Currently Ukraine’s government has money to pay expenses until March 1st. While this is a dramatic turnaround from when the government took over in February 2014 with just 10,000 Euros in the State Treasury (following the looting by Yanukovych) there is no room for macroeconomic experimentation. The Ukrainian government’s “cash on hand” does not take into account $3 billion Russian debt that came due this week. Fortunately for Ukraine, the IMF changed the rules to allow Ukraine to be in default of certain debt which they ‘de facto’ determine to be political – rather than financial in nature (although they did recognize it as sovereign rather than commercial). This allows Ukraine to declare their legal moratorium on foreign debt repayment to force the Russians to agree to the same 20% cut that all other sovereign debtors agreed to. Ultimately this will result in Russia accepting the “haircut” and moving forward.
The 2016 budget proposed by the Finance Ministry meets the IMF requirements, ensures price and currency stability, locks in low inflation and focuses on funding education, healthcare and infrastructure (while simultaneously keeping defense spending at current war time levels). Just nine months ago, Finance Minister Natalie Jaresko negotiated a record $40 billion dollar bailout package from the IMF to put Ukraine back on financial track. While this plan is in the process of implementation, it requires strict adherence to its requirements. Deviations can result in Ukraine being removed from the IMF program altogether. If Ukraine were to be removed from the IMF program, the funding would have to be found from other internal sources – or again from Russia. Following the terrorist attacks in Paris, Russia has undertaken a charm offensive to demonstrate to the Western world that they are a reliable partner for this part of the world. This effort has already convinced the Obama administration to reverse course and allow Syrian dictator Assad to remain in power. If Ukraine were to be removed from the IMF program, it would have the effect of reviving “Ukraine fatigue” and causing the West to concede Ukraine to Russia’s “sphere of influence”. Thus, Ukraine’s adherence to the IMF course is even more crucial than maintaining funding of the army at this point. Vice President Biden, US Treasury Secretary Jack Lew, and IMF Chairperson Christine Lagarde have all called on Ukraine’s Parliament to pass the government’s budget for 2016. Added to the fact that the IMF changed a decades old fundamental principle of not lending to countries in default (i.e. Ukraine with regard to the $3 billion Russian debt), the West has gone out of its way to help Ukraine. However, help has to be accepted on the terms it is offered. The fact that Parliament has not already approved this budget proposal (it is stuck in committee due to a lack of quorum last time) is shameful. Edits and tweaks can be made after the first passage of the bill on the floor of Parliament. However if Parliament does not pass the government’s budget this week, Ukraine’s entire future and desire for European integration will be at risk.• Cabinet Intrigues: Last Tuesday’s Cabinet Meeting featured a cussing and water throwing contest between Interior Minister Arsen Avakov and Odesa Governor Mikheil Saakashvili. Saakashvili, angry over not yet being appointed as Prime Minister, lashed out at the Interior Minister (an ally of the current Prime Minister) over controlling “illegal armed formations” and financing them from “corrupt income”. Avakov, who was caught off guard by the assault, responded by cussing Saakashvili and after seeing that the curses didn’t work, threw a glass of water on the former Georgian President. However Saakashvili, not a stranger to being cussed, played it cool. Snap overnight polls conducted by the Presidential Administration showed Saakashvili more popular than before and the clear winner from the spat. The Odesa Governor immediately seized the momentum to call for an “anti-corruption” conference in Kyiv on December 23. Saakashvili may not yet have made any real changes in Odesa, but he never misses a political opportunity to press his case to the roaring cheers of Western donors. Meanwhile Avakov and de facto, Prime Minister Yatsenyuk were the losers from the incident. If the chief policeman for a country can be provoked by a provincial governor into a sissy water throwing contest, it bodes poorly for his future political prospects. Avakov admitted his fault when he tried to apologize by stating, “I went berserk…” Similarily, the Prime Minister who is on the same team with the Interior Minister, also came off looking weak. Saakashvili seized on this weakness and said, “What I wish to tell Prime