There are eight oracles offered for 2016:
2. Top Yanukovych officials will continue to avoid prosecutions and convictions. The Ukrainian government’s recent release of Olena Lukash, Yanukovych’s fiery Minister of Justice, highlights the utter and complete impotence of the Ukrainian judicial system as well the government’s “headlines over headway” approach to crimes of the former regime. As one of Yanukovych’s closest confidantes, Lukash served the President with an intense loyalty that would have made Eva Braun look halfhearted in her love of the Third Reich. Lukash has been wanted for murder and mass complicity in the events of Euromaidan. However just like Serhiy Klyuyev who was allowed to escape to Russia, Dmitro Tabachnik who was allowed to re-enter Ukraine and depart last spring, and a multitude of other Yanukovych’s close associates, they have been able to escape prosecutions by simply colluding with the judges and judicial officers to purchase their freedom. In fact, there is such frustration in D.C. that there is serious talk of expanding the sanctions list to include those considered close to those persons already included on the list. Last week Lukash was returned her bail money and foreign passport allowing her to travel abroad freely and in eventually escape prosecution by going to Russia. Polling in late 2005 and early 2006 showed that the main disappointment with President Yushchenko was that he failed to put the “bandits in prison”. President Poroshenko is repeating this mistake, and as a result his popularity is rapidly declining. A Gallup poll last month put Poroshenko’s approval rating at 17% (down from 47% last year) which is worse than even Yanukovych’s popularity, which dropped from 46% to 29% after one year in office. Of course Prosecutor General Viktor Shokin is a key part of the problem, although his days are numbered both literally and figuratively due to health issues. However even if the new Prosecutor who replaces Shokin is committed to putting Yanukovych’s associates behind bars, the Ukrainian judicial system lends itself to side settlements which make actual convictions highly difficult. In many ways, it’s easier to get a binding United Nations resolution for the use of force, than a conviction of a high ranking public official in a Ukrainian court. In addition to the contradictory and ineffective Soviet era judicial system, prosecutions of Yanukovych era officials are also unlikely because some current officials are starting to worry about their own prosecutions under the next president. Given the rapidly declining popularity of the President and the current government, it is not clear how long this government will last. The talk of new Parliamentary (and Presidential) elections is already in the air and will only intensify by spring. As a result, some key officials and mid to high level bureaucrats are already hedging their bets by cutting business deals with members of the former regime. These deals both profit the officials as well as buy protection for the officials from the Yanukovych team. As this blog has noted before, court cases in Ukraine are decided by two factors. First, who does the judge fear more – the plaintiff or the defendant? Second, who pays the judge more – the plaintiff or the defendant? With Poroshenko’s falling rating, fear of the President is becoming less, which means that soon money will be the only deciding factor in the courts. Given the tens of billions dollars stolen by the Yanukovych regime, associates of the disgraced former President have little to fear under Ukraine’s judicial system. In fact, if they are generous to the right people in the current government, they may once again benefit from inside deals and corruption. Thus, the chance of top Yanukovych officials continuing to avoid prosecutions and convictions is 85%.
