Interesting, but suspiciously quiet, time at present in Ukraine – as one local told me, it feels more like the calm before the storm.
Indeed, Prime Minister Volodymyr Groysman survived the one year anniversary (April 14) of the approval of his government, and technically now is exposed to a no-confidence motion in the Verkhovna Rada – that is if the Rada was in session. Fortunately for Groysman, it is in recess, so he has a stay of execution. He also appeared pretty upbeat this week, indicating that he plans no cabinet reshuffle, sending a message that he is here to stay. I am not quite so hopeful for his sake, as inevitably once the Rada gets back in session – next month – he will almost surely face a no confidence motion, likely proposed by ex-Prime Minister Yulia Tymoshenko, Oleg Lyashko or even Samopomnich/Ukrop. And in so doing this will be enlightening to see the latest state of oligarchic political forces, and who is lining up behind/stabbing each other in the back.
As is it seems that Arseniy Yatsenyuk’s People’s Front will continue to back President Petro Poroshenko and Groysman as opinion polls suggest early elections could be terminal for Yatsenyuk’s Peoples Front – and not too good either for Poroshenko’s Bloc Petro Poroshenko. That said, the BPP is split, and we might see quite a few of the BPP crew play hard to get and even ally with the “opposition.” Well, when I say “opposition” these days it seems to be a weight of the crew which were formally in the pro-Western crew (Yulia Tymoshenko, Samopomnich, and even Lyashko) – whereas interestingly we could see elements of the Opposition Party rally back around behind Poroshenko. In particular, Rinat Akhmetov-leaning deputies in the Opposition Bloc, who now likely see the president as their best defense in the ongoing oligarch-on-oligarch action playing out in the east – and in particular Akhmetov vs. Igor Kolomoisky. Groysman might well survive the no-confidence motion, but I guess the question will be at what price – significant tradeoffs on policy and cabinet personalities are expected.
The other moving parts in this are the current battle for control of the National Bank of Ukraine given incumbent governor Valeria Gontareva’s decision to bow out – her “mission accomplished” – and surviving (literally) in that role for three years was no mean feat, plus I would add the battle over state-owned enterprise management (particularly Naftogas), and then all the anti-corruption gig.
Groysman seems to be selling himself as the anchor for International Monetary Reform-related reforms – working to introduce compromise solution on the key issues of land and pension reform, against entrenched vested interests still.
Groysman’s advantage to Poroshenko still is that he has made clear he has no ambitions to challenge in the next presidential elections – unlike most former prime ministers have in Ukraine, seeing the prime minister post as a springboard to ultimate power. Groysman can still perhaps be the fall guy, for Poroshenko, for these potentially unpopular reforms, and Poroshenko might just buy that.
Ultimately, though, Groysman’s future, and perhaps also that of the IMF program, depends on the oligarchic power play happening behind the scenes – and even if Groysman survives he may have to jettison a number of ministers, and also some of the IMF-related reforms, plus we may also see deals cut around the nomination of the new NBU governor. It is notable there that Gontareva signaled her resignation a month or so ago, formally gave notice a couple of weeks back, and yet Poroshenko has yet to announce her replacement. He has had plenty of time to think of a replacement, but this delay suggests he is waiting to see how the likely challenge to Groysman’s tenure plays out and what deals he needs to cut.
You can also perhaps put the current travails at Naftogas (in the old days the joke in the market that this it was more like “Nastygas”, but with the company much transformed, and generating $1 billion profits, it is now potentially a cash cow for public finances – we may have to change the name) into the domestic political mix. The company has been transformed but the icing on the cake is the new corporate statute which the European Bank of Reconstruction and Development is pushing, and amongst other things ensure an independent supervisory board and proper corporate governance for this critically important state-owned enterprise.
Connected herein is the energy sector de-bundling agenda, which aims to create much more competition up and downstream in the energy sector. As ever in Ukraine vested interests seem to be stalling herein, and control over Naftogas, and energy policy, might also be one of the potential prizes from the looming political shake up in Kyiv. The EBRD should be greatly commended herein in taking an activist approach, in a reform area which has various cross wires – to energy policy, public finances plus also corporate governance, anti-corruption and graft.
As another side, note therein the arrest this week of the first deputy chairman of Naftogas by anti-corruption prosecutors related to allegations not specifically related to the gas company itself. The hope of some is that a recent spate of arrests – including the head of the State Revenue Service (Roman Nasirov) plus a prominent former MP (Mykola Martynenko) – is a sign that the administration is finally taking graft seriously and actually bringing people to account. Skeptics might argue that this is more a case of political score settling/infighting between different oligarchic factions – or sacrificial heads are rolling in order to protect others. They might also argue that arresting and even indicting are two things, but securing convictions in anti-graft cases is a whole new ball game in Ukraine – yet to be proven.
As I mentioned in my trip notes from a few months back – there are lots of moving parts in Ukraine – mostly now associated with relations between Ukraine’s oligarchic groups, and linked therein to the Privatbank nationalisation, events in (Russian-controlled separatist areas) and the blockade in the east.
