Ukrainian President Viktor Yanukovych sacked his finance minister and appointed an ally to replace him on Wednesday, tightening his grip on the country's purse strings ahead of an October parliamentary election that will test his Regions Party.
Yanukovich named State Security chief Valery Khoroshkovsky, who is part of a close circle of advisers, to step in as finance minister within a few hours of Fedir Yaroshenko announcing he was quitting the post.
Khoroshkovsky, a wealthy 43-year-old businessman, has served as economy minister and head of Ukraine’s customs service in the past and was appointed SBU State Security chief soon after Yanukovich was elected president in February 2010.
In that role, he has been a key player in the prosecution of opposition leader Yulia Tymoshenko, Yanukovych’s arch-rival. The former prime minister is now serving a seven-year prison sentence on a charge of abuse of office.
Yaroshenko was quoted by the presidential website as saying he was leaving at his own request, but analysts said Yanukovich had been sharply critical of the budget strategy for 2012 and it was clear Yaroshenko was being dismissed.
Though Yaroshenko has largely been an executor of commands from above rather than a policy-maker, many saw his departure and replacement by Khoroshkovsky as a blow for conservative Prime Minister Mykola Azarov whose government has sought to draw up a balanced budget in the wake of the world economic downturn.
Yaroshenko has served as Azarov’s right-hand man in various positions since 1997.
Though no policy swerves were foreseen, analysts said Khoroshkovsky’s appointment was likely to lead to tighter control of the country’s finances by the Yanukovych camp in the run-up to the October election.
Yanukovich’s Regions Party, showing signs of alarm at its sagging popularity, has recently stepped up criticism of the Azarov government over its pensions and tax reform which have led to widespread protests.
"Someone has convinced the president that Khoroshkovsky can carry through on the budget which is very important before the elections," Volodymyr Fesenko of Penta think tank told Reuters .
In 2004 Khoroshkovsky walked out of the Yanukovich government, pointedly criticising the conservative policies of Azarov who was then first deputy prime minister.
Fesenko said Khoroshkovsky’s appointment significantly increased the chances of Azarov also being forced out.
"Azarov might not go straight away, but the probability of him going is now significantly greater," Fesenko said, arguing that a fight was under way between the prime minister’s office and the presidential administration for control of the state finances.
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"He (Yaroshenko) was not a person who formulated the government’s ideology in the fiscal sector. Fiscal policy of the government will not change with his departure," said Olexander Valchishen of the Investment Capital Ukraine brokerage.
One analyst saw Yaroshenko’s departure as part of a broader picture, reflecting strains within the leadership over how to shore up Ukraine’s stretched finances.
The International Monetary Fund halted lending to Ukraine in early 2010 over delayed reforms and Kiev’s talks with Moscow aimed at securing cheaper gas supplies have dragged on for over a year without any tangible results.
"It (Yaroshenko’s resignation) has been on the cards for some time (and) probably reflects broader stresses at the moment in the economy as the government battles against declining popular support, a weakening budget and external financial position …," said Timothy Ash of RBS.
Ukraine’s cost of borrowing has shot up in the last few months as investors pulled out of risky assets and the government failed to make progress in talks with Russia and the IMF both of which could have helped state finances.
The spread on the Ukrainian section of JP Morgan’s EMBI Plus bond index stood at 979 basis points on Wednesday, the highest level since late 2009 and an indication that foreign borrowing is hardly affordable for Ukraine at the moment.
The Finance Ministry also found it harder to meet its domestic borrowing targets in the final months of last year as investors snubbed a number of government bond auctions.
