However, politics in Ukraine is rarely as black and white as it appears on the surface. Yes, Kolomoyskyi is not directly involved in politics as a public official but he will continue to play a powerful behind the scenes role (as he always has). In addition, while Kolomoyskyi was “slapped down” publicly, behind the scenes he appears to have received five some important concessions.
1. An agreement with the President that there will be no audit checks on Ukrtransnafta. Thus, whatever financial shenanigans he was involved in while his ally ran the company, will not be investigated. The past will be the past.
2. Ukrnafta declared that it will soon pay retroactive dividends for the period of 2011-2013 in the amount of $1.5 billion dollars. Since Kolomoyskyi’s Privatbank group owns 42% of Ukrnafta that means they are set to receive $700 million dollars of dividends.
3. The NBU just provided an 800 million hryvnas stabilization credit to Privatbank on March 30. This allows Privatbank to fulfill its obligations to depositors on time. Privatbank has essentially become too big to fail” holding 26% of all deposits and 15% of all banking sector assets.
4. Progress in settling a dispute between Naftogaz and Ukrnafta which will again benefit Kolomoyskyi financially. This stems from a long running dispute involving Naftogaz not paying Ukrnafta for domestically extracted natural gas, despite a Ukrainian law requiring Ukrnafta to sell all its natural gas to Naftogaz. Towards resolution of this matter, on March 30 Naftogaz assessed it liabilities to Ukrnafta for gas consumed from 2006-2011 at 10.1 billion cubic meters of gas at the price set by the regulator amounting to 3.753 billion hryvnas. Naturally, Ukrnafta filed a court claim that the price of gas set by the National Commission for Energy Regulation of Ukraine (NCER) is too low. However whether or not the court will rule in Ukrnafta’s (Kolomoyskyi) favor will just be icing on the cake. That is because even with Naftogaz’s assessment of their liabilities to Ukrnafta, Kolomoyskyi is still looking at a minimum payout of $60 million dollars. Not surprisingly Kolomoyskyi stated after the assessment that he believes the parties can find a compromise and that the negotiations are “constructive”.
5. Kolomoyskyi ally Valentyn Reznychenko replaces him as Dnipropetrovsk Governor. Previously Kolomoyskyi had successfully lobbied to install Reznychenko as the Governor in neighboring Zaporizhya. There is an old saying that the first test of power is whether or not you can choose your successors. By this standard, Kolomoyskyi clearly remains powerful.
These public concessions, as well as perhaps some behind the scenes one, appear to have appeased Kolomoyskyi. The oligarch appeared with President Poroshenko to jointly introduce Reznychenko as the new Dnipropetrovsk Governor. In the meantime, Kolomoyskyi privately funded armies appear to be loyal to the Ukrainian government as well.However, while Ukraine has won an important battle in the “war against the oligarchs”, it takes place in the midst of an internal “clash of titans”. That is, a power struggle among Ukraine’s oligarchs in which the various business titans become situational government allies to topple their rivals. Kolomoyskyi indeed gave up open public power and lost some financial controls. However, what powers and financial controls the other oligarchs are forced to give up will be the real show to watch. Kolomoyskyi may have fallen on his own sword, only to sharpen it up for a bigger piece of Rinat Akhmetov’s assets. At the same time Kolomoyskyi was fighting against losing power at Ukrnafta, he issued a call for re-privatizations of some assets, specifically the Akhmetov owned Ukrtelecom and Dniproenergo (an electrical energy producer). Both companies were won by Akhmetov’s companies in state tenders issued under Yanukovych. If an investigation were to be opened and there was evidence of collusion, corruption, etc. the sales could be canceled by the state and a new tender offered which would presumably bring in needed money to the state budget. In practice and to avoid scaring foreign investors, the term “re-privatization” is not likely to be used. Instead mechanisms like canceled tenders and rulings from the Anti-Monopoly Committee would be used as the impetus for the redistributing control of assets amongst the oligarchs.
