COMMENT: Two different coalitions are equally possible after Ukraine polls

By bne IntelliNews September 28, 2007

Alexander Valchyshen of ING -

The most recent opinion polls indicate none of the parties would be capable of obtaining a majority in Ukraine parliamentary elections to be held September 30. In our view, two compositions are equally possible for the final coalition. In the first scenario, the coalition would remain the same with the PM Viktor Yanukovych's Party of Regions in government and Bloc of Yulia Tymoshenko and President Viktor Yushchenko's Our Ukraine in opposition. The other scenario is a coalition formed under the leadership of the Bloc Tymoshenko where Our Ukraine is secondary. A so-called "broad coalition" between the moderates from the Regions and Our Ukraine is still possible, though the chances of that are lower than the previous two scenarios.

Going to the polls

On September 30, Ukrainians will vote in snap parliamentary elections, hopefully ending the political crisis sparked in mid-spring. The complexity of developments that preceded this crisis and that unfolded in the summer only cemented our view of political life in the country. This can be laid out in the following assumption: whatever new composition of the parliament and the government is going to be right after the elections this Sunday, the tense political rivalry between the troika of key political figures will not recede for at least the next three years, in our view, and will feature the same level of controversy and manoeuvring as in the recent past.

The key figures are Victor Yanukovych (currently prime minister), Yulia Tymoshenko (currently the leader of the largest opposition faction in parliament) and Victor Yushchenko (the president). We have listed these politicians according to their approval ratings captured in recent opinion polls (see charts below). For the time being, there is still no other political figure capable of questioning the dominance of this troika in the top tier of the political arena. The following chart depicts the public approval ratings of several prominent politicians.

The charts show that the prominent standings of the top-three politicians have not suffered on the back of the interminable political fight for power since the parliamentary elections in March 2006.

The Party of Regions and its leader PM Yanukovych enjoy the highest rating. Then, in descending order follow the ratings of the blocs (and their leaders as well) that originated from the Orange camp, namely Bloc Tymoshenko and the Yushchenko-backed union of Our Ukraine and the People's Self-defence. The combined rating of those from the Orange camp is quite sizable and capable of competing with the Party of Regions.

Other parties and blocs have marginally lower approval ratings and some are hardly capable of winning the minimum 3% of votes that is needed to overcome the parliamentary threshold.

Among these parties are the Communist Party, which until recently had been comfortable in its approval rating (usually above 4%) but is at risk of losing support to below the desired 3% threshold.

The Socialist Party is not likely to get into the next parliament, as its approval rating has been in the range of 1-2% for the last 12 months. It is a widely accepted view that the Socialists lost their support base due to joining the Party of Regions-led coalition in August 2006 instead of forming a coalition with its former allies, namely Bloc Tymoshenko and Our Ukraine.

Another party that has some hope in joining the next parliament is the People's Party led by Volodymyr Lytvyn, who served as parliamentary speaker in 2002-2006. His bloc failed to gain enough support at the last parliamentary elections in March 2006, but now his public approval rating has increased towards 3% and several pollsters claim the party is capable of overcoming the threshold.

Looking at the polls, the Party of Regions leads with an approval rating of 30-34%, while Bloc Tymoshenko and the Our Ukraine tie-up with the People's Self-defence enjoy 21-25% and 9-13%, respectively.

While the Communist Party's staunch opposition to any West-leaning move means it will align itself with the Party of Regions, the behaviour of the Lytvyn Bloc is difficult to predict. Lytvyn has an ambition to return to the political helm as parliamentary speaker, which is why his party's alignment would depend on the wiliness of its ally or allies to make such a concession.

Interestingly, the number of undecided voters ranges from 9% to 14%, which could bring some surprising results in the actual number of votes cast for certain parties and blocs.

The number of undecided voters brings us to the following conclusions:

1) Firstly, the high average number of undecided voters is likely to mean more votes for the political parties which rally their voters before the election date. This may slightly (but not dramatically) shift the structure of parliament in favour of the party or parties which manage to attract undecided voters.

2) Secondly, the regional breakdown of undecided voters leads us to believe that the high proportion in the central and western parts of the country - that usually associate itself with parties like Bloc Tymoshenko and Our Ukraine - would mean more votes for these parties than others, such as the Party of Regions.

