You're reading: Key political risks to watch in Ukraine

The Ukrainian government has yet to persuade the International Monetary Fund to renew financing under its $15 billion programme after missing deadlines for crucial reforms aiming at reducing budget deficit.

Uncertainty over IMF lending, with the price of vital energy imports set to rise sharply by the end of this year, has coincided with renewed political tensions after the start of the trial of former prime minister Yulia Tymoshenko’s trial.

She is charged with abusing her power to forge a 2009 gas supply deal with Russia, an accusation which she has dismissed as politically motivated.

Last month, parliament adopted a pension reform bill that, once signed by President Viktor Yanukovich, will gradually raise the retirement age for women to 60 from 55, putting it on a par with that for men.

However, the government has yet to meet another IMF requirement and raise energy prices for households that are now heavily subsidised from the state budget.

The International Monetary Fund’s stand-by programme is a big factor in allowing Ukraine to borrow on the international debt markets at a relatively low price.

Under the deal with the Fund, Ukraine is to receive credits worth $15 billion over two and a half years, which could be a valuable spur for renewed investor interest.

The programme is key to the government’s efforts to revive its economy, which is dominated by steel exports, after a 15 percent contraction in 2009.

What to watch:

— Will the government raise energy prices for households?

— Will the IMF mission, expected in September, recommend the renewal of financing?

GAS AND RUSSIA

In January 2009 a gas pricing row between Moscow and Kiev resulted in a stoppage of Russian gas flows to European households for about two weeks, tarnishing Russia’s image.

Ties with Ukraine‘s powerful neighbour have greatly improved with Yanukovich’s arrival in power. But the high cost of imports of natural gas from Russia remains a drag on the economy.

Prime Minister Mykola Azarov says the base price for Russian gas is still way too high, despite an April agreement under which it was granted a 30 percent discount.

At the same time, Kiev is resisting a counter-proposal from Moscow for a merger between Russia’s gas giant Gazprom and Ukraine‘s state energy firm Naftogaz.

What to watch:

— Any signs of strain in Ukraine meeting its gas payments

— Renewed pressure by Moscow for a gas merger

FOREIGN INVESTMENT

Though Ukraine needs foreign investment, the strange case of steelmaker ArcelorMittal and its Kryvy Rih mill in central Ukraine raised eyebrows among potential investors.

The state prosecutor launched a court action against the company, which bought the mill for $4.8 billion in 2005, raising fears this could herald a roll-back of privatisations carried out under Yanukovich’s predecessor, Viktor Yushchenko.

The prosecutor abruptly dropped the case after pressure from French President Nicolas Sarkozy.

Another sign of investor indifference came with the failure of an auction to sell off the fixed-line telecommunications monopoly Ukrtelecom .

The privatisation auction had been set for Dec. 28, but the planned $1.3 billion sale was put off and Ukrtelecom was eventually sold to the only bidder, Austria’s EPIC.

What to watch:

— Any new privatisation auctions

— Any real signs of external investor interest

TYMOSHENKO TRIAL

Another destabilising factor could be Yanukovich’s handling of his old adversary, former prime minister Tymoshenko, who is now in opposition.

Tymoshenko, whom Yanukovich beat for the presidency last February, is on trial, charged with abuse of office during her time as prime minister.

A populist whose impassioned rhetoric can bring thousands onto the streets, Tymoshenko thrives on being victimised.

Sending her to prison is fraught with risk for Yanukovich — particularly with a parliamentary election now set for October 2012 — and Western governments have urged Yanukovich not to pursue a vendetta against her.

Political analysts say a suspended sentence is the most likely outcome as it will still bar Tymoshenko from taking part in future elections while not turning her into a martyr in the public’s eyes.

Yanukovich’s opponents say old-style authoritarianism is on the rise under his rule. But the European Union and the United States, under pressure from media and human rights groups, have urged him to honour his pledges to defend democracy and a free press.