Arsenyi Yatsenyuk: Rebel without a Cause

Graham Stack for Russia Profile (www.russiaprofile.org)

Ukraine’s youthful Presidential Candidate Arseny Yatsenyuk is tailor-made to be a pro-Western leader, but his stagnating ratings show how weak this political constituency has become in Ukraine. Instead, all three leading contenders in the presidential election campaign that kicked off this week are making pro-Russian statements.

History repeats itself as farce, Karl Marx apparently said. The Ukrainian presidential hopeful, 35-year-old Arseny Yatsenyuk’s great historical moment may have come and gone on June 7, 2009. During a week boiling with rumors it seemed that the two largest parties in Ukraine’s unicameral parliament, the Rada, were preparing a grand coalition to achieve a constitutional majority and transform Ukraine into a parliamentary republic, abolishing direct presidential elections. The trigger: Yatsenyuk’s meteoric rise in opinion polls, from zero to over ten percent in the course of months. Extrapolating, neither leader of the two largest parliamentary parties, Prime Minister Yulia Tymoshenko of the Yulia Tymoshenko Bloc or the former Prime Minister Viktor Yanukovych of the Party of Regions, could be sure of winning the presidential elections  January 2010. So they had apparently simply decided to call off the elections altogether, and divvy up power between them.

Yatsenyuk sprang into action. Talking to this correspondent, he called on the West to beware of the imminent creation of a Russian-backed “junta.” “If the coalition’s plans go ahead, Ukraine will return to the sphere of influence of a certain big country,” he warned, “and Ukraine will turn into a banana republic.” Calling the nascent coalition’s plans “an anti-constitutional conspiracy,” he said he would lead people out on the streets to fight them. Asked if there would be a second Orange Revolution, Yatsenyuk replied “you will see it.”

By Sunday, June 7, however, it was all over. The “putsch attempt” has been debunked as just another Ukrainian political stunt. Viktor Yanukovych suddenly backed out of the negotiations, saying that he was alarmed by the anti-democratic nature of Tymoshenko’s suggestions. The episode left Yanukovych looking wily, and even a little democratic, Tymoshenko looking like she would stop at nothing to stay in power, and Yatsenyuk like a callow wannabe popular hero.

Yatsenyuk, with his perfect English, baby-face looks, superb credentials and squeaky clean image, is tailor-made to fit the role of a “pro-Western democratic candidate.” But it is a sign of the times that there is no demand for such in Ukraine today, making Yatsenyuk seem like a rebel without a cause.

From Ukraine’s Obama to Ukraine’s Medvedev

Launching his unofficial campaign in late 2008, Yatsenyuk tried to tap into the buzz surrounding the new U.S. President Barack Obama. The media picked up the “Ukraine’s Obama” jingle, and Yatsenyuk’s spinmeisters playfully disclaimed it, pointing out “significant differences:” “Obama uses a Blackberry, but Arseny prefers an iPhone.”

This strategy paid off in the first half of 2009, as Yatsenyuk’s ratings rose meteorically to around 13 percent, fractionally behind prime minister Tymoshenko. Yatsenyuk’s advance, however, was at the expense of democratic President Viktor Yushchenko, as he was winning over the latter’s residual pro-Orange constituency. As a result, Yushchenko’s own rating fell below the margin of error, with Gallup declaring him to be the most unpopular president in the history of polling. Conversely, as Yushchenko’s rating tended to zero, Yatsenyuk hit his ceiling of around 13 percent, which was still less than Tymoshenko at around 15%, and way behind Yanukovych’s mid 20s.

Realizing that the post-Orange constituency was too small to get in the second round of the elections, let alone win it, Yatsenyuk was forced to change his tune and follow in Tymoshenko’s footsteps. The latter, formerly an iconic figure of the Orange Revolution, had already jettisoned her Orange ballast in 2008. In the course of months in 2008, she spectacularly morphed from an anti-Russian, pro-NATO firebrand into a moderately pro-Russian politician. By September she was  under investigation by the Ukrainian Security Service for acting against Ukraine’s national interest for the benefit of Russia. Not least, she refused to support Georgia in the August 2008 war with Russia over South Ossetia.

To compete with Tymoshenko, Yatsenyuk then likewise discarded the “Ukraine’s Obama” mask. Instead, he donned what Andrew Wilson of the European Council of Foreign Relations called the image of “Putin-lite,” to capitalize on the Russian prime minister’s sky-high approval ratings in Ukraine. Instead of railing Orange-style against juntas and authoritarianism, Yatsenyuk switched to declaring war on corruption, using hard-man talk of filling the jails and cutting off hands. He also showed himself happy to speak Russian in public, supported the Russian stance over gas transport, and praised Putin as “having saved his country.” “Putin-lite” is also reminiscent of Dmitry Medvedev, who enjoys a high level of approval in Ukraine, has declared war on corruption, is young and has a background in law, like Yatsenyuk.

But Yatsenyuk is not the only one trying to tap into the buzz surrounding Putin and Medvedev. The polls’ frontrunner, Viktor Yanukovych, has the best pro-Russian credentials, although he is hardly a Putinesque figure. Yulia Tymoshenko can match Putin for charisma, and has been hard at it, with Putin/Medvedev-like phrases, such as “dictatorship of the law” and “legal nihilism” tripping off her tongue, along with Putin-style promises to restore Ukraine’s Soviet-era high-tech aerospace and ship-building sectors. Tymoshenko’s enthusiasm for Putin apparently even caused the latter to postpone a meeting with her in October, lest it seem he was favouring her in the elections.

This means that switching to “Ukraine’s Medvedev” has not brought Yatsenyuk the anticipated breakthrough in the polls. The latest ratings have seen him fall back to around ten percent, and his chances of getting into the second round of elections ahead of Tymoshenko are fading. Meanwhile, Yanukovych is for the first time looking likely to beat Tymoshenko in a second round run-off.

