Fierce campaigning expected as many Ukraine voters still undecided

By bne IntelliNews August 23, 2007

Katya Malofeeva of Renaissance Capital -

With major elections in Ukraine happening relatively often and bringing no political stability, it is difficult to expect any major news to stem from them. But in our view the upcoming election will be different for the following reasons:

1. The pre-election campaigning period will be unusually short - the summer break season in Ukraine will only end in September, and before that the effectiveness of the campaign will be relatively low. The fact that a large number of Ukrainians are on vacation now, also suggests that current popularity ratings should be treated with caution;

2. As a result of spring defections of certain deputies to other factions, the largest parties' lists seem more consolidated. For example, deputies who in spring gave up their membership of the Bloc of Yulia Tymoshenko (BYT) are now included in the Party of the Regions' list, and we believe that the parties will now be less likely to lose any members to competitors after the elections;

3. The Our Ukraine pre-election list contains representatives of the People's Self-Defence Party (PSD) headed by Yuri Lutsenko and the two parties will participate in the election as a single bloc. Lutsenko is number one on the combined list;

4. It is very likely that the Socialist Party of Ukraine won't gain any seats in the new parliament;

5. As the economy is doing very well, the opposition parties are struggling to establish campaign issues. The election may generate less interest from the voters and result in a lower turnout than previous national elections;

6. Lastly, there are continued attempts to move the election to a later date, although we believe that it will take place, as scheduled, on September 30.

In this note we provide an overview of the key issues surrounding the election and discuss the major parties' strategies for the next several months.

Many voters still undecided

Recent opinion polls suggest that over a third of eligible voters have not yet decided whether they will vote, or if they do, for which party or whether they will oppose all parties. This is almost twice as high as we saw two months before the parliamentary election in March 2006 - although this could be a reflection of the holiday period. The number of people who say they will tick the "against all" box has not increased much compared with March 2006. In addition, as Figure 1 shows, over the past several months, there were no major trends in approval ratings: all parties' popularity remained at a relatively stable level. Apart from general political fatigue (rather understandable in Ukraine's context), the large number of undecided voters may still be a function of the continuing holiday season. The sizeable pool of still-undecided voters suggests that campaigning will be fierce.

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In Figure 2, we show parliament's composition after the March 2006 election and before parliament's dismissal in April 2007, and then a possible composition after the election, based on the latest-available opinion polls (as of the end of July). The chart suggests that all parties except the BYT have a strong chance of improving their representation in parliament - largely because of the redistribution of the Socialist Party mandates and the reduction of the number of independent deputies.

Currently, Tymoshenko's party appears to be failing to gain support from Oleksandr Moroz's (chairman of the Socialist Party) supporters - and this is not surprising, given the very bitter rhetoric between the two lately.

As illustrated in Figure 2, we expect the new parliament to be formed by four parties - the Party of the Regions, the Bloc of Yulia Tymoshenko (BYT), Our Ukraine/People's Self-Defence (OU-PSD), and the Communist Party. Two more parties are runners-up - the Socialist Party of Ukraine and the People's Party by Volodymir Litvin. The chances of the last two getting into parliament are slim, in our view - their current opinion ratings are around 1.5-2.5%. If they do get into parliament, they would dilute the leadership of the Party of the Regions but could also swing the vote. We doubt, however (and provide our arguments later in this note), that the Party of the Regions would be prepared to team up with these parties after the election.

New government: What to expect and when to expect it

If the election is conducted on September 30 (as we anticipate it will be), the new government should be formed within three months. We believe it is very unlikely that any party will be able to win a simple majority and therefore form the government single-handedly; coalitions are unavoidable.

Three majority coalitions are possible:

1. Between the Party of the Regions and Our Ukraine - People's Self-Defence;

2. Between The Party of the Regions and the Communists;

3. Between OU-PSD and the BYT.

The factors in favour of the first bloc are strong similarities in the economic interests of the key sponsors of both parties, and an absence of major dissent regarding foreign policy. In our view, this coalition would be very natural and logical.

What could prevent an agreement being signed between the BYT and Our Ukraine (before the union between the latter and the People's Self Defence party) is that they will only form blocs with each other if they get into parliament and also the stance of the party's formal leader, Lutsenko, who has recently harshly criticised the government of Yanukovich for its economic policies. Although the deal with Tymoshenko may not be binding now as Our Ukraine has entered a different alliance, breaking it may be very detrimental, as it would offer the BYT a very promising PR target. Representatives of both the OU-PSD and the Party of the Regions have recently dismissed the possibility of their coalition, but these statements should not be taken at face value, in our view: in Ukraine, economic interests are increasingly taking priority over political statements.

