I have been in Kyiv this week, meeting the usual suspects but also attending the Concorde Capital “Game of Thrones” – the Ukrainian version – conference on May 16.
The highlight for me was a panel of four oligarchs who gave their own very particular spin on things. Surreal to say the least, this seemed like more of a campaign rally at times as TV cameras were deployed and they seemed to be pitching their expertise to certain constituencies, be that the public or the old and new political classes. It was eye-opening nonetheless as to how things have worked up until now in Ukraine.
But Volodymyr Zelenskiy’s April 21 election as president of Ukraine suggests the population want something different.
There were numerous foreign bank investor types visiting Kyiv this week, and plenty of foreign investors trying to figure out the landscape post-Zelenskiy’s landslide victory.
Here are my own takeouts:
A starting point for me is that Zelenskiy’s win has totally left the Kyiv establishment flummoxed and disorientated. The bulk of the Kyiv establishment was in President Petro Poroshenko’s camp, and I guess, assumed that the power of incumbency would inevitably win out in the end, as it so often does in post-Soviet space – excluding the Baltic states. This always seemed bizarre to me, as if the Kyiv establishment had its head in the sand as to anti-establishment movements doing the rounds globally, but also not really understanding Ukraine itself.
Ukraine has proven time and time again that it is a different story to the rest of the former Soviet space, as proven by the 2004 Orange Revolution, which vaulted Viktor Yushchenko to power, and the 2014 EuroMaidan Revolution, which overthrew Yushchenko’s successor, Viktor Yanukovych, and led to Poroshenko’s election.
The fact that Ukrainians fought for their statehood against Russian aggression in Donbas. Ukrainians have a strong independent and anti-establishment vein running through their beings. For me, Poroshenko was always going to lose. I just thought first that singer Svyatoslav Vakarchuk would beat him, then ex-Prime Minister Yulia Tymoshenko and finally Zelenskiy. But this was more a case of anyone but Poroshenko, bar a pro-Russian candidate.
So I had lots of interactions with Kyiv elites this week who seem to be struggling still to understand the Zelensky phenomenon. But it is what it is. Get used to it, and work with it.
The other takeout is that few people in Kyiv seem to understand much about the new president’s team or program. Critics would argue that that is because there is no team or program. A more charitable view is that Zelensky is keeping his powder dry from friends (such as billionaire oligarch Ihor Kolomoisky) and foe (also potentially Kolomoisky and others).
I also understand a 100-day Zelensky program is being “constructed” under the auspices of an adviser. While not that much is known about Zelenskiy’s policy program, the consensus from those that have had any interaction with the president-elect is that he is clever, business-savvy, a quick learner and that he genuinely has the good of the country at heart and does want to deliver change the electorate voted for. He is a joker, but certainly no fool.
There are obviously lots of unknowns and concerns – who will be in the team, what will be in the program, how the presidency will work with parliament in the run-up to Verkhovna Rada elections, how he will deal with corruption and the judiciary and oligarchs, the PrivatBank hand grenade thrown in the mix just before the elections, plus how will he manage relations with Russia.
But, first, let’s set out the positives:
First, yet again Ukraine has proven its democratic credentials – in stark contrast to much of the post-CIS space. The presidential elections were free and largely fair. We can debate there the role of oligarchic-controlled media channels, but is it so much different from the mass media in the United Kingdom or the United States? Ukrainians had a real choice in these elections, and overwhelmingly (73 percent) chose Zelenskiy. On the plus side he was given a strong mandate to govern.
Second, Ukraine has some notable checks and balances, but particularly a free and very dynamic press, and NGO culture. They continue to challenge politicians and expose wrongdoing in politics, business and the wider community.
Third, while Zelensky is anti-establishment, he is liberal, and not in the autocratic, illiberal tradition of some of the other anti-establishment movements doing the rounds globally. He is pro-business, pro-market, and pro-Western, and given his Jewish origins, he hardly fits into the frequent xenophobic slant of many of these other anti-establishment parties and forces globally. This also helps counter the Kremlin script that Ukraine is some kind of pseudo-fascist state which it is absolutely not – quite the opposite as suggested by the points earlier made.
