• Cabinet & Coalition Cracks Continues: The surprise mid-June firing of SBU Chief Valentin Nalayvychenko was followed by the sacking of Ecology Minister Ihor Shevchenko, and the resignation of Health Minister Aleksander Kvitashvili last week. The mid-summer Cabinet shakeup was followed by Poroshenko Bloc faction leader Yuri Lutsenko, resigning as its head after 72 faction deputies voted in favor of a populist banking law. Clearly, the coalition and Cabinet is fracturing.
While the battle between Poroshenko and Nalayvychenko continues, the future political career of Ihor Shevchenko appears dismal – at least in the short term. Shevchenko attacked Prime Minister Yatsenyuk for tolerating corruption in his ranks, but the charges were merely a one-day news story. Kvitashvili on the other hand, resigned to avoid being fired by Parliament, and went out with far more grace. He cited vested financial interests in the medical sphere that thwarted his efforts and ultimately led to him being forced out of office. However, former Georgian Embassy Secretary (2005-2010) Bacho Korchilava asserted that Kvitashvili made a “mistake as he tried to play corrupt officials too softly”. Regardless, Kvitashvili stated his plans to remain in Ukraine as a newly minted citizen rather than return to Georgia. He also stated his readiness to assist the new Health Minister, since without needed reforms to the system it “will fall apart before the year ends”. With his mentor Saakashvili too busy fighting corruption in Odesa to save him, Kvitashvili became the first “foreign” casualty in the new Ukrainian government.
The resignation of Yuri Lutsenko as Poroshenko Bloc faction leader was the not the first time he threatened such action, but this time he made a public declaration of his intentions. Lutsenko was angered over the fact that 72 members of the Poroshenko faction voted in favor of a populist banking bill against his instructions. The bill would allow borrowers who took credits when the hryvna to dollar exchange rate was 5:$1 and/or 8:$1, to repay their loans based that rate rather than being pegged to the dollar (or euro). For example, a borrower who took a $100,000 hryvnas equivalent loan in January 2008 did so when the exchange rate was five hryvnas to one dollar. That meant they would have to repay approximately 500,000 hryvnas since all transactions must be in local currency under Ukrainian law. However, the hryvna exchange rate is now around 22 to $1. The same borrower must still pay back the equivalent of $100,000 but the hryvna equivalent is now approximately $2.2 million hryvnas. Difficult though it is for consumers, the borrowers did agree to repay in hard currency equivalents. If the bill became law, it would cost the already fragile banking system $95 billion hryvnas (more than $4 billion US dollars which is more than Ukraine is spending on defense and law enforcement combined) at a time when the country is dependent upon IMF financing (the upcoming tranche of which is $1.7 billion US dollars – less than half of the cost to the banking system). Suffice to say, the bill would bankrupt the entire Ukrainian banking system and send the economy in deeper turmoil.Following reports of Lutsenko’s resignation, Deputy Faction Leader Ihor Kononenko said that Lutsenko was simply angry after an “emotional” day and that they faction believed they could convince him to stay. Kononenko went to say that the vote was in question since it received just three more than the minimum and one Poroshenko Bloc faction MP, Andriy Pavelko, said that someone voted his card for him as he was not present in the chamber during that time. Another MP from Motherland, Ihor Lutsenko, claimed he was unaware of what he was voting for and planned to withdraw his vote. President Poroshenko slammed lawmakers over the vote by saying, “What disappointed me a lot and raised great concern regarding the future of the coalition and the future of the parliament- voting yesterday on restructuring of currency-pegged credits. Unfortunately, among those who voted, I saw politician-populists who wishing to face the sympathy of some parts of the society, put under threat the financial and banking system of the country and the stability of economics, and they are giving promises that can’t be fulfilled”. Poroshenko went on to add that he will not sign the bill to prevent it from becoming law. As for Lutsenko, his frustration over the vote stems from his irritation from waiting for a higher level appointment from his friend, President Poroshenko. Lutsenko is said to be eyeing the Prosecutor General’s Office (PGO), and with the growing criticism of Viktor Shokin (as well as concerns about Shokin’s health), a change in the PGO is likely no later than autumn. In the end, Deputy Faction Leader Ihor Kononenko proved to be correct and Lutsenko agreed to stay on as the Poroshenko faction leader – at least until something better comes along. While Mr. Lutsenko begins to resemble Aesop’s “The Boy Who Cried Wolf!”, all signs point to more Cabinet shakeups this autumn when Parliament returns to session in early September…
