KYIV -- I visited Kyiv last week on the usual country visit to kick the tires and to try and better understand the investment story. I met with diplomats, government and central bank officials, corporates and bankers. I leave Kyiv with many more concerns and the feeling that I had been a little too optimistic in my earlier views

Here are some of the key take outs from the visit:

1) On the geopolitical setting, I am no longer convinced that Putin stays out of the East for an extended time period.

In the aftermath of the furor over Flynngate, the Trump administration seems very unlikely to deliver on Putin's agenda of a great power settlement between the US and Russia and sanctions moderation on Russia any time soon. After events in Avdiivka, the danger is that Putin again looks to test the US administration's resolve in Ukraine, albeit he might likely await there the outcome of the French elections in April.

But re-escalation might work to destabilize the improving Ukrainian macro story, which would likely be one of the objectives from Putin's perspective. All this needs to be set in the context of the one year timeframe now to presidential elections in Russia itself.

On the one hand, Putin will not want to take undue risks. But at the same time, he will be eager to ensure a very good victory. If the Russian economy is not firing on all cylinders, which seems unlikely without sanctions moderation, he may well want to return to jingoism and gunboat diplomacy to rally the nation behind his cause. Importantly, he will not want Ukraine to be doing too well, so as to outshine Russia's own performance. On current trends Russia looks set to grow by 1% in the year ahead, and Ukraine perhaps at three times this pace. That looks bad on Putin.

2) The ongoing blockade in the east of trade between DPR/LPR and the rest of Ukraine raises major risks for Ukraine itself.

The hope still is that some kind of compromise deal will be done over the next few weeks (as sensitivities over the three year anniversary of Euromaidan ease back). But the blockade is beginning to suit many different interests and is developing a dynamic of its own which may be hard to stop. There may also be some oligarchic point settling underway in all of this as well, which adds its own dynamic which may not always be that easy to read.

Net-net the blockade may proved prolonged, and this will impact on key strategic industrial assets (the Avdiivka coking plant is key), industrial production and exports.

There does appear to be some fair complaints from those blockading, including the slow release of POWs, and the failure to reform the energy sector - diversifying away from reliance on DPR/LPR -- plus the issue of energy sector unbundling, which is going very slowly.

Protests against coal trading with areas occupied by Russian backed separatists have drawn cross party support.

But the political dimension is that opposition groups, perhaps even supported by disaffected oligarchs, are taking political advantage and now see a real weak spot for the Poroshenko administration - which is unable to use force to break up the blockade, given it is manned by war veterans with widespread popular support.

Major concessions may need to be made to break the blockade, including cabinet changes. But the longer this goes on the more disruptive to the wider macro economy - 500,000 jobs depend on the metals/energy/primary production trade in the region. The blockade also has the potential to change the political dynamic in Donbas itself, weighing on popular support for the government in Kyiv, which is already weak in this region. Obviously the blockade has the potential to impact growth, the fiscal position and the balance of payments as well, given metals exports from the region is a mainstay of the BOP.

3) Expectations of the early sign off on the third tranche of the IMF EFF seem overoptimistic.

True, the IMF appears willing to sign off on the completion of the third review itself - likely reflective of relief over the smooth (thus far) nationalization of Privatbank, and passage of the budget for 2017. But eight structural benchmarks were not met under the third review. The quid pro quo for giving a waiver on these may well be to lock the government down with a clear and specific timetable for improved realization of structural benchmarks in the fourth review.

I think we are close to agreement on the contentious issues of pension and land reform -- or at least the basis for further reform, albeit fine details still need to be worked out. But I think the whole anti-corruption agenda is proving to be a real sticking point. This raises a broader issue of inertia and foot dragging in the anticorruption agenda, which really is so important now in making real improvements in the business environment and therein key to unlocking FDI and raising the country's long term growth potential.

Reports have emerged that the Governor of the National Bank of Ukraine Valeriya Gontareva may resign. (UNIAN)

The IMF perhaps is mindful of past failed IMF programs, which were too soft and light on conditionality to the detriment of reform and growth/development. Perhaps there is nervousness that the fourth review might prove very long winded (the second review took a year). This is especially true if Ukraine manages to re-access international capital markets early, which will surely (given past experience from numerous prior IMF programs in Ukraine) weaken the willingness/necessity (at least from a financing perspective) to hold to IMF conditionality. I think there is recognition that the IMF needs to use any leverage it might have now to lock in and anchor key reforms.

The nuance to this is that 600 million Euro in EU macro financial assistance is linked to sign off of the third review, and the window for sign off on that is narrow due to EU regulations - the next two months or else these funds could be lost to Ukraine. The EU hence might push for early completion of the third review. Mindful that visa free travel for Ukrainians is unlikely to be signed off this side of the French presidential elections -- and in some respects is still hostage to the result of those elections. If Le Pen wins, it is hard to see the new French president signing off on this.

4) On the issue of the anti-corruption agenda, I heard many frustrations that it stalled again, with the new anti-corruption institutions proving ineffectual, and with few prosecutions as yet even though the new e-declarations have revealed numerous potential "excesses."

