I visited Kyiv this week, meeting with politicians, diplomats, journalists and members of the business community.

Obviously a large part of the focus was on looming presidential elections, due at the end of March, with a likely run off vote then expected between the top two polling politicians after the first round vote, on April 14.

First the good news - I don’t think anyone knows what the result will be. That’s good, as it reflects on the fact that Ukraine is a functioning democracy unlike so many other Emerging Markets (and some DMs!) these days - where the trend seems to be in reverse. The vote will be free and fair, albeit we can argue over access to the media, given the domination of oligarchs over media channels and their penchant for intervening in - actually trying to capture - the political process.

Second, the bad news - I don’t think anyone knows what the result will be. This is a clear risk for the market, and there are outcomes that could be very negative for the investment and business outlook.

Opinion polls suggest that former prime minister, Yulia Tymoshenko, is leading and is a near dead cert to make it to any second round vote. That’s the only real certainty in this election. Well the only other thing I would say with confidence is that no candidate offering a pro-Russian agenda can win this election.

This is reflected in the fact that the consistent message from opinion polls is that two thirds of Ukrainians favour a Western orientation, and now perhaps only single digits support a reorientation back East, towards Russia. So this likely rules out candidates from the Opposition Block, including its leader, Yuri Boiko.

But the problem then is that a whole array of politicians are vying for second place, and the right to face off against Tymoshenko. And all the above are in single digits, with Tymoshenko out in front with mid teen ratings.

Currently polling second is a comedian, Volodymyr Zelensky, followed then by the incumbent President Petro Poroshenko, a former head of the national security council, Anatoliy Hrytsenko, as noted above Yuri Boiko, a former minister of health, a former speaker of Parliament, and now in low single digits a pop star, Svyatoslav Vakarchuk. Many more candidates are expected to run - including a former head of the tax administration who has been fighting off charges of corruption. It is possible the presidential field numbers as many as a score of contenders. But at present the biggest category remains the “undecided” meaning that anything could still happen in this election.

The consensus (perhaps lazy) though is that the run off vote will pit Tymoshenko against Poroshenko. The logic here is that while Poroshenko is still trailing in the polls, he will benefit from the power of incumbency and the ability to deploy patronage carte Blanche.

Poroshenko seems to be basing his election campaign on a message of security (he has argued that the country’s defence is only safe in his hands - having boosted defence spending to 5% of GDP), language (enacting legislation to boost/defend Ukrainian language rights), church (winning autocephalous status for the Ukrainian orthodox church) and the economy (is safest in his hands - focusing there on macro stability and economic recovery and growth). 

Poroshenko seemed to hope that the recent military action in the Sea of Azov and his robust response in declaring martial law would create momentum behind his campaign. But what seems evident is that Poroshenko is struggling to generate lift off in his poll ratings. And therein incumbency seems to be playing against him (the chain of incumbency weighs heavily around his neck) - he has been in power for close to five years and many Ukrainians ask if they have really seen an improvement in their own lives.

I would add that there is a strong underswell of opinion that Poroshenko has failed to address some of the key complaints of the population - including fighting corruption, and dealing with oligarchic capture of the state and the political system.

Poroshenko is selling himself as the continuity candidate, and of steady improvement, but the message from the population is that they do not like the status quo, they want change, and Poroshenko is the archetypal candidate of the old system. He is not marketing change and this looks like a terminal blow to his campaign. The electorate seems to want something different. I think it is important also to recognise that in his majority, landslide first round win in the presidential election in May 2014, there was no euphoria around his election - he was not then seen as a radical reformer, or something different. He was seen as a old school politician (a former founding father of Yanukovych’s Regions of Ukraine party), but the best of the old school bunch and the best person then to deal with the critical issue facing the country, which was the war with Russia in the East. He was seen as a good manager, and was best able to help rally the state machine and country to counter the threat from the East. And he did that. He was a successful war leader - his victory in the East was stopping the forward offensive by Russia in the Donbas, and fighting the Russians to a standstill. But I think a sense is now with the military situation in the East having stabilised - notwithstanding the risks emanating now from the standoff in the Sea of Azov - that the country needs change, and someone to take the economic reform agenda to a new level or different direction.

There is a sense that reforms ran out of steam sometime last year - around the time the country went off track with its IMF programme. Someone who will take on entrenched vested interests much more wholeheartedly might well score better this time around. And I think there is real doubt whether an establishment figure like Poroshenko is that person.

Now it could be argued - it is - that Yulia Tymoshenko hails from the same oligarchic heritage as Poroshenko, but she is offering something different. She has run with a populist agenda, including renegotiating terms with the IMF, cutting gas prices, stalling a move to the creation of a land market, firing the governor of the NBU, and also with talk of a windfall tax on undeclared wealth.