But the remarkable result of Yatsenyuk’s switch to “Putin-lite” is that the leading three candidates in Ukraine’s crucial presidential elections are now all actively campaigning on their lack of hostility toward Russia, and their current order in the ratings corresponds to the respective plausibility of this platform

Ukraine’s new foreign minister Poroshenko “will not oversee” EU free trade negotiations

Graham Stack, Berlin / Kyiv

According to Ukraine’s ambassador to Germany, Natalia Zarudna, new foreign minister Petro Poroshenko will not oversee trade negotiations with the EU, despite being tasked by President Viktor Yushchenko with achieving an associate membership agreement with the EU as soon as possible.

“Petro Poroshenko will not oversee negotiations on the free trade part of the Ukraine-EU associate membership agreement,” Zarudna told this correspondent in an interview. “This will be done separately by ministry trade experts, with Poroshenko overseeing only the political component of the agreement.”

Zarudna says this rules out any conflict of interest with Poroshenko’s business dealings: Poroshenko is not only a close associate of President Viktor Yushchenko and political high-flyer. He is also a top businessman, and his assets are held to include Ukraine’s second largest car producer Bohdan Corporation, although he does not officially acknowledge ownership of the car maker.

“Poroshenko may be a shareholder in Bohdan, but he is not involved in operational control of the company, since this would contradict Ukrainian legislation,” explains Zarudna.

The issue is pertinent, because Bohdan Corporation is one of the principle victims of Ukraine’s economic crisis, with its revenues down 87.4% in the first half of 2009, and losses totaling $27.1m.  Analysts are questioning whether the company can continue servicing its debt, after having come close to default in August.

In an interview with this correspondent earlier in the year, Bohdan Corporation CEO Oleg Svinarchuk demanded a government U-turn on trade policy, with a shift from free trade to protectionist tariffs to save Ukraine’s car industry. Svinarchuk also bitterly criticized the terms of Ukraine’s accession to the World Trade Organisation.

This indicates Poroshenko’s ties to Bohdan Corporation could clash with his duties as foreign minister – in particular concerning trade negotiations, where higher import tariffs on cars would directly benefit Bohdan Corporation.

There are already signs Poroshenko’s appointment will benefit the company. Immediately following his appointment, the government announced a raft of measures to help Poroshenko’s automotive holdings. Prime Minister Yulia Tymoshenko called Bohdan “a strategic partner in bus production,” and announced a government order for 750 school buses worth UAH 150m, and orders for Euro 2012. There is also talk of a government credit line to modernize bus production facilities, according to sources at Bohdan.

Tymoshenko’s generosity contrasts with previous animosity between herself and Poroshenko, whom she openly accused of corruption in 2005, days before Yushchenko ended her first spell as prime minister. However, considering that votes from Tymoshenko’s party Bloc Yulia Tymoshenko were crucial for Poroshenko’s confirmation by Ukraine’s parliament, the Rada, it is likely that some wider deal is in place, believes Yelena Biberman, Ukraine foreign policy expert at Brown University.

“It could involve Poroshenko buying into Tymoshenko’s more pro-Russian foreign policy line,” says Biberman. Biberman points out that among Poroshenko’s first actions as foreign minister was to reject US radars in Ukraine as part of the US anti-missile defence system. Poroshenko said such plans, aired by U.S. Deputy Defense Secretary Alexander Vershbow, would “contradict the constitution.”

According to Zarudna, however, Poroshenko’s appointment does not signify any shift in Ukraine’s foreign pro-NATO policy. “But because of the crisis, foreign policy may be temporarily more oriented to trade and aid,” she concedes.

Meanwhile, the foreign ministry itself is pinning its hopes on Poroshenko to secure more budget funds. “The foreign ministry suffered disproportionately from budget cuts in 2008, compared to ministries more loyal to the prime minister,” complains Zarudna. “We think that Poroshenko will use his ‘special diplomatic skills’ to get more funds for the ministry.”

According to Zarudna, Ukraine’s foreign representations have had funding cut to 40% of 2008, with budget funding down 20% and hryvnia devaluation doing the rest. “We are being inventive and attracting sponsors to help with our functions,” Zarudna says.

Post gas war, Ukraine’s gas market remains a can of worms

Graham Stack in Kyiv for business new europe (www.businessneweurope.eu)

Ukraine’s Prime Minister Yulia Tymoshenko touted January’s gas agreements between Russia’s Gazprom and Ukraine’s main energy company Naftogaz Ukraine as creating transparency in the sector by eliminating the gas trader Rosukrenergo. But while Rosukrenergo has definitely exited, the Ukrainian gas market is a far as ever from transparency – and Naftogaz Ukraine is far from being the only provider of gas to industry.

“Naftogaz has cut off our gas since May 5th, the plant has completely stopped working,” a source close to management of Rivneazot, West Ukraine’s largest nitrogen fertilizer producer, told bne. “And the reason is the Prime Minister [Yulia Tymoshenko]’s personal feud against Dmitry Firtash. We have no debts to Naftogaz.”

Dmitry Firtash was the man who until January 2008, as co-owner of Swiss-registered gas trade Rosukrenergo, appeared to hold all the strings in Ukraine’s notoriously opaque gas industry. For this reason he was the personal bete noir of firebrand Prime minister Yulia Tymoshenko.

In 2008, she declared it her mission to eliminate Rosukrenergo, and all intermediaries in general, from the gas trade. She claimed to have achieved this in the gas agreement finally signed between Ukraine’s domestic energy operator Naftogaz and Gazprom in January 2009, ending a stand-off between Russia and Ukraine that saw gas supplies to Europe interrupted. The agreement stipulated that Gazprom would in the future sell gas directly to Naftogaz, with Naftogaz granted the status of monopolist gas importer for Ukraine.

