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Ukraine: Why markets should (still) be worried

Sergey Gapon | AFP | Getty Images

The market seems to have blithely shrugged off recent troubles in Ukraine.

Yields on the country's ten-year bonds are now down to 8.8 percent, about 2 percentage points lower than at the start of May. A new president, billionaire chocolatier Petro Poroshenko, will be inaugurated this Saturday (June 7), and optimism about his ability to solve the military conflicts over Ukraine's borders seems high.

Yet there are still plenty of potential mis-steps and risks in the months ahead.

Is the West really united on Russian sanctions?
Is the West really united on Russian sanctions?

Unrest in eastern Ukraine, and Ukraine's own position in the world order, are the biggest risks to its return to normality, Vakim Khramov, Ukraine, Israel, and CEE economist at Bank of America Merrill Lynch said.

This was in evidence at the meeting of G7 leaders this week, which was marked by both Russia's absence, and a statement from the leaders condemning its "continuing violation of the sovereignty and territorial integrity of Ukraine" and vowing to consider further sanctions against the country and its businessmen.

Read MoreG7 summit snub to Russia

Ukraine is close to signing a trade deal with the European Union to remove customs duties on some of its exports, which could benefit agriculture in particular, according to Khramov. Yet this could in turn lead to further action in terms of trade sanctions from Russia, previously its biggest export partner, against Ukraine.

The price for gas from Russia is set to rise by 40 percent in May next year, which will further squeeze Ukrainians.

Read MoreWhy Ukraine needs Russia

A bailout from the International Monetary Fund has been well received, but comes with plenty of conditions attached.

And several of the country's banks are facing the process of recapitalization.

There is also plenty of potential for political unrest with elections for the new Rada (the Ukrainian parliament), likely to be called earlier than planned (the last election was in 2012).

Solidarity, the political party linked to Poroshenko, is predicted to win more than a third of the seats, based on the most recent polls, and a coalition with Solidarity, UDAR, former boxer Vitaliy Klychko's party and Fatherland, the party of Yulia Tymoshenko, would have more than two-thirds of the seats in parliament, again based on polls.

Read MoreRussia 'unpredictable': Poroshenko

With violence still erupting in eastern Ukraine, this could be an extremely contentious election.

There are also still significant risks attached to investing in neighboring Russia.

Russia's conduct in the past few months has signaled the power shift away from liberalism towards the 'siloviki' faction in the top echelons of government. While this has been in progress for a while, recent appointments in the army and regions suggest the faction is gaining strength as Russia feels more threatened – and this is unlikely to be good news if Ukraine is trying to establish itself as more than a Russian satellite.

"The risks of expropriation and nationalization – especially in response to Western sanctions – are likely to rise," Matthew Clements, Deputy Head of Europe/CIS Analysis, IHS Country Risk, warned.