INVESTORS SHOULD STAY AWAY FROM UKRAINE

UKRAINE: THE MAIN CONCERN IS THE ECONOMY


By : Jonathan Fenby January 15, 2006

THE success of opposition leaders in passing a vote of no-confidence in Prime Minister Yury Yekhanurov's administration in Ukraine will have little direct impact on the functioning of the government.

The current cabinet will remain in place and is unlikely to be replaced before key parliamentary elections on 26 March. But the vote – nominally to protest against an agreement with Russia a week earlier that doubles the cost of gas imports – will have a negative impact on the economy.

Constitutional changes that came into effect on 1 January transformed the country from a presidential republic into a parliamentary republic. Under the new rules, after the election the parliamentary majority will have the right to choose the prime minister and win significant new powers.

President Viktor Yushchenko is supposed to nominate a new prime minister, but parliament is almost certain to reject all candidates until the March elections. The main concern is the state of the economy as businesses hate uncertainty.

Business halted domestic investment after the Orange Revolution last year, and then came under attack by then prime minister Yulia Tymo-shenko. Gross domestic product (GDP) growth fell from more than 12% in 2004 to less than 3% with-in months. Yushchenko managed to restore some confidence after sacking Tymoshenko in September and making a pact with the oligarchs. Now, what little confidence was restored is being destroyed again.

The parliamentary vote is an attempt by the opposition to seize the initiative from Yushchenko’s Our Ukraine movement ahead of the March elections. Relations between the former colleagues, Tymoshenko and Yushchenko, are deteriorating – Tymoshenko inflamed dissatisfaction and partly provoked last week’s “no confidence” vote by releasing the text of the energy deal with Russia. She is on a collision course with Yushchenko in the run-up to the election, having sided with the former regime’s prime minister, Viktor Yanukovych and his Regions of Ukraine party in the “no confidence” vote.

Polls show the Regions party leading in the polls, followed by Block Yulia Tymoshenko (BYT) while Yushchenko’s Our Ukraine fraction trails in third place.

The gas deal with Russia caused genuine dismay. Gazprom had been seeking to more than quadruple the price Ukraine pays for gas from $50 per 1000 cubic metres to $230, but agreed to a compromise deal of $95, slightly more than the $80 Kiev was holding out for.

The real winner of the agreement was an intermediary company called RosUkrEnergo (RUE) a joint venture between Gazprom and unidentified private Ukrainian businessmen. RUE has been dogged by scandal. Tymoshenko and the head of Ukraine’s security forces have repeatedly linked the company to organised crime figures. The taint of corruption associated with RUE is especially damaging for Yushchenko, who promised to end the insider dealing of the previous government. Nearly half Our Ukraine's deputies refused to support the government by abstaining from the no-confidence vote.

The President is being backed into a corner, and the crisis could quickly deepen. Last week he threatened to challenge the legality of the vote in front of the Constitutional Court.

But the court has been hamstrung and is not quorate after the Rada group refused to approve Yushchenko’s nominees.

The president has also threatened to dissolve parliament, though it is unclear if he has the constitutional right to do this. He has also talked of trying to reverse the constitutional changes that went into effect in January.

With the Constitutional Court inoperative, Yushchenko’s most likely course is to call a referendum on the constitutional changes to regain the initiative. But his opponents have scented victory, and will be out to create maximum trouble a year after a peaceful democratic revolution seemed to have triumphed in Ukraine.


earlywarning, edited by Jonathan Fenby, is a global predictive news service.