In May, the conflict then took another twist, when Naftogaz cut gas supplies to three chemical companies owned by Firtash – Rivneazot, Crimean Soda Plant, and Crimean Titan. Supplies to the Crimean plants, but not to Rivneazot, were later restored. Naftogaz claimed the companies had run up debts for gas supplies, while the companies argued they were consuming gas they has purchased earlier.

Demonstrating how politicized Ukraine’s gas market has become, Naftogaz’ decision to restore supplies to Firtash’ Crimean companies led to the dismissal from the company of deputy CEO Vladmir Trikolich on May 25, according to media reports that were confirmed by Rivneazot. “Tymoshenko demanded his head for the decision,” said bne’s source.

The episode with Firtash’ companies goes to show that the elimination of Rosukrenergo may have increased government control over the gas sector in Ukraine, but it has not created the hoped-for transparency.

In fact, the move may have done exactly the opposite, thanks to the ongoing collapse in Ukrainian industry. Supplying gas to industrial customers is the only profitable part of Ukraine’s gas sector, with gas supplies to households and utilities tightly regulated by the state. So when Tymoshenko vowed to remove intermediaries, part of the idea was to improve Naftogaz’s hitherto disastrous financial position by giving the company a dominant position on the market for industrial customers.

But in times of crisis, having a state-run and budget-subsidized company supply energy to cash-strapped industrial customers has one huge disadvantage: any decision to cut off gas to a major industrial plant, because of debts, becomes a political decision taken at highest level, opening the door to populism, cronyism and corruption and cronyism. Government officials ultimately decide the fate of tens of thousands of workers, and of their oligarch employers.

According to Ukraine’s Centre of Energy Studies, industrial companies’, excluding utilities, payment discipline is at 86.1%, with total debts of $2bn.

So while Firtash’ chemical companies had their gas switched off for (alleged) debts of less than $1m, other oligarchs can run up substantially larger debts with apparent impunity, as seems to be the case with metallurgical giant Industrial Union of the Donbass (IUD), owned by oligarch’s Sergei Taruta and Vitaly Gaiduk. A letter leaked to business daily Kommersant-Ukraine June 10 showed that Naftogas’s deputy head Igor Didenko had directly ordered supplies to be continued to IUD plants, despite IUD having run up nearly $51m in debts.

N.B: Vitaly Gaiduk also just happens to be head of Tymoshenko’s advisory service, and Naftogaz head Oleg Dubinin, until moving to Naftogaz Ukraine in December 2007, was CEO of IUD-owned Dzherzinsky Metallurgical Combine. IUD is one of the most heavily indebted industrial groups, with an estimated $3bn total debt, of which $500m is still due in 2009.

Privat Group’s private gas supply

Privat Group, co-owned by billionaire Ihor Kolomoyskiy, is another oligarch structure for which Tymoshenko is said to have a soft spot for. In 20005, since she backed Privat in its attempt to take Nikopol Ferroalloy Plant from Viktor Pinchuk in scandal that led to her first exit from government.

Privat is also, via Ukrnafta, Ukraine’s largest oil and gas producer, owner of a large stockpile of gas estimated at being from 3bn to 10bn cubic meteres held in underground storage. Ukrnafta. While the state in fact holds a 51% stake in Ukrnafta, Privat group, with a 42% stake exercises operational control over the company via management appointments.

Ukrnafta, as a state-owned company, is by law allowed only to sell its gas to households at prices around 11 timed lower than those charged to industrial customers. Privat has for this reason since 2007 blocked any sale of Ukrnafta’s gas, which is where the stockpile comes from.

But when in late February 2009, deputy chairman of Ukrnafta, Valentin Franchuk, linked to Privat Group, moved to become deputy chairman of state-controlled Naftogaz, analysts held it only a question of time before Ukrnafta’a gas seeped through to industrial consumers. Sure enough, at the end of May, the first sketchy reports provided by trading structure insiders surfaced of Ukrnafta gas finding its way to industry, unhindered by the government.

Analysts agree that Ukrnafta has been selling its oil for artificially low prices to Privat-affiliated companies. Since the Privat group comprises gas-guzzling metallurgical and chemical plants, it would not be far-fetched to think that the same scheme is going on with its gas, although this has not been confirmed.

Gazprom Sbyt of the action

The biggest winner from Tymoshenko’s elimination of Rosukrenergo as intermediary is, potentially however, Gazprom itself, in the form of its fully-owned Ukrainian subsidiary, Gazprom-Sbyt Ukraine, as well as a possible direct supplier of Ukraine’s chemical sector itself.

According to the gas agreements signed between Naftogaz Ukraine and Gazprom, Gazprom Sbyt gained the right to purchase up to 25% of gas imports, reselling a maximum of 7.5bn cubic meters to industrial customers. According to Gazprom Sbyt’s CEO Anatoly Podmishalk’skii, the company aims to sell 4-5bn cubic meters in 2009,

“It’s a myth that Tymoshenko got rid of intermediaries,” Bogad Sokolovsky, adviser to President Yushchenko on energy issues, told bne. “What is Gazprom Sbyt, if not an intermediary and indeed one that surpasses all that went before. And explain to me how it is that Gazprom Sbyt Ukraine is managing to conclude contracts with the most solvent companies in the country?”

Gazprom Sbyt cannot undercut Naftogaz in price, since it buys its gas back from Naftogaz at the import price, and has to earn a margin on this. However, in crisis times, it crucially has the resources to offer considerable more flexible payment conditions and also more supply security than cash-strapped Naftogaz. This means it is likely to attract the more solvent companies that can afford to pay the mark-up to get the added payment flexibility, where Naftogaz demands prepayment from industrial customers. This will then leave Naftogaz with the dross who are struggling to pay their bills.

It is however not just Gazprom Sbyt that is filling the void left by Firtash. Big brother Gazprom itself is starting to loom as a potential direct supplier of Ukrainian industry – with the Ukraine’s crisis-stricken chemicals plants serving as a bridgehead.

