Danylo Spolsky of Galt & Taggart Securities -

Opinion polls show opposition leader Viktor Yanukovych, Prime Minister Yulia Tymoshenko and the outsider, ex-Parliamentary Chair Arseniy Yatseniuk, leading the race for Ukraine's presidency. Yanukovych looks destined to book a place in the run-off, incumbent President Viktor Yushchenko is unlikely to challenge for another term, while Yatseniuk may play a kingmaker role in the second round. We believe the near-term risk of early parliamentary elections has faded, while the risk of another International Monetary Fund (IMF) loan disbursement delay persists due to potential pre-election manoeuvres that may hamper parliament's ability to pass laws.

Parliament favours January 2010 vote

On the back of the recent Constitutional Court ruling banning an October 25 election, we believe parliament has few constitutional avenues other than to appoint presidential elections for January 17, 2010, and we expect lawmakers to legislate that date in the near term. Meanwhile, a lack of a legal basis, the departure of Presidential Chief of Staff Viktor Baloha, and parties' sliding ratings mitigate the risk of pre-term parliamentary elections.

The leading trio

Opinion polls yield three frontrunners - Viktor Yanukovych, Yulia Tymoshenko, and Arseniy Yatseniuk - while second-tier candidates, including the incumbent Viktor Yushchenko, trail at a distance of 10-20 percentage points. A showdown between Yanukovych and Tymoshenko in the second round is the likeliest scenario, and we believe Yatseniuk's key opponents may enter into negotiations for his votes, agreeing to divide the vertical of power and split the premiership and presidency.

Who is Yatseniuk? Young but with vast government experience, Yatseniuk is well connected with Ukraine's political and business elite. His political platform is purposely undefined as yet, part of his middle-ground strategy, and he has gained sharply in the polls by presenting himself as a reformist politician isolated from the current political class. Yatseniuk has vast government and business experience, having served as Deputy Head of the Board of Directors at Bank Aval, before it was acquired by Raiffeisen, and in the government sphere as Parliamentary Chair, acting Central Bank Governor, Minister of Foreign Affairs, and Minister of the Economy of Krym. Yatseniuk's unconfirmed business connections include Victor Pinchuk (EastOne/Interpipe), Dmytro Firtash (RosUkrEnergo) and Vitaliy Hajduk (Industrial Union of Donbass).

Bargaining, populism pose risk to IMF loan

Pre-election manoeuvring that may lead to parliamentary gridlock threatens further IMF financing, but Tymoshenko has shown herself adept at working with the Fund. After a prolonged delay in the disbursement of the second loan tranche, the government recovered the fund's confidence by instigating reforms on the budget, bank recapitalization measures and Naftogaz's books.

Eight months before presidential elections

The date of the presidential elections has yet to be legislated, but on the back of the recent Constitutional Court ruling banning an October 25 early election and the Constitution's election guidelines, we believe parliament will appoint presidential elections for January 17, 2010. Recent statements made by the five parliamentary faction leaders point to that date, and taking into account recent poll dynamics we believe it is in the best interest of all potential candidates. A later date offers Yatseniuk time to increase recent poll gains and Yushchenko time to correct low approval ratings. Tymoshenko will have leeway to make improvements on the economic front and recover lost polling points, while Yanukovych can continue to distance himself from economic troubles, potentially awaiting further losses for Tymoshenko.

With potentially eight months until election day, opinion polls for the 1st round are yielding three main contenders - Yanukovych, Tymoshenko and Yatseniuk. Polling at significantly below 5% approval, the incumbent Yushchenko is considered to have little chance at a second term. Other second-tier candidates include Parliamentary Chair Volodymyr Lytvyn and Communist Party leader Petro Symonenko. Yatseniuk gained sharply in the past several months, polling at above 13%, having doubled support levels in the first quarter from the 6-7% in December 2008. Generally, the Big-3 (Yanukovych, Tymoshenko, Yushchenko) ratings stabilized in April/May after being hit significantly after the economic crisis took hold in Ukraine. Yanukovych is the only top-tier candidate in Eastern Ukraine, and we believe that the region's unified electoral support will propel him to a 1st round victory. We expect Tymoshenko and Yatseniuk, the two main candidates with electoral bases in Central and Western Ukraine, will split that voter base, with one of the two joining Yanukovych in the 2nd round.

Party of Regions and Bloc of Yulia Tymoshenko - fight or collude

Recently, Party of Regions top ideologue Boris Kolesnikov said the chances of a Party of Regions and Bloc of Yulia Tymoshenko (BYuT) coalition being formed well before the election are 50/50. Over the last 20 months, the two largest parliamentary factions have attempted to form a governing coalition at least four times, but failed on disagreements over potential constitutional revisions. If the long-rumoured negotiations are successfully completed, we believe the two would move to marginalize both Yushchenko and Yatseniuk, as well as adopt constitutional changes.

However, any negotiations would see strong opposition from Yushchenko, Yatseniuk, Lytvyn and other potential candidates. In addition, changes to the constitution this near to a presidential election may seem a vain attempt to retain power, not to mention that a BYuT-Regions marriage would sink Tymoshenko's ratings in Western Ukraine, and likely hit the Party of Regions' polls, as it has been campaigning strongly against Tymoshenko. We do not rule out that if the two form a coalition, President Yushchenko might respond by attempting to dissolve parliament. Yet, the legal basis for such a move is highly questionable. We believe the chances of the new coalition before the presidential elections are low.

Yatseniuk in 2nd round

With his current ratings, Yatseniuk will play a central role in the election, as his ratings look likely to continue their steady climb on the back of electorate's distrust of the main political parties and institutions, and its search for a fresh political face. Currently, he is third behind Tymoshenko and Yanukovych, and polls show Yatseniuk winning the presidency if he emerges into the second round against Tymoshenko, but losing to Yanukovych in a run-off. After the first round, and unless Yatseniuk shows a significant poll lead, we believe Yatseniuk's key opponents may enter into negotiations for his votes, agreeing to divide the vertical of power and split the premiership and presidency. The table below shows potential second round run-off scenarios based on opinion polls. On the strength of his relatively unchallenged electoral base in the east, we believe Yanukovych will emerge into the second round, most likely against Tymoshenko. The chances that Yatseniuk and Tymoshenko, the two candidates that hold Central and Western Ukrainian bases, will face off in round two are limited.

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