• Post-Euromaidan Honeymoon Aftershocks: The battle between President Poroshenko and former SBU Chief Valentin Nalayvychenko continues in a less public – but still dangerous manner. Last month Nalayvychenko was invited to speak to the US House of Representatives Foreign Affairs Committee about the military situation with Russia. However he was summoned for questioning by the Prosecutor General’s Office about a fire at the BSRM-Nafta oil depot instead which caused him to cancel his trip to Washington. Nalayvychenko accused the Deputy Prosecutor of being involved in financial schemes related to the oil depot which resulted in President Poroshenko calling his work “unsatisfactory”. Then Parliament voted to dismiss Nalayvychenko with a mere 248 votes despite last minute offers by Poroshenko to make the SBU Chief the new Vice Premier for European Integration. Immediately after Nalayvychenko’s firing, Poroshenko fired three of four Deputy SBU Heads and appointed his own persons to the sensitive posts. Not surprisingly, the Prosecutor General’s Office quickly dismissed Nalayvychenko’s accusations of the Deputy Prosecutor being involved in financial schemes relating to BSRM-Nafta. However, the saga continues…
Last week Nalayvychenko chided Poroshenko Bloc Faction Leader Yuri Lutsenko for allowing an “enforcer” to influence the votes of the faction. This enforcer intimidates and pressures MP’s to vote a certain way according to the former SBU Chief. Though a name was not given publicly, it is believed to be a reference to MP Ihor Kononenko. The 48 year old businessman has become increasingly influential in the Poroshenko Bloc and often is a source of breaking news items relating to the President.
In retaliation for the case against former Deputy Prosecutor Danylenko being unilaterally dismissed by the Prosecutor General Viktor Shokin, Nalayvychenko ally Andriy Levus initiated a petition in Parliament to vote no-confidence in Shokin. Levus, a first term MP with People’s Front, served as Nalayvychenko’s Deputy SBU Director until the Parliamentary election last year. Levus also carried the evidence of Russian involvement in Ukraine to Washington in Nalayvychenko’s absence to share on Capitol Hill. At present, Levus’s petition has the signatures of 80 MP’s from Samopomich, Motherland and the Radical Party. However they will need to get nearly double that number (150) to put the question before a vote of the whole Parliament.However the Prosecutor General’s Office was too busy with an internal corruption case to worry about Levus’ petition. Last week brought the sensational headlines of the arrest by the SBU of two Deputy Prosecutors for demanding a bribe. The imagery of the seizure of half million dollars of cash, unregistered firearms, and 35 packs of diamonds other precious stones resulted in both applause and anger (due to the fact that corruption continues in government offices). The discovery of the diamonds was particularly symbolic as it evoked memories of the famous Soviet comedy “Diamond Arm” in which black marketers try to smuggle diamonds only to be outsmarted by the state authorities. First Deputy Chief of the Prosecutor General’s Office Main Investigations Department, Volodymyr Shapakin and Kyiv Deputy Prosecutor General Oleksandr Korniyets were arrested and the judge set bail at 3.2 million hryvnas (about $150,000 dollars). The two officials quickly posted bail which led to another Nalayvychenko ally, Deputy Speaker Andriy Parubiy stating, “I am convinced that the judge who made the decision to release on bail the Deputy Prosecutor of the Kyiv region and the official of the Prosecutor General’s Office should be suspended from his duties”. The sensational imagery and headlines aside, what really happened? The investigation will continue and eventually the truth will be revealed. However some administration insiders believe that case originates with MP Vyacheslav Konstantinovskiy. Konstantinovskiy is a Kyiv businessman (with a twin brother Oleksandr) who received some fame last summer when he sold his Rolls Royce to help finance the battalions and then enlisted and fought on the front himself. This helped propel Konstantinovskiy into Parliament with the People’s Front last October in Kyiv’s District #220 (Podil). Konstantinovskiy is involved in the sand business as well as restaurants (including the popular Concord Restaurant). Due to problems with paperwork, the Prosecutor General’s Main Investigations Office wanted to open a criminal case against him. Interestingly, Konstantinovskiy quit the People’s Front faction on June 17th and the party on June 25th – approximately the time of the potential case against him. However it is believed that Konstantinovskiy complained to Deputy Prosecutor David Sakvarelidze that the investigators (Shapakin and Korniyets) had demanded him to pay a bribe in exchange for dropping the case. At that point it appears that Sakvarelidze got a green light from the Presidential Administration to use the elite Alfa unit of the SBU to conduct the raid on the Podil based Main Investigations Office. That led to raid on the office which resulted in the seizure of the cash and jewels. The news story caused Prosecutor General Viktor Shokin to promptly return from the US to try to tidy up the matter. While the case made headlines, apparently the SBU unit had no search warrant and there were no witnesses to the discovery of the cash and jewels. Suffice to say, beyond a “feel good” news story, this case may end up like practically every other case, and never result in justice for the parties involved. One is reminded final scene in “Diamond Arm” (“Бриллиантовая рука”) when Nonna the nosy apartment superintendent says, “We will have to take appropriate action. What else can we do?” While it is not clear what will happen, it is clear that there are increasing cracks in the government and ruling coalition following the end of the Euromaidan honeymoon last month.