Ukraine’s industry minister Volodymyr Novitsky announced June 3 that six nitrogen fertilizer producers would be allowed to purchase gas directly from foreign companies. “Nitrogen fertilizer producers are in a very special position,” a source in Ukraine’s Union of Chemical Producers, which was involved in lobbying the resolution, told bne. “Gas for them is not just a source of energy, but their key raw material, comprising around 70% of costs”.

“The suppliers could be famous Russian companies,” the source explained. “This would be a step towards demonopolisation of the gas market. After all, what is Naftogaz Ukraine if not a giant intermediary itself?”

But the move has prompted apprehensions that any company supplying cheaper gas directly to these companies would then be in a prime position to acquire or privatize them. President Yushchenko has been bitterly resisting the government’s attempts hitherto to privatize Odesa Portside Plant, Ukraine’s most strategic chemical asset, and one of the companies on the list. Russia’s largest petrochemicals holding, Sibur, is a Gazprom affiliate.

“The whole thing seems unclean,” Bogdan Sokolovsky says, referring to the government announcement. “It in fact directly contradicts the gas agreement between Gazprom and Naftogaz that stipulates Naftogas as monopoly importer. How will it then be possible?”

West should beware “junta” coalition, says Yatsenyuk

Graham Stack in Kiev

With a grand coalition in Ukraine’s parliament looking set to cancel upcoming direct presidential elections and change the constitution, Arsenyi Yatsenyuk, dubbed Ukraine’s Obama, and one of the favourites to win the elections, has warned the West of a Russian-backed “junta” that could turn Ukraine into “a banana republic.”

“I know the West is exhausted of the stand-off in Ukraine,” 35 year old Arsenyi Yatsenyuk, parliamentary deputy and leader of Ukraine’s “Front for Change”, told this correspondent in perfect English, ”but this is very dangerous. Because if the coalition’s plans go ahead, Ukraine will return to the sphere of influence of a certain big country,” he added, leaving no doubt he had Russia in mind. “It will also turn Ukraine into a banana republic,” he added.

Yatsenyuk called the nascent coalition’s plans to cancel presidential elections and shift power to the parliament “an anti-constitutional conspiracy,” and promised to head a campaign to stop what he referred to as a “junta”.

Asked if there would be a second Orange revolution, Yatsenyuk said, “you will see.”

The two parties which are negotiating the coalition, Prime Minister Yulia Tymoshenko’s Bloc Yulia Tymoshenko and opposition leader Viktor Yanukovch’s Party of Regions, together command 70% of the parliament, meaning the coalition will monopolise power in the country if comes to fruition, as it is expected to within this week.

Currently, presidential elections are scheduled for January 2010. The nascent coalition and its plans to abolish presidential elections are expected to be formally announced coming Tuesday.

Analysts agree that the move would condemn Ukraine to follow Russia and Belarus along the path to authoritarianism, by sidelining opposition and restricting political participation.

Until Yatsenyuk threw his hat into the ring, the presidential elections were seen as a two horse race between Yanukovych and Tymoshenko. Incumbent president Viktor Yushchenko, although also intending to run, has poll ratings of 2%, making him a marginal candidate.

Yatsenyuk’s rating has already reached 14% and is rising monthly. PM Tymoshenko is on 15% and opposition leader Yanukovych on 25%.

Yatsenyuk’s campaign team have no doubt that his rapid rise has prompted the move to cancel elections, with both Tymoshenko and Yanukovych now uncertain of their chances in the winner-takes-all presidential race. Yatsenyuk declared his candidacy on May 22 on turning thirty five, the minimal age for a presidential candidacy.

Former PM Yanukovych and current PM Tymoshenko were on opposing sides during the globally-acclaimed 2004 Orange revolution. It was largely Tymoshenko’s firebrand rhetoric and actions that stymied Yanukovych’s attempt to rig the elections in his favour. Now they appear to be divvying up power between them to keep Yatsenyuk out. Reports indicate Yanukovych will have himself elected president by parliament, in return for Tymoshenko continuing as prime minister.

Yanukovch openly favours a pro-Russian Ukraine. Tymoshenko, formerly vehemently pro-Western, has shifted radically to a pro-Russian position since the Russian-Georgian conflict of August 2008, prompting Ukraine’s secret service to investigate her for betraying the national interest.

Yatsenyuk’s soaring popularity in Ukraine has led to him being dubbed the Ukrainian Obama. Like Obama, he is a legal scholar by profession, with a background in civil activism. Despite his youth he has held high office in Ukraine as Minister of Economy, Foreign Minister and Parliamentary speaker. He has however avoided being mired in political sleaze and backstabbing that has dogged the country.

His campaign is also modeled on Obama’s success in 2008, with its slogan of ‘change’, and reliance on grassroots activism and also financial support from the pockets of ordinary people donating via the Internet.

His campaign team, however, playfully disclaim any such parallel, saying there are significant differences between the two young politicians. “Obama uses a blackberry, while Yatsenyuk prefers an i-phone’ a source close to Yatsenyuk joked.

–

Problems bubble up as Tymoshenko cooks Ukraine’s books

Graham Stack in Kyiv for business new europe (www.businessneweurope.eu)
Naftogaz’ payment difficulties could be first sign that Tymoshenko’s budgetary house of cards is folding.

“We have doubts about Ukraine’s ability to pay,” said Russian President Dmitry Medvedev on Friday, May 22, referring to whether Ukraine’s gas monopoly Naftogaz would find the $4bn Medvedev says it needs for stockpiling of gas for the winter.

Medvedev’s comments were hardly off the cuff: he was speaking at a press conference together with EC President Jose Manuel Barroso following the EU-Russia summit in Khabarovsk. He went on to call on the EU and Russia together to syndicate a loan to cover Ukraine’s gas needs.