However, undecided voters should not dramatically impact the actual results of the election compared to what the polls say about the troika of leaders. None will be able to gain a majority and they will be forced into negotiations with each other and with one or two smaller parties, depending on the results.

Where are Yanukovych and his Party of Regions now?

At the moment Yanukovych is the most popular politician in Ukraine, leading a party that also enjoys the highest approval rating. However, this support is concentrated in Donbas, the region that comprises Donetsk and Luhansk oblasts - the stronghold of the Party of Regions - and in Crimea, where the Party of Regions replaced the Communists as the leading political advocate in a region with an extremely high pro-Russian sentiment among voters. It has also gained vast popularity in the eastern and southern oblasts thanks to its Russian-leaning rhetoric.

This summer's events, with the unfolding of the political crisis, showed in our view that Yanukovych is quite divided, running a complex political formation that unites hardliners and moderates. The party's hardliners appear to be firebrand politicians eager to fight with their political enemies to the political death. In our view, this wing of the party several times pushed Yanukovych to question the political agreements with his opponents this summer on the early election date.

On other hand, there are moderates led by Ukraine's richest businessman Rinat Akhmentov, who is widely considered the key financier of the party. It was these moderates who eventually brokered the political deal on early elections last July.

As such, we believe that the Party of Regions though quite a strong political formation has divisions inside it, with the moderates capable of balancing out the firebrand politicians with their sober approach in dealing with political opponents.

Despite the fact that there are two wings in the party, it is unlikely that it would break up because of the internal tensions. Indeed, one of key strengths of the party is its ability to remain a solid political formation even if there are different views on and approaches to certain political issues.

In our view, it is particularly the moderate wing of the party that has formulated the current verbal framework of the party leader, who just recently (in early September) stated publicly that his prime ambition was to remain serving as the prime minister for the next five years. This is quite a revealing statement as the next presidential election is scheduled for January 2010 and the prospects are slim that his party would gain a higher approval rating than the party enjoys right now in the run-up to the presidential elections.

Summing it all up, the Party of Regions now appears likely to be an open-minded negotiator on the formation of the new government. It is also ready, in over view, to negotiate with the president's Our Ukraine on wider issues such as, though it may sound unrealistic now, supporting Yushchenko's bid for a second presidential five-year term. In return it would demand guarantees of its own stable presence in executive power prior to and beyond 2010. One thing that is strikingly negative with the Party of Regions is its somewhat defensive approach to foreign strategic ownership. Two terms of Yanukovych premierships has proved that the privatisation programme is slow in execution and the auctions themselves have allegedly been labelled by the opposition parties as not transparent.

Where is Tymoshenko now?

Yulia Tymoshenko, after spending about two years in the opposition, has managed to preserve her support base among the public (she actually enjoys a slowing rising approval rating), and has saved her faction in parliament from widespread departures (in fact, all the key businessmen who came with her to the parliament after March 2006 have stayed with her and now are running for re-election). She learned a lesson in 2005 to not ignite re-privatisation fears. Instead, she emphasises that she would fight with every allegedly unfair sell-off of state-owned asset or shady privatisation. In addressing the privatisation programme, she advocates open privatisation auctions such as when Mittal Steel bought Kryvorizhstal.

As for government talks, she rules out forming a coalition with the Party of Regions (actually, this is an unacceptable coalition not only for Tymosheko's supporters but also for Party of Regions supporters according to the polls). She advocates only one possible coalition structure comprised of Bloc Tymoshenko and Our Ukraine, where she gets to be prime minister. To accomplish this, she needs to bring her bloc ahead of Our Ukraine (which she appears to have already accomplished) and wait on Our Ukraine's results so that their combined number of seats in parliament constitutes a majority.

Once asked recently about how her bloc would react to a coalition of Party of Regions and Our Ukraine, she replied readily that her bloc would initiate early presidential elections. Under such a development Tymoshenko could consolidate even greater public support as some voters that support Yushchenko would not accept a union with the Party of Regions.

Where are Yushchenko and his Our Ukraine Party now?