Minister Yatsenyuk, who calls me a ‘guest artist’, and his accomplices on a par with him suggest me to get out of the country, I’m proud to be a Ukrainian passport holder. This passport isn’t just a formal document- It’s my obligation to the Ukrainian people, to people of our state. I have been spending many years in Ukraine. I wasn’t born in Ukraine, but I in fact grew up here…I was an active participant of both Maidans…I’m not going to leave this state and won’t allow them to continue to rob a wonderful beloved Ukraine”. Since autumn Saakashvili has been openly engaged in attacks against Yatsenyuk. While it is clear that Yatsenyuk is not a good politician, he has been propped up by US support – something Saakashvili depends on as well. During Vice President Biden’s visit earlier this month, some observers expected Biden to jettison the weakened Premier over corruption allegations. However Biden reasserted support for the coalition and stressed that there should be “no new elections”. This was viewed as a rebuke by Saakashvili who wanted the US to order the sacking of the Premier and organize his appointment as the new Prime Minister. However the United States of America doesn’t work that way. In the end, the Odesa Governor took out his frustrations on the unsuspecting Interior Minister. He may not yet be able to “take out” the Prime Minister (that may come in spring), but now he has a shot at taking out one of the key ministers closest to the Prime Minister. For his part, Avakov has threatened that if he is forced to resign, the whole government may come down with him. While clearly that is a gross overstatement of his value to the government (although yes, he is a key participant), a shakeup of that magnitude could precipitate early parliamentary elections. Early Parliamentary elections are the one thing that VP Biden insisted be avoided. Thus, Cabinet moves in the next month will be captivatingly entertaining, with real consequences for ordinary Ukrainians. The resignation of Infrastructure Minister Andriy Pivovarskiy has sparked a Cabinet intrigue into his possible replacement. Pivovarskiy quit earlier this month citing low pay and bureaucratic red tape. The resignation of the 37 year old former Dragon Capital executive is seen as a leading indicator of dark days ahead for the governing coalition and prospects of reform. While Pivovarskiy’s resignation has yet to be approved by Parliament (yes, Ukraine still practices indentured servitude for government officials), two powerful names are emerging as possible replacements. In addition, there is growing talk of combining the long vacant First Deputy Prime Minister post with the Ministry of Infrastructure (formerly the Ministry of Transport). In other words, creating a First Deputy Prime Minister with the Ministry of Infrastructure portfolio job. Deputy Poroshenko Bloc Faction leader Ihor Kononenko is campaigning for the post as compensation for his successes in Parliament. Nicknamed “The Enforcer”, Kononenko has largely delivered for the President on key votes through the use of effective “carrots and sticks” (although many argue that Kononenko prefers the “stick”). Kononenko, age 50, is a business partner of President Poroshenko in the International Investment Bank (Poroshenko owns 60% and Kononenko 15%). Kononenko served two terms on the Kyiv City Council with the Bloc of Leonid Chernovetskiy (2006-2014) before being elected to Parliament last October. “The Enforcer” came under attack for corruption this October when former SBU Chief Valentin Nalayvychenko gave evidence before a Parliamentary Committee on Kononenko’s activities. Kononenko’s chief rival for the newly combined First Deputy Prime Minister and Minister of Infrastructure post is said to be Vitaly Kovalchuk. Kovalchuk currently serves as Poroshenko’s First Deputy Head of the Presidential Administration (First Deputy Chief of Staff), and previously was the political mind behind Vitaliy Klitchko. Kovalchuk is not particularly well liked by anyone, but is seen as an effective and shrewd manager. Given that both Kononenko and Kovalchuk will never win a “Mister Congeniality” contest, a third option is also being discussed. That option is to push forward the candidacy of 31 year old Serhiy Berezenko who was elected in a special election in Chernihiv district #205 in July. Berezenko has been on a political fast track scoring the Head of the State Management Service (US equivalent of Ministry of the Interior) a year earlier. Berezenko hails from Poroshenko’s Vinnytsya and has former MP and Yushchenko Deputy Chief of Staff Anatoliy Matviyenko as an uncle. Berezenko and Kononenko became close allies during their time together on the Kyiv City Council starting from 2006. Even if First Deputy Prime Minister is too far a reach now for Berezenko, it is only a matter of time before the young face has a shot at real power. With the First Deputy Premier’s post vacant since Vitaly Yarema left the post in June 2014, a Deputy Premier post vacant since September due to the resignation of Valeriy Voshchevsky (who quit when the Radical Party left the coalition) and Deputy Premier Vyacheslav Kyrylenko now on the ropes (see below), some new Deputy Premiers will need to be appointed. It remains to be seen though who will emerge successful when the intrigue is ended and the dust settles…