Naftogaz has had cash flow problems all this year, but these were a problem of hard currency liquidity. With liquidity problems receding in Ukraine, and considering the strategic significance of summer gas stockpiling for energy security in winter, the new payment problem points instead to Ukraine’s overstretched state budget. Naftogaz is massively dependent on direct and indirect state subsidies, so much so that the International Monetary Fund (IMF) wants its finances consolidated as part of the budget

How overstretched is not yet clear. Naftogaz has apparently settled a large part of its April gas bill against future 2009 transit payments from Gazprom, meaning the company is already burning up future revenue flows.

“The government is concealing the fact that Naftogaz cannot collect the money from consumers to pay for the imported gas it is using. In these conditions, the company is forced to turn to Gazprom to get an advance against future services in transporting gas to European customers,” said Roman Zhukovsky, head of Ukraine’s Main Service of Social-Economic Development, in documents published on the website of Ukraine’s president Victor Yushchenko in May.

“Naftogaz is not paying for the gas it receives from Russia, and instead settling up against future transit fees, which means basically that it is running a deficit,” authoritative former finance minister Viktor Pinzenik told Ukrainian weekly Zerkalo Nedeli May 16. Pinzenik resigned his post in February on questions of principle regarding a budget for 2009 he regards as wildly unrealistic.

“The country cannot continue continue to sell gas to the population at a price several times cheaper than it buys it for. But that’s exactly what it does, creating a huge hole in the budget,” Pinzenik added.

Cooking the books

If Naftogaz can’t find the cash to stockpile crucial gas for the winter, this is the first indicator that the Ukrainian budget is in big trouble, despite or because of the government’s attempts to paper over the cracks.

Prime Minister Yulia Tymoshenko, who recently declared her candidacy for presidential elections in January 2010, has been fighting tooth and nail to protect an expansionist budget, and the high level of vote-winning pension and social payments it contains. The budget remains predicated on 0.4% GDP growth assumption for 2009, despite an economic collapse of 8% of GDP on the year in fourth quarter 2008, and accelerating in the first quarter of 2009.

The method she has used to do this, according to critics and experts, is essentially the same as used for Naftogaz – using future revenues to prop up current finances, leaving a budget black hole gaping later in the year.

As a result, Sergei Buryak, head of the State Tax Administration, could announce May 13 to general disbelief that tax revenue collection plans as laid down in the 2009 budget had been fulfilled and even exceeded in the first four months of the year.

However, ever the killjoy, President Viktor Yushchenko weighed in against these claims. The Presidential Secretariat published on its website an in-depth analysis of the manipulations employed by the government to attain these miraculous results.

Their analysis of how Tymoshenko has cooked the budget books is widely accepted by experts.

“Everyone was surprised by the tax collection rate, but after we saw the analysis done by the Presidential Secretariat, we understood what was happening. I largely agree with their analysis,” Renaissance Capital’s Anastasia Golovyakh told bne.

“If you take the Secretariat’s view, along with the quasi-neutral view put forth by ex-Finance Minister Pinzenik, and add in the unwillingness shown by the government to report first quarter GDP results, all signs point to an attempt to present the books in a better light,” agrees brokerage Galt & Taggart’s analyst Danylo Spolsky.

Even the Tymoshenko government seems to agree with the Secretariat’s analysis – it promptly imposed a statistics embargo on the Presidential Secretariat following publication of the detailed report.

The basic argument of Yushchenko’s number-crunchers is that the government boosted its revenues in the first four months of 2009 at the cost of revenues in the second half of the year: by having companies make advance payments on taxes due in 2009, (i.e. having companies pay tax due for the whole year straight off); delaying payment of VAT rebates for exports; having the National Bank of Ukraine (NBU) pay its entire annual contribution to the budget straight off in the first quarter; and one-off customs charges on gas owned by gas trader Rosukrenergo and now transferred to Naftogaz.

In addition, media have reported that the State Tax Administration has been overtaxing companies at the end of each month, booking the cash, and promptly returning the difference in the next month, thus inflating revenues.

The Secretariat’s analysis also details that payment of Pension Fund contributions is off track: the Pension Fund has simply revised downwards monthly collection targets to avoid registering a deficit. This means the sum remaining to be collected later in the year rises.

The motivation for such short-term machinations is apparently to create superficially acceptable parameters allowing the IMF to sign off on the second and third tranches of its $16.5bn stabilization loan.

The IMF seems to have turned a blind eye to the manipulations, and is otherwise showing unprecedented patience with Ukraine. Despite its articles specifying that funds be used to only tackle balance of payments problems, it has even agreed to cover part of Ukraine’s planned 4% budget deficit – a first for the IMF.

Ukraine’s government has also found an unprecedented way of helping the IMF help it. It has delayed publishing its GDP data for the first quarter of 2009 until July. By postponing publication until after the IMF has reached a decision on the second and third tranches, the government ensures that the 4% deficit will be measured for the last available GDP figure – for the fourth quarter of 2008.

Estimates of subsequent GDP collapse in the first quarter of 2009 range from 10% to 25% ,=meaning that the actual budget deficit as GDP proportion will be considerably higher.

Tymoshenko calls hryvnia fall ’sabotage’ aimed to introduce state of emergency

Prime Minister Yulia Tymoshenko has declared that the hryvnia exchange rate to the dollar is being deliberately weakened by the National Bank with the aim of introducing a state of emergency in Ukraine.

“Unfortunately the government cannot influence the National Bank … We believe that the exchange rate is collapsing deliberately, as an act of sabotage.. There are no financial, economic or crisis-linked reasons for this exchange rate,” Tymoshenko said, according to Korrespondent.net and RBK Ukraine.

“This is being done so that certain political groups can criticize our work and so that there emerges the chance of introducing such a unique situation as a state of emergency, meaning that no elections, including the presidential elections, will take place,” Tymoshenko continued.

