Political Tension

Economic News

22 Jul 2010
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Relations between Ukraine's President Viktor Yushchenko and Prime Minister Yulia Tymoshenko may have reached an impasse over growing inflation and contentions of electioneering.

The conflict between Yushchenko and Tymoshenko approached a fever pitch on May 13, when the president was unable to give his annual address to the parliament because the podium was blocked by the prime minister's supporters.

The pair were allies in the "Orange" coalition that swept to power in 2004 after street protests against alleged election rigging by the then government. Yushchenko made Tymoshenko, a former gas magnate, his prime minister in 2005, only to dismiss her months later. At the September 2007 elections, they reformed their alliance and Tymoshenko was once again appointed premier.

However, the marriage of convenience, largely driven by a mutual antipathy to the former ruling Party of the Regions (led by former prime minister Viktor Yanukovych, who was defeated by Yushchenko in the 2004 presidential election), has once again soured.

Several factors have contributed to the tension between Yushchenko and Tymoshenko, with both sides accusing the other of manoeuvring in the run-up to the next presidential election, due to be held in January 2010. Tymoshenko is widely expected to stand against the incumbent, pitting them in direct electoral competition for the first time.

The prime minister has accused the president of blocking her government's attempts to control inflation, which hit 26.2% year-on-year in March and more than 30% in April. On May 14, Tymoshenko declared that regional governors had one month to "demonstrate implementation of the laws and resolutions of the government to stop inflation" in their jurisdictions, or face dismissal. She said she would then call for the governors of the three regions with the highest inflation rates to be sacked. Given that it is the president's prerogative to appoint and dismiss governors, this could be seen as both an attack on Yushchenko's authority and an attempt to force a showdown over an issue that seriously troubles an increasing number of Ukrainians.

Further adding to the suspense, Tymoshenko has indicated that if the government's orders are not carried out she may resign, probably forcing an election in which Yushchenko and his supporters could be routed. His Our Ukraine party is currently polling just about 8%, according to the local press.

"If the situation in the country does not improve, the prime minister cannot be the partner and ally of the president," Tymoshenko said on May 14, going on to accuse Yushchenko of electioneering. "To humiliate your own country, practically destroy in the economy everything that we are creating - this is no way to fight for the next presidential election."

For the moment, no easy solution to the impasse seems forthcoming. Yushchenko and his governors face two unsavoury prospects: heightening tension and possibly forcing an election, or a humiliating climbdown. Meanwhile, inflation, the core issue, seems unlikely to be tamed in the immediate future.

Even if a solution is found to this particular bone of contention, other conflicts loom. Yushchenko opposes the government's policy of using some of the income from privatisations to compensate those who lost Soviet-era savings due to government seizure and hyperinflation, saying that the proceeds should be spent on economic and social development. The president is therefore trying to block the sale of the Odessa port to a private firm.

The government also takes issue with the head of the presidential secretariat, Viktor Baloha, whom some have accused of aggravating tensions between Tymoshenko and Yushchenko.

While Ukraine continues to enjoy robust growth and the overall political picture is relatively stable compared to other former Soviet states, the recent spats and galloping inflation, issues that are not unrelated, have raised some worries. On May 14, ratings agency Fitch cut Ukraine's outlook from "positive" to "stable", while keeping its long-term foreign and local issuer default ratings at the same level.

"While improving fundamentals continue to support Ukraine's ratings, an uncertain policy response is not convincingly mitigating the near-term risks facing the economy, justifying a reversion to a stable outlook," Fitch said.

While there is no sign of market panic, a continuation of high inflation and political infighting could pose a more serious threat in the months to come.

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