In the meantime, Akhmetov is struggling to maintain his business empire as he tries to fend off Kolomoyskyi, appease Kyiv and play footsy with the Russian backed forces in the Donbass to keep his assets in the occupied parts of the Donbass from being nationalized. Akhmetov’s precarious position has made a prime target for Kolomoyskyi’s appetite since Akhmetov’s links to the DPR and LPR starkly contrasts Kolomoyskyi’s public support for the Ukrainian army and the war effort. At a meeting between “former Prime Minister” of the “Donetsk People’s Republic” Alexander Borodai and Russian nationalists on April 2, Borodai stated that Akhmetov was exporting his products to the DNR and added, “So do you know why we didn’t take Mariupol in September even though that possibility existed? Because how could (Akhmetov) bring his products from the terrorist territory – according to the West- of the Donetsk Republic to Italy? Well, obviously, there is no way. He can’t take them out. Accordingly, he has to take them out of Ukrainian territory, and the only accessible port for him is Mariupol. Odesa is not available. The Odesa ports are controlled by Kolomoyskyi, and he would never let Akhmetov in.” Borodai went on to add, “You can be against fascism, for fascism, be antifascist or fascist, anything at all, but the main thing is that the results of the privatizations of the 1990’s are sacred”. Even broken clocks are right twice a day and in this case, Alexander Borodai has rightly indentified that there is a major battle taking place for control of Ukraine’s assets between Akhmetov and Kolomoyskyi. It remains to be determined whether Akhmetov’s ties to the DNR and LPR will be a help or hindrance though. The clash of the titans will not be finished any time soon but rather will play out over the coming months until a new Ukrainian order is established – one way or the other.
· Political Moves: President Poroshenko continues rewarding loyalists with key appointments. Two Poroshenko Bloc MP’s: Stefan Barna and Valeriy Kulinich were named as the new Governors for Ternopil and Chernihiv respectively. Barna, in particular, is one of the “new faces” of young leaders (age 35) including on the Poroshenko bloc electoral list who had not previously served as an MP. His appointment creates a vacancy in Parliament that will need to be filled. The next person on the list is the Head of the Crimean Tatar Medzhlis, Refat Chubarov. However, since Chubarov currently serves as a Member of the Anti-Corruption Commission (and has served a couple terms in Parliament before), it is not clear if he will accept the mandate. In that case, the next person on the list is Grigoriy Shverk, the Deputy Head of the National Radio and Television Council (NRTC). In the event, Shverk too decides to stay in his current position; the parliamentary mandate goes to the next person in line who happens to be another NRTC Board Member, Vladyslav Sevryukov.
The appointment of Valeriy Kulinich as Chernihiv’s Governor creates a vacancy in Parliamentary District 205 which is covers the city of Chernihiv. Kulinich won as the Poroshenko Bloc candidate, in a crowded field of 20 candidates, by a 28-14% margin over his nearest opponent (independent candidate at the Ministry of Youth and Sports Andriy Deryzemlya). The race attracted many candidates because the incumbent last year, Tymoshenko Bloc MP Valeriy Dubil had vacated the seat to take a presumably “safe” seat on the party list. However when Byut received just 18 Parliamentary seats from the proportional list due to their poorest election performance since 2002, Dubil found himself unemployed at #19 on the list. Given that Byut is a minor coalition partner with just one minister in the government (Igor Zhdanov the Minister of Youth and Sports), it is not likely that Dubil or others on the Byut list will eventually become Members of Parliament due to succession. Therefore it is likely that Dubil will enter the race to fill the Kulinich’s vacancy. Dubil soundly defeated his Regions Party rival in 2012 by a 50-28% margin. The special election will likely take place in June.
· Gagauzia Victory for the Kremlin Backed Socialists: As anticipated, Kremlin backed Communist turned Socialist, Iryna Vlah won a first round victory to become Governor of the semi-autonomous republic of Gagauzia in Moldova. Vlah bested her nearest rival by a 51-19% margin. Last February Gagauzia conducted a questionable referendum with 98% of voters calling for closer ties to Russia and 97% rejecting the EU. In the short term this continues the momentum of the Socialist Party in Moldova’s politics following their surprise first place finish in the November 2014 Parliamentary elections with 21% of the vote. In addition, the Socialist’s proposal to hold national local elections on June 7 now will gain some momentum. Following the solid victory in Gagauzia, the Socialists want to capitalize on their popularity (and general dissatisfaction with the new governing coalition of Liberal Democrats, Democrats and Communists) and take control of as many municipalities as in the local elections. Of course, in the long term it gives Moscow another lever to use to destabilize Moldova and prevent any major moves toward the EU without its’ consent.