According to Korrespondent.net, the interbank hryvnia rate is 9,235-9,375 to the dollar.

Over the last two days, the hryvnia has fallen over 10% against the dollar.

Ukraine’s government survives no-confidence vote

February 6, 2008

Ukraine’s government narrowly survived a no-confidence vote in parliament yesterday February 5 with a majority of 23 votes. Prime Minister Yulia Tymoshenko is now expected to reshuffle her cabinet to incorporate representatives of new coalition member Lytvyn Bloc.

In yesterday’s no-confidence vote in parliament, of the Verkhovna Rada’s 450 lawmakers, 203 supported the vote (Party of Regions – 172, Communist Party – 20, Our Ukraine-People’s Self-Defense – 10, BYuT – 1, Lytvyn Bloc – 0), significantly less than the needed simple majority of 226.

“During her address to the Rada, Tymoshenko again confirmed the government’s 2009 GDP forecast (+0.4% YoY real GDP growth vs a -5% YoY real GDP contraction expected by the IMF), but did not provide any clear indications of the drivers of such growth. The prime minister cited agriculture, construction, energy-saving and machinery as priority sectors for government support. However, further details of this support were not discussed,” writes Rencap’s Anastasiya Golovach.

The opposition can make another attempt to oust the government only at the next parliamentary session starting in September as the constitution allows only one noconfidence vote per session.

This was the second unsuccessful attempt to disband the Tymoshenko government initiated by the opposition Party of the Regions (PoR) since August 2008.

The Party of Regions is now left with two possibilities to form the country’s government before the 2010 presidential elections – a simple reformatting of the government coalition, unlikely unless the 20 Lytvyn Bloc deputies cross the floor of parliament, and the mass “resignation” of its entire electoral list, which would require strict internal party discipline.

Right after the vote, PoR representatives threatened to lay down 150 lawmakers’ mandates to make the parliament dysfunctional and initiate early parliamentary elections. The latter is very unlikely, as there is no consensus among the ruling elite and the public over the necessity of elections when the country is in the midst of economic crisis.

Having won a respite from parliamentary battles, PM Yulia Tymoshenko plans to reshuffle the Cabinet in the next two weeks to strengthen her party’s recently formed coalition with parliament speaker Volodymyr Lytvyn’s bloc and a majority of the once pro-presidential Our Ukraine party.

“Look for potential new leadership in the Ministry of the Economy and the Ministry of Finance, two posts that have come under fire recently for their performance during the crisis,” says Galt & Taggart’s Danylo Spolsky. “In addition, reports suggest Vice Prime Minister Ivan Vasyunyk will be replaced by Vitaliy Hajduk, co-owner of the Industrial Union of Donbass (IUD), which controls key metallurgy assets in Ukraine’s eastern regions.”

Uncertainty mounts in Ukraine, as Yushchenko calls all change

Graham Stack for business new europe (www.businessneweurope.eu)
President Viktor Yushchenko, in a pre-recorded televised message played last night, announced the dissolution of the Verkhovna Rada and today, in a decree posted on his website, called preterm parliamentary elections for Sunday December 7. Yushchenko invoked his constitutional power after parties failed to form a new coalition within one month of the breakup of the last coalition in September.

In his televised address late Wednesday, Yushchenko blamed the coalition’s collapse on Prime Minister Yulia Tymoshenko, leader of the eponymous bloc.

“I am convinced, deeply convinced that the democratic coalition was ruined by one thing alone — human ambition. The ambition of one person,” he said in his address.

He also told viewers that Tymoshenko had exhibited unrelenting “thirst for power”.

Tymoshenko’s BYuT party immediately said it would consider challenging the constitutionality of the dissolution.

Andriy Portnov, a deputy leader of BYuT’s parliamentary faction, was quoted by Interfax as saying, “we deem this step anti-constitutional and senseless. What has happened was certainly provoked by the president. It is he who stands behind the coalition’s breakup.”

“We will not vote for any bill aimed at legitimating these anti-constitutional steps by the president,” he added.

The constitution states that the president has the formal authority to dissolve the legislature if no majority coalition has been formed within 30 days after the collapse of its predecessor.

However, lawmakers still have to adopt changes to the current legislation in order for early elections to be held legitimately, as some clauses of the existing law are impossible to implement by December 7. The legislature must also allocate money for holding elections out of the state budget for 2008.

A further potential legal quibble arises from the date of Yushchenko’s decree, according to Rencap analysts.

On 3 September, the President announced he would use his constitutional right to dissolve the Rada if a new coalition was not formed in the next 30 days.

However, the break-up of the ruling coalition was first officially announced in the Rada on 16 September, meaning that Yushchenko’s decree dissolving the Rada and calling new elections could be ruled premature.

This means that there is likely to be continued political uncertainty in the coming weeks about how and when elections are going to take place.

“Tymoshenko seems intent on derailing or at least delaying the upcoming vote to take advantage of widespread disapproval of new snap elections among voters ,” says Dragon’s Viktor Luhovyk.

Ukrainian roulette

Beyond likely legal disputes, the outcome of the elections themselves, when they take place, is equally uncertain, due to floating voters, electoral fatigue, a plethora of small parties and a low threshold of only 3%.

“Voting day comes 14 months after the last elections,” says Galt & Taggart’s Spolsky, “and with Ukraine’s population suffering election fatigue the president is risking a very low turnout on elections.”

Polls show a drift away from established parties to small parties, making the outcome in terms of a governing coalition is thus even more open, according to analysts. So even after elections, coalition negotiations are likely to be even more protracted than was the case last year.

According to recent polls, BYuT is supported by 18-24% of the electorate (vs 30.7% at the previous elections), the Party of Regions has 20-26% (vs 34.4% last year) and OU-PS 4-10% (vs 14.2 %), say Rencap analysts.

