Ukraine's Parliament Endorses New PM, Presidential Power Solidified

Coalition Backs President's Man

Yesterday Ukraine's parliament had a productive day, forming a new ruling three-party coalition, the Stability and Reform alliance, as well as approving Mykola Azarov from the Party of Regions (PoR) as the new prime minister. The new ruling coalition is led by President Viktor Yanukovych's PoR and also includes the Communists' parliamentary faction, the Lytvyn Bloc and 16 independents. The creation of the coalition as well as the endorsement of the pro-presidential candidate was only made possible after the independent deputies joined the coalition which gave the Stability and Reform alliance a majority of 235 seats in the 450-seat Verkhovna Rada. Yesterday's rapid developments were made possible due to legislative amendments made last week to the Law of Parliament, allowing parliamentary coalitions to be formed with individual deputies, rather then factions, as had previously been the practice. The PoR-sponsored changes allowed the president's party to stop negotiations with the former ruling coalition partner, the Our Ukraine-People's Self Defence (NUNS). Instead, it focused on creating a coalition derived from more loyal factions and independent candidates as well as some deputies from former PM Yulia Tymoshenko's ruling coalition (see Ukraine: 10 March 2010: New Government Formation Nears as Ukraine's Parliament Eases Coalition Creation Rules). This great tactical move by Yanukovych and his party raised a predictable outcry from Tymoshenko who is the main opposition leader in the Rada following her ousting as prime minister in early March. She called the move illegal, but with the appointment of Azarov and announcement of the new government line–up the former PM does not stand a chance of reversing the course of events.

Return of Azarov

The yes vote by 242 out of 450 Verkhovna Rada deputies returned Mykola Azarov to the prime ministerial post that he briefly occupied in January 2005. Born in Russia, the new prime minister is perhaps the most pronounced Russophile in the new cabinet. He has been the deputy leader and a faithful right-hand man of President Viktor Yanukovych. He also led Yanukovych's victorious presidential campaign. Azarov, a geologist by training, is known for being a man of numbers and is certainly the complete opposite of his predecessor, flamboyant Tymoshenko, when it comes to charisma. Azarov became a member of the Verkhovana Rada in 1994 but is most known for his stewardship of Ukraine's tax authorities during 1996-2002, a period that many of his opponents call the era of "Azarovshchina", referring to his crippling tax policies. Azarov has also been the first deputy prime minister and finance minister during the 2002-2005 and 2006-2007, when Yanukovych was Ukraine's prime minister.

Widely described as an unassuming grey personality, Azarov is perhaps what Ukraine needs most right now. The greatest asset of the newly elected PM is to a lesser extent his experience and more his loyalty to the president. While it is true that the global economic crisis was partially to blame for Ukraine's 15% GDP drop in 2009, this blow could have been less hard if the former president Viktor Yushchenko and his one-time Orange Revolution ally Tymoshenko could have stopped fighting and made a unified front in tackling the necessary reforms including unpopular public expenditure cutting. Yushchenko and Tymoshenko had different political and personal agendas and they pursued policies accordingly. The good news is that Azarov's relationship with Yanukovych is the opposite. The new Prime Minister is an old hand as far as public-sector finances are concerned. Having been finance minister during Yanukovych's premiership, Azarov knows the budget and the ministry by heart. Although he has been not immune to heavy-handed industrial policies and favours for special lobby groups, he may eventually succeed in sorting out the fiscal mess left behind by the Tymoshenko government and devising a workable budget. This will surely placate the International Monetary Fund (IMF), which will have a more reliable partner in Azarov to deal with than Tymoshenko ever was.

Outlook and Implications

The election of pro-presidential Azarov closed the chapter of the Orange Revolution as neither Tymoshenko nor Yushchenko managed to secure any governmental position. Ukraine now enjoys a political dominance which has not existed in Ukraine for at least the last four years. Both the government and the President will be working on guiding the country in the same direction. Unravelling the political stalemate could thus have serious positive implications for the economy and financial risks; investor confidence could be strengthened as companies are likely to have a more reliable basis for planning. However, the big question is whether the new government will be able to push through necessary austerity measures indeed and not bow to populist pressures.

The tasks ahead are daunting, and Yanukovych's own promises during the election campaign will be no small obstacle on the way to rectify the budget. If Ukraine was living beyond its means in the first half of 2009, fiscal policy became even more profligate during the run-up to the presidential election. Tymoshenko's refusal to raise retail gas prices and Yanukovych's successful proposal to raise minimum wages and pensions by 20% in 2010 have been only the most prominent examples of that. As a matter of fact, the government has not been able to honour its financial obligations for several months now. It has accumulated payment arrears and has de facto financed the most important operations by holding back VAT reimbursement to companies; it has also issued short-term Treasury Bills to a great extent. The rising level of VAT arrears has harmed exports and thus directly damaged Ukraine's recovery potential. The new government has already promised to reduce arrears and devise a workable budget for 2010. Exactly how this will be done and which sources will finance this is still unclear, though. Moreover, how and when gas prices will be raised has not been specified yet either. The government will perhaps try to renegotiate the gas deal with Russia's Gazprom, but the Russian gas supplier will not reduce the price level without serious concessions from the Ukrainian side. The implication of this is that while the political situation has cleared up, financial risks will still linger until action on the fiscal front has been confirmed. In fact, if the government is making headway with austerity measures, an upgrade of Ukraine's current sovereign rating by at least one notch is possible very soon. Similarly, the IMF will likely be back on board by then, strengthening confidence further.