Vyacheslav Kyrylenko, the Deputy Prime Minister and Minister of Culture may soon be dismissed by Parliament. The People’s Will faction in Parliament (formerly oligarch Yeremeyev, now Ivakhiv) registered a bill to dismiss him signed by 14 of 20 faction members. They were joined by two Poroshenko Bloc deputies and one independent. Kyrylenko’s tenure as Deputy Premier and Culture Minister has been uneventful. He is generally viewed as a competent manager but not a “prime time” politician. In 2007 for example, Kyrylenko was a key supporting actor in the push for dissolving Parliament and forcing a snap election, but was overshadowed by the dynamics between then President Yushchenko and Yuliya Tymoshenko. As a result of Kyrylenko’s perceived vulnerability by not being a household name, a vote on his dismissal will test the strength of the governing coalition. Previously Kyrylenko served as Minister of Labor and Social Policy after the Orange Revolution (2005-2006) and has been elected to Parliament six times.Oleksiy Goncharenko, remains in contention to replace Aleksandr Kvitashvili as Minister of Health and has at least 50 MP’s supporting his candidacy. Goncharenko, an Odesa native and Member of Parliament with the Bloc of Poroshenko, made international headlines by wearing “Fuck Putin” and “Putin=Hitler” t-shirts to meetings in Strasbourg as well as being arrested in Moscow at pro-Nemtsov demonstrations. Goncharenko chaired the Poroshenko campaign in Odesa in May 2014 which resulted in a decisive victory in the Russian speaking region. Goncharenko, age 35, is a clever and charismatic politician with an interesting background. His career began with the Green Party in Odesa, and later with the Union Party which advocated the union of Russia and Ukraine. He was elected to the Odesa City Council in 2006 with the Party of Regions and was instrumental in passing legislation to make Russian an official language of the city (equal to Ukrainian). However during the events of Euromaidan, Goncharenko apparently had a change of heart and quit the Party of Regions. Since that time he has been a loyal supporter of President Poroshenko and a close personal friend of the President’s son Oleksiy (also an MP). While rewarding recent converts with high positions is a useful and longstanding political practice, some have cast doubt on Goncharenko’s qualifications to be the Minister of Health. Some media has been referring to Goncharenko as a “pediatrician” and noting that his wife Olga (whom he met in the medical university) is a Lieutenant in the military medical reserve. While no one questions his wife’s rank, there are however questions about Goncharenko’s actual medical experience. What is clear is that he graduated with honors from the same medical university as his wife in 2002. However, during Goncharenko’s first term on the Odesa City Council, then Mayor Eduard Hurvits consistently taunted Goncharenko from the podium by referring to him as “nurse Goncharenko”- in reference to the sole work entry in his Ukrainian labor book. Thus, is he a pediatrician or a nurse? Nurses do important medical work and there is no requirement that the Minister of Health be a medical doctor. For that matter, the Minister of Health position is an administrative post and not one requiring neurosurgery. However, it does beg the question, “Is Goncharenko’s candidacy being promoted based on his experience and qualifications or rather on his relationship to the President’s family?” Regardless of the answer, Goncharenko is a politician with an upward trajectory – for this post or the next…
Goncharenko’s chief rival for the Health Minister position is the 41 year old current Deputy Minister of Health Ihor Perehinets. Perehinets, a graduate of the Lviv Medical University, previously worked as the Deputy Head of the World Health Organization (WHO) in Ukraine as an expert on infectious diseases. He also studied medicine in the US and is a graduate of San Jose University’s Masters of Public Health program. Perehinets’ wife is Nataliya Popovych, who is a co-founder of the Ukrainian Crisis Media Center.
