Bickering could delay formation of new Ukraine govt until 2008

By bne IntelliNews November 26, 2007

Roman Olearchyk in Kyiv -

Ukraine's leading political parties kicked off this week arguing over when exactly the newly-elected parliament would convene again after having been officially sworn in on Friday, November 23.

Such continued bickering, nearly two months after snap parliamentary election, suggest that Ukraine is facing a continuation of the political paralysis that has gripped the country for more than a year now. Analysts said political horse-trading could put off the formation of a new government for several more weeks, possibly until early next year.

The fear for many investors is that such delays on the political front could further put off important decisions concerning the economy. The country has yet to sign a price agreement for natural gas to be supplied next year by its key energy supplier, Russia. Other big challenges include passage of next year's budget and tax relief legislation for cash-strapped state energy holding, Naftogaz, which finds itself on the verge of a technical default on its Eurobonds.

Politics as usual

During a brief parliamentary session on November 23, Viktor Yanukovych, the outgoing prime minister, formally tendered his resignation. His cabinet will serve as a caretaker government until being replaced by parliament. With a strong showing in the September 30 vote, Yulia Tymoshenko is the leading candidate for premier. Her bloc is expected to form a razor-thin coalition with the political camp of pro-Western Ukrainian President Viktor Yushchenko. But in recent weeks pro-presidential lawmakers have threatened not to support Tymoshenko's candidacy for premier unless she publicly rules out plans to challenge Yushchenko in a presidential campaign that kicks off in 2009.

On November 23, her chances of landing the PM's job still appeared uncertain, but a bit stronger. A day earlier, Yushchenko personally urged his allies to back Tymoshenko's candidacy and the formation of a coalition based on her bloc and his Our Ukraine People's Self Defence bloc.

Tymoshenko expressed hope that a new parliament leadership would be formed swiftly on Tuesday, November 27, at the next scheduled parliament session. "I very much hope that the new speaker will be voted in on Tuesday, and very much believe that voting will be unanimous" in support the revived Orange coalition, she said.

But in a twist, a Yanukovych ally temporarily chairing the new parliament went against protocol and scheduled the next session for November 29. Tymoshenko dubbed the move as a stalling tactic intended to provide time for Yanukovych's Region's party to sabotage her coalition with the president's camp. "They need time to continue buying out lawmakers," she said, referring to the practice where legislators allegedly receive large sums to vote in a certain manner. Over the weekend, Tymoshenko allies alleged that lawmakers were being offered as much as $10m to vote against the coalition. The bribing of lawmakers for key votes was one of the key arguments that Yushchenko used to defend his decision this spring to dissolve parliament.

Tymoshenko insisted her faction would show up for the next session on November 27 as originally planned; Yanukovych-allied lawmakers held firm insisting that the next session would be on November 29. The persistence of such cutthroat political manoeuvring raised expectations that Ukrainian politics is again set for deadlock.

Some political analysts predicted that if the Tymoshenko-led coalition is not formed, Ukraine would drift along for months, possibly even half a year, without a coalition. Yanukovych would, in theory continue to serve as acting premier, or be replaced by a new Yushchenko-loyal acting premier by virtue of a power-sharing agreement.

The main victim of such sustained political paralysis will be Ukraine's economy, reforms and the country's state energy holding, Naftogaz.

High stakes

Ukraine is still adjusting to stiff price increases from previous years on gas imports from Russia and Central Asia and has expressed its willingness to Russia to accept a further hike from the current $130 per 1,000 cubic metres (cm) to $150-160. But on November 23, Gazprom announced the main supplier of gas resold to Ukraine, Turkmenistan, called for its export price to be increased from $100 per 1,000 per cm to a $130 rate. Gazprom, which resells Turkmen gas to Ukraine through Swiss-registered RosUkrEnergo, said it would consider such an increase. Officials in Ukraine said the increase would further raise the final price tag for Ukraine, possibly to a $170-180 rate.

Some sources in Kyiv said the announcement by Gazprom that Turkmenistan gas might get more expensive was linked to the possibility of Tymoshenko becoming prime minister. Her return as PM is expected to strain relations with Moscow; she has pledged to clean up the murky role of intermediaries such as RosUkrEnergo in the multi-billion-dollar gas trade between Russia, Ukraine and Central Asia.

"Gazprom used their trump card, which will give them an edge in negotiations over a pricing formula setting the rules for years to come. Russia is also trying to weave the gas price for Ukraine into politics. They are dragging their feet and certainly not happy about the prospects that Tymoshenko could become premier," says one informed government official.

Meanwhile, European banks with an interest in Ukrainian debt have expressed fears the political paralysis will leave Naftogaz's growing troubles ignored. The state energy firm has failed to produce an audit for last year, thereby violating the covenants in its Eurobonds. Sources close to the company said the audit, prepared by Ernst & Young, won't be signed until parliament adopts tax relief laws for the company. The cash-strapped Naftogaz has continued to make payments, but with fresh rumours about its precarious financials, bondholders are increasingly nervous about the possibility of a default. This month, bondholders agreed to a waiver, giving the company until the end of the year to produce an audited annual report.

With parliament deadlocked, analysts fear tax relief laws won't be passed by the end of the year, triggering a technical default. If Naftogaz, once Ukraine's largest company, sinks into a technical default, the cost of corporate and sovereign borrowing for Ukraine would likely rise, hurting many Ukrainian borrowers and the economy overall.

"The danger is that because politicians are not currently focusing on it, the company could fall into a technical default with very significant consequences for the country," says Tim Ash, debt strategist at Bear Stearns. "Any investor would think twice about investing in Ukraine if they mishandle this one."

Kaushik Rudra, a debt strategist at Lehman Brothers, says that, "with delays in the functioning of the parliament, investors remain concerned that the company will not be in a position to release its 2006 financials by year end, despite already receiving an extension from investors."

"Although we still expect the company to avoid default, we remain concerned about the impact such an event will have on any debt issuance out of Ukraine. These events are happening against the backdrop of very fragile credit markets - and very poor risk appetite among investors," he added.

Rudra said Naftogaz's Eurobonds have traded very poorly in recent months. Once, Ukraine's largest company, stiff gas price hikes have curtailed payments by cash-strapped consumers making a dent on its sales. In recent years, Naftogaz has yielded Gazprom affiliates control over sales to industry, the best-paying consumers.

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