Ukraine: a 4 month forecast

The Verkhovna Rada of Ukraine, the unicameral parliament of Ukraine. Photo: Vadim Chuprina (cc) wikimedia.org

Ukraine: The European frontier – a blog curated by Valerii Pekar.

What should be expected? In this article I highlight the key points in Ukrainian politics until the end of the year in a chronological order, as far as these months will be the most critical.

The government

The one-party majority of the president’s party Servant of the People will form a government ensure control of parliamentary committees in the end of August or beginning of September. We don’t know the names of the prime minister and ministers yet, although some prospects are actively being discussed. The government is likely to end up as a compromise containing many genuine reformers, but still be strongly linked to the president’s office and have internal contradictions. This government will be bound by two conditions: it will be required to do popular things and show rapid results within 3-4 months.

International Monetary Fund

An IMF delegation is expected in mid-September, following the formation of the government. Most likely, this IMF mission will conclude with a staff level agreement. Although the final agreement is to be approved by the IMF board of directors sometime in December, the preliminary agreement, along with a very possible increase in Ukraine’s ratings by some international rating agencies, is expected in early autumn. This will be a great positive signal with which the government may enter the foreign borrowing market.

The war and presidents’ summits

President Volodymyr Zelenskyy needs President Donald Trump’s supportive statements on progress in the Ukrainian economic and security. And Trump needs to show his peacemaker’s success story before the 2020 elections. Thus, the Ukrainian card appears on the table of talks between Trump and Putin, whose ideal situation is to get assurances from the US President that Ukraine is fully within Russia’s sphere of influence. All these negotiations will take place against the backdrop of a dramatic escalation of the situation at the front line as Putin strengthens his position before the talks.

While the presidents of Ukraine and the US have to demonstrate success in peace-making (the most difficult and most pressing problem for voters in Ukraine), the President of Russia is losing legitimacy. Two key factors there are the elimination of the illusion of elections and the excessive use of force against the background of rising poverty and separatist sentiment in the Russian regions. As usual, Putin will answer by escalating the military conflict.

So, President Zelenskyy and President Trump need peace, and President Putin needs war. This does not create an easy situation for peace-making initiatives. An important key point will be what what Zelenskyy will promise Trump in exchange for his support. Excessive promises threaten sovereignty, which will be negatively perceived by much of society.

The parliament’s aspiration for reforms

In the meantime, the parliament will set up its work and begin producing reform bills, a substantial package of which has already been prepared. But civil society, other political parties and international partners need to follow these changes with keen eyes, because some seemingly good bills can have small secret loopholes for the bad guys (even a couple of bad bills can go unnoticed within the whole package), and pressure from the president’s office to keep the highest possible rate of output will not allow for high quality discussions. Furthermore, the overwhelming majority of MPs having no experience. In this situation, small parliamentary factions will play an important role in trying to control the quality of the hasty decisions, but it will depends on their strength and cohesion.

Until the end of the year the parliament will work fairly intensively, and the large presidential faction, under strict scrutiny from the president’s office, will seek to maintain its solidarity. But conflicts will escalate as different groups will be formed based on different values, interests and subordination to external centres of influence. Conflicts between the party leadership and the MPs elected in local majority districts will be inevitable. These MPs  will feel more responsibility to their voters than to the party. Tensions will also arise inside the presidential team, where there are several opposing groups.

Igor Kolomoyskyy, the National Bank and Privatbank

In late September or October we shall approach a possible fork in the scenarios. Oligarch Igor Kolomoyskyy, who is associated with the president, wants to change the National Bank management as a part of his revenge for the nationalisation of Privatbank. The purpose may even go further, to the condemnation and imprisonment of the oligarch’s opponents. This means losing the independence of the National Bank, and resulting in the extreme dissatisfaction of all international partners. This decision will have fatal consequences for the cooperation with the IMF, so Ukraine is facing a negative scenario.

It is also the time for the Court of Appeal to consider the question of the legality of the nationalisation of Privatbank. Ukrainian courts have already demonstrated they favour Mr. Kolomoyskyy. The probable decision to consider the nationalisation of Privatbank as illegal will lead to paralysis of the government and a potential crisis in the banking system. Also after that Ukraine will have a very weak position against Kolomoyskyy in international courts.

Gas consumer prices

The next key point is the price of gas for the heating season. It should be raised to the market level (futures contracts give us a hint on this), and this unpopular decision cannot be postponed. But the government is tasked with providing popular solutions, so it is hardly an easy step, especially when 39 per cent of voters expect that president Zelenskyy will decrease, not increase prices. Avoiding this very unpopular decision will mean a red card from the IMF and a negative scenario.

State budget

At the end of October, the world will remind Ukraine of itself, as far as elections will be held in Argentina, and some form of Brexit will come into force. Add this to trade wars and economic slowdowns across the world, and Ukraine’s prospects for borrowing cheap money look pessimistic.

November is a time of active work on the state budget. The key issue here is not to increase the budget deficit and stay in line with other requirements agreed with the IMF. A serious complication is the huge number of pre-election and post-election promises made by the president. The country will need to hurry as the meeting of the IMF board of directors is expected to happen in December.

Summary

At the end of the year multiple scenarios that could prove positive or negative.

The positive scenario includes: many reformers in the government, maintaining the independence of the National Bank, market gas prices, continued cooperation with the IMF (a 5, 7 or 9 billion US dollars program), moderate conflicts in the president’s team and his large faction, and low social tension. In this case, the economy continues to grow, Ukraine easily services its debt in 2020 and creates sufficient conditions for attracting investment, even in the difficult world economic situation.

The negative scenario includes: a government tightly controlled by the president’s office, the loss of independence of the National Bank, artificially low gas prices, budget imbalances and worsening of the payment balance, recognition of the illegal nationalisation of Privatbank, and finally failure of cooperation with the IMF against the backgdrop of the worsening overall situation in the world economy. In this case, internal conflicts around the president will be intensified, and his large faction will begin to fall apart.

Indeed, Ukraine is never so good and so bad as it seems. The main challenges will be in 2020: Ukraine may face them being strong, consolidated and mobilised, or weak with numerous internal conflicts. The coming months will show us the choice.

Valerii Pekar is a co-founder of the Nova Kraina Civic Platform, a lecturer at the Kyiv-Mohyla Business School and a former member of the National Reform Council. He curates a blog on New Eastern Europe titled Ukraine: The European frontier.

Servant of the People, Ukraine, Ukraine conflict, Ukrainian politics, Zelenskyy