The concern is that they are suffering from elite capture. And within the political elite in the Rada there is a fundamental unwillingness to give these agencies the real teeth to go after offenders as this might potentially see many in the establishment put at risk. I think the IMF, et al, want to see real evidence of action in this field, and government stalling on giving the anti corruption agencies real power/authority is a major concern now. I think there is also frustration building over slow progress in related issues, including improving governance of SOEs, deregulation in the energy sector and privatization, amongst others. The list is quite long as reflected in eight structural benchmarks having lapsed. Several people mentioned to me that anti-corruption institutions are in place -- they now need to get on with their job.

5) There seems to be some major flux in the domestic political scene on going at present.

This may reflect geopolitics (nervousness over what the Trump presidency means for Ukraine, recent events in Vienna over the Firtash case, plus the electoral cycle and the rise of populist forces at home. Some reform parties (Samopomnich) have left the administration and other more populist ones have rejoined (Lyashko's Peoples Party). The Hroisman government lacks a permanent majority, so is vulnerable given its reliance on situational majorities.

The latter might require some reformulation of the ruling coalition, for example, to enable Lyashko to secure the prize of speaker of Parliament. This might see a quid pro quo emerge and jostling for key cabinet positions and also in key state institutions, perhaps also extending to the central bank (note the on going and bitter campaign by oligarch Serhiy Taruta against the current leadership of the NBU).

While I doubt we will see early elections yet, I think it is likely we see a change in government again, akin to the ousting of the Yatseniuk administration - this might suit the agenda of some who are less willing to implement key aspects of the reform agenda related to graft, or at least it will further delay their implementation therein. The rumpus mill in Kyiv is rife with suggestions as to potential cabinet appointees - albeit this is often the case in Ukraine.

It is notable that in the context of the 2016 budget debate, a strong lobby argued in favor of a more aggressive tax cutting agenda, and breaking away from the IMF shackle. I sense these same forces are circling at present, with some of these same names mentioned in the context of cabinet reshuffles. So we could see a new government, the IMF program going off track, the anti-corruption agenda given less priority in favor of pro-growth policies in the run up to the 2019 elections, with the market tapped to finance all of this. And the risk of history repeating itself in my view from period 2010-2012.

6) Linking the above and geopolitics around the Trump administration we have seen some unusual developments in recent days, and lots of talk of plans to resolve the problems in the East and with Russia.

Elites could prove vulnerable around fallout from the Firtash case, and this might be pushing a drive to look to higher risk strategies to find solutions over Crimea and Donbas. We already saw this with suggestions of a lease deal for Crimea, and even the return of Yanukovych to co-run Donbas. For anyone with even a rudimentary understanding/memory of Ukraine, it is clear that these are ridiculous suggestions. But the mere fact that there is some 'out of the box' thinking going on, could result in outcomes which could only serve to undermine domestic political stability.

Anything including the return of Yanukovych, or accepting the loss of Donbas, is political suicide for any mainstream Ukrainian politician with ambition and would risk social and political unrest, and insecurity as a result. However, political elites appear vulnerable in the context of the anticorruption agenda, and the danger is that we might see poor political judgements resulting with unintended consequences - and perhaps a willingness to accept slower progress on economic reforms/softer conditionality in exchange for "deals in the East".

Suffice to say I sense something is brewing on the domestic political scene in Ukraine, and it is unlikely to be good.

7) It is fair to say there is a degree of fatigue amongst key reformers in the administration.

I wonder whether a cabinet reshuffle would be seen as an opportunity by some of these to retire from the scene.

Key will obviously be who replaces them and the durability of key institutions such as the central bank, and finance ministry, et al. I can speculate on various market friendly, or otherwise, names.

8) There are many other issues to watch for

Issues also to watch which are bubbling away in the background include: on going court cases over the $3 billion Russian 2015 Eurobonds, the 2009 'take or pay pay' gas agreement with Russia, and then Ukrainian claims against Russia for reparations for losses incurred in the annexation of Crimea and then military intervention in Donbas.

The first of these claims is likely to decided in U.K. courts over the next few months and I don't expect it to be resolved in a way which would materially change the Ukrainian investment story.

The second is being heard in the Stockholm Court of Arbitration which could also rule over the next few months, and given claim and counter claim involving tens of billions of dollars from both sides it obviously represents a larger material risk to Ukraine, albeit the outcome is still uncertain. While any losses suffered from the gas take or pay case could be partially be countered by expected reparations for Crimea/Donbas losses, any rulings on these latter cases could take years to hear and resolve - albeit more likely in Ukraine's favor but with a sequencing problem.

One final aside, in the aftermath of US elections, I did not sense from Western diplomats I spoke to any weakening in the resolve to support Ukraine in its tussles with Russia. Indeed, arguably more important a conclusion from the Munich Security Conference last weekend than the expressions of support from VP Pence for Ukraine was the fact that EU leaders seemed to rally more firmly behind Ukraine, amid nervousness I think over the on-going regional threat from Russia (with important elections looming) and nervousness over wavering US commitment to defend Europe.

There is a sense that Europe is now more understanding that it cannot solely rely on the US for a weight of its defense, but needs to work together with European partners, including Ukraine, against common threats - with more clarity now in the aftermath of the US elections what those threats are. The Trump election victory, and foreign meddling therein, has crystallized thinking in Europe.

Timothy Ash is a senior sovereign strategist at BlueBay Asset Management, London

Posted Feb. 27, 2017