• A Ukrainian American in the US & Some Limited Lobbying Help for Ukraine: June 22 brought filings under the US Federal Agents Registration Act (FARA) that showed the Ukrainian government hiring APCO Worldwide to do some lobbying work in Washington. Ukraine has long needed lobbying help in Washington and the FARA filings are welcome news. The two contracts are with the Government of Ukraine and the Ministry of Finance. The work on the contracts began as early as April 28th, but the law allows a short window to before submitting the full registration. In the case of the Government of Ukraine, the hiring of APCO is to assist with Premier Yatsenyuk’s visit to Washington this week for the investment conference and follow up work thereafter. In the case of the Ministry of Finance, APCO’s work will be to assist with messaging for the ongoing bondholder debt negotiations.
What is APCO Worldwide? APCO is one of a host of worldwide public relations and lobbying firms with a strong Washington presence. APCO was founded in 1984 and focus most of its work on corporate than political clients. As evidence of their success, the Yanukovych administration hired APCO to try to break the deadlock in negotiations with the International Monetary Fund (IMF) in March 2012. Kharkiv businessman Oleksandr Feldman hired APCO in 2010 to try to get pro-Yanukovych opinion editorials placed in European newspapers. Feldman, an independent at the time (following his departure from Tymoshenko’s faction), was one of the last holdouts of the Party of Regions last year. He currently is an independent Member of Parliament from Kharkiv District #174. In December 2012, the Yanukovych administration again hired APCO (for $330,000) to improve the image of the liquefied natural gas (LNG) terminal that was planned for Odesa. All of those efforts including breaking the IMF deadlock, improving the image of the LNG project and improving Yanukovych’s image in Europe – failed to varying degrees. Hopefully APCO’s efforts on behalf of the current Ukrainian government will prove more successful than previous ones.
Meanwhile, Deputy Presidential Chief of Staff Valeriy Chaliy was finally appointed as Ukraine’s Ambassador to the United States. Chaliy’s appointment had been known privately for several months, but the Deputy Chief of Staff asked the President for additional time to finish some projects in the Secretariat before he departed. Chaliy served as Deputy Foreign Minister under Yushchenko when Poroshenko was Foreign Minister. Chaliy plans to aggressively begin his work in Washington, which will include pushing for the White House to sell defensive weapons to Ukraine, as well as working to attract US direct foreign investment. In an interview last Friday, Chaliy noted that “Ukraine expects to quickly receive at least 1000 Javelin anti-tank missile systems” if Russia launches a full scale attack. Thus, it appears that at long last, Ukraine is finally getting serious about lobbying its own interests in Washington.• Chernihiv’s Hot Summer Election or Round II of the Poroshenko-Kolomoyskyi Proxy War: Special elections, even Parliamentary ones, rarely attract much attention. However, the summer’s political race in Chernihiv’s district 205 (Chernihiv City) is the exception. There are an astounding 127 candidates registered for the July 26th for the Special Parliamentary Election. However, despite the multitude of candidates, the race is essentially an arm wrestling match between President Poroshenko and oligarch Igor Kolomoyskyi. The two political titans are represented by the Poroshenko Bloc candidate Serhiy Berezenko and the Ukrainian Association “Dill” Party candidate Gennadiy Korban. “Dill” or “укроп” in Russian language is associated closely with support for the battalions on the front, as well as being ubiquitous Ukrainian green herb and a Russian slang word for a Ukrainian soldier (Kolomoyskyi is known for his financial support of the Ukrainian army).
