Troika Dialog -

The Rada finally endorsed Yulia Tymoshenko as Ukraine's new prime minister on December 18, her approval being passed with the minimum required number of votes: 226 out of 227, or the entire democratic coalition minus one member who was absent for health reasons. The lawmakers voted by a show of hands followed by a verbal confirmation of each deputy's decision. Opposition groups including the Party of the Regions abstained from voting. Straight after the vote, the coalition approved the composition of the new government as proposed by the newly elected PM. Despite the long delays and the coalition's small majority, the bloc once again demonstrated its ability to run parliamentary sessions effectively.

In accordance with an agreement formulated earlier, the coalition partners agreed to distribute key government and parliamentary posts equally; the Yulia Tymoshenko Bloc gained control over the economics, finance, and fuel and energy ministries, while Our Ukraine People's Self-Defense took charge over the law enforcement and social bodies. The new cabinet doesn't include many new faces, as the majority of the new ministers worked within the government previously. The three vice prime ministers include two close Tymoshenko allies, Oleksandr Turchynov and Grygory Nemyria, and Ivan Vasyunyk, the former deputy head of the Presidential Secretariat, from President Viktor Yushchenko's camp. The biggest surprise was Yushchenko's nomination of civil technocrat Yury Yekhanurov to replace Anatoly Grytsenko (who had a good chance of retaining his post) as defence minister. This seems due to Grytsenko's opposition to the speedy abolition of universal conscription, which was one of the Tymoshenko Bloc campaign pledges.

Under the coalition agreement, the parliamentary majority must adopt a set of laws amending current legislation in order to fulfil the promises coalition members made during their election campaigns. Among the most important of these are changes to the law on the cabinet, which curtails the responsibilities of the president. The veto override written into the cabinet law in the beginning of 2007 was at the root of the political crisis that emerged in the spring and led to the snap elections in September, 2007.

A rocky road

Tymoshenko's government is set to encounter strong opposition and be forced to manoeuvre through a system of checks and balances within the democratic coalition itself. The ruling majority still has to reach a compromise on cooperation with the opposition, namely the Party of the Regions, which has 175 seats. The party has demonstrated its ability to effectively block the parliament's work by preventing the coalition from holding conventions and making legitimate decisions. Hence, the new government is unlikely to resort to radical economic moves of the ilk of mass re-privatizations and excessive increases in social expenditures, which could scare off both international and domestic investors. In addition, the current economic reality differs from that of 2005, as the emergence of a current account deficit in 2006 and expectations of its significant widening in 2008 and beyond requires sustained inflow of foreign capital, achievable via an investor-friendly approach to economic policies.

The loosely tied-together democratic coalition does not seem to stand much chance of speedily implementing all the pending structural reforms, especially those that require the approval of special legislation and/or envisage unpopular measures, such as increasing utilities tariffs. Among the challenges that the new government will face are: the need to establish clear rules of interaction between the major branches of power; the resolution of the issue of Oschadbank's lost savings (one of the Tymoshenko Bloc's election promises) in a manner that would not spark inflation; the continuation of energy sector reforms, including privatizing distribution companies and developing a clear tariff policy for households (the adjustment of which to cost recovery levels has been put off for political reasons).

The key near-term challenge is the approval of the 2008 budget by year-end. The new government has already announced that it intends to revise their predecessors' draft. Former Prime Minister and Party of the Regions leader Viktor Yanukovych and his cohorts recently approved changes to the draft budget, providing for more aggressive hikes in the minimum and living wages. It is unlikely that Tymoshenko's government will roll these back, despite them posing a number of challenges, including the threat of high inflation and the need to adjust utility tariffs.

Though the process of coalition building and government formation took more than two months, it generally bodes well with Ukraine's sustained, albeit very gradual, transition toward becoming a full-fledged democracy. It looks as if the coalition and the new government will demonstrate coherency in the short term, but closer to the presidential elections (expected in early 2010), the emergence of conflicts among coalition partners cannot be ruled out (both President Yuschenko and PM Tymoshenko could appear as rivals during the presidential race). The market reacted to the news of Tymoshenko's approval with only a modest cheer, as the outcome had been expected.

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