A Turning Point for Ukraine
Wednesday, January 13th, 2010By James M. Gomez and Daryna Krasnolutska
Jan. 13 (Bloomberg) — Ukrainian President Viktor Yushchenko has feuded with Russia and struggled to forge links with the European Union since taking power in the 2004 Orange Revolution. Voters may now turn to his rivals to mend ties with both East and West.
Yushchenko is unlikely to survive the Jan. 17 first round of the presidential election, according to two December polls showing 3.7 percent of respondents supported him. Opposition leader Viktor Yanukovych, who favors closer links with Russia, and Prime Minister Yulia Timoshenko, another Yushchenko adversary, placed first and second and probably will face each other in the Feb. 7 second round.
A Yushchenko departure may bolster Ukrainian markets, unfreeze a $16.4 billion bailout loan from the International Monetary Fund, ease conflicts with Russia and improve the prospects for a free-trade accord with the EU, said Sacha Tessier-Stall, head of foreign policy at the International Centre for Policy Studies in Kiev.
“No matter who wins, there will be an improvement,” said Tessier-Stall. “Yushchenko exacerbated tensions with Russia, thinking it would get himself into the EU. But he failed to see that bad relations with Russia are bad relations with the EU.”
Yushchenko yesterday said the election would be “a national referendum about Ukraine’s European future.” Speaking to reporters in Kiev, he said his policies were “simple and clear: Let’s go home, to Europe.”
Stalled Accord
Both Timoshenko, 49, and Yanukovych, 59, have promised better relations with Russia and publicly supported concluding a free-trade agreement that has stalled over European objections to the country’s economic management.
“I want a new president to be flexible,” 60-year-old accountant Valentyna Lozova, an undecided voter, said yesterday in Kiev. “I want the president to be oriented to the European Union, but at the same time the president must set up good relations with all neighbors. I do not like conflicts.”
The former Soviet republic’s disputes with Russia led to two gas cutoffs to Europe, in January 2006 and in January last year, as Prime Minister Vladimir Putin accused Ukraine of stealing the fuel. Yushchenko, 55, Timoshenko and state-run NAK Naftogaz Ukrainy denied the charge.
About 80 percent of Russian natural gas destined for Europe is shipped through Ukraine, a country of 46 million people that lies between Russia and the EU. A quarter of the gas the EU consumes comes from Russia.
Orange Revolution
Yushchenko was swept to power in 2004 in the so-called Orange Revolution, when millions of demonstrators demanded new elections. A ruling by the Supreme Court found that Yanukovych’s initial victory was based on fraud.
The president, whose face still bears the scars from what his Austrian physicians said was dioxin poisoning, won the re- vote. His victory over Russia-backed Yanukovych raised investor optimism he would make it easier to exploit Ukraine’s geographic position and wealth of raw materials.
Ukraine attracted $36 billion in foreign direct investment from the start of Yushchenko’s presidency through November 2009. FDI totaled $5.7 billion between 1999 and 2004. The country also won membership in the World Trade Organization and the EU declared Ukraine a market economy.
Timoshenko has served as prime minister twice in an off- again, on-again alliance with Yushchenko. Parties loyal to her and Yanukovych prevented parliamentary votes last year on improving the banking system and passing the 2010 budget.
Record Decline
That violated requirements for the IMF loan, accorded when the credit crisis undermined demand for exports and crippled the financial sector. The IMF delayed Ukraine’s $3.4 billion tranche due in November as a result of the lack of spending discipline.
Ukraine’s economy shrank a record 20.3 percent on an annual basis in the first quarter of 2009. Gross domestic product declined 17.8 percent in the second quarter and 15.9 percent in the third.
It is the second-least creditworthy of economies behind Argentina, as measured by the cost of credit-default swaps that protect bondholders against default. Contracts on Ukraine’s debt were trading at 934.207 basis points as of 2:54 p.m. in Kiev, compared with 499.997 basis points for Latvia, according to prices from CMA Datavision in London.
Goals ‘Partly Met’
The currency, the hryvnia, was the world’s worst performer versus the dollar from September 2008 to September 2009. The 6.75 percent government bond maturing in 2017 sank to a record- low 34.215 on March 9. It was unchanged today at 83.36.
EU Commission President Jose Barroso said on Dec. 4 that Yushchenko “only partly met” goals to prepare Ukraine for closer trade ties and eventual EU membership. Barroso delayed signing a so-called Association Agreement, which includes a free-trade component.
A Dec. 12-24 poll by the International Institute of Sociology in Kiev found Yushchenko would get just 3.7 percent of the vote, putting him in fifth place. Timoshenko had 15.8 percent and Yanukovych led with 30.3 percent. The margin of error was 2 percentage points and more than 4,000 people were surveyed.
The Kiev-based Democratic Initiatives Foundation, in a poll of 2,010 people from Dec. 12-26, found the same percentages for Yushchenko, 19.2 percent for Timoshenko and 33.6 percent for Yanukovych. The margin of error was 2.3 points.
A Yushchenko departure would allow the country to regain its footing and attract investors, said Ivan Tchakarov, an analyst at London-based Nomura Holdings Inc.
“Ukraine can be a positive surprise this year,” he said. “A lot more political capital has been expended building up spheres of influence than doing good. It is high time to change that.”
