Seems Like Old Times

Economic News

22 Jul 2010
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This week Ukraine found itself in a familiar situation. President Viktor Yuschenko called for the dissolution of parliament and a new general election, sending the country into another period of political uncertainty.



The call, made late Monday evening, was promptly met by opposition from the ruling coalition, led by Prime Minister Viktor Yanukovych, Yuschenko's 2004 presidential election rival.



Progress is now largely in the hands of Ukraine's constitutional court. On Tuesday, 262 deputies of Ukraine's parliament, the Verkhovna Rada, asked the court to assess whether or not the call is constitutional or not, with a request for the court to provide a ruling within a week. The court is expected to soon set a date to hear the case. The political crisis in the country will remain unresolved until the court pronounces its verdict.



Though some could view the current turmoil as merely the latest manifestation of the enmity between the president, his party and his rivals in Rada, the dissolution of parliament was triggered by the ongoing defection of parliamentary deputies from the parties which once formed the president's "Orange Coalition" to join the prime minister's bloc. Each defection moves Yanukovych closer to the supermajority needed within the Rada to override presidential vetoes. An overwhelming majority would put the ruling bloc in a position to amend the constitution, which could foster the gradual reduction of presidential power. According to the constitution, a two-thirds majority vote is required to adopt constitutional amendments.



Though the president has the power to dissolve parliament and call new elections, he must have constitutional grounds to do so. The president's camp argues the defection of ministers to other parties constitutes a breach of democracy. Ukraine uses the party list method, and therefore voters essentially cast ballots for a party rather than a specific candidate. As a result of switching parties, voters could end up with a government they did not elect.



Yuschenko set the date of May 27 for new elections. While most observers are confident elections will go ahead, leaders of parliament issued several threats in the early stages of the crisis, indicating that they would withhold funding for new elections, or even call for an early presidential election. However, most believe that both sides will respect the decision of the court.



The big question for business is what effect the current crisis will have on investment. According to analysts, most important is that the stalemate is solved quickly, and that the situation does not worsen. According to Roman Zakharov, Deputy Head of Research at Kyiv-based Foyil Securities, based on historical data gleaned from Ukraine's most recent two political crises - the 2004 Orange Revolution and the 2006 Parliamentary crisis - "We anticipate relatively flat markets during the course of this political stand-off, with a subsequent return to a bullish trend." Analysts say that Ukraine's stocks have surged more than 60% this year before falling in response to the latest announcement.



But the implication of the constitutional court means that a swift resolution is not likely, as the conflict could drag on for months. It is possible that sectors dependent on government either through tight regulation or the presence of large government-linked companies - such as the energy sector - could be adversely affected. The move could threaten long-term government projects.



On Wednesday Ukrainian Minister of the Economy Anatoly Kinakh told reporters that the political crisis in Ukraine may lead to the delay of Ukraine's accession to the World Trade Organization (WTO), which many had predicted would occur later this year.



Serhiy Rusnak, FDI promotion project manager for the Organisation for Security and Cooperation in Europe and project co-ordinator in Ukraine, told OBG: "Although I don't think any one sector will be affected more than others, pending decisions like the sale of Ukratelecom, or the floating of additional shares and small privatisations could be effected a bit because investors are not willing to take on additional risk."



Among the business community, there appears to be caution, resignation and hope that the situation will be resolved quickly. Business life in the country is set to carry on, as Ukrainian businesses are becoming increasingly immune to political strife. Some have noted last year's situation was equally uncertain, as the country lacked a government for eight months in 2006. "Those investors who have been in Ukraine for some time are becoming immune to these situations. They know that it can happen, but are not overly worried about adverse effects on business," Rusnak said.



Zakharov notes a similar cautious optimism among investors. "The peculiarity of investing in Ukraine is such that these political conflicts are rather common between the pro-Western opposition and the pro-Russian ruling coalition. Many investors, savvy to the idiosyncrasies of the Ukrainian stock market, have learned to take a wait-and-see approach, and exploit market weaknesses for buying stocks cheaper," he said.



Though there are a number of possible outcomes that would affect investment to different degrees - from the refusal of the court to uphold the president's decision to the impeachment of the president - the most likely, according to analysts, will be early parliamentary elections.



The ideal outcome in the eyes of the business community is an election that is swiftly carried out and genuinely representative. According to Zakharov: "As long as this [pro-Western and pro-Russian] balance is reflected in politics, there is no real threat to the Ukrainian economy or its stock market."



Rusnak echos this sentiment, telling OBG: "The current instability shouldn't have long-lasting negative effects on the economy. Though there will be some increased risk perception by investors, both the Orange Coalition and the governing coalition are interested in stable economic development and growth and are not likely to take any steps to adversely affect the business climate."

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