Ukraine's post-election scenarios

By bne IntelliNews October 22, 2007

Paulius Kuncinas in Kyiv -

While a degree of uncertainty lingers over the final outcome of post-election negotiations in Ukraine, the ex-Prime Minister Yulia Tymoshenko remains the only candidate to replace the current head of the government. This has prompted a largely bullish capital market reaction underpinned by mostly positive expectations for the economy.

The exact composition of the next government is going to remain subject to speculation until the parliament actually votes on the new government in early November. The bets are on the Orange coalition parties dividing up most of ministerial portfolios amongst themselves with some possible concessions to the Party of Regions.

President Viktor Yuschenko, too, seems to have come to terms with this post-election outcome, albeit reluctantly. Despite his earlier calls for broadening the coalition to share power with the Party of Regions he told the press during his visit to Bratislava last week that "the Orange team has won the elections and it has every reason to form a majority and propose its Prime Minister".

Four days later - shortly after the Central Electoral Committee (CEC) officially confirmed a slim victory for the Orange alliance - Yulia Tymoshenko Bloc (BYut) and Our Ukraine-People's Self-Defense (NU-NS) initialed a pact to form a parliamentary coalition. The move assured the public that everything is going according to the Orange plan and that the coalition remains intact.

Behind the scenes, however, the negotiations are expected to continue right up to the parliamentary vote required to appoint the new government. According to election law the new parliament has to resume its work twenty days after the publication of the election results, i.e. by November 9th.

"A lot of horse-trading is yet to be done" according to Tom Warner, Kiev-based analyst at Sito Capital. "But there are only two options: either we see a relatively quick appointment of Tymoshenko as Prime Minister by mid-December or negotiations will drag on into the new with Yanukovich government still in place."

There is no other candidate, according to Warner, who could replace the current government, given the outcome. "Our Ukraine party does not have any political excuse to abandon Tymoshenko and form a coalition with the Regions.

Nonetheless, given to get her 226 votes in the parliament, Tymoshenko must count on all the Orange deputies to stick to the coalition agreement. Although Tymoshenko's old Orange foes, such as Petro Poroshenko are now left on the sidelines, there are around 30 deputies in the Orange alliance who are considered to be capable of dissent and whose loyalties primarily lie with the President.

For a quick Orange government appointment to take place Yushchenko has to lean on his group of deputies to toe the coalition lie even though they stand little to gain from reneging on their coalition deal apart from keeping Yanukovich in power and extracting political benefits.

Yushchenko's ambivalent statements after the elections, however, clearly demonstrate he is reluctant to reappoint Tymoshenko as Prime Minister, even as he faces an even less palatable prospect of yet another collapse of the Orange alliance and another major victory for Yanukovych.

Tymoshenko, however, seems to be in a conciliatory and politically pragmatic mode willing to approve a package of Cabinet laws ceding greater powers to the President to ensure the fragile Orange majority survives in the parliaments and results in her taking the governmental control.

Most analysts therefore believe that given the lack of other options Yushchenko will find a way to protect their alliance, despite pending negotiations on detailed power arrangements.

Meanwhile, there are different opinions as to how the Regions are going to react to another power reversal in the making. Yushchenko's call to include the Regions, some analysts argue, suggests he reached a deal before the early elections not strip them entirely of their power.

In Yushchenko's own words he wants to heal the national divide and wants to ensure political stability. The Regions still have a couple of nuclear options in their arsenal, such as boycotting the parliament or resigning their seats in order to trigger an early election.

According to Warner, however, they stand little to gain from any of these moves as their performance is unlikely to improve should another election be held in the near future. More likely is that the leading businessmen within the Party of Regions, notably Ukraine's richest man Rinat Akhmetov is going to try to secure a peace deal with the new government.

In contrast to 2005, Tymoshenko cuts a more predictable and pragmatic figure. Although her campaign slogans still carried the same populist message of seeking retrospective justice through the process of reprivatization the consensus is that she is unlikely to press to fulfill her election promise on this particular front.

Most tellingly she softened her stance on the reprivatization of Ukraine's largest thermoelectric power generator, Dniproenergo, which was recently sold to Akhmetov's System Capital Management (SCM) holding. Despite making strong pre-election promises to take control of this particular asset, Tymoshenko softened her stance considerably after the elections saying he expects the courts to rule on the matter.

Similarly, other companies that are currently embroiled in legal debates over ownership and privatization, such as the locomotive manufacturer Luhanskteplovoz and Nikopol Ferroalloy Plant are unlikely to face full scale reprivatization, even as they continue to be bogged down in protracted legal wrangling.

Where Tymoshenko's policies could make a difference, according to analysts, is in the gas sector which given Gazprom's recent announcement of outstanding debt claims is inevitably going to face a major shake up. The Russian-Ukrainian gas trading company, RosUkrEnergo is expected to come under a major political attack once Tymoshenko returns as Prime Minister.

If prices of gas eventually rise as they are expected to Tymoshenko's government is unlikely to offer preferential prices to companies close to the Party of Regions that rely heavily on Russian gas, such as the chemical producer Stirol.

Some, however believe that her market instincts demonstrated during the first tenure are by no means liberal, as she is prone to introducing administrative price controls whenever sharp increases reach unpopular levels. Like last time, the temptation to keep a lid on rising energy prices will continue to be the source of main political dilemmas pitting her populism against the need for economic prudence.

Meanwhile, in fiscal policy, Tymoshenko is widely expected to adopt a looser regime delivering on her election pledge by increasing social spending. Although the minimum wage and pension hikes are not going to be on the same scale as in 2005 they would come at a time when inflation is already running in double digits.

Nonetheless, the domestic capital markets responded positively to Tymoshenko's expected return as Prime Minister. According to analysts she has learned a valuable lessons in politics and economics and appears to be a lot less radical and pragmatic than in her first incarnation.

At the same time Tymoshenko is expected to bring back her original strengths of Western orientation, promise of greater transparency and level playing field. A positive change in business environment, analysts argue could unleash significant FDI inflows, lead to greater global integration, know-how transfer, raising Ukraine's productivity and external competitiveness.

This positive outlook however depends on Tymoshenko's genuine departure from destabilizing policies of reprivatization and arbitrary price-interventions which had a major negative impact on domestic investment and GDP growth last time she was in power. For now the market mood is bullish, based on hopes that Ukraine's most gifted political campaigner has learnt a valuable lesson.

Send comments to The Editor

Related Articles

Ukraine's largest PrivatBank faces down nationalisation fears

Graham Stack in Kyiv - Ukraine's largest lender PrivatBank has survived a stormy week of speculation over its future, but there are larger rocks ahead, with some market participants anticipating the ... more

bne:Chart - Russia begins to steady the ship according to latest Despair Index

Henry Kirby in London - Ukraine and Russia’s latest “Despair Index” scores suggest that the two struggling economies could finally be turning the corner, following nearly two years of steady ... more

Austria's Erste rides CEE recovery to swing to profit in Jan-Sep

bne IntelliNews - Erste Group Bank saw the continuing economic recovery across Central and Eastern Europe push its January-September financial results back into net profit of €764.2mn, the ... more

Notice: Undefined index: subject_id in /var/www/html/application/controllers/IndexController.php on line 335