Ukraine’s ‘Dysfunctional Democracy’ May Linger For Half A Year

KIEV, Ukraine -- Newly inaugurated Ukrainian President Viktor Yanukovych may be forced to share power with rival Yulia Tymoshenko for as long as six months as he searches for the votes to oust her as premier or calls new parliamentary elections.

Viktor Yanukovych (L) may be forced to share power with rival Yulia Tymoshenko.

The president’s lack of a ruling majority in the 450-seat parliament threatens to deprive the former Soviet republic of the stability needed to combat Europe’s deepest recession and revive investor confidence.

Ukraine, whose debt is the third-most expensive to insure in the world, can’t gain access to an international bailout and pay Russia for gas to Europe without a government capable of winning approval for this year’s budget.

“There is going to be a lot of uncertainty for some time,” said Nick Day, London-based chief executive officer of the security and intelligence research group Diligence Inc. “Clearly Yanukovych has not got an overwhelming majority and needs to get a lot of people on his side in order to push through any meaningful changes within the economy. People will swap sides and it will become a dysfunctional democracy.”

A prolonged battle may deepen Ukraine’s economic decay and delay the resumption of a $16.4 billion emergency loan from the International Monetary Fund that has been frozen since November.

The IMF is demanding spending cuts that narrow the budget deficit by about a third from its 2009 level of about 13 percent of output, a reduction of energy subsidies and a consolidated banking industry. Lawmakers have yet to approve a 2010 budget.

Won’t Leave Voluntarily

Tymoshenko has said she won’t leave her post voluntarily, setting Yanukovych, who took office yesterday, the challenge of overturning her majority in the parliament. She is supported by a coalition of 244 lawmakers that includes her party, former President Viktor Yushchenko’s group and parliamentary speaker Volodymyr Lytvyn’s supporters.

Yanukovych’s Party of Regions has 171 seats, and he needs to secure 27 seats from the Communists and lure 20 followers from Lytvyn’s party and at least eight from the Tymoshenko or Yushchenko ranks to oust her.

If he fails, early parliamentary elections can’t be held until autumn, according to Yuriy Yakymenko, head of legal and political studies at the Kiev-based Razumkov Center. “The situation is very difficult and hard to predict,” he said.

Olexiy Haran, a professor of comparative politics at the Kiev-Mohyla Academy, said elections may be possible in June “though the Party of Regions will try to avoid it” because of concern about potential election fatigue among the electorate and because of possible delays to the budget passage that would stall the disbursement of the next IMF loan installment.

It will take the new president “some time” to form a coalition, said Nigel Rendell, senior emerging-market economist at RBC Capital Markets in London, by telephone.

Difficult Consensus

“There’s a lot of disagreement between the politicians, the economy is in a recession and the IMF loan is still up in the air,” he said. “To get a consensus that can govern is going to be quite difficult.”

And the stalemate could persist, leaving the IMF without a functioning government to negotiate with over the loan resumption, Rendell said.

“It would be a very bad-case scenario,” he said. “But it’s possible.”

Day said Tymosheno’s “strong and dedicated following” will force Yanukovych to seek compromises on legislation that is important to him.

“Everything is going to be a great struggle overshadowed by the horse-trading and political infighting,” said Day.

Yanukovych may be hampered in such maneuvering by his campaign promises to increase wages and social payments, said Yakymenko.

Limited Finances

“They understand already that the state finances do not make it possible,” Yakymenko said. “It is going to work against Yanukovych.”

Yanukovych defeated Tymoshenko in a Feb. 7 presidential election that was certified as legitimate by international observers. Tymoshenko has refused to concede defeat and tried to challenge the outcome in the courts.

Investors have lost patience. The hryvnia has lost 41 percent against the dollar since September 2008 and was the world’s second worst performer after the Venezuelan bolivar.

The yield on Ukraine’s 2016 Eurobond fell 18 basis points to 10.07 percent. The credit default swap spread on the country’s five-year debt narrowed to 936 basis points on Feb. 24 from 944 the previous day, Bloomberg data show. A narrower spread signals improved investor perceptions of credit risk.

“A country like Ukraine needs to put so many things right,” said Day. “They need to get some real fiscal discipline into their country to attract foreign investment and to do that they need to push through strong reform.”

Source: BusinessWeek