Fourth, while much is made of Ukraine’s weak points in terms of corruption and a captured judiciary and elite political class, it has some strong macroeconomic and financial institutions. I would highlight the institutional transformation of the National Bank of Ukraine over the past five years to an international best practice central bank, winning many friends now for its able and competent management of monetary and exchange rate policy and banking sector regulation and reform. Monetary policy is prudent and orthodox, exchange rate management moving to greater flexibility dovetailing with its inflation targeting mandate. Inflation is in the high single digits but on a declining trend, the hryvnia is stable to stronger, with foreign-exchange reserves standing at a solid $20 billion plus, over three months of import cover.
Fiscal policy is generally prudent, with the fiscal deficit reduced to below 3 percent of gross domestic product, and the ratio of public sector debt to GDP cut below 60 percent. The Ministry of Finance is establishing a debt management office and pushing ahead with developing the local debt market which should help alleviate a particular vulnerability which was the relatively high share (two thirds) of foreign-exchange debt in total public sector debt liabilities.
But prudent macroeconomic policy means that macroeconomic imbalances have generally been reined in – with now only modest and manageable twin deficits.
The NBU has led banking sector reform sufficient that the sector is now generally profitable, reasonably well run with manageable capital levels – albeit NPLs remain an issue, particularly in the state-owned banks. But importantly the banking sector as is does not suggest an imminent systemic risk to the broader economy, albeit it might not be a growth driver in terms of provision of adequate credit for the economy – likely reflected in the feeble 2.2 percent first-quarter real GDP growth print.
The above suggests that macro stability is sufficient to get Ukraine through the current electoral cycle which should run through parliamentary elections which have to be held by October, if not earlier.
But what about the risks?
There is a concern that policy will drift in the run-up to parliamentary elections, and of some kind of legislative logjam between the presidency and parliament in the run-up to parliamentary elections, and while President Zelenskiy lacks a working majority in the Rada – and indeed, does not even control the prime minister or the cabinet. But somewhat reassuringly moves were made this week to bring Zelenskiy’s inauguration forward to May 20, which would then allow early parliamentary elections by July. This would cut the time span for drift by months and offers the prospect of Zelenskiy being able also to command a majority in the Verkhovna Rada and hence select the government of his choice.
Recent opinion polls have suggested that Zelenskiy’s Servant of the People Party could poll well, likely around 40 percent, but still might struggle to form a majority. But established parties in parliament seem unnerved by the meteoric rise of Zelenskiy and seem to think that the best chance of preventing Servant of the People front securing a majority is to go the polls early before the new party has time to build a grassroots party organization. Yulia Tymoshenko, the Opposition Front, and Poroshenko’s bloc all seem content to aim for 10-15 percent and see their best chance of staying above the 5 percent threshold to secure parliamentary representation if they go for early parliamentary elections. Also note that waiting until October also risks election reform which could end the single-mandate constituency, which has historically benefited oligarchic business groups. Only the National Front of former Prime Minister Arseniy Yatsenyuk seems intent on stalling early elections as they are polling well below the 5 percent threshold and need more time to try and come back from the brink. The party this week pulled out of the ruling coalition in a plot which seems set on preventing early elections – as the Rada will then be required to go through the motions of trying to forge a new ruling coalition within 30 days. I think this ploy will ultimately fails as too many interests want early elections now.
It seems, though, that established parties are of the view that with a weak and inexperienced president in Zelenskiy, power will move to the parliament, and the key is getting into parliament to be a player when power is ultimately distributed.
But at least early elections should be positive by reducing the period of potential policy drift.
The bigger issue for me is the now long-running saga of the PrivatBank nationalization and the role, if any, its former owner, Ihor Kolomoisky, may have in/around the Zelenskiy administration. I think this, above all else, will shape perceptions and the reality of the Zelenskiy presidency. It could fail or succeed on these two linked issues.
