While the selection of Shokin initially seemed peculiar, it should be remembered that Shokin was the Deputy Prosecutor responsible for nearly convicting Party of Regions leader Borys Kolesnikov in 2005 on charges of abuse of office, extortion and making death threats. At that time, Poroshenko was the Head of the National Security and Defense Council and his ally Yuri Lutsenko was the Minister of Interior. The troika actively worked to prosecute the Donbass leadership of Yanukovych, Kolesnikov, and Akhmetov until Poroshenko was sacked in September 2005 as part of the infighting with then Prime Minister Yuliya Tymoshenko. Even though Kolesnikov was released from pre-trial detention and the charges eventually dropped, the troika’s campaign did contribute to the re-privatization and sale of the Krivorizsthal Steel Factory. Krivorizhstahl was privatized by Kuchma’s son-in-law Viktor Pinchuk and Rinat Akhmetov in the summer of 2004 for a mere $800 million dollars. Following the re-privatization of the factory and subsequent “new” privatization in 2006, the deal brought more than $5 billion in revenues for the Ukrainian government (an amount almost comparable to the reserves the National Bank of Ukraine currently holds). Mykhailo Chechetov was the Head of the State Property Fund which sold the steel factory for 1/6th of the price a year earlier to Pinchuk and Akhmetov. Thus, with Poroshenko as President, Lutsenko as Speaker and Shokin as Prosecutor General, the band is back together and appears to be ready to resume their campaign against Yanukovych’s team a decade later. Hence the arrests of Yefremov, Chechetov, and the request to Parliament to lift the immunity from prosecution of three Yanukovych judges (including Sergiy Vovk who presided in the case of Yuri Lutsenko being sentenced to four years of prison) have the whiff of justice, judicial payback and perhaps a touch of “Shokin and awe…”
• Budget Success: Parliament may remain the country’s least trusted government institution but they continue to provide key votes at the right times. Last night Parliament approved amendments to the budget that adjust projections to take into account rapidly changing economic realities (like the hryvna devaluation, GDP forecasts and inflation). More importantly in the short term, the amendments allow Ukraine to receive the $41.5 billion loan package from the International Monetary Fund (IMF). With just $6.4 billion in reserves remaining (after the Yanukovych family looted an estimated $34 billion), the loan package will allow Ukraine an opportunity to restructure its $15 billion in debts, cover social obligations like pensions, and pay for gas from Russia and Europe. In addition, when the IMF meets on March 11 to approve Ukraine’s loan package, it is believed that the aid with be “front loaded” to allow Ukraine to receive as much as $10.5 billion this year with more than half of that the day after it’s approved (March 12). That first tranche will be split between the government and the National Bank of Ukraine which should shore up the hryvna against other currencies. The days of the artificial eight hryvnas to one dollar will never be seen again, but at least the hard currency influx will stop the bleeding. Both President Poroshenko and NBU Chief Gontareva have predicted a stabilization of the hryvna at 20-22 to the US Dollar to occur in the near future – most likely after the release of the front loaded IMF tranche.
It is also notable that the budget was passed with 273 votes, which is nine votes more than the original passed budget passed on December 29, 2014. This slight increase in support for the budget represents the economic reality that Ukraine has no other option but to reform. This is strong leading indicator that Ukraine’s government will continue to make the tough choices to lead the country away from its’ Soviet legacy and into Europe.Regarding reforms, the fact that Ukraine has already undertaken the tough financial reform of free floating the currency rather than trying to enforce a peg to the dollar, (which they could no longer afford to sustain) is a painful but necessary step in the right direction. In addition, the increase in utility prices is long overdue and part of the agreement with the IMF. To ease the burden on the most vulnerable in society though, the subsidies will affect 3.7 million families rather than the one million currently. Fortunately for the government, there are no elections directly affecting them at this time otherwise they would suffer serious electoral defeat from the voters. As expected, the Opposition Bloc and Party of Regions politicians are already nostalgic for the “good old days of Azarov” when “social bread was just kopeks”. Nonetheless, the fiscal reforms are showing some promise. For example, the electronic VAT pilot program is underway and the State Fiscal Service has received more than 800 applications for tax amnesty which has resulted in more than $100 million dollars in additional revenues. By the time the government faces national elections, the worst of the recession may well be over. • From Russia with Love: with the arrival of March and nine days remaining before Ukraine receives IMF money, Russia now has the right to “call” or demand early payment of the $3 billion debt owed it by Ukraine. The $3 billion package, which was a birthday gift to then Prime Minister Mykola Azarov (December 17, 2013) has turned out to be an albatross around Ukraine’s financial neck. The strict provisions of the loan allow Russia to demand early payment if Ukraine’s debt to GDP ratio exceed 60% (which now appears to be the case depending on who is calculating it). The debt was shrewdly designed to come due for repayment shortly after the planned Ukrainian Presidential Election in 2015. That would have given Moscow additional leverage with the new President to either extend the loan in return for concessions or force default to embarrass a President who refused Russia’s wishes. However with the early Presidential Election last May, the matter for Ukraine is simply a large debt which needs repayment. The $3 billion debt gives Putin leverage in Ukrainian internal affairs which benefits’ far exceed the five percent interest rate that Russia receives from the loan. Thus, even though Russia