula, as was the case also with Minsk. It is hard to see how Zelensky can square this circle. If he bows to Moscow’s demands, then he risks escalating demonstrations, with a risk of violence, on Ukraine’s streets, but if he does not bow to Moscow he risks a resumption of hostilities in the east (which are ongoing anyway), and perhaps losing some friends for Ukraine in the West.

Perhaps at this stage both sides have an interest in going through the motions of re-initiating peace talks, but ultimately someone needs to compromise.

I cannot see the compromise coming from Moscow – which seems to think that merely showing a willingness to de-escalate and talk should be enough to get sanctions moderation. It assumes sanctions moderation because the mood music from the Macron and Trump administrations seems to be towards deal-making again with Moscow and trying to bring Moscow back from the cold.

Moscow thus far has shown zero willingness to compromise so the question is why Putin will do so now. I don’t think he will, which means the onus will be on Zelensky – and I think Putin sees Zelensky as someone who knows wants a deal more than he does, so is malleable. And therein if he does, he will likely have to face down violent demonstrations at home – therein this might explain the “surprise” retention of Arsen Avakov as an interior ministry, useful given his control over the national guard, and tough man persona.

For Putin, all this seems like a win-win now. If Zelensky delivers on Steinmeier, as per the Moscow interpretation, Moscow wins no NATO/EU membership for Ukraine, and the risk is this destabilizes Ukraine further, creating opportunities for Russian intervention. If Zelensky fails to compromise over Steinmeier, he appears intransigent, and Moscow might then still be rewarded with sanctions moderation, and can always re-escalate in Donbas, having lost nothing.

Third, we have seen the Prime Minister Oleksiy Honcharuk administration showing a willingness to address the National Bank of Ukraine/International Monetary Fund demands around threats to National Bank of Ukraine independence, with the Rada committee to investigate NBU wrongdoing around the 2014-2016 banking sector reforms/restructuring seemingly being pulled.

Photo opportunities of Zelensky visiting the NBU, and pressing the flesh with NBU officials, plus then a memo of perceived support, are aimed at improving the mood music, and giving assurance to NBU officials. But all that said, the issue of the future of PrivatBank, and where Zelensky stands on PrivatBank and his friend, billionaire oligarch Ihor Kolomoisky, remains unresolved.

I still find it inconceivable to imagine the IMF extending a new program to Ukraine unless Zelensky provides clear cut support for the original 2016 nationalization of PrivatBank, details what his response will be if the courts rule against that nationalization, and also affirms his intention to follow past commitments to pursue former bank owners for losses incurred to the state from bank owners in the period 2014 – 2016.

Remember that the above losses amount to something like $15 billion combined – a huge total for Ukraine. How can the Zelensky administration walk away from these and still be deserving of IMF support? This would give an impression that the Zelensky administration really is not serious about fighting corruption, and surely in the context of the Ukrainegate saga above, its hard to see Western IMF shareholders having much truck with a Zelensky administration which failed to signal its support for the existing IMF approved strategy towards resolution of issues around Privatbank and other failed banks for that matter.

And the suspicion is that in the context of delivering on his campaign promise to deliver peace in the Donbas, and the risk of street demonstrations, that Zelensky is unwilling to take on key oligarchs which have leverage over the militia, nationalist groups or media concerns.

I cannot see all this flying with the IMF, or other Western governments – or perhaps I am wrong, and the quid pro quo for Zelensky cutting a deal with Putin in the east, will be for the IMF, or its Western shareholders, to look the other way on issues related to PrivatBank and agree to a new program. This would be a huge sellout in my mind from the IMF of Ukraine – as the PrivatBank is all about the rule of law, which is still the number one issue facing Ukraine when it comes to the economy and investment. The price of any such sellout will be lower growth, investment, development, and jobs – and yet more Ukrainians will seek their futures outside the country.

In conclusion, while I addressed all three issues separately, I think all three can be intertwined.