MBS Blog

The thaw after a long winter has begun and this applies to Ukraine’s political situation. Politics does make for strange bedfellows. As this article states, an alliance between old foes may be just the sort of pragmatic move necessary to get Ukraine moving forward. Investors…like the IMF… are waiting on the sidelines and will pounce when the political situation stabilizes. Indeed, Ukraine could grow 5% or more this year.

March 4 (Bloomberg) – Yulia Tymoshenko’s defeat in Ukraine’s parliament yesterday may push President Viktor Yanukovych to team up with his other Orange Revolution rival as he relies on supporters of his deposed predecessorViktor Yushchenko to form a majority.

Yushchenko’s Our Ukraine Party “is considering the possibility of taking part in creating an effective new coalition which would form the government, with Yushchenko as prime minister,” party leader Vira Ulyanchenko, who was Yushchenko’s chief of staff until Yanukovych ousted him from the presidency, said yesterday.

Yanukovych, whose ability to push legislation through the parliament hinges on his choice of prime minister, may need Our Ukraine to create a stable coalition. Lawmakers have yet to pass a 2010 budget, leaving in limbo a $16.4 billion International Monetary Fund loan needed to help the nation stay afloat. Investors are demanding yields in excess of 20 percent on hryvnia debt to compensate for the perceived risk of holding government bonds.

“Yanukovych secured a victory yesterday” in ousting Tymoshenko but “it will be difficult for his party to put together a majority,” said Kaan Nazli, director at New York- based Medley Global Advisors LLC. Tymoshenko was defeated in a no-confidence vote after some of her and Yushchenko’s followers changed sides and supported the new president.

Stability Is Key

“Negotiating with Our Ukraine and” supporters of Parliament SpeakerVolodymyr “Lytvyn is the most realistic scenario” for Yanukovych’s Party of Regions to pursue, Dragon Capital said in a note to clients.

Stability is key to ensuring Ukraine’s economic survival and investors have punished the country for its political turmoil.

Ukraine’s debt is the third-most expensive to insure in the world after Argentina’s and Venezuela’s, credit default swap spreads show. Ukraine this month paid the highest borrowing costs in six weeks on domestic debt as investors pushed the average yield up to 22.92 percent. The government sold just 150 million hryvnia ($18.8 million) of the 1.4 billion hryvnia offered at auction.

The yield on Ukraine’s dollar-denominated bond due 2016 jumped 15 basis points to 9.14 percent at 9:07 a.m. in Kiev, according to Bloomberg data.

Fickle Support?

While a parliamentary coalition that includes Regions of Ukraine and Our Ukraine would create a solid majority, the rivalry between the two party leaders may undermine any smooth legislative process.

The outlook remains uncertain and Yanukovych may push through amendments on how coalitions can be formed to avoid having a government whose support may be fickle, Dragon said. His Party of Regions yesterday submitted a bill that would allow coalitions to be created based on individual lawmaker affiliations, rather than on blocs of political parties.

“If Regions moves to implement the bill, it would be a big mistake,” said Yuriy Yakymenko, an analyst at the Razumkov Center for Political and Economic Studies in Kiev. “It will undermine the constitution from the inside and rule out any constitutional logic behind forming a majority.”

According to Yakymenko, Yanukovych’s party is using the bill as a “manipulation attempt” to “pressurize opponents in Our Ukraine. I don’t think they realize the negative consequences of this bill.”

Orange Days

Yanukovych’s first bid to be head of state in 2004 was overturned by the courts after millions swept on to the streets in the so-called Orange revolution, claiming the vote was rigged. Yushchenko, backed by Tymoshenko, won the court-ordered re-run.

Yushchenko, who twice made his Orange partner Tymoshenko prime minister during his term, also fell out with her, firing her once, re-appointing her and in October ratifying a deficit- swelling opposition bill that prompted the IMF to suspend its program.

Some commentators say Yushchenko is unlikely to team up with Yanukovych as the partnership would complicate any future attempt to run for president.

“It is not clear why Yushchenko would like the post,” said Nazli. It “is almost certain to require difficult economic decisions and would thus deprive him of the ability to make a political comeback later.”

Elections?

Yanukovych, 59, has 30 days to form a majority in parliament and a further 30 days to appoint a new head of government and get the budget approved. If he fails, early parliamentary elections will be called.

Investors would be quick to reward a stable government, analysts said.

“Capital inflow will be strong as soon as political stability is in,” said Timothy Ash, head of emerging market research at Royal Bank of Scotland Plc in London. “Foreign investors, hedge funds will come to Ukraine as the government domestic debt offers attractive rates, while the country’s economy may expand 5 percent this year.”

With stability as evasive now as before the presidential election, the country may face a difficult economic future.

Ukraine may find it “challenging” to raise funds in financial markets to service its foreign and domestic debt unless a stabilization of the political situation reopens dialogue with the IMF, Danske Bank A/S said in a research note.

“With Yanukovych hamstrung by the presidency’s weak powers and struggling to form and sustain an inclusive government, Ukraine faces more instability and uncertainty,” Nazli said.