3. Yatsenyuk will be dismissed as Prime Minister before his 42nd birthday: Yatsenyuk has had a long and successful career in Ukrainian politics, starting with his appointment as Deputy Governor of Odesa at age 30. Yatsenyuk then was promoted to Minister of Economy at age 31, Foreign Minister at age 33, Speaker of Parliament at age 34 and Prime Minister three months before his 40th birthday. As one of the key leaders of Euromaidan, Yatsenyuk proclaimed his administration would be a “kamikaze” for reforms. However, when Yatsenyuk’s “kamikaze” proved to be more of a “Doolittle’s Raiders” mission,( that is, a symbolic, “feel-good” bombing mission inflicting no substantive damage) the public’s impatience with the slow pace of reforms and increasing resentment over continued corruption in government, resulted in a collapse in public support for one-time “Wunderkind”. Within less than year after leading his upstart People’s Front political party to a first place 22% finish in the October 2014 Parliamentary elections, Yatsenyuk’s party had collapsed to less than two percent in the polls nationwide. Sensing vulnerability and opportunism, Odesa Governor Mikheil Saakashvili openly attacked the Premier for corruption following the Premier’s admission that he couldn’t “do much” about the issue. The former Georgian President’s attacks led to the resignation from Parliament of Yatsenyuk’s longtime financier Mykola Martynenko, but a visit last month from US Vice President Joe Biden saved the Premier’s job. Biden delivered two key messages. First, this was Ukraine’s (and specifically Yatsenyuk’s) “last chance” to fight corruption. Second, a change in the Prime Minister was possible, but only if there would be NO new parliamentary elections. Since firing Yatsenyuk at the moment would almost certainly result in new Parliamentary elections, the Vice President propped up the Premier for a few months longer. Following the visit, Poroshenko publicly proclaimed his continued support for the Prime Minister and Yatsenyuk in turn, avoided talk of a strained relationship. “I would like to tell you a lot, but I won’t tell you anything, and will keep silent until the end, so that the sadly remembered 2005 scenario will not be replayed” said the Prime Minister. This was a clear warning to Poroshenko, who was accused of corruption in September 2005 by then Premier Yuliya Tymoshenko, resulting in the Premier’s firing by President Yushchenko and the split of the Orange Revolution forces. Meanwhile the unofficial word from Bankova Street was that while Yatsenyuk “stays on” awhile longer, the President would not be expending any of his declining political capital to protect him. With the growing demand for rapid reform and more aggressive action against corruption, Arseniy Yatsenyuk’s political career is not likely to survive until his 42nd birthday on May 22nd. The man who once harbored ambitions of becoming the Head of the World Bank now appears headed for the political wilderness. Like his political mentor Victor Yushchenko though, history is likely to be kinder to Arseniy Yatsenyuk than the present. In addition, the careers of many Ukrainian politicians like Tymoshenko, Yanukovych and Lytvyn were also on “life support” at different times before those politicians returned to prominent roles. However, the chance of Yatsenyuk being dismissed as Premier before his 42nd birthday is 80%.
4. Russia will finally accept a 20% principal reduction on the $3 billion of Yanukovych-era debt. Never before has the International Monetary Fund (IMF) been as accommodating to a country as they have to Ukraine over the last year. Not only did they agree to a record $40 billion dollar bailout for Ukraine, for they changed their rules to allow Ukraine to default on its debt obligations to Russia without suspending their participation in the IMF program. In a unique show of solidarity, the IMF has been joined by the US government, the European Union, and other pro-Western countries to both issue public statements in support of Ukraine and to back them up with concrete actions. To use a New Year’s analogy, it’s as if the entire international community has rallied behind George Bailey (played by Finance Minister Natalie Jaresko) to save the Bailey Building and Loan (i.e. Ukraine) from the cruel Mr. Potter (starring Putin). Meanwhile with the onset of 2016, Ukraine’s $3 billion dollar debt to Russia is now officially ‘past due’. This debt, incurred on December 17, 2013 as a birthday gift to then-Premier Mykola Azarov, was provided with the purpose of rewarding the Yanukovych regime for snubbing the EU Association Agreement the month before as well as propping of the government during the Euromaidan protests. Within two months though, Yanukovych had fled the country and the new government was saddled with repaying the former regime’s debts (despite moving in an opposite direction politically). In effect, it was as if a spouse involved in an affair with his/her banker took out a new car loan from the same banker just two months before filing for divorce, and then insisting that the betrayed spouse make the payments to the banker involved in the affair. Following a series of halfhearted negotiations last autumn, the Russian side offered to amortize the debt over three years if a Western partner would guarantee the debt. Not surprisingly, no Western bankers wanted to guarantee the dubiously incurred debt. This gesture by the Russians was followed by the change in rules to allow Ukraine to default on the Russian debt without having their participation in the IMF program suspended. However to prevent other countries from requesting the same exemption, the IMF simultaneously ruled Russia’s debt would be classified as “sovereign” rather than “commercial” to maintain the established lending system between nations. In other words, Ukraine can repay the debt on its own timeline. On New Year’s Day 2016, Russia began to initiate legal proceedings against Ukraine to force repayment. However even the Russians realize they have an uphill climb even if they were to successfully win the case in court. Hence, Russian Finance Minister Anton Siluanov’s statement, “Russia intends to carefully examine any significant proposal from Ukraine, but it also believes that the court proceedings do not rule out a constructive dialogue in order to reach an acceptable settlement of the debt”. Translation? Russia’s economy is hurting and 80% repayment soon, is better than gambling on a 100% repayment later. In all likelihood, Russia will agree to the 20% reduction in principal, provided they can participate in the derivative options offered by Ukraine that allow lenders to share in any unexpected growth in Ukraine’s economy and receive somewhat greater returns. Finding a face saving option for the Russians is likely to accomplish Ukraine’s ends of reducing the debt by 20%. That is not to say the negotiations will be easy, but given the dynamics of the Minsk II Agreement and desire for Russia to get sanctions lifted, a goodwill gesture on a dubious debt would further Russia’s claim to the “sanctions probations officer” that they have been “reformed” by the time in isolation. Thus, the likelihood of Russia accepting the 20% principal reduction in the $3 billion dollars of Yanukovych-era debt is 70%.
