Khoroshkovsky appointed finance minister as Ukraine's economy deteriorates

By bne IntelliNews January 19, 2012

bne -

President Viktor Yanukovych appointed security service head Valery Khoroshkovsky as finance minister on January 18 in a first response to the country's increasingly precarious financial situation.

Khoroshkovsky replaces technocrat Fedor Yaroshenko who resigned earlier the same day. The appointment puts one of Ukrainian politics' heavyhitters at the forefront of efforts to shore up the country's finances as growth rates plummet, the price of Russian gas soars, and external debt markets clam up.

The switch "reflects broader stresses at the moment in the economy, as the government battles against declining popular support, a weakening budget and external financing position set against a break in relations with the IMF, and problems in closing an agreement to deliver cheap gas/energy from Russia," writes Tim Ash of Royal Bank of Scotland in a note.

Khoroshkovsky is a hugely wealthy businessman, who controls the country's largest TV channel, the pro-government Inter. Gas and chemicals oligarch Dmitro Firtash is his former business partner and the two are still regarded as allies.

Before heading the security service, Khoroshkovsky led Ukraine's tax service. Media now speculate today that his condition for taking on the job of finance minister will be the subordination of the tax and customs services to him, making him the absolute master of the country's revenue streams.

That puts him in a position of significant power over the country's oligarchs. The World Bank has recently lowered its forecast for Ukraine's economic growth in 2012 to 2.5% while the planned budget deficit of 2.5% is based on 4% growth, thus opening up a funding gap. The question as to which of the major financial-industrial groups will be asked to stump up more taxes to ward off a crisis will be a key political battlefield, analysts say. Khoroshkovsky is now the man who decides.

One deputy prime minister post in the cabinet is currently vacant, and pundits predict Khoroshkovsky will soon fill this gap. If he does so, he will become a potential rival to energy tsar and deputy Prime Minister Andrei Klyuev, who is closely linked to Yanukovych's other main business backer besides Firtash, metals & mining magnate Rinat Akhmetov.

The move will also weaken the authority of Prime Minister Mykola Azarov, previously seen as directly supervising state finances through placeman Yaroschenko. Khoroshkovsky already once quit an Azarov government in protest at his 'authoritarian' style, and may even have his sights set on the post of prime minister as the country goes into parliamentary elections in October this year.

"Khoroshkovsky's rumored affiliation with Dmytro Firtash, who controls one of Ukraine's most powerful business groups, may strain relations between competing business groups in the government," writes Dragon Capital in a research note. "Khoroshkovsky's appointment could also be viewed as a sign of Yanukovych's growing focus on Ukraine's fiscal challenges and his intention to more closely control this aspect of government," they add.

"While there might be some change in the management of the Finance Ministry as a result of the reshuffle, we do not believe Khoroshkovsky will pursue a more aggressive reform agenda" write Concorde Capital analysts. "Rather we relate the appointment to shifting influence in government among rival clans within the Party of Regions."

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