Don’t say the C-word in Kiev. It tends to get businesspeople uptight. “This is not a crisis,” insists Vadim Mironyuk, head of international business at Ukrsibbank, the country’s fourth largest bank. “It’s not even a particularly dramatic situation for most Ukrainians.”
It certainly looks dramatic to an outside observer. Maidan Square, which two years ago was filled with the orange banners of the supporters of Viktor Yushchenko and Yulia Timoshenko, is now filled with hundreds if not thousands of the blue flags of Viktor Yanukovich’s party of the regions, and the red flags of the communist party.
The twists and turns of Ukrainian politics read like a cheap political thriller. The story so far: two years ago, Yushchenko ran against Yanukovich for the presidency. Yuschenko survived a poisoning and a rigged election to become president. Yulia Timoshenko, his ally, became prime minister.
But the two fell out after less than a year over differences in economic policy. During parliamentary elections, Yanukovich’s party did fairly well, and managed to lure the socialist party away from the Orange Coalition to form a blue coalition. Yushchenko was forced to appoint Yanukovich, his most bitter rival, as his prime minister.
The government did not survive much longer than the previous one. Yushchenko and Yanukovich were incessantly at odds, partly because of a constitutional amendment, which was signed during the Orange Revolution, whereby the prime minister took many of the powers of the president.
As Kamen Zahariev, head of the EBRD’s office in Kiev, says: “This was a hastily-written document, created during a revolution with the threat of bloodshed nearby, and nobody bothered to read the small print. It’s a badly written document, and it’s not clear who has what powers.”
The problem became more acute as Yanukovich ousted more and more Orange ministers from his government, or lured them over to the party of regions. Ukraine’s foreign minister, Arseniy Yatsenyuk, who organized Yushchenko’s 2004 election campaign, says: “The prime minister’s coalition was formed eight months ago, of three factions, or 238 deputies. But then the government tried to eliminate the opposition, by inviting individual deputies from opposition parties to join the coalition.”
For example, Anatoly Kinakh, once Yushchenko’s finance minister, defected from the opposition to join the coalition in May, taking with him 12 other deputies. He is now minister of economy.
Unconstitutional
The president and his supporters argue that such moves are unconstitutional. Yatsenyuk tells Emerging Markets: “The constitution says that the coalition can only be formed by factions, and that it must be formed 30 days after the first meeting of parliament. Even more, the ruling coalition announced its intentions to attain a constitutional majority of 300, which would have enabled them to overrule the president’s veto. And they would definitely have got it.”
As an act of self-defence, Yushchenko issued a presidential decree on April 2 dissolving the parliament and, on May 5, signed a decree that required elections to take place in late June. Yatsenyuk refuses to be drawn on whether the coalition had bought the deputies who joined them. But he says the two main problems of Ukrainian politics are political immaturity and political corruption.
Kinakh himself says he joined the coalition in rebellion against an opposition that opposed everything the government suggested. He tells Emerging Markets: “It is important for political parties not to oppose nation building but to propose alternatives to the central government. Of course, what is really needed is good political will from all parties involved. We expect the politicians of this country to put national interest above party interests or elections.”
But Kinakh also warns that investment could suffer. “We are very much aware that we must not allow this situation to continue. Already we see there are a lot of investors who are taking a ‘wait and see’ approach,” he says. He points out that the political challenge comes at a critical time for Ukraine’s financial sector development, its stock market development as well as key reform of land, pension and tax systems. “All these things require efforts from [proper functioning] executive and legislative powers,” he says.
The constitutional court is, at the time of writing, meeting to discuss the political impasse. But despite the thousands of protestors waving various banners outside the court, it seems more likely at this stage that the solution will be political rather than legal. Analysts think there will be parliamentary elections in the autumn.
But so far the fallout from the political volatility has barely registered on the economy, which is on course this year for 6-8% growth – roughly repeating last year’s 7% achievement. Financial markets too have largely shrugged off the political wrangling: the stock market grew by over 200% in the first quarter of the year – the strongest performance in the world – and has only lost 9% (at the time of writing) since the stand-off began. Sovereign bond spreads widened by about 100 basis points in the week after Yushchenko dissolved the parliament, but they have also tightened since then.
And Ukrainian corporates are still able to find financing from the international capital markets, even if the country doesn’t have a government. For example, on April 20, Raiffeisen Bank Aval raised a $500 million syndicated loan, which was the biggest ever loan for a Ukrainian financial institution. At the time of writing, Ukrsibbank and Ukreximbank are also in the process of raising syndicated loans. Vadim Mironyuk of Ukrsibbank says: “The interest from foreign investors is good, so it’s reasonable to assume that they too don’t think the situation is a crisis.”
Long-term planning
While Ukrainian politicians are hardly thinking beyond next week, Ukrainian big business has already embarked on multi-year modernization plans. Kamen Zahariev of the EBRD says: “We don’t see local investors postponing decisions. The big financial groups are continuing with their multi-billion-dollar investment plans, such as the Industrial Union of Donbass’ $2 billion modernization of the Alchevsk steel mill, which we’re helping them with. You can’t just stop a train like this. These are long-term projects.”
Ukrainian big business is, in fact, increasingly cleaning itself up in its search for international capital. One example is System Capital Management (SCM), the holding group owned by Ukraine’s richest man, Rinat Akhmetov. SCM’s head of international business relations, Jock Mendoza-Wilson, says: “We’re about to do the parent group’s debut syndicated loan, a $400 million deal arranged by BNP Paribas, and we’re making all our different business units IPO-ready.”
Akhmetov has traditionally been a staunch supporter of Yanukovich. However, there are signs the present situation is not to SCM’s liking. Mendoza-Wilson says: “The political situation is an unwelcome distraction. What business really wants is liquidity, and political uncertainty creates a sense of instability.”
Several analysts think that Ukrainian big business will – or at least should – act as a “civilizing influence” on the various political leaders. Volodimir Fesenko, a leading Ukrainian political analyst, says: “The oligarchs want to increase the value of their assets, so they will try to reduce political risks after the election. In general, big business and foreign investors need to be clearer in formulating their interests to politicians. The politicians are, if anything, too independent from business at the moment.”
Ukrainian business can do well despite the lack of political leadership in the country, but only up to a point. FDI was $5 billion last year and is likely to be the same this year, but it could have been a lot more if the country finally passed a proper tax code. The stock market grew very strongly, but would probably grow a lot more if the government finally passed a joint-stock law. And the economy will take a whole leap forward when the government finally passes WTO accession, which will itself open the door to a new free trade agreement with the EU, which would be the first step on the long road to EU accession.
As Denis Gorbunenko, CEO of Rodovid Bank, says: “We all want more stability. The politicians should be strong enough to sit down and work something out.”