5. Russia’s “loose” adherence to the Minsk II Agreement will result in local elections in the Donbass this year. Due to Russia’s military occupation, 16 districts in the Donbass were unable to hold elections during the October 2014 Parliamentary Elections. The Russian occupation also prevented local elections from being held in October 2015. As a result, the pro-Yanukovych authorities elected in October 2010 are still technically “in office” with Russian mercenaries managing the day to day affairs of the occupied territories. As part of the Minsk Agreements though, local elections must be held in the Donbass before the agreements can be considered fulfilled. Ukraine has long argued for these elections as a way of reasserting control over the regions. Now with the war in the Donbass downgraded to a sniper competition, and the Minsk Group agreeing to continue its work for another year, there is hope for a Russian military withdrawal from the Donbass, return of the occupied territories to nominal Ukrainian control and ultimately new local elections. Granted of course, peace comes at a high price for the Ukrainians as they will be forced to pay the equivalent of reparations to cover the costs of rebuilding the region and pay all social services. Nonetheless, under pressure from the West and facing pressure from within, Ukrainian is likely to go along with the terms of the Minsk Agreement and accept unfavorable terms in hopes of having influence in the Donbass at a later time. In what will be spun as a concession from the Russians, new elections will be conducted in the Donbass and under Ukraine’s election law and with OSCE (Organization for Security and Cooperation in Europe) monitoring. Why would Russia agree to such terms in the territories it fought to control? First, more than two million residents of the Donbass have fled the region leaving only the elderly and poor – a demographic not inclined to be inspired by talk of a visa free regime with Europe and NATO membership. Second, even when the Donbass was booming economically, the region consistently voted for Yanukovych and the Party of Regions (i.e. pro-Russian political forces) with as much as 90% of the vote. Third, following a war in which more than 9,000 Donbass residents were killed, public opinion in the regions is skeptical of Ukraine at best and hates Ukraine at worst. Finally, the Donbass will have been occupied by mercenaries and Russian forces for more than two years by the time of the election. This occupation and blockade on objective information has radicalized the remaining population against Ukraine. Given these four factors, even if Ukrainian election law is followed religiously, Ukrainian political parties are allowed to compete freely, and the election is truly free, fair and honest, the only results that can be produced are local councils full of pro-Russian zealots (and former mercenaries) which will make the Opposition Bloc look like “constructive moderates” in comparison. When you throw in the added benefit of the OSCE blessing the election by acknowledging that it reflects the will of the voters, the radicalized, pro-Russian councils will be legitimized by an international organization and certified by the Ukrainian authorities. Thus, despite the Br’er Rabbit rhetoric (“please Br’er Fox/OSCE, don’t fling me in dat brier-patch of an election”), Russia wants local elections in the Donbass precisely to formalize their official influence on the region. With the likely passage of the Special Status Law by Parliament, the radical pro-Russian local councils will operate almost autonomously from the government in Kyiv, but taking their cues from the Kremlin. Of course, there is little Ukraine can do in the Minsk negotiations to prevent this, as the West continues to pressure Ukraine to accept the Special Status Law as an uninventive way of deflating the conflict. In effect, Ukraine’s negotiators (which include the capable former President Leonid Kuchma and former Presidential Chief of Staff Roman Besmertniy) can merely perform the equivalent of rearranging the deck furniture on the Titanic. Without a greater outcry (and much more than just that of Deputy Speaker Oksana Syroid and a handful of others), this is a fait accompli. Thus, there is a 60% chance that Russia’s “loose adherence” to the Minsk Agreement will result in local elections in the Donbass in 2016. 