PrivatBank nationalization has been challenged in the courts by former owners, and a ruling some weeks back appeared to support the reversal of the original nationalization. PrivatBank, the country’s largest bank, which was and is systemically important, was nationalized back in late 2016 after a large hole ($5 billion or 5 percent of GDP at the time) appeared in its balance sheet. To stabilize the bank, and indeed the whole banking sector, the government stepped in and injected $5 billion in capital by issuing government securities onto its balance sheet. Former owners claim that the process was technically flawed and indeed illegal and want the process reversed. The market concern would be now if the nationalization was reversed, the state would have a fiduciary responsibility to pull out its capital, leaving the bank with another glaring hole in its capital base. Former owners should presumably have to stump up $5 billion to replace the capital pulled by the state. Real doubts remain as to whether they would be able to stump up this level of cash when they were previously unable to do so back in 2016. The result might be to leave the country’s largest bank with serious capital deficiencies, bankrupt in effect, and at risk of bank runs, and liquidity shortfalls which could spread.
The NBU and the Ukrainian government is challenging recent Kyiv court rulings, trying to reverse these to sustain the nationalization. Ultimately a Supreme Court ruling is expected to decide the issue over the summer. But what if any such rulings come out against the NBU and the Ukrainian government, and then what does this mean for the sustainability of PrivatBank, the banking sector more generally, Ukraine’s relations with international creditors and macroeconomic stability?
Possible outcomes are a court ruling in favor of the NBU and government, a speedy de-nationalization followed by almost instantaneous re-nationalization or some kind of “deal” with former owners.
The problem with any such “deal” would risk undermining the very credibility of the Zelenskiy presidency at the outset of its rule, and given already much concern over the close associations between Zelensky and Kolomoisky. International financial institutions have made it crystal clear that the nationalization of PrivatBank was a prior action for previous official credit disbursements to Ukraine and it is inconceivable that they would be prepared to keep existing lending programs to Ukraine online in any scenarios where PrivatBank’s former owners get the bank back (without replacing the state capital), secure compensation for its nationalization or indeed actions to secure damages against former owners for state losses incurred as a result of the original failure of PrivatBank were stopped. In a scenario where PrivatBank is de-nationalized, returned to former owners where capital deficits are not immediately addressed, international financial institutions would, I think, feel that Ukraine’s macroeconomic financial situation would then not be sustainable enough to put at risk further and indeed existing lending.
On the issue of the Zelenskiy – Kolomoisky relationship I think much will be revealed soon after Zelenskiy takes office and the shape of his team placed in key positions such as head and deputy head of the presidential administration, foreign minister, defense minister and head of the national security council. There is much talk of Kolomoisky and Zelenskiy’s personal lawyer, Andrei Bogdan, securing the post of head of the presidential administration. This seems entirely possible, albeit Bogdan would no doubt respond that he has provided legal services across the spectrum in Ukraine. Inevitably Bogdan’s appointment would be greeted with suspicion and much concern, albeit he has proven to some his organizational, strategic and political skills through the campaign. Bogdan will be judged on his actions – and should expect to be called to account by Ukraine’s Western partners, the media and international financial institutions, and likely the electorate in the parliamentary elections. Let’s see how the population judge the appointment of the former anchor person for corruption under former President Viktor Yanukovych. That said, even the reform and market darling, ex-Finance Minister Oleksandr Danylyuk, worked in the presidential administration of former President Yanukovych.
Markets and investors are likely to appreciate a prominent position in the Zelenskiy administration for Danylyuk, providing an important counterweight to Bogdan, and guarantor of the reform credentials of the administration. It is unclear as yet what this role will be, but the hope of the same constituency would be something very significant.
On the issue of the Zelenskiy – Kolomoisky relationship, there is much concern that yet again an oligarch will be pulling the strings in the background – which would go back against the reform commitments of Zelenskiy made during the campaign in term of meaningful change in the way Ukraine is governed and bring an end to oligarchic state capture. I did find some reassurance in a constraint theme that Zelenskiy is his own man, knows the issues and problems and will box off Kolomoisky. History will judge him on that one – but as noted, his presidency will likely stand or fall on this very issue.
What about the relationship with the International Monetary Fund?