Volodymyr Yelchenko’s recent appointment as Ukraine’s new Ambassador to the United Nations (UN) is raising some eyebrows. Yelchenko previously served as Yanukovych’s Ambassador to Russia, but when Crimea was annexed he was recalled to Kyiv for consultations. Since diplomatic protocol and the war in the Donbass prevented him from returning to Russia, Yelchenko was essentially mothballed and planning to retire. Yelchenko’s decision to retire was aided when Nalayvychenko’s SBU (Security Service of Ukraine) raised concerns over Yelchenko’s frequent contacts with the FSB agents during his three year stint in Moscow. Admittedly, distinguishing ordinary Russians from FSB informants/agents is difficult in Putin’s Russia. Nonetheless, the frequency and level of the contacts suggested that at a minimum, Yelchenko may have been under the influence of certain FSB agents. However Yelchenko’s appointment this month has resuscitated his career. Presidential Chief of Staff Borys Lozhkin is credited with arranging the appointment, which is another sign of his huge influence on the President.• Ukraine Tightens Border – Against Expats: Non-Ukrainian citizens exiting the country in recent weeks have noticed the zealous overreach of State Border Service in administering penalties on foreigners who exceeded the 90 day continuous stay/180 days in a year limit. In the past (even under the tyrant Yanukovych) after such penalties were paid, the individual was allowed to re-enter the country as it would allow the state to potentially receive another fine for the state budget. Now however, the State Border Service is preventing such foreigners who overstayed their visit from entering Ukraine for a 90 day period. Such enforcements against Russian citizens are understandable in a time of war, and especially after the death of more than 9000 Ukrainians due to Putin’s aggression. However these denials of entry into the country are being used against some of the very people who are working to help Ukraine the most. In the past few weeks for example, American citizens have been denied entry into Ukraine who have brought humanitarian and medical supplies to soldiers on the front. In one particular case, a former Blackwater soldier volunteered to spend several months in the Donbass training the Ukrainian military to identify Russian snipers. Inevitably, after months on the frontlines he needed a break, and departed to a neighboring country for the weekend. The former Blackwater soldier (named withheld to protect him from Russian retaliation) was fined 800 hryvnas ($32) at the border for overstaying his visit. Fines are fines and rules are rules, so the volunteer soldier paid his fine and exited the country. However when he attempted to return after his brief R&R a few days later, he was DENIED entry by the State Border Control. No sooner had the Border Control Officer asked him, “Do you speak Russian?” (yes she said, “Russian” – not Ukrainian) than he was back on a plane to a foreign destination. The former Blackwater soldier is now waiting his three months in a neighboring country in hopes of returning to Ukraine to assist the Ukrainian armed forces again. Meanwhile if Putin invades over the holidays (as is widely rumored), will the State Border Guards be as vigilant and arrogant against the Russians as they are against Americans? Presumably they will have the consolation of knowing they followed the bureaucratic procedures as their motherland burns.
The bigger issue is registration itself. Current legislation allows longer stays than 90 days for individuals who marry a Ukrainian citizen, have a business in Ukraine, or work on a government technical assistance project. Apparently a new category for humanitarian workers has been added this year but is bureaucratic in nature and requires two trips abroad to obtain a year long visa. Instead a new category for Westerners who want to stay in Ukraine long term is needed. Currently Ukraine can earn 800 hryvnas twice a year from each foreigner by enforcing existing penalties for overstayed visas. These fines would amount to about $60. However a wiser and mathematically more intelligent approach would be to offer new long term visas for Westerners at a flat price of $500 per year (with appropriate criminal background checks). This would create far more money for the strapped state budget than the 800 hryvna fine twice a year produces. For example, having just 1500 Westerners pay for a $500 residency permit would generate almost two million dollars in revenue ($1,875,000) annually. In contrast, it takes the State Border Service catching 64 overstayed visa violations per day for a full year to create the same revenue. In addition, it would have the added effect of NOT preventing former Blackwater soldiers who are assisting the Ukrainian armed forces during a time of war, from being denied entry into the country. In the end, Ukraine must decide if it truly wants to “go West and innovate”, or “talk West, and stagnate”.
Dates to Watch (for Ukraine unless otherwise noted):
December 22-25: Parliament in Session: This week is the last scheduled voting session of the year. With a budget vote needed, expect decentralization to be punted until January. In this way, the Presidential administration has enough time to mount a lobbying campaign in favor of decentralization (read: suitcases full of Ben Franklins to find the necessary 300 votes. Though the first vote yielded 265 in favor, support for decentralization is less than before. The government is counting on holiday good cheer and late Christmas gifts to make up the vote deficit.
December 30: Last Day to Repay the $3 Billion in Russian Bonds
January 12-15: Parliament in Session: First regularly scheduled voting session of Parliament in 2016.
January 31, 2016: End of the Current Session of Parliament.
April 20, 2016: Tentative Donbass Local Elections in the Occupied Territories
February 2016: Stockholm Arbitration Hearings on Counter Claims between Naftogaz and Gazprom. Naftogaz is seeking $16 billion dollars and a decision is expected by June 2016.
June 23, 2016: New EU Expiration Date for Crimea related Sanctions on Russia
June 2016: Stockholm Arbitration Courts Expected to Render a Decision on the Case Between Naftogaz and Gazprom.
July 31, 2016: New Date for Expiration of the EU’s Donbass related Sanctions on Russia: Despite Italy’s hints that the sanctions not be extended much longer, they will remain in place until summer. That is because despite Russia’s public relations efforts, nothing has fundamentally changed with regard to Russia’s involvement in the Donbass.