Brigham Marriott of Phoenix Capital -

In a speech given to mark Ukraine's 19th year of independence on Aug 24, President Viktor Yanukovych declared that he has a "formula" for strengthening Ukraine that includes "a strong president who has real powers to coordinate and control the implementation of key reform issues and the country's strategic course." The main ingredient in the president's "formula" is a return of Ukraine's government to the presidential-parliamentary system of the Kuchma era. In order to accomplish this, Yanukovych is pushing for a repeal of law No. 2222-IV.

Enacted in 2004, law No. 2222-IV shifted significant power from the president to the prime minister and parliament (Verkhovna Rada). Yanukovych attempted to repeal the law in early July 2010 by initiating a referendum, but the motion was shot down in parliament by the opposition and the Communist Party and Lytvyn Bloc - both members of the Stability and Reform Coalition spearheaded by the Party of Regions (PoR). The president's ambitions did not fade, however, and on July 14 parliament approved a motion by a vote of 252 (out of 450) requesting the Constitutional Court consider the constitutionality of law No. 2222-IV. The court's decision is expected in October.

Rebalancing power could lead to political tension. In our view, the court is increasingly likely to determine the law unconstitutional. Though this decision would result in a clearer separation of the powers of Ukraine's central governmental bodies, tensions between groups within the PoR could appear in the ensuing reshuffle.

Changes

If law No. 2222-IV is repealed, the following changes would take place:

--The president would have the right to nominate the PM (confirmed by parliament), the Cabinet of Ministers and the heads of the Security Service of Ukraine (SBU), the Antimonopoly Committee, the State Property Fund and the State Committee on TV.

--The president would be able to dismiss the PM and prosecutor general without approval from parliament.

--All bills would require the president's signature. (Currently, bills with a 2/3 majority approval by parliament become law after 10 days with or without the president's approval).

--The President would be able to annul decisions made by the cabinet.

--The Prosecutors Office would no longer serve as the supervisory authority over state and local authorities and government offices and officers, thus weakening the Prosecutor Office's influence.

--Parliamentarians would be elected for four-year terms rather than the current five-year terms.

Repeal of law No. 2222-IV looks increasingly likely. Recent developments point to the Constitutional Court ruling law No. 2222-IV unconstitutional. On July 12, Anatoly Golovin was elected head of the Constitutional Court - Golovin was President Yanukovych's clear favourite for the position. Sergiy Vdovichenko has been appointed Judge-Rapporteur for the court's decision on the law. Both Golovin and Vdovychenko are natives of the Donbass region - the PoR's home turf - and Golovin has been present at meetings on judicial reform held by the presidential administration. In addition, among the most eager lobbyists for the repeal has been the group within the PoR led by the president's Chief-of-Staff Sergiy Levochkin and Dmitry Firtash. The Levochkin-Firtash group maintains the closest ties with the Yanukovych group and together wield significant influence over Ukraine's judiciary, the Constitutional Court included. Both groups will be able to bolster their political stature once the authority of parliament and the Prosecutors Office has been weakened Tension in the ranks.

Not all groups within the PoR are excited about repealing law No. 2222-IV. The group led by steel magnate Rinat Akhmetov would like to see an alternative, and initiated a revision of the law "On the foundations of foreign and domestic policy" along this line. The proposal would have increased the president's power by providing him control of the National Security Council; however, this mechanism did not find the necessary support.

Prime Minister Azarov could be ousted this fall

When the smoke clears, the group led by Prime Minister Azarov may be on the outside looking in. The buzz among political insiders in Kyiv is that Azarov will be used as a scapegoat for the government's recently implemented unpopular reforms and demoted to head of the National Bank. President Yanukovych would then use his newfound power to hand select the replacement PM. Top contenders for the position include First Vice Prime Minister Andriy Kliuyev (Kliuyev group), Vice Prime Minister Borys Kolesnikov (Akhmetov group), Sergiy Levochkin and Minister of Fuel and Energy Yuriy Boiko (both of the Levochkin-Firtash group).

As President Yanukovych forges ahead in his plan to transform Ukraine's government back into the presidential-parliamentary system of the Kuchma era, tensions may rise among groups within the PoR, which would weaken the country's relatively stable political environment. On the other hand, if groups are able to settle their differences, the PoR would lead Ukraine toward further stability as the current parliamentary- presidential system has a tumultuous track record - the imbalance that this system creates led to the demise of the Orange Revolution.

We are optimistic that all sides within the PoR will come to terms sooner than later. We base our judgment on the fact that the motion to send law No. 2222-IV to the Constitutional Court was strongly supported by the PoR in parliament. In addition, the party's recent dip in the polls will foster cohesion ahead of local elections scheduled for October 31, 2010.

Parliamentary elections next year?

Earlier than expected parliamentary elections are a possibility. The repeal of law No. 2222-IV could result in parliamentary elections being held a year earlier than anticipated. The current parliament was elected in 2007 to a five-year term as dictated by the rules established under the 2004 reform. Therefore, if the law is repealed, a fifth year for parliamentarians could be deemed illegitimate, thus resulting in elections in 2011.

The uncertainty surrounding election campaigns in Ukraine has never been good for investor confidence, a trend unlikely to change in the near future. However, considering the PoR's recent dip in the polls and that more unpopular reforms are on the way in the next six months, the party would have little to gain by holding elections in 2011 and will look to defer elections until 2012, in our view.