Factbox: Challenges facing new Ukrainian government

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March 11, 2010, 2:41 p.m. | Politics — by Reuters


March 11 (Reuters) - Ukraine's parliament appointed ex-finance minister Mykola Azarov, a close ally of President Viktor Yanukovych, prime minister on Mar. 11 as the country moved to restore stability and tackle an economic crisis. Following are some of the challenges facing the new leadership, which comes to power after years of fractious rule since the pro-Western Orange Revolution in 2004.


Parliament must adopt the 2010 budget, delayed for months by political infighting. The version on the table was drafted by the cabinet of outgoing Prime Minister Yulia Tymoshenko, targeting a deficit of around 4 percent.

The draft can be changed, and could fall foul of some of the more populist pledges made by Yanukovych in his presidential campaign.

Yanukovych has said he will stick to the wage increases passed by parliament last year and which derailed a $16.4 billion bail-out package from the International Monetary Fund.


The IMF held back a $3.5 billion tranche expected last November after parliament increased minimum wages and pensions by up to 10 percent, a move that would cost the budget billions of dollars it does not have.

The fund has insisted household gas prices be increased. Yanukovych has said he wants to renegotiate the IMF deal, which could mean months of further talks.

The outgoing government says the IMF is unlikely to resume funding until the second half of this year, leaving the country to find between $3 billion and $5 billion per quarter to cover budget spending.


Investors continue to worry that Ukraine may have problems repaying its short-term domestic debt, which it has been issuing in increasing volumes and sky-high yields as the economic crisis takes its toll and IMF funding remains absent.

The state has just one foreign debt to repay this year -- a 35 billion yen ($390 million) Samurai bond due in December.

Its monthly domestic debt bill is getting higher and will spike in April when the finance minister has to repay treasury bills worth 3.7 billion hryvnias ($460 million).

On Wednesday, the country repaid in full and on time T-bills worth 596 million hryvnias ($75 million), meaning so far Kiev has the ability and will to repay its debts despite the political uncertainty.


Russian Prime Minister Vladimir Putin forged a long-term gas deal in 2009 with Yanukovych's election rival Tymoshenko, removing the preferential price treatment for Ukraine and bringing rates paid in line with the market.

Ukraine is an important export route for Russian oil and gas to Europe but strained relations with Russia after the 2004 Orange Revolution led to price disputes and cuts in supply.

Many analysts believe Ukraine's desperate public finances mean Yanukovych must push to renegotiate the deal to lower onerous gas bills, but there were no public promises from Moscow on his first official visit there on March 5.

Reports have suggested Yanukovych will offer Moscow a one-third stake in the management of its gas pipelines in exchange for big price cuts.


Yanukovych, seen as broadly pro-Russian, must balance the expectations of the Kremlin with Ukraine's need for Western financial support. He has declared he sees Ukraine as a "European non-aligned state", a bridge between East and West, but Russia remains a priority.

He has hinted at possible concessions to Moscow over the future of Russia's Black Sea fleet, based in Ukraine's Crimean peninsula.

The West wants Ukraine to have more stable ties with Russia to avoid more gas cut-offs, but it also wants Yanukovych to carry out painful economic reforms that could meet resistance from his wealthy industrialist backers.

Being seen as too pro-Russian will not play well with Ukraine's nationalist constituency based in the west and centre of the country. More than half of voters cast ballots against him in the Feb. 7 run-off against Tymoshenko, a huge bloc to take into consideration in running the country.
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