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This delay of
almost two months indicates his problem in appointing a new government.
Moreover, two of the 23 cabinet posts were left vacant. Yet, rather than
reaching out, Yanukovych has further narrowed his already so slim power base.

government formation can best be explained in terms of clan competition. The
Yanukovych family clan made a significant gain from five to nine cabinet
members out of a total of 21, but the big winner was Rinat Akhmetov, who jumped
from two to six ministers. Everyone else was marginalized.

Two loyalists
of gas trader Dmytro Firtash stayed in the government, but they were kicked
upstairs as deputy prime ministers (former Minister of Energy Yuri Boiko and
former Foreign Minister Kostyantyn Hryshchenko), while three relatively
independent loyalists of Yanukovych stayed on (Prime Minister Mykola Azarov,
Justice Minister Oleksandr Lavrynovych and Education Minister Dmytro

the October elections it was widely rumored by the young friends of businessman
Oleksandr Yanukovych, the president’s older son, that they would take over the
government. Chairman of the National Bank of Ukraine Serhiy Arbuzov would
become prime minister and Interior Minister Vitaliy Zakharchenko presidential
chief of staff, but neither of them achieved what they wanted.

Arbuzov became first deputy prime minister, which is naturally interpreted as
him being the crown prince. But the two most recent first deputy prime
ministers (Andriy Klyuev and Valery Khoroshkovskiy) lost out from that senior
but ultimately powerless position. Zakharchenko stayed interior minister.
Finance Minister Yuriy Kolobov and Agriculture Minister Mykola Prysyazhniuk
also retained their jobs, while former Minister of Ecology Eduard Stavitskiy advanced
to minister of energy and Aleksandr Klimenko, head of the state tax
administration was promoted on his post to become Minister of Revenues and
Duties. Thus Yanukovych keeps his control over finance and agriculture, while
expanding into energy. Similarly, Yanuovych keeps direct control over the Interior
Ministry, the Defense Ministry, even if he switched minister of defense, and
the security services. He also appointed his loyalists to foreign minister,
Leonid Kozhara (who like Hryshchenko is a career diplomat), and Olena Lukash as
his minister of the Cabinet administration.

The big
change was the reinforcement of Akhmetov’s representation in the cabinet.
Previously, he had only two loyalists in the cabinet, deputy prime ministers
Borys Kolesnikov and Raisa Bohatyreva. Kolesnikov departs, while Bohatyreva
stays as minister of health.

Akhmetov’s people march into the government taking over five economic posts.
Dnepropetrovsk Governor Oleksandr Vilkul took Kolesnikov’s job as deputy prime
minister for infrastructure. His deputy Hennadiy Temnyk became minister of
regional development, housing and utilities. Akhmetov’s former CEO Ihor
Prasolov became became economic and trade minister, and the head of the state railways
Volodymyr Kozak became infrastructure minister. Finally, Natalia Korolevska,
who headed a fake opposition party in the elections that failed, became social
policy minister.

government formation does not bode well for the president. It faces three big
tasks: to govern, to break Ukraine’s foreign isolation and to salvage the
country from a vulnerable financial situation. There is little reason to
believe that it can solve any of these three tasks.

First, this
is a government of only two oligarchic clans, the Yanukovych family and
Akhmetov. It could have reached out to three other clans – Klyuev,  Firtash and the Communist Party, whose support
Yanukovych needs for a parliamentary majority.

To judge from
the government formation, Klyuev and the Communists have obtained nothing,
while the Firtash faction remains in marginal posts.

ormer heavyweight
ministers with a standing of their own have departed, seemingly at their own
will: Deputy Prime Minister Serhiy Tyhypko, Economy Minister Petro Poroshenko
and Emergency Situations Minister Viktor Baloha.

At present,
Yanukovych’s Regions Party has only 208 seats out of 450 in the parliament.
With this government formation he has not broadened but narrowed his power
base. The questions are whether he will be able to hold a majority in
parliament and whether this government can govern.

Second, there
is no reason to believe that this government will have any greater success in
breaking its isolation in foreign policy.

The European
Union will continue to demand that Yanukovych release former Prime Minister
Yuliya Tymoshenko, and this seems to be what the president is least keen on

President Vladimir Putin demands that Ukraine joins the Customs Union for any
significant cooperation, but the main loser from the Customs Union, which would
block a free trade agreement with the EU, is Akhmetov.

The IMF will
demand not only substantial gas price increases and a freer foreign exchange
policy, which Arbuzov has opposed more than anybody else. It does not help that
hardly anybody but Gryshchenko and Kozhara speak English in the new government,
fewer than in the old government with internationally respected personalities
such as Poroshenko and Khoroshkovskiy. Thus, this government is likely to dig
itself into an even deeper international hole than the previous one.

Finally, this
government is unlikely to do anything to improve Ukraine’s financial situation.
The possibly most harmful policy pursued has been the draft law on a foreign
exchange tax of first 15 percent and later 10 percent that Arbuzov pushed so hard.
Fortunately, Azarov has so far blocked it.

Arbuzov has
also severely aggravated Ukraine’s already excessive currency regulation and
maintained an over-valued exchange rate of the hryvnia so that everybody
expects a devaluation of at least 10 percent in 2013, but it can become much
more because the currency market has been drained by the regulatory policies of
the National Bank. If steel and coal prices continue to be low, Ukraine can
face a serious financial crisis, essentially caused by incompetent economic

government formation is quite perplexing. With its narrow base and limited
competence, it is likely to weaken the president’s standing both in the
parliament and in Ukrainian politics at large. Has Yanukovych overestimated the
strength of his hand, or have other political forces concluded that they had
better stay away from him and his government? Regardless
which is the case, this government appointment is a sign of the increasing
weakness of the Yanukovych presidency.

Anders Åslund
is a senior fellow at the Peterson Institute for International Economics and
author of “How Ukraine Became a Market Economy and Democracy.”


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