As for the coalition between the Party of the Regions and the Communists, if it materialised, it would represent a continuation of the previous majority coalition in parliament (except the Socialists would not be a part of it anymore), and it would be easier to explain to the voters (the conflict between the Party of the Regions and Our Ukraine is supposed to be the major watershed in Ukrainian politics). If this coalition is formed, however, we expect the OU-PSD bloc to support most of the government's pro-reform policy initiatives.

The third coalition will be possible if both parties jointly get over 50% of seats in the new parliament, which appears unlikely. Within this outcome, it is expected that the BYT will receive more seats than the OU-PSD, than vice versa, which would give Tymoshenko claim for the position of prime minister. However, we stick to our view that this outcome will be very uncomfortable for the business community in Ukraine, and if the possibility of such a government becomes real, the Party of the Regions will make every possible effort to avoid it.

In our view, it is too soon to estimate what the probabilities are of each coalition being formed as a lot will depend on the exact composition of parliament after the election. The parties' strategies will be defined depending on the relative strength of both the coalitions and the opposition.

We believe that the first coalition will be stronger and based on common economic views, and thus preferable to the Party of the Regions. This fact, in our view, puts the OU-PSD in a very favourable position: the Party of the Regions is likely to want them as part of the majority coalition, and should be prepared to offer sufficient reward to compensate for the potentially negative implications of such an alliance (as these would be magnified by a skilful PR campaign run by Tymoshenko).

Although the Party of the Regions will definitely represent a major force in government and the coalition, it should not be taken for granted, in our view, that Yanukovich will be reappointed as prime minister. His relationship with the main sponsor of the party - Akhmetov - is not at its best, while other members of the party are also dissatisfied with the way he has run government over the last year. Their main point of criticism is very slow progress in reforms, which would be beneficial for the whole Ukrainian business community, not just for those who support the Party of the Regions. Last, but not least, Yanukovich's relations with the president are clouded by recent conflicts, as well as a bitter 2004 presidential election campaign, and this factor is definitely considered by the leaders and sponsors of the Party of the Regions. The Party of the Regions can communicate and reach compromises with President Yuschenko.

If Yushchenko was to step down now, it is completely possible that Tymoshenko could win the elections, and this scenario is clearly detrimental for the Party of the Regions. This suggests that the latter should aim to encourage normal cooperation between the president and government.

After September 30

In Ukrainian politics, things are never quiet, and in our view the period after the parliamentary election will not be any different. The formation of the majority coalition will not be easy and may take weeks. If the timeline set by legislation is kept, it may take up until the middle of December for the new government to be formed.

The political system that is gradually emerging in Ukraine is one of checks and balances, which is imposed not by any single influential politician at the top, but as a result of the interaction of several large political groups, which pursue both political and business interests. Our overall conviction remains that Ukrainian politics, despite its turbulence, remains rather predictable and stable. As no one can claim dominance, all major decisions will be the result of a well-prepared and discussed compromise. This leaves little room for surprises - either negative or positive - in the areas of reform, appointments and government moves.

In our view, in the medium to long term, Ukrainian politics will witness the formation of three major political groups: one will represent the interests of the industrialists of the east (similar to the platform of the Party of the Regions); another will lobby for the interests of the poorest part of the population and those dependent primarily on the transfers from the budget (currently this is the support base of the Communist and Socialist parties, and increasingly so of Tymoshenko); and the third will be the group that represents the interests of the pro-Western business groups, as well as the small and medium businesses (currently this policy stance is formulated by Our Ukraine). Other political parties will crystalise around these three. We believe that the interests of Ukraine's oligarchs, who already rely increasingly on international markets, will eventually be aligned with the third group.

In the long term - by 2015 - the economic impact of the current oligarchs in the metals sector is bound to decrease, as their companies are growing at slower rates than some other sectors, like retail trade or services. The metals industry - which is the asset base for all major oligarchic groups in Ukraine - will likely end up representing a much smaller component of the economy than is the case today. We are also encouraged by the trend we see currently of a growing number of people employed in the economy, as well as the growth that is taking place in the private sector. Although we do not believe that the increase in the absolute number of people employed will go on forever, given the demographics, migration from the state to the private sector will continue, which would also reduce the size of the electoral support of the "populists."

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