COMMENT: Ukraine's economy performs well despite political uncertainty

By bne IntelliNews June 21, 2007

Sokrat Capital in Kyiv -

Two weeks have gone by since Ukraine's president, Viktor Yushchenko, issued his third decree on June 4 calling for early parliamentary elections. Even though this was a compromise between all five forces in the Ukrainian parliament, little progress has been made on preparing the elections. Also, the issue as to whether or not the current parliament is still legitimate has not been resolved. While experts suggest the ongoing political instability could impede the inflow of investments and further economic development, the latest data from the State Statistics Committee indicate the economy is still sufficiently strong despite the politics.

Political machinations

The question over the legitimacy of the current parliament stems from the fact that a total of 155 opposition MPs have resigned so far, as was agreed by the president, prime minister and parliamentary speaker in the compromise reached on May 27. According to the country’s constitution, this means that the parliament is illegitimate since there is less than two-thirds of the total number of MPs left.

Coalition MPs have also appealed to the Constitutional Court against Yushchenko’s decree scheduling early elections for September 30. This is the third attempt to put the responsibility for the election on the court. During the first two proceedings, the court didn’t show itself to be politically independent, which is currently also an issue.

We continue to consider a September election as the most probable scenario. Although the coalition still maintains its ambivalent position, neither accepting the election on the one hand nor hindering it on the other, for the opposition, after its resignation from parliament, there is nothing to lose. Due to continuing court proceedings over the election, the date is the only thing that can be changed. Last week, another opinion poll showed that in general terms the Ukrainian population approves of the new elections.

The election alliances of the various parties are now clear. The pro-presidential Our Ukraine has created a political bloc with the People’s Self-Defense party and Ukrayinska Pravitsya. Thus, unlike the parliamentary election in March 2006 when some small pro-Orange Revolution parties didn’t get into parliament, on this occasion only two political blocs will represent the Orange camp: the newly created union and the Yulia Tymoshenko Bloc. In contrast to the Orange parties, the Party of Regions hasn’t made an agreement to unite with the Socialists. At the present time it can be said that both these forces will run separately in the election. Thus, the uncertainty about the election result in the autmun increases.

It's the economy, stupid

For a second consecutive month, the economy has left politics behind. According to the State Statistics Committee, in May (the second month of the political crisis) the slight slowdown in GDP growth observed during the first four months of 2007 ended. In the January-May period, GDP growth managed a 7.9% rise on year. The main growth generators were the processing industry (up 13.8%), construction (up 11.5%) and trade (up 15.5%). The recovery of industrial growth to record a 2% month-on-month rise in May from the fall of 3% on month in April was important. The decline in chemicals (down 4.1%) and oil refining (down 2.5%) was outstripped by the increase in food production (up 6.7%), mineral production (up 6.5%) and metallurgy (up 3.0%).

The government expects economic growth to remain solid in 2008. Despite the performance at the start of the year, the government is sticking to its 6.5% GDP growth forecast for 2007. It adds that growth will improve in 2008 to 7.2%. The main reason for this is significant investment inflows and just a slight change in the price of gas, which is expected to be $10 higher at $140 per 1,000 cubic metres.

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