Support for smaller parties is on the increase, with the Lytvyn Bloc possibly getting 5-7% (vs 4.0%) of votes and the Communist Party – 4-6% (vs 5.4%), according to Rencap.

According to Concorde’s Verbyany, “looking at current poll numbers, both the Party of Regions and Tymoshenko blocs have good chances of increasing their seats in parliament – while the pro-presidential Our Ukraine party risks not breaking the 3% threshold to get in. A number of smaller parties will again stand in the election, and considering voter’s distain for current political personalities, they could very well make the cut.”

Galt & Taggart’s Spolsky comments, “with several parties fracturing internally – some quite severely – the political landscape could see some changes, especially with a few better-known politicians set to change allegiances, establish new parties, or make the jump from municipal to federal politics.”

Orange eats itself: Yushchenko vs. Tymoshenko

A number of analysts argue that Yushchenko’s move is aimed at removing Tymoshenko from government in the run up to next year’s presidential election campaign, and that the president is ready to reestablish the coalition with current opposition Party of Regions, with current defence minister Yury Yekhanurov as prime minister, that fell apart in spring 2007.

“The opposition Party of Regions, which lost power after last year’s elections, has tacitly taken Yushchenko’s side and is eagerly awaiting a new vote to return to government office, possibly by forming a majority coalition with the president’s party in the next parliament,” comments Dragon’s Luhovyk.

Foyil’s Ismail Safaraliyev argues that “although Prime Minister Yulia Tymoshenko’s eponymous bloc (BYuT) will remain a force to be reckoned with, we can expect Regions of Ukraine to win more seats in Parliament than it now controls, with Ukraine’s Communists returning as allies to create a bloc of MPs that would be enough to build a stable ruling coalition. In this scenario, which we find the likeliest, Regions would nominate its leader and former PM Victor Yanukovych as Prime Minister, with Mrs. Tymoshenko going into opposition to both President Yuschhenko and Mr. Yanukovych.”

G&T’s Spolsky argues trenchantly, “President Yushchenko’s main goal in the month-long political turmoil was the end of Yulia Tymoshenko’s premiership. Both Tymoshenko and Yushchenko have their sights firmly set on the battle for president in early 2010, and President Yushchenko deemed it necessary to remove Tymoshenko from her post in an effort to discredit her and reap the public opinion benefits. The president chose elections, and it is widely believed that no matter the outcome, Tymoshenko will not find herself in the prime minister’s chair come the new year.”

Yushchenko’s move to dissolve the Rada and break political deadlock thus can hardly be seen as a move to some new stability, but as exacerbating instability, just as the effects of the global financial crisis start to bite deeper into the Ukraine economy.

Concorde’s Volodymyr Verbyany comments, “from the political view, the Rada’s dissolution could be a logical attempt at resolving the deadlock that has paralyzed Ukraine’s parliament. But from the economic point of view, amid the C/A deficit concerns and exchange rate volatility, and particularly considering the population’s staunch opposition to new elections, the call to dissolve parliament is a very risky move.”

And Foyil’s Safaraliyev says tersely,”considering that the global financial crisis is starting to seriously affect key industries of the Ukrainian economy, the last thing this country needs is more political uncertainty.”

Parties play blame game as Ukraine counts down to Rada dissolution

Graham Stack for business new europe (www.businessneweurope.eu)
Ukrainian President Viktor Yushchenko has set parties a deadline of Tuesday, October 7 to reach a new coalition agreement, otherwise he will dissolve Ukraine’s parliament, the Verkhovna Rada, and call fresh elections.

As of October 3, Yushchenko has had the constitutional right, but not the obligation, to dissolve parliament following the collapse in September of the coalition between the Bloc Yulia Tymoshenko (BYuT) and the president’s Our Ukraine/People’s Self-Defence (NU-NS).

“I fully understand that I am absolutely entitled to dissolve the parliament today,” the presidential press service quoted Yushchenko as telling journalists on Saturday October 4. However, Yushchenko said he could wait until October 7 to see if a coalition appeared.

But hopes for renewing the previous “democratic” coalition by taking on board the small Volodomyr Lytvyn Block led by former speaker Volodomyr Lytvyn were dashed on October 3. Members of the Lytvyn Bloc declared that the coalition negotiations were merely “a cynical political game,” according to Lytvyn’s faction leader Oleh Zarubinskiy. “The coalition of the three [ByuT, NU-NS, and Lytvyn Bloc] is impossible,” he said at a briefing, according to Interfax.

Including the Lytvyn Bloc in the coalition could have restored its majority in the Rada. The coalition had been technically a minority government following the defection of two deputies in June. Without including the Lytvyn Bloc, restoring the coalition would have done little to overcome the political instability and deadlock.

Blame game

Zarubinskiy’s comments adds grist to the mill that the various party leaderships are now only interested in avoiding the blame for unpopular and expensive new elections they are already secretly preparing for. For his part, Zarubisnkiy put the blame for the breakdown of talks squarely on the presidential administration, telling Interfax that, “script writers and directors at N11 in Bankovaya Street are not interested in any coalition in the Verkhovna Rada and are doing everything to make sure that there is no coalition.”

Prime Minister Yulia Tymoshenko, leader of the eponymous bloc, also blamed Yushchenko for the Lytvyn Bloc’s exit from talks. bne reported October 1 that President Viktor Yushchenko said during a summit in Washington that he had given up hope of re-forming the coalition between BYuT and NU-NS and is preparing for new elections. Yushchenko expressed scepticism October 3 about the genuineness of recent conciliatory moves by Tymoshenko, leader of BYuT. Such moves included a promise to retract the bills passed September 2 that transferred powers from president to parliament that originally caused the coalition to collapse.