is quick to demand gas debts to be pre-paid or paid quickly, they will not demand that this debt be repaid early. Instead, the debt will be part of a larger restructuring which is likely to lengthen the maturities of some bonds. It is highly likely however that Ukraine will find a way to pay off the $3 billion debt to Russia when it comes due in December to eliminate this area of the Kremlin’s influence in Ukraine’s financial affairs. Other levers still remains including energy piracy and trade restrictions but at least Ukraine will have one less Russian nuisance to deal with. However, expect the Kremlin’s spin machine to use this opportunity to trumpet the decision not to demand early payment as a sign of their “love” for their Slavic brother Ukraine. One can already envision a Kremlin mouthpiece on RT stating, “even though Ukraine slanders Russia to the world, this is a selfless and brotherly gesture to show our love for neighbors as well as our desire for peace and stability in the world.” In 1963, the second James Bond film was comically named “From Russia with Love” to represent the deceptive nature of Russian “love”. Today, “From Russia with Love” is an ironic reality for Ukraine – and there is no James Bond anywhere to be found. • OSCE Outrages & Impotence Part II: in our blog post entitled, “Ukraine Update 2/19: Minsk II, OSCE Outrages and Georgian Wrestling” we noted the general ineffectiveness and naivety of OSCE (Organization for Security and Cooperation in Europe) monitors in the Donbass. Last week on February 26, the OSCE Representative on Freedom of the Media, Dunja Mijatovic stated that Ukraine’s decision to deny 100 Russian media outlets journalist accreditation at Ukrainian public institutions was “excessive”. Mijatovic added that “the lack of transparency in this matter is troubling”. These statements are somewhat surprising coming since Mijatovic saw her country of Bosnia and Herzegovina ravaged by a war with Serbia and Croatia from 1992-1995 that claimed 100,000 lives. During war it is common practice to deny media credentials to journalists from the country one is at war with. For example, President Lincoln didn’t allow Confederate journalists to get front row seating at White House news conferences and enjoy the free coffee and donuts in the reporter’s lounge. Ukraine’s decision to deny accreditation to Russian journalists during war time is the right decision given that many of the so-called journalists are actually intelligence officers for the FSB (KGB). In the big scheme of things, this matter is a minor bump on the road, but it is indicative of the misplaced priorities and overall ineffectiveness of the OSCE in war time.
• Moldovan Maneuvering: with the election of Cirill Gabiruci as Prime Minister last week and the ouster of incumbent Iure Leanca, Moldova’s political situation is likely to return to a less dramatic and more pragmatic affair. Gabiruci received 60 votes out of a possible 63 (the combined number of MP’s from the Liberal Democrats, Democrats and Communists). Incumbent Iure Leanca declined to vote for Gabiruci and left the Liberal Democrat faction shortly thereafter taking one MP with him. Leanca plans to form his own political party despite lacking financial resources in Europe’s “poorest country”. However Leanca does have public support and is generally well regarded within the Western diplomatic and local NGO communities. While the results of Leanca’s efforts aren’t clear at this time, the 60 votes for Gabiruci generally bode well for the Presidential Election plans of Vlad Filat next year. Filat, Prime Minister before Leanca and leader of the Liberal Democrats, appears to be angling for the job stability of the Presidency when Parliament holds the election next year. The Constitution of Moldova requires 61 of 101 votes in Parliament to elect a President and that gives Filat a year to find one more vote (while simultaneously holding on to the 60 current coalition votes).In other Moldovan matters, the semi-autonomous republic of Gagauzia will hold Governor’s elections on March 22 with a runoff planned on April 5. Former Communist MP turned Socialist Iryna Vlah is the front runner. In addition to the region holding a bogus referendum in February 2014 in which 98% of voters supposedly voted in favor or closer ties with Russia and 97% against Moldova’s European course, the pro-Kremlin Socialist party received 57% of the vote in the November 2014 Parliamentary Elections in the semi-autonomous republic. These election results combined with the fact that all of the other candidates are not running as pro-Moldovan (but rather running away from Moldova), could signal separatist troubles ahead for tiny Gagauzia.
Dates to Watch:
March 6: “New” Deadline to Select the Anti-Corruption Bureau Chief.
March 12: Anticipated Arrival Date of IMF Money: at this point, speculation on the hryvna should settle down and the currency will resume trading in a stable range. Time will tell if Poroshenko and Gontraeva’s prognosis of a 20-22 hryvna to US Dollar exchange rate will be accurate.
June: IMF Talks with Bondholders Completed
October 2015: National Local Elections for Mayor and City Council: While October remains the most likely date, Parliament still must pass decentralization legislation to empower the local communities. The first vote is tentatively planned for June with the Constitutional Court expected to provide a favorable ruling shortly thereafter. Then when Parliament returns for the September session, they will presumably gather 301 votes to pass the legislation. Ideally, the new powers will take effect with the newly elected councils and mayors following the October election. However, if there are delays in decentralization, the election could be pushed back till November or December. Interestingly, most MP’s in the governing coalition do not anticipate that the new Minsk Agreement will ever be implemented. The Minsk II Agreement requires Ukraine to pass decentralization legislation this year to simultaneously empower the occupied parts of the Donbass. Thus, since Russia is likely to push hard for an intolerable federalization rather than a decentralization which Ukrainians can stomach, the October Local Elections may yet be delayed as part of a new compromise agreement.