Both sides managed to register up to 30 technical candidates each. A technical candidate is a candidate that is not campaigning to win, but rather to assist another candidate. This can be accomplished by either using the state allotted media time to attack opponents or endorse candidates – as well as potential control of election commissions. The law gives factions in Parliament representatives on all election commissions but also selects parties by lottery (that were registered for the previous election) as well. Thus, out of 18 District Election Commissioners, six are from parties/bloc passing the 5% barrier for representation in Parliament during the October 2014 election, and the other 12 are from smaller parties competing last fall. A third candidate in the race, and the only other candidate to play any impactful role, is Ihor Andriychenko with the Democratic Alliance. Andriychenko finished third in the October 2014 Parliamentary Election behind the winner from Poroshenko Bloc (now Governor Valeriy Kulinich) and an independent. Barring something unexpected, another third place finish for Andriychenko is likely.
Gennadiy Korban, is a businessman and a former Deputy Governor of Dnipropetrovsk worth an estimated $150 million dollars. He heads Slavutych Capital and is a Member of the Supervisory Board of Ukrnafta. Korban faces off against 31 year old Sergiy Berezenko. Berezenko, a Vinnytsya native and nephew of Anatolyi Matviyenko (former Kuchma era Vinnytsya Governor and later Prime Minister of Crimea under Yushchenko), is the Head of the State Management Affairs Office, a powerful government agency which manages all Ukrainian government property (the equivalent of a US Ministry of Interior on steroids). Berezenko previously was elected twice to the Kyiv City Council (2006 and 2010) with the Bloc of Leonid Chernovetskiy and Headed the Kyiv City Department for Management of Family and Youth. Following Poroshenko’s dismissal of Kolomoyskyi as Dnipropetrovsk Governor in April, this is the latest battle between the government and the oligarchs. Unlike typical special elections however, this election is shaping up to be a high powered grudge match. As evidence of the growing interest in the election, 1+1 Channel hosted a live televised debate last weekend amongst the three main candidates: Korban, Berezenko and Andriychenko. The seat is vacant due to the incumbent Valeriy Kulinich being appointed Chernihiv Governor.
• Gas Talks with Russia: The Russians continue to thrive on unpredictability. Such was the case last week in gas talks for the third quarter. Rather than give the Ukrainians an expected six month deal through the end of the year, the negotiations fell apart with Russia refusing to provide a discount as they have in the past. This has resulted in Ukraine being forced to rely on reverse supplies from Europe and to return to the negotiating table later this month. In frustration, Prime Minister Yatsenyuk then criticized Energy Minister Volodymyr Demchyshyn for his failure to provide the government with an official balance of energy generation and consumption “for the third month in a row!” Negotiations are likely to resume with Gazprom this month and next, although the vacation season will hinder the availability of both sides to meet. If Ukraine cannot reach a deal for the third quarter, it will cause much less gas being pumped into underground storage (which is currently at 40% capacity). As a result, Ukraine will have to buy more Russian gas in the fourth quarter and first quarter of 2016 to provide adequate heat in the winter. Thus Gazprom is gambling on higher energy prices later this year rather than a lower but fixed price now.
• Personnel Moves: Maksym Burbak has been elected as the new Chairman of the People’s Front Faction in Parliament. He replaces the two previous Co-Chairs, Andriy Teteruk and Viktoria Siumar. Teteruk remains the First Deputy Head of the Faction. Burbak was the Minister of Infrastructure in the first post Euromaidan government (February to December 2014) and won election last October in Chernivtsi District #204 (Hotyn) over his Poroshenko bloc rival. Burbak, a businessman in the automobile industry, was elected from the Motherland Party list in 2012 and is a family friend of Premier Yatsenyuk.Vitaly Klitchko and Gennadiy Kernes Announce Re-Election Plans: With Mayoral Elections just a little more than 100 days away, Kyiv Mayor Vitaliy Klitchko and Kharkiv Mayor Gennadiy Kernes both announced their plans to run for re-election. Klitchko won an outright majority last May (51%) but is likely to face a runoff this time around due to the new Local Election Law in Parliament. This law requires the top two vote getters to compete in a runoff two weeks later (November 8, 2015). While Klitchko’s popularity is less than it was a year ago, as the day to day mayoral duties take their toll, he remains the favorite for re-election. Speaker Hroisman ruled out a rumored run for Mayor on July 9th by stating, “I believe in what I am doing right at the moment”. This is good news for Klitchko as it means he will likely to continue to enjoy the support of the Poroshenko Bloc in his re-election bid. Possible opponents include Kyiv’s premier restaurateur and City Council Deputy Sergiy Gusovskiy (Shoti, Pizzeria Napule, Pantagruel, etc.) who is considering being Samopomich’s candidate, and former MP Mykola Katerynchuk – who remains interested.