In an era of populists globally, Tymoshenko is owning this populist space - and she is offering change. Something different (albeit she hails from the same political class/old guard as Poroshenko), and that seems to resonate.

Added in here is her offer of electoral and political reform - a move to a PR system in parliamentary elections away from the current 50% “rotten borough” model, and to the creation of a parliamentary democracy. A lot of this seems to be resonating with voters, and while both Poroshenko and Tymoshenko have high negative ratings, polls show that Tymoshenko would beat Poroshenko in a run off vote, as voters seems to want change and might be willing to take a risk with Tymoshenko in the hope of delivering on this.

I also think for some, even amongst reformers, there is nervousness as to what a second Poroshenko term would mean - would it risk Poroshenko’ elites and allies completing the take over of the political system and economy with major risks therein for future trends in democracy and for the efficient functioning of the economy? The recent move to martial law in the East seems to have fanned these concerns, that somehow Poroshenko would do anything to retain power. So in going for Tymoshenko they see this as a rebalancing between elites, before it is too late.

What about new political faces?

Well the experience of the 2011 presidential election is that new political actors or movements can appear - back then it was Serhiy Tyhipko, who eventually tipped the balance in the second round vote away from Tymoshenko to Yanukovych. But this time around time is running out.

To run in the March 31 election, candidates have to declare their hand by February 4. Hopes had been put on the pop star, Vakarchuk, as providing a rallying point for reformers, and those wanting to fight the establishment. But Vakarchuk has been slow to declare his hand, and some are now asking is it too late - momentum, which appeared to be there in August, seems to be ebbing away.

Hence all the above said, at this stage it seems likely any run off vote will be Tymoshenko, against one of either Poroshenko, Zelensky, or Hrytsenko - and just possibly Boiko. Of these she would likely beat all, except perhaps Zelensky. And I would guess Zelensky’s ultimate political backers, who also seem more closely aligned behind Tymoshenko, and against Poroshenko, will be asking whether their objectives are better served with a Tymoshenko or a Zelensky presidency. Zelensky might prove more malleable in their minds, hence they might still let him run, to defeat Poroshenko and Tymoshenko.

One issue, which was raised by some during the trip was whether faced with likely defeat in the presidential poll Poroshenko might step aside in support of another candidate - with many names mentioned, including cutting deals with Tymoshenko, but also perhaps even Vakarchuk. Hard to say here. Ukrainian politics is Machiavellian at the best, or worst of times. I would guess Poroshenko will run as his ego might suggest he always has a chance of winning, while trust in any other candidate is likely to be lacking in terms of defending his own interests after any deal is cut.

So at this stage, unless Vakarchuk surprises by announcing his candidacy, Tymoshenko seems very well placed to emerge as president. 

So, if Tymoshenko wins, what next?

On the political front, her first challenge will be forming a government as she still lacks a majority in the Rada, and parliamentary elections are not scheduled until October. And it is parliament’s prerogative to approve a prime minister, and his/her government. 

It’s possible that a Tymoshenko victory in the president poll will see defections from other parties, sufficient to give the Bloc Yulia Tymoshenko a majority and then an ability to form a government. An alternative scenario is that an interim or technocratic government is formed to take the country to elections. It’s even possible - albeit unlikely - that incumbent PM Groysman stays until parliamentary elections in October, as simply finding a replacement to win majority parliamentary backing will be too difficult. During this period intense negotiations are likely over political and electoral reform.

Dovetailing with a difficult political situation post presidential elections, will be a challenging economic script. A weight of debt service falls due in the months ($5-6bn in FX) following the elections, including on May 1 a $1bn Eurobond, with a US loan guarantee, while the market is likely to be concerned about the prospect of a change in the presidency, political cohabitation likely between Tymoshenko and a then opposition led Rada, plus question marks over the future of the relationship with the IMF. In recent months investors have voted with their feet in demanding higher yields to support Ukrainian sovereign Eurobond issuance, and Naftogas even failed last month to come to market at all but high yields. Further upward pressure is likely on yields, and on the UAH unless the new team can quickly assure investors and markets in terms of their own competency and the credibility of their own programme. 

Tymoshenko is likely to have to quickly moderate more populist political demands - rowing back from plans for gas price cuts, and to make meaningful management changes at the NBU.

Indeed, one of the assuring factors through this electoral cycle now is the strength of institutions such as the NBU, which has proven its competency in the management of monetary and exchange rate affairs, and the banking sector, and shown and proven it’s independence. Similarly so the MOF has run a credible and tight fiscal policy this year - commended by the IMF and as reflected likely in IMF board approval for the first tranche under the newly agreed SBA.

