COMMENT: Yanukovych's first 100 days could redefine his legacy

By bne IntelliNews February 24, 2010

Brad Wells of Concorde Capital -

Viktor Yanukovych's actions immediately following his inauguration have the power to define his legacy as much as everything on his record to date, which includes the rigged 2004 presidential election in his favour and his chequered criminal past. Yanukovych is looked upon - and expected - by Ukrainians and the world to restore political order and steer Ukraine out of the current crisis.

With this in mind, here is a look at 10 things to watch in Yanukovych's decisive first 100 days in office:

1. Verkhovna Rada's allegiance

A stable and loyal majority coalition in Ukraine's parliament will arguably be the single most important determinant of Yanukovych's success. If his Party of Regions can cobble together a new coalition that proves viable, or strikes a deal with current prime minister and presidential runner-up Yulia Tymoshenko to share power - his government will be set up to hit the ground running and move quickly on its reform agenda. There is, however, the possibility that talks fail and new parliamentary elections are called, setting the stage for months of uncertainty.

2. Prime ministerial mettle

In Ukraine's parliamentary-presidential government, as much will depend on the identity of the PM as on Yanukovych himself. The president nominates the prime ministerial candidate proposed by the coalition in the Rada. The most positive signal would be the appointment of someone with an appetite for unpopular measures, especially in the budget sphere. Cabinet nominations will equally be reviewed based on whether they seem best fits in terms of experience or payback for political favours.

3. Unlocking IMF funds

Ukraine has $6.1bn of $16.8bn in an International Monetary Fund standby loan on ice. While Ukraine looks able to cover external sovereign debt and gas payments to Russia this year via ample central bank reserves ($25.3bn as of end-January), the resumption in the IMF funding flow sends a more vital symbolic message that Ukraine is a country that can be worked with. The issue will be closely watched, as it was Yanukovych's party that led the charge last year to pass increases in social standards that sidelined IMF cooperation.

4. Pragmatism in 2010 budget

2010 will be a tough year in terms of public finances no matter what: the real economy will still be relatively weak, limiting budget revenues. The degree to which the new budget backs away from populist promises and turns more pragmatic is key. Hikes in retail utility tariffs (by a planned ~30%) are badly needed to bolster the wobbly finances of the state gas company Naftogaz.

5. National Bank of Ukraine's vector

The next central bank governor, a presidential appointment, will be under the microscope in terms of his or her exchange rate policy (Yanukovych, due to his backing by export-oriented industrial groups, may favour stability or a slight depreciation), ability to toe an independent line (the degree they wield monetary policy to meet the government's needs), and support to the banking system (restrictions on foreign currency lending, facilitation of cheap hryvnia funding).

6. Repayment of sovereign hryvnia debt

Ukraine faces UAH9.5bn in domestic debt due by the end of June. If the government is not able to refinance it, up to 50% of that amount might needs to be restructured. At end-2009, the government refinanced large amounts of maturing hryvnia-debt by letting the yields breach 27%. Restructuring could push the cost of debt up even further.

7. Utility tariff hikes

In the run-up to the election, politicians paid lip service to raising retail utility tariffs: it was viewed as necessary, but tantamount to political suicide. Unless early parliamentary elections are called, with the presidential vote out of the way, rates are expected to finally rise. Higher tariffs, in particular, are badly needed to shore up the cavernous gap between Naftogaz's revenues and expenses.

8. Privatization headway

In the last five years, several headline assets have been prepped for sale only to be derailed; 2010 could finally be the year they reach the auction block: Ukrtelecom, Odesa Portside Plant, Turboatom, and even power distribution and generation companies. The re-privatization of Luhanskteplovoz, which was repossessed over procedural violations by Tymoshenko's government in 2009, is also on the table.

9. Nadra Bank's fate

Nadra Bank, Ukraine's 11th largest lender by assets, is the biggest bank taken under temporary administration by the NBU whose fate has yet to be decided. In February, the NBU extended its work there by another year. Deciding Nadra's fate is necessary for facilitating the return of the population's confidence in the domestic banking system.

10. Foreign policy orientation

Yanukovych is expected to pursue a multilateral approach to foreign policy: restoring friendly relations with the Kremlin while cozying up to the EU. He has said his first foreign trip could be to Brussels, not Moscow, and pledged to continue work on a new EU association and free trade agreement.

Brad Wells is political analyst for Concorde Capital in Kyiv

COMMENT: Yanukovych's first 100 days could redefine his legacy

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