· Transnistria Blues: Of course, Moscow already controls Transnistria, which has been an open sore for Moldova since the 1992 war. Following the Russian annexation of Crimea last March, there was wide speculation that Transnistria might be the next target since 97% of voters elected to join Russia in a 2006 referendum. However despite Transnistria officials virtually begging to be absorbed into the Russian state, the Kremlin remained cool to the appeals. In the meantime, the Western economic sanctions that crippled the Russian economy have spilled over into Transnistria. This time however, “mother” Russia is no longer paying the bills. As a result, state pensions are only paid at 30 cents on the dollar, with vague promises to catch up later. Industrial production has fallen by 17% since last year and the decline in the value of the Russian ruble (and subsequently Moldovan lei) has created additional economic hardships. However an over looked factor in Transnistria’s economic decline is due to the Ukrainian Customs Service and Border Guards enforcing the requirement that all merchants show certification that they are registered with the Moldovan authorities. This requirement has always been on the books but not enforced until last year. In requiring this certification, Ukraine supports Moldova’s territorial integrity and taxation authority in a powerful manner. Thus imports from Ukraine had declined by 70% according to Transnistria authorities, creating a $20 million dollar shortfall in the budget. If the “official” figure for legitimate goods is 70% from a semi-autonomous republic with a poor history of revealing economic statistics, it can safely be assumed that that the impact on reducing contraband (arms, human trafficking, narcotics, etc.) is also great. Transnistria leader Yevgeniy Shevchuk has tried to compensate for the lost revenues by instituting a requirement for third party liability insurance for vehicles entering the semi-autonomous republic. These insurance policies cost $5 for a two week visit or $30 per year. With 1500 vehicles from Moldova entering Transnistria on a daily basis, that would amount to at least $2.7 million dollars of tax revenues in a year’s time. As retaliation against Ukraine for enforcement of customs laws, the third party liability requirement will be enforced starting from June 1 (it began for Moldova and Romania on March 1). Still though, this stop-gap measure will not be enough to stem the economic tide of turmoil in Transnistria. When Moldova signed the Deep and Comprehensive Free Trade Agreement with the EU (i.e. the economic part of the Association Agreement), the Europeans graciously extended trade preferences to Transnistria as well. However those preferences expire at the end of this year. Thus, if Transnistria declines to join the EU-Moldova “Free Trade Area” (FTA) then it will lose all economic preferences with the EU which will deepen the economic recession. In addition with Moldovans receiving visa free travel privileges to the EU last year, the average citizen in Transnistria is quickly realizing that the future lies in being a part of a European Moldova and not a neglected Russian backwater.
· Spring Gas Deal and the Star of the Month: A year ago, when Ukraine was almost entirely dependent on Russia gas at the exorbitant price of $378 per thousand cubic meters, the idea that Ukraine would be paying just $248 for the same gas and relying on Russia for less than a third of its gas needs would have been given the same odds of success as an opposition electoral victory in Russia (i.e. virtually zero). Nonetheless, that is exactly what has transpired with full credit going to Ukraine’s government and specifically Energy Minister Volodymyr Demchyshyn and Naftogaz Chairman Andriy Kobolev. The persistence, pragmatism and “outside the box” thinking exhibited by Ukraine’s government in eliminating dependence on Russian gas is as important to the country’s national security as a strong national defense. Just as Ukraine’s economic team were the stars of the month of March for delivering the IMF package and subsequent reforms, the energy team has chimed in this month to help the country in a critical way. In January alone, according to the State Statistics Committee, Ukraine imported more natural gas from Europe than from Russia and at an average savings of four percent.
Given that January is typically the coldest month of the year and combined with Ukraine’s large underground gas storage of gas (due to a determined effort to reverse supplies that began under the new government last year), Ukraine has proven to itself and to Russia that it will not be energy dependent on a single country. In addition, the terms of the “spring package” are likely to be continued until the Stockholm Arbitration Court rules on competing claims by both Naftogaz and Gazprom early next year. The short translation is that the Western sanctions and lower energy prices have been effective in hurting the Russian economy enough to force them to remove energy as a weapon in their arsenal against Ukraine.
Dates to Watch:
April 7-10: Parliamentary Voting Session Scheduled
April 21-24: Parliamentary Voting Session Scheduled
May 5-8: Parliamentary Voting Session Scheduled
May 19-22: Parliamentary Voting Session Scheduled
Late May: IMF Talks with Bondholders Completed: the talks are underway and new conditions will soon be known. The negotiations will likely result in lengthening of maturities, coupon reductions and some nominal reductions (haircuts). Most importantly though, Ukraine will not default on its obligations and the government’s economic team gets full credit for being the stars of the month of March.
June 2-5: Parliamentary Voting Session Scheduled
June 16-19: Parliamentary Voting Session Scheduled
July 1-3: Parliamentary Voting Session Scheduled
July 14-17: Parliamentary Voting Session Scheduled
October 2015: National Local Elections for Mayor and City Council:
February 2016: Stockholm Arbitration Hearings on Counter Claims between Naftogaz and Gazprom.