Ukraine's 2010 policies: do you guesswork carefully

Ukraine's elections bring a need for those interested in things Ukrainian to find out "Who is Mr. Yanukovich?" as he is the likely winner of the presidential campaign. Provided Ukrainian parties are build around personalities rather than around policies and ideologies it is very hard to understand as of now what specific stance will be taken by the new president on this or that issue. We are going to devote more attention to specific aspect of future economic, foreign and domestic policies to be expected in 2010. As of now - a a factbox from Reuters on what to expect from Ukraine's election front-runners. Read on under the cut.

Slippery ground of forecasts: 10%, 12% or 15% gap?

We're going to share some rumors. It is hard to come by honest sociology in Ukraine in the wake of presidential elections, so we'll present you the assortment of evaluations, if only to check our sources later on for accuracy. According to pro-Tymoshenko's internal sociology the gap between the candidates will be about 10% in favour of Yanukovich, pro-Yanukovich internal data tells of 12% gap, other "trustable surveys" say that the gap may reach 13-15%. 

We assume that there’s significant probability that Tymoshenko will try to delegitimize second election round. The gap of at least 10% makes it difficult for Tymoshenko to fight for the third round, but even if it is scheduled a miracle is needed for Tymoshenko to win.

Short-term risks for Ukrainian economy still remain high due to increased propensity to resort to radical moves by the two major political groups. Examples are the assault on Ukraina printing house (where voting ballots are printed), Party of Region’s attempts to dismiss the head of police loyal to Tymoshenko, and PoR's pressure on Central administrative court.
 

In case of prolonged political standoff there are risks for the National bank of Ukraine and the whole banking system. Deposits outflow is probable, as well as grivna devaluation pressure and sharp rise of prices for certain food products.

At the same time, we do not forecast the situation to get as radical as it was during the 2004 Orange Revolution.

Gas consortium - a topic for the presidential candidates

Julia Tymoshenko has declared that her idea for the development of the Ukrainian gas transit system is radically different from that of Mr. Yanukovich and Mr. Tigipko. Both Yanukovich and Tigipko said that they support the idea of a gas consortium to manage Ukrainian gas transit system. While Yanukovich was less clear about the membership in the consortium Tigipko was more clear: 50% in Ukrainian ownership, 25% in Russian and 25% in European. That kind of consortium according to Tigipko would guarantee that the consortium is stable and guarantees Ukrainian interest.

In the recent Focus on Ukraine note from German Marshall Fund its Senior Fellow Jorg Himmelreich seems to support Mr Tigipko (or vice versa):

But more than this: the EU should think about buying into or leasing stakes in Naftogaz by the European Bank for Reconstruction and Development (EBRD) or other international financial institutions. Such an EU investment touches Ukrainian sensibilities about its sovereignty, because gas pipelines and storage capacities are perceived as assets of Ukraine’s sovereignty. But the EU stakeholdership should also be seen as strengthening Ukraine’s negotiating position with Gazprom. The European Union as a stakeholder could then enforce the transparency of Naftogaz and Ukraine’s energy sector—and that would unblock Ukraine’s political and economic transformation.

 Recipy from GMF is enticing. Indeed the time has shown that Ukraine is unable by itself to untangle the gas knot named Naftogaz. European and Russian participation in the gas consortium would seem to guarantee the bright future of the enterprise. However, Russia is interested in making its gas more competitive and EU also wouldn't mind cheaper gas. These interests make Russia and EU perfect collaborators in taming Ukrainian side.

Presidential elections: interim reflections

Elections were fair and free. There were not many mechanisms for fraud in the electoral law this time, because both camps of the front runners were not sure that they can exert enough influence to control these mechanisms to their own benefit.

Big surprise was the amount of votes that a relatively "new" face of Sergei Tigipko won - 13%. Former NBU Head and ex-Vice-Prime Minister refuses to ask his voters to support one of the candidates, making a bet on their support during local elections in May 2010 (perhaps coinciding with early parliamentary elections). However, his refusal to support other candidates may be due to his electoral base being relatively new. That is it may not be likely to follow Tigipko's call to support one of the front-runners, but will only deem Mr. Tigipko to be a technical candidate thus reducing trust in him. That in turn can diminish his future May success on local elections.

Certainly, Ms Tymoshenko, one of the front-runners, who loses about 10% to Mr Yanukovich, is in a difficult position. Her chances of victory are slim. One of the interesting scenarios for her would be to step down from electoral battle and to ask her supporters to vote for Mr. Tigipko, thus making him a winner. That would make Tigipko a president, remove Mr Yanukovich from the playing field as well as preserve Yulia Tymoshenko as a Prime Minister of the country - a post that might be prefereable to weak presidential office.  That scenario is just one of the many and is not very likely, but... a really interesting one.

