A new deal with the International Monetary Fund has brought temporary financial relief for Ukraine, but painful reforms could rebound on the popularity of the cash-strapped government later this year.
Local elections across the ex-Soviet republic reinforced President Viktor Yanukovich’s grip on the country, but a low turnout reflected voter disenchantment and opposition cries of fraud further cast a shadow over the victory.
A call by Prime Minister Mykola Azarov for Russia to accept a lower price for its supplies of gas indicates the government still sees the cost of its gas imports as a drag on the economy despite a much-trumpeted agreement last April.
Under the deal with the Fund, the ex-Soviet republic will receive credit of $15 billion over two and a half years, which could spur renewed investor interest.
A first tranche of $1.9 billion has been disbursed and ratings agencies Fitch and Standard & Poor’s have raised Ukraine’s foreign currency rating by a notch.
Yanukovich’s election, after a bitter campaign against ex-Prime Minister Yulia Tymoshenko, defused political tension and brought an end to infighting. Parliament is now controlled by his supporters, a court ruling on Oct. 1 significantly boosted his powers and the opposition is fragmented.
But the IMF deal could still be costly in raw political terms for the Yanukovich leadership. His government had to cave in to IMF demands to raise domestic gas prices and raise the pension age age for men and women.
On foreign policy, he fulfilled many pre-election prophecies that he would tilt Ukraine back towards its old Soviet master by extending the Russian navy’s stay in a Ukrainian port until 2042 — a move which sparked riots by the opposition in parliament.
Though the country badly needs foreign investment, the strange case of steelmaker ArcelorMittal and its Kryvy Rih mill in eastern Ukraine raised eyebrows among possible investors.
The state prosecutor launched a court action against the company, which bought the mill for $4.8 billion in 2005, over alleged violations of contractual commitments, raising fears this could herald a roll-back of privatisations carried out under Yanukovich’s predecessor, Viktor Yushchenko.
The state prosecutor abruptly dropped the case after pressure on Yanukovich from France’s Nicolas Sarkovy.
But investors will be now be keenly monitoring the progress of Ukraine’s next biggest sell-off, that of fixed-line monopoly Ukrtelecom.
What to watch:
— An economic turnaround in key areas such as metals and chemicals, real growth and new investment.
— New loans from external lenders linked to the IMF deal.
— Any social discontent when the government announces widely expected retirement age increases.
— How transparent the Ukrtelecom public auction will be on Dec. 28. Will it be sold to an outside investor or to a local oligarch ?
RUSSIAN GAS
In Janauary 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.
Prime Minister 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, it is resisting a counter-proposal from Moscow for a merger between Russia’s gas giant Gazprom with Ukraine’s state energy firm Naftogaz.
A visit to Kiev by Russian Prime Minister Vladimir Putin on Oct. 27 failed to produce a new gas supply deal, leaving the threat of a new year gas war hanging in the air
What to watch:
— Signs of strain in Ukraine meeting gas payments.
— Renewed pressure by Moscow on the merger idea.
INCREASING POWERS
Yanukovich’s steady accumulation of power is alarming his political opponents and critics who see old-style authoritarianism growing. They say this is reflected in shrinking media rights.
Western governments have largely given Yanukovich the benefit of the doubt up to now and have been equally unruffled by his decision to drop NATO membership as a foreign policy objective.
But the European Union and the United States, under pressure from media and human rights groups, have urged Yanukovich to honour his pledges to defend a free press in Ukraine.
What to watch:
— Any signs of growing authoritarianism in Yanukovich’s style of rule. Are media freedoms under pressure?
— Any signs of strain in relations between Yanukovich and Azarov over the pace of economic reform.
RELATIONS WITH MOSCOW AND THE WEST
Yanukovich says he intends to take Ukraine along a middle path between Russia and Europe, improving poor relations with the former but moving his country into the European mainstream.
But he has pushed NATO membership off the agenda and taken major steps toward Russia.
What to watch:
— How far will Yanukovich go in overtures to the European Union to balance out his policy ? What progress will there be in talks on a free trade zone with the EU at a Brussels summit on Nov. 22?