Ukraine’s economy team are currently in Washington, D.C., at the IMF meeting and selling the reform story to the investor base, and I assume also the international financial institutions and also the U.S. President Donald J.Trump administration. The message is likely that we are committed to reform and the IMF program, but some key reform battles lie ahead – and we need your support (money and softer conditionality, as ever).
The key reform battles therein are plans for land and pension reform which are key deliverables therein expected for completion of the next review under the IMF – by April/May, presumably with the aim to secure the next credit tranche release in June/July. My sense is that all this is still wrapped up with the prospects for government chance/cabinet reshuffle. Let’s see if Groysman is still in his seat in May, and what is the shape of his or the next government, before figuring out whether June/July is still a realistic target for getting the next IMF sign off. I would add that past experience is that government change/cabinet reshuffles can drag out, which would push IMF compliance to later in the year. That said, if Poroshenko is serious about pension/land reforms, which are potentially unpopular, then maybe better to get them out of the way this year, well ahead of the 2019 presidential elections. May looks set to be a critical month for determining the shape of reform in Ukraine.
I noted from Washington a comment from the Ukrainian Ministry of Finance that they expected to come to market again in the fall with another $ 1 billion U.S. guaranteed Eurobond. I am not sure if something got mistranslated along the way, as the US has provided three such guarantees and I am pretty sure (I know) there are no more in the pipeline. Now either this was just wishful thinking, or it may refer to plans to come to market with a regular Ukrainian Eurobond but lacking the U.S .guarantee. I have never been an enthusiast of early market re-entry for Ukraine as we all know from bitter experience that if Ukraine has financing alternatives to the IMF (aka the market) it will just drop IMF conditionality. Maybe this time is different – but I really doubt it. I would rather the IMF played tough, the Ministry of Finance held back, and all this forced more reform implementation.
Similarly there are also many fronts to the struggle between Ukraine and Russia, and this continues to impact also on domestic politics in Ukraine and the foreign affairs environment which Ukraine faces. I don’t think there has been any reduction in Russian focus/interest in Ukraine – it remains centre stage from Vladimir Putin’s geopolitical and strategic thinking and the desire to pull the country back into its orbit.
Only tactics and timeframe for delivery changes, depending on developments in Ukraine, Russia and international relations. On the latter I think Russia is awaiting the outcome of this weekend’s French presidential elections – as at least three of the candidates have decidedly pro-Russian outlooks, and from Moscow’s perspective might be expected to weaken the Western alliance over sanctions if they end up in power. Indeed, Francois Fillon, Marine Le Pen and Jen-Luc Melenchon have all more or less said as much. And, even Emmanuel Macron is decidedly wishy-washy over Ukraine/Russia.
Meanwhile, I think U.S. Secretary of State Rex Tillerson’s trip to Moscow last week gave the Putin regime hope of some re-enagement with the U.S. administration, albeit mindful of the optics of all this from a U.S .congressional perspective which is still hawkish on all things Russian. But I still think the Putin regime thinks is can cut deals with the Trump administration – only it may have to bide its time. And this is what I think Moscow is doing at present with Ukraine. The goal for Moscow is clear – bring Ukraine back under its orbit of control – but it may have to keep its powder dry a little longer, to see how Western politics still plays to its advantage. The advantage herein to Ukraine is that this buys the reformers time to further bed down reforms and build more durability in the economy and defenses more generally. Let’s hope they use it as the test is almost certainly coming.
I guess the above then raises the question of why Moscow has moved to bring (separatist) territories further under its control – accepting identify documents, allowing use of rubles plus also the move to formally seize control of key economic assets in both entities.
I would argue that this is Moscow building leverage for the eventual negotiation pending with the Trump administration over Ukraine, but also sending a clear message that Moscow considers the Minsk II peace deal dead and buried – interestingly, also the view in Kyiv these days (as it was back in 2015 when it was signed, if the truth be told). But by calling the Minsk II process dead, Moscow is looking to open the way for direct talks with the U.S. over Ukraine, and other matters.
Bubbling away now we also have various legal cases between Russia and Ukraine. The International Court of Justice at The Hague case over Russian involvement in the Donbas conflict, and minority rights in Crimea, plus the $3 billion 2015 Eurobond case in the London courts all look set to rubble on, but with no definitive decision expected any time soon. Stockholm of Arbitration Court rulings though over the 2009 Gazprom-Naftogas “take or pay agreement” and gas pricing and transit could come quite soon, and given their tens of billions of dollars in claims could prove very material for both sides. I am not sure there is currently enough focus on either of these. There is also the Firtash case in Vienna which could still have much broader consequences.
Russian banks operating in Ukraine, meanwhile, seem to have decided that the costs of remaining are just too high, and have hit the sell key, albeit to entities with ethnic Russian interests – which kind of still keeps options open for the future. But I guess the high profile blockades of these entities just accelerated the decision to depart, for the time being – more a case of “do stretcha” then.
And then we have the Eurovision extravaganza in Kyiv this year – with no Russian entry – which will no doubt be a focus for everyone, albeit I think Russian TV channels have opted not to screen it this year – clearly they just cannot bear to see the fantastic U.K. entry get another “nul points.”
