Thesis: Ukraine -- Country Risk Assessment

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Ukraine -- Country Risk Assessment

With the emergence of globalization, economic agents were presented with the opportunity of territorially expanding their operations into other regions. The endeavor allowed them increased access to resources, including all labor force, commodities, technologies and capital, but also a wider access to international consumer markets. The success of these global operations depended directly on the managerial abilities to assess the risks and opportunities in each country and adapt to the unique characteristics of each international market. The most important tool in this instance is given by the analysis of the country risk.

Theoretical Underpinnings

In a most simplistic formulation, the country risk can be defined as the totality of challenges faced when investing in a foreign country. There are five such risks:

Political risk

Exchange rate risk

Economic risk

Sovereign risk, and Transfer risk (the possibility that the financial investments in the respective country will be blocked through governmental action).

An inadequate analysis of these risks could lead to a conclusion that the initial estimations have no way of coming closer to the true results; also, this could materialize in significant financial losses. Managers have to assess the risk in each country and based on the intensity of each challenge, they must develop and implement the proper course of action (Investopedia, 2009).

The Country Risk Model is the most popular tool used to assess the country risk of a given state. Basically, it covers the sovereign risk, the currency exchange risk and the risks adjacent to the banking sector. The model conducts analyses on various countries and allows investors to compare the figures across states; the United States is often considered a low (and desirable) benchmark as its country risks are relatively reduced. The Country Risk Model is applied to 100 countries in six global regions (Americas, Asia and Australasia, Eastern Europe (including Ukraine), Middle East and North Africa, Southern Europe and finally, Sub-Saharan Africa). The model addresses 13 different categories of risk, as follows: current account -- current and accumulative account deficit, direction and magnitude of current account, influences of consumption and investment on the current account deficit, reliance on a single export commodity and the annual growth rate; debt structure; exchange-rate policy; fiscal policy; financial structure; global climate; growth / savings; liquidity; monetary policy; political efficacy; political stability; regulatory policy and trade policy (the Economist).

OECD, the Organization for Economic Cooperation and Development proposes the CRAM as the most adequate risk assessment tool. The Country Risk Assessment Model is based on the measurement of the country's credit risk through the quantitative analysis of three primary indicators -- the payment experience of the participants, the country's financial status and third, the country's economic situation. Once the figures are retrieved, they are qualitatively compared to the findings in other countries (Organization for Economic Cooperation and Development).

Other country risk models may refer to hybrid neutral network models, Kohonen network models, models based on discriminant analyses, logit and probit models, ANN models, hybrid ANN country risk models, cluster techniques or models of hierarchical cluster analysis (Yim and Mitchell, 2005). The basic feature that has to be remembered about country risk models is that the specialized literature presents the investors with a wide selection of tools. However, not all the existent models will best apply to the unique characteristics of a respective country and the most adequate ones have to be selected through objective processes. Additionally, it is often advisable to combine several country risk tools in order to ensure high clarity of the results obtained.

3. Ukraine -- Country Risk

With the capital at Kiev, Ukraine is the 36th largest economy of the globe in terms of measured gross domestic product, with the GDP per 2008 of an estimated $337,000 million. The economy is growing at an annual rate of 2.1% and the GDP per capita is of $6,900, in a context in which the global average is of $10,000. This means that the foreign investor would be able to benefit from Ukraine's comparative advantage of cost-efficient labor force. The unemployment rate is of 3% and the country's national debt represents 10% of their GDP (comparatively, U.S.'s national debt is of 60.8% of the country's GDP). All these figures point out to a relatively stable economic and political climate, but the 25% inflation rate does raise some questions (Central Intelligence Agency, 2009).

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