Brad Wells of Concorde Capital -
On August 8, Pechersk District Court Judge Rodion Kireyev upheld his order from last Friday to detain ex-prime minister and opposition leader Yulia Tymoshenko for contempt of court and berating witnesses, following an incident in the courtroom with rival and current Prime Minister Mykola Azarov.
Tymoshenko's trial is widely derided as politically motivated - she is charged with striking an agreement with Russia in 2009 that halted a 13-day cut off in the flow of gas to Southeast Europe. The scale of the criticism following Tymoshenko's arrest both domestically and internationally has been quick and reached levels unprecedented in Ukraine's history: from rival opposition figures, the US and European governments, international rights organisations; even Russia's Foreign Ministry issued a statement disapproving of the arrest. The backlash threatens to strain Ukraine's relations with its key trading partners: Russia and the EU
In addition, the arrest of Tymoshenko has worrying implications for the overall business and investment climate in Ukraine. The authorities have recently shown they are willing to go after political and business opponents alike. On July 12, Security Service of Ukraine (SBU) agents stopped work at the production facility of Rosava, part of Finance & Credit Group, which is controlled by Ukrainian businessman Konstantin Zhevago, a member of the Yulia Tymoshenko Bloc in parliament. Kommersant reported SBU agents have also visited other F&C Group businesses, including Finance & Credit Bank, Arterium Corporation and Stakhaniv Wagon. The official SBU investigation is ongoing.
A divisive figure turns uniter?
Ukraine's opposition parties are well known for their disunity, which derailed cooperation when they were in power in 2005-2010 and has rendered their combined efforts back in opposition ineffectual. For the first time in recent memory though, domestic opposition parties are standing together. Nine political parties, including Arseniy Yatseniuk's Front of Change, Tymoshenko's own Batkivshchyna, and Nasha Ukraina signed a joint statement against the current government and political repression.
Outside the courthouse August 8, we estimated several hundred protestors; Tymoshenko's party has called for larger protests on Ukraine's Independence Day on August 24. Yanukovych's presidency has prompted numerous short-lived protests over the last year: the Black Sea fleet for gas deal, education minister appointment, tax reform, pension reform, etc... but none have grown legs. Most Ukrainians remain disenchanted with politics and now are more focused on the financial and economic woes than political and legal ones. We see a low probability of widespread protests as a result of Friday's arrest so far, and continue to monitor developments.
Russia rapprochement stalls over Kyiv's gas machinations
Russian leaders have rebuffed attempts by Kyiv this year to secure a sweeter gas deal, beyond what President Viktor Yanukovych got when he agreed to extend Russia's basing of the Black Sea Fleet in Crimea for 25 years in exchange for a 30%, 10-year price discount in April 2010. Russia has said it will respect the 2009 agreement, signed by Tymoshenko and Russian Prime Minister Vladimir Putin, and does not agree with Kyiv's rationale for new talks.
Undeterred by Russia's unwillingness to renegotiate, Ukrainian officials countered by saying they might seek to annul the 2009 agreement in court. Russia has reportedly not been happy with Kyiv's gas machinations nor its reluctance to join a Customs Union with Belarus and Kazakhstan. After a flurry of bilateral visits on the presidential level last year, (six, according to President Viktor Yanukovych's website), there has only been one so far in 2011, though Yanukovych's website confirms plans to meet his Russian counterpart Dmitry Medvedev in Sochi on August 11. No progress on new gas agreements or customs union is expected.
EU concerns likely to lead to lengthy DCFTA delays
EU and Ukrainian politicians had announced plans to tie up a landmark Deep and Comprehensive Free Trade Agreement (DCFTA) at their annual summit in December in Kyiv. In our view, negotiations should continue, but the political headwind in Europe is going to only get harsher. Tymoshenko's arrest adds kindle to an already blazing fire of criticism in Europe over how much longer it can tolerate democratic backsliding following last October's flawed local elections, crackdowns on the opposition and the media, and issues with the rule of law and judicial reform.
Center for European Studies fellow Michael Emerson noted in a July 27 article that on the EU side, the DCFTA must be ratified by both the European parliament and all 27 national parliaments. Emerson said all such agreements now include a human rights clause, which could trigger delays over Ukraine's record. The EU took four years to adopt Ukraine's last major EU agreement, the Partnership Agreement of 1998. Though Yanukovych could get a political victory in the form of signatures on the DCFTA this winter, we view a lengthy-adoption scenario as likely - with true DCFTA benefits for Ukraine delayed for the mid-term.
Moreover, Europe hailed the 2009 contract when it was announced, which set up rules to govern gas supplies and transit between Russia and Ukraine for 10-years, as a breakthrough. Further attempts to unilaterally review the deal by Ukraine would tarnish Ukraine's international reputation as a trade partner.
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