bne -

The ruling coalition in Ukraine officially collapsed on Tuesday, September 16. No surprise there, but it's not at all clear what happens next.

Prime Minister Yulia Tymoshenko sparked the most recent in a string of political crises on the very first day of the autumn session of parliament on September 2 by joining forces with her nemesis of the Orange Revolution, Viktor Yanukovych, and his Regions of Ukraine party.

In a marriage of convenience that Tymoshenko has been careful to label "temporary," the odd bedfellows now command a total of 331 seats in the Rada of 450 souls, enough to force through changes to the constitution and override any presidential vetoes. Regions and the PM's eponymous Bloc Yulia Tymoshenko (BYuT) immediately voted through a raft of amendments that strip President Viktor Yushchenko of many of his powers. BYuT's hitherto allies, the president's Our Ukraine-Self Defence, promptly quit the coalition, a decision which became effective September 16. The Rada now has 30 days to form a new coalition from amongst the existing deputies or the president has the right (which he is not obliged to exercise) to dissolve parliament and call fresh elections, a little over a year after the last elections.

So what is Tymoshenko up to? Analysts agree that she wants more power, but none of the leading analysts can agree on what happens next. There are several possible outcomes to the current crisis.

The least-complex resolution is that negotiations to form a new coalition fail and Yushchenko dismisses parliament in October and fresh elections are held in the New Year. More complicated, and more likely, is that a new coalition is formed out of the existing parties. Most analysts believe a new coalition will be formed, although complete confusion reigns on what form this coalition will take.

Dragon Capital's chief strategist, Andriy Dmytrenko, believes the BYuT-Regions alliance is also the most likely and offers some strong supporting evidence. Galt & Taggart says that reforming the existing coalition is most likely, but that fresh elections are also likely. And UkrSibbank says that a coalition between Our Ukraine and Regions has a 60% probability of happening, early elections 30% and the ruling coalition reforming is the least likely with 10%.

bne's view is that Tymoshenko doesn't have a specific goal in mind, as she wins in almost all these scenarios. She is attempting to negotiate the best deal that will significantly improve her hand, and will be tough in each round of negotiations as she stands to lose little if any of the negotiations fail or even if there are fresh elections.

Fresh elections

No one wants more elections - especially not the population. However, if it comes to this, Tymoshenko would probably emerge as the winner.

A survey by FOM-Ukraine (polling conducted August 8-21) showed that if new elections were held, 23.4% of voters would support BYuT, 20.3% would vote for Regions and just 4.6% for Our Ukraine. In addition, nearly a quarter of those polled (24.6%) said they would like Tymoshenko as president, followed by 19.5% supporting Regions head Viktor Yanukovych, and a mere 5.3% backing Yushchenko.

Also noteworthy is potential voters' initial negative reaction to the prospect of new elections. According to a Razumkov Center poll conducted September 4-5, a day after Yushchenko threatened to dissolve parliament, 48-72% of respondents polled in Kyiv and six other cities with different voter patterns disapproved of a potential new vote.

There are two interesting adjuncts to fresh elections. First is BYuT and Regions could agree to increase the threshold to enter the Rada from 3% to 10%. This would have the effect of excluding all the other parties and effectively turning Ukraine into a two-party system. Tymoshenko would agree to this, as it would remove the need to form coalitions and so increase the power of the prime minister's office. Regions could agree to this as if they are going to be in opposition anyway, better to be the only opposition and take all of whatever power is left over.

Second, if there were early elections, Tymoshenko would be very tempted to play the Nato card. She has been noticeably quiet on this issue recently, which is not popular with the electorate. If she were to abandon Ukraine's Nato ambitions (but keep its EU aspirations, which is more popular with the electorate), then she would cut into Yanukovych's support in east Ukraine. Moving closer to Russia would also have the same effect and both would allow her to open up the gap between BYuT and Regions.

For its part, following the five-day Russo-Georgian war, Moscow is in the mood to deal now. As PM Tymoshenko is facing difficult negotiations over gas prices for next year soon, more open support for Moscow in the elections could be rewarded with lower gas prices, which would be an electoral boon for Tymoshenko.

New coalitions

More likely is that the Rada deputies will do a deal to form a new coalition. There are several possible combinations. There are five parties in the Rada, but only a combination that contains two of BYuT (156 deputies), Regions (175) or Our Ukraine-Self Defence (72) can form a majority. If one of the three big parties join forces with the two small parties of the Communists (27) or Bloc of Volodymyr Lytvyn (20), these alliances would not have enough seats to form a majority.

• BYuT + Our Ukraine-Self Defence:

Many analysts see this as the most likely option, as does bne, with one addition. On September 15, BYuT announced it had done a deal with the Bloc of Lytvyn, which controls 20 MPs, who will go into a coalition together. Then within hours of the formal dissolution announcement the next day, Yushchenko suggested the Our Ukraine-Self Defence alliance would rejoin BYuT.