I think post election, economic realism will set in. Any politician who emerges victorious in the presidential election will be forced to re-engage with the IMF, and moderate their more populist promises made during the elections. And encouragingly for the IMF and the durability of institutional and more orthodox policies, what we have learned (and let’s hope Ukrainian politicians have too) over recent months, is that the market will not finance Ukraine if policy makers go off track with the IMF programme. Simply put their is no alternative to continued engagement with the IMF - well there is, but it likely involves devaluation, debt restructuring, inflation and economic collapse.

I am though encouraged that the new president is likely to see reformers (or enough of them to make a difference) want to stay around, or at least in all the most likely outcomes. This might suggest a smoother ride to this re-engagement with the IMF.

All the above said, the transition in power could still be disruptive, and as to how disruptive will be determined by how quickly the political leadership set to emerge after the presidential elections realises that their room for manoeuvre, at least on the macro and financing fronts, is pretty limited. But any new government will have ample opportunity, if they so want to, to make meaningful change and reforms at the micro level - particularly in following through in the fight against corruption and in efforts to improve the business environment. This should be low hanging fruit, albeit with a gold plated and extremely hard to dislodge stalk.

In conclusion to the above, I would argue that the risks of political change are high, but then the risks to the macro economy can be moderated by the strength of institutions such as the NBU and MOF, plus also extremely limited room for manoeuvre given that the market is likely to be unforgiving of any attempt to go significantly off piste in macro policy. The idea of a wealth tax/amnesty is though an interesting one - given the problems in addressing corruption thus far, and similar solutions have been, or are being, tried in Pakistan and Turkey.

What about Russia?

The Ukrainian media is awash with concerns that tensions in the Sea of Azov will escalate to a fuller brown conflict with Russia along its border with Ukraine. And there is indeed credible evidence of a large scale Russian military build up in Western Russia, adjacent to the border with Ukraine.

I would not be that quick to entirely rule out the chances of a larger scale military conflict between Ukraine and Russia - and indeed, I think over the longer term the chances therein are very high - but I doubt that Russia is planning an imminent large scale assault into Ukraine (again).

What we are seeing here though is a pattern of behaviour. In the Sea of Azov there is now a clear and indisputable effort by Russia to take control of the Sea, and/or deny Ukraine full access. This is meant to disrupt economic activity for Ukraine, blockading in effect the important port of Mariupol, but also an effort to continuously erode Ukrainian borders and therein sovereignty.

In the Sea of Azov this has been going on for several years now, but the crisis escalated due perhaps to intent and opportunity on both sides. Ukraine clearly wants to break the blockade (it has a right to freedom of navigation), and Russia to block it.

In the context of the looming Ukrainian election campaign, both sides perhaps saw and sought some advantage in escalation. But escalation brings with it risks of miscalculation and more serious conflict albeit I doubt either side really want this at this juncture.

The West’s efforts at conflict resolution have been feeble - Trump seems uninterested, and the EU incapable/inept. The battle for the Sea of Azov could easily get out of hand and develop into something bigger/larger. The risk of miscalculation are high.

In terms of the build up of Russian land forces, I don’t yet see this as a prelude to a large scale Russia assault, but rather part of a pattern of behaviour going on now for several years, of the Russian military scaling up and down its military forces in the East, with the aim to build the sense of insecurity in the East, so as to undermine political instability in Ukraine and weaken the Ukrainian economy in the run up to elections.

It should also be noted that a full scale military assault by Russia into eastern Ukraine would carry huge risks - especially given the much improved military capability of Ukraine. Russian casualties would be very high - perhaps damaging further Putin’s now lagging domestic political popularity even further. And win or lose in Ukraine, politically any Russian assault would just further harden Ukrainian popular opinion against Russia, and further support for the drive West.

Perhaps Putin’s game plan is to remind the Ukrainian population of the problem in the East, so as perhaps play to the advantage of Ukrainian politicians running on mandates to improve the relationship with Russia. I think this policy will fail, but so many Russian policies towards Ukraine have failed in recent years as they are based on a fundamental lack of understanding of the reality of Ukrainian opinion and politics.

It is though possible to see localised and managed Russian escalation along specific points on the contact line or against high worth infrastructure, including the canal, which provides water supplies to Crimea.

And I would just reiterate here that no candidate in the presidential elections can run and win on a platform of compromise or appeasement with Russia. Any politician who tries this will provoke a bitter domestic backlash, including likely mass street protests, which would eclipse those of Euromaidan. Candidates are though using the appeasement card on each other, but overall I see little real change in the policy towards Russia and the West, whoever wins these elections. Ukraine’s Western orientation and move firmly out and away from the Russian orbit will continue. Russian intervention will only accelerate this process.

This note first appeared as an email to clients. Timothy Ash is the Senior Sovereign Strategist at BlueBay Asset Management