KYIV BLOG: Yanukovych proves to be old dog that learns new tricks

By bne IntelliNews April 27, 2010

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A majority of commentators hated "Russia's man" in the run-up to the Ukrainian presidential election, but Viktor Yanukovych has so far proven himself to be a better president than many would have thought since he beat his rival in recent elections, opposition leader Yulia Tymoshenko.

As prime minister over the last two years, Tymoshenko flouted the terms of a $16.8bn standby deal thrashed out with the International Monetary Fund (IMF) at the end of 2008 to rescue Ukraine's public finances. Under the initial terms, Ukraine was supposed to run a zero deficit in 2009, but Tymoshenko pushed through a 3% deficit. The IMF swallowed that one without too much complaint (else it would have to accept the collapse of the Ukrainian economy). However, by the end of the year it became clear the situation was far worse; Tymoshenko had cooked the books and the real deficit was 11.4% of GDP (UAH103.8bn) by the end of the year. Without a qualm, Tymoshenko showered money on the economy in a (failed) effort to get elected president in February.

While the favourite moniker used by the international press when describing Yanukovych is "convicted criminal," after only a few months on the job he is proving himself to be more competent than anyone had been expecting (even if he remains a hopeless public speaker).

Defying low expectations

He defied the "Moscow's lapdog" label that commentators were thrusting on him by making Brussels his first foreign trip abroad and made it abundantly clear that Ukraine's best interests are served by moving closer to Europe. The Kremlin is miffed, but Yanukovych has also made it clear that Russia remains Ukraine's most important partner and Moscow is in a pragmatic mood after suffering its own nasty crisis.

Now Yanukovych is tackling the thorniest issue: paying down its debt and putting the public finances in order. Having negotiated a $40bn cut in Ukraine's gas bill to Russia, a draft budget will be debated in the last week of April that has a (realistic) 5-6% budget for this year, Prime Minister Mykola Azarov said on Friday, April 23. "We plan to have a 5% budget deficit and 1% we will leave on [indebted state-owned gas company] Naftogaz's deficit. It's true, I'm planning for us to balance Naftogaz in light of the signed gas agreement with Russia," Interfax quoted Azarov as saying on the government press service.

As Yanukovych holds the presidency and his Party of Regions has the majority in the Rada, the budget is expected to be rapidly adopted, despite Tymoshenko's griping. Most importantly, the IMF mission signed off on the 6% deficit at the end of March, Azarov said, which will allow the standby agreement to restart. The IMF should release the remaining $12bn if placated, giving Kyiv enough time to put the state's house in order as growth resumes. The government has already confirmed a budget declaration for 2011 that reduces the deficit to 4.5% and unlike Tymoshenko's pronouncements on deficits, analysts are already inclined to believe this one.

The reappearance of fiscal responsibility has already paid dividends. Ukraine's stock market soared following the presidential elections, which (hopefully) mark the end of the political instability that saw general elections every year for the last five years. But the market has continued to climb and is now the best performing market in the world in recent months as Yanukovych increasingly proves to be an competent pair of hands.

Likewise, the domestic bond market has been on fire as both the state and local companies raise money to get their businesses going again. The Russian gas deal may push yields on Ukraine's sovereign debt below 10% for the first time in more than two years, rivalling borrowing costs in Greece, economists at Nomura and UniCredit said.

Credit default swaps on five-year debt have more than halved this year, while the yield on the country's 2016 dollar bond shed about 5 percentage points in the same period.

The picture can only continue to improve this year, as after contracting 15% in 2009 - one of the worst performances in the world - the economy is bouncing back strongly; economic growth was 5% in the first quarter of this year, according to government estimates.

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