"The Ukrainian president has said on many occasions that he supports the presence of a democratic majority in the parliament. Precisely this kind of majority will be able to implement the course towards Ukraine's European integration and democratic development," Yushchenko said in a statement.

The BYuT and Our Ukraine-Self Defence coalition has a razor-thin one-seat majority, so adding Lytvyn's 20 deputies to this coalition would actually improve things, making the coalition stronger and more stable. Tymoshenko's deal with Lytvyn also puts more pressure on Our Ukraine-Self Defence to do agree to join, as the president's party is already in danger of falling apart. In the September 2 votes to strip the president of power, 10 deputies belonging to the president's Our Ukraine voted with Tymoshenko; rumours that the party is on the verge of splitting have circulated for some time. Doing a deal with Lyvtvyn might tempt more deputies to leave a sinking ship and join Tymoshenko. However, she would have to persuade 50 deputies to jump ship from Our Ukraine-Self Defence to form a new majority, which is unlikely.

However, reforming the old ruling party is no shoo-in, as any deal will be contingent on increasing Tymoshenko's power, and BYuT and the president's office have traded some pretty sharp words in the first two weeks of September.

• Regions + BYuT:

Another favourite with the analysts is for BYuT to officially form a coalition with Regions. This combination would give the parliament a super-majority and effectively turn Ukraine from a presidential republic into a parliamentary democracy. The combined voting power of 331 seats would allow them to ignore the president, override any and all vetoes, and change the constitution at will. "Firstly, the two parties, which have positioned themselves as irreconcilable foes in the past, currently are avoiding any critical remarks about the other. Second, the fiery rhetoric between Yushchenko and Tymoshenko over the past week seems to have gone far enough to make a reunion of the Orange Revolution allies impossible. Third, both BYuT and Regions have shown little enthusiasm for early elections, with Tymoshenko calling the vote 'the worst scenario'," says Dragon's Dmytrenko.

However, bne thinks this scenario is unlikely simply because Tymoshenko has invested too much political capital in opposing Regions come what may. Yushchenko's decision to cut various deals with Yanukovych over the last four years has cost him dear, a lesson that won't have been lost on Tymoshenko.

The only way this would work is for the threshold to enter the Rada to be raised to 10%, turning the next elections into a two-horse race. Tymoshenko could then steal Regions voters at the next elections by playing her Nato and closer-to-Moscow cards. But her success at the polls would boil down to a gamble that faced with only two choices, her supporters - disliking her deal - would dislike voting for Regions more.

• Our Ukraine-Self Defence + Regions:

If Our Ukraine-Self Defence joined forces with Regions they would have a combined 247 seats, enough to form a comfortable majority. Yushchenko's entourage have long been in favour of tying up with Regions. However, while this option would be enough to take control and oust Tymoshenko from her job as PM, it would also be political suicide for Yushchenko. He would destroy the last of his Orange Revolution credibility and certainly lose the presidential elections in January 2010. Moreover, Our Ukraine would likely be wiped out at the subsequent parliamentary elections in 2011.

Yushchenko's other options look equally unappealing. Yushchenko could call for a snap presidential election to confirm his mandate and take back the initiative from Tymoshenko. However, analysts say this is unlikely as given his current standing in the polls, he would definitely lose and Tymoshenko would probably win and so would gain nothing.

More extremely possibilities have been floated, but these are even more unlikely.

There has been some talk of putting the tanks on the street and a constitutional coup similar to Boris Yelstin's showdown with the Duma in 1993. However, if you call the army out on questionable legal grounds, they will waiver. Given Yushchenko would lack popular support for this sort of move, the army would almost certainly come down on the side of the Rada.

Tymoshenko could also be thrown in jail. She was interrogated at the Prosecutor General's Office for almost five hours on September 11, "within the framework of a criminal case into the poisoning of Ukrainian President Viktor Yushchenko," stated Marina Soroka, spokeswoman for Tymoshenko, who promptly left and ran a cordon of journalists without saying a word. No one knows what was said at the meeting. The PM surely has some very large and smelly skeletons in her closet, but analysts rule this option out too. "This is different to Yukos. In Ukraine, the political power is fragmented. In Russia, it is all concentrated in the Kremlin. In Ukraine, the oligarchs are clannish, whereas the Russian oligarchs are not," says Dragon's head of sales, Peter Bobrinsky.

How this crisis will end remains far from clear. However, what does seem clear is that Tymoshenko is likely to emerge with her political standing greatly increased. Given the pressing need for reforms and difficult relations with Russia and the EU ahead, a strong leader and greater political stability may be a boon for the country.

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