6. The EU votes to lift sanctions on Russia for “relative” compliance with Minsk II. Neither the Obama administration nor the Europeans wanted to impose sanctions on Russia. However their shock at the annexation of Crimea, followed by the war in the Donbass, sobered them into imposing sanctions in June 2014. So far, in a rare show of European solidarity, the 28 member countries have kept the sanctions in place and even renewed them for another half year last month. However the sheer bulkiness of maintaining consensus with 28 EU partners doesn’t bode well for the long term maintenance of the sanctions. It is no longer a question of “if” the sanctions get lifted, but rather “when”. To the sanctions credit, they inflicted severe economic damage on the Russian economy. The sanctions combined with the collapse in energy prices resulted in an almost four percent decline in Russia’s Gross Domestic Product (GDP) in 2015 and are expected to lead to another half percent decline in 2016. However, in an intertwined world economy, the weak Russian economy affects the Europeans too. The Germany economy, the engine of the European Union, is expected to continue to putter along at less than two percent growth in 2016 – following a similar year in 2015. The effects on other economies in the EU zone are the same, and when combined with domestic political pressures, are causing some of the nations of “Old Europe” to go “wobbly”. In addition to Germany’s domestic economic and political considerations, there is a growing discomfort over the imposition of sanctions by the Italians, Austrians, Spaniards, Greeks and Hungarians. Italy openly laid the groundwork for the lifting of the sanctions at the EU meeting last month by stating that continuation of the sanctions are not “automatic”. In addition, Hungary’s President Victor Orban has long been critical of the sanctions, and Greece’s leftist government is playing the Orthodox card by cuddling up to Putin. In effect, Europe is looking for a reason to restore economic relations with Russia, and with the conflict in the Donbass decreasing in intensity, they will have just cause. Russia is moving towards “relative” compliance with the Minsk agreement to allow for “business as usual” to return. The appointment last week of former Russian Parliamentary Speaker Borys Gryzlov to the Contact Group is Putin’s olive branch to the Europeans. In addition, given that no one really wanted to impose the sanctions in the first place, Russia will be graded on a curve to ensure that their halfhearted measures pass the bar. Of course, Russia’s actions against ISIS/Daesh in Syria subtlety assist, despite Western assurances of no “quid pro quo”. The fact is, just keeping France and Germany on the same page has been a challenge for the last century, but keeping a consensus among 28 independent countries is like herding cats. Alas, while the sanctions are likely to remain in place for 2016, expect a spirited debate in June regarding continuation of the sanctions until December. This will be the “last hurrah” of European unity resulting in a vote to lift the sanctions in December. Then the actual lifting of the sanctions will actually take place in July 2017. By that time Russia will have successfully driven a wedge into Western solidarity with Ukraine. Thus, the chance of the EU voting to lift sanctions against Russia in 2016 due to their compliance with Minsk II is 55%
7. New parliamentary elections will be called.Last year, only Russia wanted new Parliamentary elections in Ukraine. In 2016 though, practically every oligarch in Ukraine wants new Parliamentary elections. In fact, it is the first thing Kolomoyskyi, Akhmetov, Firtash and Livochkin have agreed upon since before Euromaidan. While the primary motivating factor is increasing their respective number of allies in Parliament, others have personal reasons as well. For example, Kolomoyskyi seeks to win a decisive victory in his war with the President, Livochkin smells an opportunity to emerge as a compromise Prime Minister, and Firtash simply wants to be able to return to Ukraine without worries over an arrest. Regardless of the oligarchs’ motivations, public support for new elections is surprisingly comparable to the opposition to new elections. The recent Democratic Initiatives Foundation (DIF) poll put support for new elections at 37% and opposition at just 43%. In the same poll, Parliament was the second most distrusted institution behind Russian media (only by one percent though). At this rate, murderers and rapists are only slightly less popular than Ukrainian MP’s. The reality is that persuading several percent more of Ukrainians to support new elections could easily be done through a mere television advertising campaign (besides the fact that public opinion has no official say in the matter). Under the Constitution of Ukraine, if 150 MP’s give up their mandates then a new election can take place. The factions