Second round of elections is expected on February 7 with a new president stepping into the office by March 29 should everything go on schedule. It is interesting to note lack of published polls predicting who the victor of the second round may be under different scenarios and what turnout to expect.

Post-election redistribution of property: is it coming?

Presidential elections in Ukraine will stop the times of duality in Ukrainian power. The conflict between Orange revolution leaders Yulia Tymoshenko and Viktor Yushchenko are over whatever the result of the election. It is likely that early parliamentary and local elections will cement the victory of a presidential winner, whoever it will be. Once the power gets consolidated in the hands of one political camp the question is - will the other camp suffer or rather how exactly will it suffer.

Certainly, many bureaucrats will lose their positions due to elections (more in case of Yanukovich victory, provided YuliaTymoshenko already controls Cabinet of Ministers and is rather influential with many courts). But it is likely that some property is also destined to change hands. Many oligarchic businesses were built on shaky ground of discretionary bureaucratic decisions with respect to licenses, permits, access to monopolistic markets etc. Those kinds of businesses are likely to suffer after the president gets settled in his or her seat.

One of the likely targets in case of the Tymoshenko win will be Mr. Firtash, who has already lost his intermediary business in gas trade between Russia and Ukraine and is now trying to defend remnants of his business empire. Today OstChem Ukraine publishes a press-release that its stake in Crimean Titan enterprise is under threat due to government's decisions, which may lead to raider attack. Other likely targets of the second round of re-privatization may be in Mr. Pinchuk's business empire.

After Orange revolution Yuliya Tymoshenko has initiated reprivatization process, which came to a halt after a loud sale of Kryvorizhstal' plant to Arcelor Mittal. Kryvorizhstal' was privatized by a consortium of Viktor Pinchuk and Rinat Akhmetov for fraction of the market price.

In case Viktor Yanukovich wins property redistribution may also be likely, but it is less probable, provided his camp has suffered from it in 2005 and ardently protested any kinds of privatization revision. However, being the victim of the process in opposition is one thing - it is much harder to stay away from it once the opportunity is there.

IMF witholds financing to Ukraine

As UR has already pointed out in November there will be no financing from IMF to Ukraine until after the presidential campaign. IMF grew tired of Ukraine's lies, willingess to use money for financing electoral promises, no budget and discord between president and prime minister. USD 3.5 bn should have been transfered to Ukraine as a part of a USD 16.8 bn loan, but now that tranche is on hold.

As Judy Dempsey writes in NYT until there be consensus among elite in Ukraine there will be no financing from IMF and that basically means until after the presidential elections. Ms. Pazarbasioglu previously heading missions to Ukraine is now likely to step down, apparently being tired of dealing with Ukrainian leadership.

Although Mr. Strauss-Kahn has quite frankly said in November that there will be no co-operation with Ukraine until the end of the presidential campaign, Ukrainian authorities played it in a way that the tranche was going to be paid. However, that game did not seem to succeed afterall. 

Gas distribution networks - civil gas war

Instead of having a usual winter gas war in Russia Ukrainian authorities decided to move the gas war to domestic terrain this year. The idea is that the state wishes to take control over the gas distribution networks previously rented out by private gas distribution companies - oblgases. January 1, 2010 rent agreements become void and the state decided that it does not want to prolong these agreements that easy. Temporary contracts may be signed, but there is no talk about long term contracts so far. Needless to say that the private owners of the distribution companies are getting the value of their companies diminishing to zero dollars. The big fight between the state and owners is ready to begin.

The management of the gas distribution networks is to be accumulated under the roof of Naftogaz - state monopolist in the gas sector. After that the state will have a second wave of privatization in the gas distribution sector giving long-term management contracts to new firms, or may be will condescend to giving these contracts to good old owners of oblgas enterprises, but on entirely new conditions. Naftogazmerezhi, an enterprise that will now manage all state gas distribution networks, is ready to start a long fight or getting all the networks under its control, with litigation if necessary.

Businessmen like Mr. Firtash, oligarch mainly known for owning intermediaries in Ukraine-Russia trade, may be pushed out of the distribution market. Instead Gazprom is likely to enter, perhaps through new chain of intermediaries. Certainly, the result of the civil gas war in Ukraine will be fully determined by who is going to be in power in Ukraine after presidential elections. Should Yulia Tymoshenko win it is most likley that the state will win the control over the distribution networks and Gazprom is likely to enter the market. In case of Viktor Yanukovich unlikely victory status quo in the industry is likely to be preserved.