I am in Kyiv at the moment and trying to figure out the Ukraine story. After a few meetings the sense is building that the next few weeks could be critical in terms of setting direction. First, a key vote is coming on the new tax code and budget. Therein we have two variants, an IMF compliant code (3.7% of GDP deficit) and then an non-IMF compliant variant which threatens to blow the deficit back out to 10% of GDP plus.
The former is being pushed by Finance Minister Natalie Jaresko, the latter by the head of the Verkhovna Rada parliamentary budget committee, and a member of the Poroshenko Bloc.
The vote looks set to be surprisingly close. The International Monetary Fund (IMF) has made it clear no budget no cash, and neither any from the EU or US, et al - with $4bn in cash backed up.
For most outside observers this would seem like a slam dunk, ie get the budget passed, and get the IMF cash, but not in Ukraine. Seemingly the vote is going to be knife edge, and I sense a strong feeling that the IMF compliant budget and code will not get approved, and the whole thing will drag on into 2016.
Partly the problem is that the govt is no longer desperate for cash ($3bn in the single treasury account), and the assumption is that even if the budget and tax code are not approved, they can survive through to 2016 on a temporary budget - but no cash for the NBU which is still short of FX reserves ($13bn, way down on IMF Extended Fund Facility targets [agreed in March 2015].
The other problem is the reform trade off. The most important issue in Ukraine, by far is corruption/graft. I did a survey with the Kyiv Post this week and 93% (yes, NINETY THREE) of respondents said corruption was the main problem, three times those that say tax reform is an issue.
But the push to drive out corruption challenges elites right at the top and hence they are reluctant to take things too "close to the bone". Radical tax reform (as per the Verkhovna Rada draft) is though seen as providing a quick win - popular fix hence is being prioritised over the anti corruption drive. This suggests the Rada - non IMF compliant version may be approved and to hell with the international community.
Third, domestic politics is getting messy, with the one-year anniversary of the government meaning that there can now be a vote to bring down the government - a confidence motion is expected to be tabled. Former prime minister and head of the Batkivshchyna party Yulia Tymoshenko and others want early elections - March, or a reformulation of the government (Tymoshenko as PM?. The latter seems unlikely still in my mind.
But we should expect shenanigans over the budget and tax code which could get very messy. It would not surprise me to see minister Jaresko offer her resignation – ‘back the budget or tax code, or fire me’. Not sure markets are taking enough notice of this. My gut feeling is the Poroshenko/Yatsenyuk coalition sustains, but we have a political malaise through to the first quarter of 2016, and likely no budget/tax code or IMF budget until well into 2016. This leaves Ukraine looking vulnerable.
Finally - Crimea. A strong view I met is that the issue of energy supply to Crimea and security in the East is now being used as a diversionary tactic by politicians in Kyiv as they don't want to do some of the difficult stuff on anti-corruption domestically. They seem to be prodding Russia, assuming that Putin is busy in Syria and unlikely to want to re-open the military front in Ukraine.
The "win" for Ukraine in Crimea is that the power shortages reveal the failings of the Russian state - 18 months after the annexation of Crimea they are still not able to assure energy supplies to Ukraine. And I guess prodding Russia over Crimea and getting no response just underlines that Russia's military options may not be what they once were - well, let's hope they are right there in trying to call Putin's bluff.
Timothy Ash is head of Central Eastern Europe, Middle East & Africa credit strategy for Nomura International, a Japanese financial holding company.