During his presidency, Victor Yushchenko appeared dragged down by cleansing his team of controversial figures and fighting for power with the coalition led by the Party of Regions as a new constitution took effect after the parliamentary elections in March 2006. He reshuffled his close circle, appointing as his chief of staff Victor Baloga who served as an emergency minister and proved to be tough in achieving his targets. In addition, his team added some high profile lawyers to fight out the legal battles with his opponents. Eventually, such an approach proved successful as he managed to persuade his opponents on the need for snap elections (actually it took about four months to establish a political and legal consensus on early elections).

Despite all the talk about his political weakness, he appears to be the true leader of Our Ukraine as he stood behind the curtains when they wrote out the list of candidates for the elections. He reshuffled the top ranks of the candidates by promoting Yatsenyuk (age 33), who served as deputy governor of the central bank, minister of economy and until recently as minister of foreign affairs, and Kyrylenko (age 39), who was previously the minister of industrial policy in 2005-06.

Petro Poroshenko, who allegedly has business interests in machinery, confectionary and media, was ousted from the bloc's election list due to bad publicity. Perhaps foreseeing his departure from the bloc's political activity, he concentrated on bidding for the post of the head of the central bank's council, an advisory body to the central bank's executive board. He managed to negotiate with representatives of the different political parties represented in the council and with council members appointed by the president for his final approval as head of this body.

Later, some reports said Yushchenko had a meeting with Poroshenko asking him to step down from running for a seat in parliament this September,. With the news that incumbent Central Bank Governor Stelmakh appeared on the Our Ukraine election list, this sparked allegations that with Poroshenko may receive a proposal from the president to govern the central bank once the new government is settled.

Yushchenko has nurtured the quick rise of former interior minister Yuriy Lutsenko (age 43), who used to be a member of Socialist Party but eventually resigned from its ranks right after the move of the Socialists' leader Oleksandr Moroz to join the coalition with Party of Regions and the Communists.

During the orange revolution, Lutsenko was one of the most active politicians in Yushchenko's victory in 2004.

In early 2007, Lutsenko himself created a movement called the People's Self-defence with its core motive to point the finger of blame for alleged corruption at the government led by Yanukovych. Later, Yushchenko proposed Lutsenko join with Our Ukraine and eventually appointed him as the front man for the union.

Lutsenko has not expressed a willingness to run for the presidency in 2010, showing his strong support for Yushchenko's second bid for the presidency. He also, for the time being, understands that the PM position for him is still in the distance. In fact, it looks like Lutsenko is preparing to make a bid for Kyiv mayor if the newly elected parliament calls for snap elections in the country's capital.

According to recent opinion polls, Our Ukraine led by Lutsenko should gain some 15- 17% of total seats in the parliament. The bloc's front man repeatedly says that there is no other choice for Our Ukraine than to form a government with ally Bloc Tymoshenko. However, Yushchenko himself said recently that would like to see democratic forces uniting to form the government (implicitly he meant that would favour a coalition between Our Ukraine and Bloc Tymoshenko), but in the statement he did not rule out a so-called "broad coalition" (a term widely perceived to describe a union between the Party of Regions and Our Ukraine).

It is obvious that Yushchenko intends to run for re-election in January 2010 - in fact current statements indicate he has already started preparations. With his current approval rating behind that of Yanukovych and Tymoshenko, he would need the support of one of them. This elections and eventual shape of the government will be a guide on what kind of political game he will have to play in the upcoming two years.

Even if Bloc Tymoshenko and Our Ukraine get a majority in parliament, which looks uncertain now, in our view Yushchenko would also consider forming a coalition with the moderates from the Party of Regions, who definitely would prefer to preserve their foothold on power. However, Tymoshenko may then also make a counter-play.

If Bloc Tymoshenko and Our Ukraine do not achieve a majority, Yushchenko would be forced to talk with the Party of Regions over a package of issues with the government and the 2010 presidential race as the two main ones. The problem would be another two years in staunch opposition with the government, which would be a dead end for the president.

There was some indication of wider talks in the near future between the moderates of the Party of Regions and the president's Our Ukraine. Akhmetov's utilities company gained ownership in the state-owned company Dniproenergo, and while this move was labelled by Tymoshenko as stealing from the government, the president's office remained quiet on the issue.