Gennadiy Kernes also a favorite to win re-election as Kharkiv Mayor. The controversial Mayor won an extremely close race against Arsen Avakov (now Interior Minister) in 2010, and since then has managed to win the support of the local business community. Unless Avakov himself gets in the race, Kernes will be hard to defeat. As the old saying goes, “you can’t beat something with nothing”. Avakov is unlikely to give up his Interior Ministry post given the stakes, although he may persuade some close allies like MP Anton Herashchenko or MP Yarolsav Markevych to run (both first term People’s Front MP’s from Kharkiv). Until the Avakov team unites behind a single candidate though, Kernes remains likely to be re-elected. In an interesting development last week, the Kharkiv City Council finally voted to recognize Russia as an aggressor state by a 69-4 margin. This was the third attempt to get a majority and previously Kernes’ supporters on the council had blocked the resolution. This may be a sign that Kernes is playing ball again with Kyiv to avoid faces criminal charges for his actions during Euromaidan.
Dates to Watch (for Ukraine unless otherwise noted):
July 13: Ukrainian Investment Conference in the US: Ukraine’s government plans an investment conference to unveil its plan for privatization, fiscal reform and the energy potential of the country. About 150 executives of major US companies are expected to attend as well Prime Minister Yatsenyuk and eight Ukrainian government ministers. Ukraine will present its agricultural sector, IT, infrastructure, pharmaceuticals, energy, aviation, and missile building industries at the forum.
July 14-17: Last Parliamentary Voting Session Scheduled Until Autumn: During this week the long expected vote on decentralization is expected to take place (July 16 according to President Poroshenko). With the recent cracks in the Parliamentary coalition, it will be a test of the strength of President Poroshenko and Speaker Hroisman’s influence if they can get a 2/3 vote on issue. In addition, Finance Minister Jaresko has called on Parliament to pass four pieces of legislation to unlock the next $3.2 billion in IMF financing. Failure to pass the legislation this week will be financially catastrophic.
July 21: Next Meetings of the Trilateral Contact Group (Ukraine, Russia & the OSCE): Meanwhile the subgroups for elections and the special status for the Donbass have agreed to meet every week this month (July 7, 14, 21 and 28). The so-called Donetsk People’s Republic (DPR) has scheduled local elections for October 18th – a week before National Ukrainian Local Elections. This announcement bodes poorly for reaching any real solution on Donbass elections. The new local self governance law passed by Parliament punts on the issue of local governance in the Donbass by stating, “The specifics of local self governance in certain parts of Donetsk and Luhansk regions will be determined by a separate law”. Thus, Parliament is anticipating passing a law this autumn relating to local governance in the Donbass which will have separate provisions from the national local self governance legislation. In the meantime, rumors are brewing that Poroshenko is being offered a “grand bargain” through intermediary businessmen close to the Kremlin, that would include Russia’s withdrawal from the Donbass in exchange for recognition of the annexation of Crimea and about $100 billion in debt forgiveness and gas rebates.
July 26: Special Parliamentary Election in District #205 (Chernihiv City)
September 10: Deadline for Moldovan Parliament to Elect a New Prime Minister: If no candidate is elected by this date, then new elections will be called under the Constitution. Parliament has up to two votes to try to elect a Premier. If both votes fail before the September 10th deadline, this will also force new elections.
September 23: Ukraine must repay $500 Million in Foreign Debt.
October 18: Local “Elections” in the so-called Donetsk People’s Republic
October 25: National Local Elections for Mayor and City Councils.
November 1: Local “Elections” in the so-called Luhansk People’s Republic: Note that the DPR and LPR have sandwiched Ukraine’s legitimate local elections with their phony elections the week before and the week after, to try to control the message to the West.
November 8, 2015: Runoff Election Date under the New Election Law
January 31, 2016: New EU Expiration Date for Donbass related Sanctions on Russia
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