On October 3, Tymoshenko went one step further by finally adding her signature to a statement on the Georgian crisis of August that implicitly criticizes Russia. She then claimed at a press conference that BYuT had now complied with all conditions NU-NS and the president had specified for renewing the coalition, passing the buck back to Yushchenko.

Tymoshenko’s BYuT party stands to gain at the expense of the pro-presidential NU-NS in the event of fresh elections. This makes Yushchenko’s claims that Tymoshenko is only going through the motions of talks very plausible.

However, BYuT is still only neck-and-neck with the opposition pro-Russian Party of Regions (PR) at 25%. Thus, for Tymoshenko to form a stable government following elections, she has to take votes off PR. The best way for her to do this is to shift to a (relatively) pro-Russian platform by deemphasizing, and perhaps dropping altogether, the divisive policy of Ukrainian accession to Nato. This is what Tymoshenko seems about to do. During the Georgian conflict, she kept a conspicuously low profile, and has sounded conciliatory notes towards Russia. This has met with a warm response from Moscow and rewards.

On October 2, Tymoshenko flew to Moscow for talks over crucial gas imports with Russian Prime Minister Vladimir Putin. She came home with a deal going forward that was considerably softer for Ukraine than many had anticipated, especially with Putin simultaneously accusing Ukraine of supplying arms to Georgia. The gas deal provides for a three-year transition for gas delivered by Russia to Ukraine to reach European price levels minus transit differential. There were fears Russia would demand world market prices staring in 2009. Even so, the final 2009 price has not yet been specified, meaning that Moscow is retaining leverage until a later date.

However, Tymoshenko’s shift towards Moscow, aimed at taking votes off PR, has opened up an unbridgeable chasm between her and Yushchenko. Members of Yushchenko’s entourage have openly accused Tymoshenko of treason, and the Ukrainian secret service SBU has investigated her on suspicion of actions harmful to national interests.

The standoff between the two reached new heights as Tymoshenko was preparing to fly to Moscow on October 2. The government plane that she was meant to travel on was commandeered at the last minute by Yushchenko to take him to the West Ukrainian town of Lvyv. Tymoshenko was forced to charter a Slovenian jet instead. The presidential administration claimed that the presidential jet had been damaged, and there was no reserve plane. However, adding to the farce, the Transport Ministry informed journalists that the presidential plane had been in perfect working order.

Tymoshenko prefers Kremlin to Yushchenko

Graham Stack for business new europe

In a further sign of her startling pro-Moscow shift, Ukrainian Prime Minister Yulia Tymoshenko called on President Viktor Yushchenko to clarify with Russia the price for gas for 2009. She said this was an essential precondition to her finalizing the 2009 budget.

“The budget can be clarified after the final price for the natural gas is fixed. I think that if the Ukrainian president is talking so much about “Moscow’s hand,” then let him try to receive gas from this “hand” at moderate prices in the short term,” Tymoshenko said after a government session, as quoted by Interfax.

In a veiled threat not to pass the budget before an agreement is reached, Tymoshenko said the Rada would not clarify the budget until a final price had been arranged with Russia.

Underscoring the shift in Tymoshenko’s position regarding Russia – a shift that has triggered a secret service investigation into her dealings and accusation of treason – Tymoshenko explicitly put the blame for deteriorating relations with Russia on President Viktor Yushchenko, not the Kremlin.

Tymoshenko’s current position regarding gas prices is a u-turn on her position at the start of 2008 on paying Ukraine’s gas debts to Russia.  In talks over size and payment of Ukraine’s gas debt, Yushchenko took a conciliatory position and Tymoshenko a stridently anti-Kremlin position.

Now they have reversed their roles.

“President Viktor Yushchenko is personally responsible for all the radical decisions made with regards to Ukraine,” Interfax cites Tymoshenko as saying at a news conference Wednesday September 17 , referring to alleged Russian initiaives to restrict the free trade regime with Ukraine.

Tymoshenko went on to actively back Kremlin claims about an information war being waged against Russia by the West and Western allies.

“When information wars are declared on some countries, and when states are insulted and humiliated, Ukraine anticipates a return blow. Therefore, Viktor Yushchenko will be personally responsible for all the bad trends in relations between Ukraine and Russia, in my opinion,” Tymoshenko said, according to Interfax.

Gas price conflict next up

Yesterday Alexander Shlapak, an aide to Ukrainian President Viktor Yushchenko, admitted that the Ukrainian government’s gas price projection of $250-260/tcm in its 2009 budget now appears to be unrealistic and will need to be raised at least to $300/tcm.

“However we note that this expectation is still below the projected European market price of $340/tcm for 2009. Negotiations between Russia and Ukraine over pricing have yet to be completed,” write UralSib analysts.

Several months ago Gazprom signed an agreement to purchase Central Asian gas in accordance with its “net-European” gas price formula (average gas price in Europe minus excise taxes, transportation costs and Gazprom’s margins).

Since Ukraine consumes almost all of the Central Asian gas, a gas price for the Ukraine below the EU market price less transport differential would make Gazprom sales to Ukraine loss-making, argue UralSib analysts.

Ukraine is threatening to use as a bargaining chip the tariffs it charges for Russian gas transit to Europe.

Yesterday Uriy Kolbushkin, Deputy CEO of Ukraine’s gas distribution monopoly Naftogaz, said that Natfogaz could increase gas transportation tariffs for Russian gas by over double to 86 hryvnya for 1000 cubic meters for 1km starting from 2009, according to Vedomosti.

UralSib analysts writes, “we note that Ukraine provides transit for about 80% of Russia’s total gas exports to the EU. If Gazprom increases gas prices for Ukraine too aggressively, the Ukraine may respond by raising transportation tariffs and Gazprom’s margins would be squeezed.”

Russia is making it clear that the gas price hike for Ukraine is not political. Yesterday Gazprom also announced a price hike for Armenia, a loyal Russian ally. However the price hike for Armenia looks like being more gradual, according to UBS.