Communists are the same as usual

The Communist Party looks likely to get into parliament, however with less seats than before. Its public rhetoric has remained the same - privatisation would be in danger, as the protectionism sentiment could be brought to the fore. Being rather small players in parliament and staunch opponents of the Yushchenko and Tymoshenko duo, this party would seek a coalition with the Party of Regions, especially with its hard-line wing.

However, it would be up to the Party of Regions to decide on whether to accept the party into its coalition and this might depend on if the party had enough seats to form a majority.

Who is Lytvyn?

According to some respected pollsters, the bloc led by Volodymyr Lytvyn (age 49) will overcome the 3% threshold. Lytvyn was a close ally of former president Leonid Kuchma and his recent and highest post was parliamentary speaker (2002-06). Developments during the fall of 2004 showed that Lytvyn provided some slight support to Yushchenko's bid for the presidency rather than to Yanukovych's.

In mid-2005 there was talk that Lytvyn might join the Orange camp in preparation for the parliamentary elections in March 2006, but this union failed to materialise. As recently as August and September, in public appearances Lytvyn sounded quite neutral in terms of favouring one large party or bloc. One thing he emphasises quite strongly is that would be capable of managing the parliament effectively. This indicates he may try to participate in some kind of coalition under the condition that he hold the parliamentary speaker post again.

If Lytvyn's Bloc manages to get into parliament then it would be approached to join a coalition. Similar to August 2006, the Party of Regions would probably make such an offer to Lytvyn much more easily (as it did to Moroz) as a coalition between Bloc Tymoshenko and Our Ukraine would already have too many people with ambitions similar to Lytvyn's. But the sour experience of August 2006 should make these two parties more grateful to take on a minor member.


In our view, Ukrainian politics remain a difficult theatre of developments to grasp at first glance. The complexity of the current situation and behaviour of the political players may change overnight, though the configuration of the coalition and government should last for at least the next three years, in our view. We see two equally possible scenarios and another less likely scenario for the coalition:

1) Between former Orange allies Bloc Tymoshenko and Yushchenko's Our Ukraine if they gain a majority or they would need to attract Lytvyn if his bloc gets into parliament.

2) The Party of Regions with the Communists and probably Lytvyn's Bloc.

3) We see slightly lower chances for a coalition driven by the moderates from the Party of Regions and Our Ukraine.

In terms of the impact on economic development in the next two-three months, in our view the election results and the new government are likely to have limited influence.

Consumer confidence is firm and will likely be further supported by political commitments on raising social payments and the minimum wage. And business confidence is as strong as it was in 2004 when economic growth picked up to a record level of 12% (partly thanks to favourable external factors). The wealthier Ukrainian businessmen are affiliated somewhat proportionally among the key political parties and blocs, providing financial support and contributing to a level playing field for private businesses.

The result may have some impact on the increase in price for imported natural gas supplied from Russia and several Asian countries. Suppliers may demand higher prices, but as seen recently, Yanukovych can manage natural gas price increases in a quiet manner (a 10% increase was announced for 2008), otherwise it would spark very unpleasant rhetoric capable of threatening business and consumer confidence.

However, even a 25% price hike would nevertheless keep the current account deficit into still quite manageable territory of 3.8% of GDP in 2008 as net inflows of foreign direct investment are likely to be strong as private businesses and the ongoing privatisation will attract foreign capital (net FDI forecast for 2008 is 3.6% of GDP).

Aside from politics, one event is highly certain at the moment - Volodymyr Stelmakh (aged 68) will leave his post as central bank governor to go into lawmaking (taking a seat in parliament as a member of Our Ukraine). It seems the president has asked him to vacate the position and someone else will be nominated. Probably, the post will be used as leverage in power-sharing negotiations with coalition members, along with other government posts. As the president has the constitutional authority to name the candidate for central bank governor, he would push the names of people loyal to him (the most likely candidates are Petro Poroshenko who heads the central bank council and Arseniy Yatsenyuk who was deputy governor of the central bank in 2002-04). With the replacement of Stelmakh, who represents a decade of central bank governing, we expect new thinking and a fresh approach to central bank policy. In our view, the nearly three-year peg of the local currency to the US dollar within a 5-5.06/USD band would be reviewed and we expect gradual flexibility for exchange rate in the first half of 2008.

Alexander Valchyshen is Head of Research at ING in Ukraine

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