An IMF mission is due in Kyiv later in May, ostensively to begin work on the first review of the loan agreed last year, but also likely to start work on Ukraine’s Article IV review. Issues for the fund will be a resolution of outstanding issues over legislation covering illicit enrichment, and the PrivatBank issue. I cannot imagine the IMF disbursing credits to Ukraine unless these two issues are resolved, which likely means after parliamentary elections, but hopefully by the autumn.
What about the relationship with Russia?
Putin likely cannot quite figure out how to handle Zelenskiy as he is a new and different type of politician with whom Putin just cannot resonate. He unlikely liked Poroshenko, but likely respected his business, political and professional qualifications – being more an ex-Soviet establishment figure. Initially, I think there was glee in Moscow at Zelenskiy’s victory as this furthered their attempt to portray Ukraine as a failed state, not credible and certainly not a model of governance for anywhere else in the post-Soviet space. I also think Moscow thought that they could trounce Zelenskiy in the face-to-face talks that Ukraine’s president-elect has promised with Vladimir Putin, and therein taking advantage of his inexperience. But now I think they are unsure. Zelenskiy certainly got off to a good start, running rings around Putin in his response to the Russian-controlled separatist passport issue – making Putin appear out of touch with reality. Putin likely will feel the need to test Zelensky but the question is how and when. Their agenda likely will be to buoy support for pro-Russian parties in the looming parliamentary elections, but they may be unsure whether this will be better suited by confronting Zelenskiy sooner rather than later. My sense is that they might back peddle this side of parliamentary elections – perhaps mindful herein not to waylay hopes of a US-Russia reset following the U.S. President Donald J. Trump-U.S. Secretary of State Michael Pompeo outreach and the promised Trump – Putin G20 meeting in June.
One potential near term flashpoint in the Russia – Ukraine relationship could come over the summer with threats by Russia to cut off Ukraine from the gas transit system to Europe. Both sides seem to be stockpiling gas, ready for a standoff. The question is would Russia want to rattle this cage around the time of the Trump – Putin meeting, and especially when there is strong U.S. political backing to derail the North Steam II project and which is central to Russia’s strategy of cutting Ukraine out of the European gas transit system. But certainly, one to watch.
What about the role of the West?
What about the role for Western governments in managing efforts to ensure a smooth transition from Poroshenko to Zelenskiy, and in helping the new and politically inexperienced Zelensky build a credible team and manage relations with Russia. Herein, unfortunately, the transition comes at an inopportune time, with the Trump administration’s focus elsewhere – on Iran, Venezuela, China tariffs, and improving ties with Russia – Europe facing numerous other more pressing priorities (Brexit, European Parliament elections, U.S. relations, tariffs, the rise of populism) and the West’s Kyiv base diplomatic cadre in a state of some flux. U.S. Ambassador to Ukraine Marie L. Yovanovich as retired early (with no new ambassador likely to be confirmed by Congress any time soon), U.K. Ambassador Judith Gough is on the way out, new German and Japanese Ambassadors are in place. Zelenskiy hence should not hold his breath for too much Western support. That said, arguably Ukraine has learned self-reliance the hard way in response to events in the east. So perhaps they are now better versed. But still it would be better to have signs of better leadership and coordination from the West on Ukraine over the next few months.
So what about your conclusions?
Pretty much as I wrote some months back before Zelenskiy’s election. He was elected on a platform of change, and expectations are high. Arguably Poroshenko had taken the country as far as he could, and a 73 percent Zelensky poll rating would suggest the judgment of the Ukrainian people was that Poroshenko was not capable of sufficient change. They wanted something different, and Zelenskiy is very different. He seems honest, capable and knows the general direction of travel in which he wants to take Ukraine. He is a blank piece of paper, but can succeed, if he makes the right choices, and is prepared to really change the system, which means spurning oligarchic vested interests, and hopefully at the very outset of his presidency. But the risks that he runs into oligarchic-vested interests and ends up getting captured himself by the system are not insignificant. Zelenskiy remains a high reward, high-risk candidate, but Ukrainians were evidently willing to take this risk. They are certainly not stupid, as the 2004 Orange Revolution and 2013-14 EuroMaidan Revolution proved. Maybe we should give them more credibility, and giving Zelenskiy the benefit of the doubt as a result.