of Opposition Bloc (Akhmetov-Livochkin), Renaissance (Kolomoyskyi), People’s Will (Ivakhiv) and the Radical Party (Firtash) combined forces they number 107 votes. They would then need to persuade 43 of 53 independent MP’s to join the cause. Alternatively, by persuading Yuliya Tymoshenko to give her 19 votes, they would only need 24 of 53 independents which is a much easier goal to achieve. Since polls consistently show Tymoshenko’s populist rhetoric resonating during a time of economic recession (the DIF poll puts her at 7.7% versus Solidarity’s first place 9%), she stands to win more seats in Parliament than she currently has – and perhaps have another shot to return as Prime Minister. Suffice to say that with Tymoshenko’s ambition and ego, the oligarchs would not have to ‘hard sell’ her on voting for new elections. What could trigger new elections and the return of 150 parliamentary mandates? There are two primary threats: First, the sacking of Prime Minister Yatsenyuk. Yatsenyuk warned of the consequences of his firing last week. The Premier stated, “If a decision is made on the Cabinet of Minister’s resignation, this implies failure to fulfill the coalition agreement. This means that the one who undertakes political responsibility for the government’s resignation is supposed to form a new coalition and appoint a new Cabinet of Ministers, or otherwise all of us run in early elections. There is no other option…If someone wants the coalition to split, they can make a relevant political statement. And the consequence of the collapse of the coalition or the formation of a new coalition (I’d like to see its lineup), or early parliamentary elections. This is called democracy…There is also a third option –not to engage in cheap politics and implement the coalition agreement”. Clearly Yatsenyuk is leveraging his real or perceived American support to stave off new elections (or at least his firing) as long as possible. Finding a compromise candidate to replace Yatsenyuk could be mathematically complicated if his People’s Front faction with their 80 MP’s doesn’t support the nominee. Without People’s Front, the President would almost certainly have to invite the oligarch factions to join the new coalition and/or Opposition Bloc – and thereby risk losing Samopomich in the process. Thus, the firing of Yatsenyuk could result in new parliamentary elections simply because the formation of a new coalition might not be possible. The second threat to trigger new elections is the potential passage of the Special Status Law for the Donbass. This law will empower Donetsk and Luhansk residents with local autonomy, but in the process create a real or perceived inequality of power with other regions of the country. It will be a difficult sales job to convince the residents of Kyiv and Lviv that they should have fewer rights and privileges (despite their loyalty to the Ukrainian nation) than the residents of two Donbass regions, who have been openly flirting with Russian backed secession. In the end, Ukraine may decide that after years of betrayal and the new financial demands that the marriage with the Donbass might not be worth saving. Passing the constitutional changes on decentralization (which must precede the Special Status Law) is a challenging task as it requires 300 votes, and currently the President has less than the 265 votes he had on August 31st. Passing the Special Status Law requires 226 votes, but will prove far more challenging than the decentralization vote. If successful in finding 226 votes for the Special Status Law, its passage by Parliament is likely to cause the collapse of the coalition, and force a new election. However the vote is not urgent and as a result, will either be done in conjunction with a change in the Prime Minister, and/or near the end of the year when the Minsk Agreement requires final fulfillment. Thus, the chance of new parliamentary elections being called this year is 50-50. 8. Poroshenko will struggle to pass decentralization legislation. The President’s decentralization legislation (mostly authored by Speaker Groisman) passed with 265 votes on August 31st despite unexpectedly violent protests outside Parliament which resulted in the deaths of three persons. Under Ukrainian law, the first vote requires a 226 majority, but the second vote requires 300 votes since it involves a change to the Constitution. Now the President faces a real test to win over 35 additional votes. On the positive side, there were 40 members of his faction and the Prime Minister’s factions who did not vote for the legislation and could potentially be persuaded. However since the local elections in November, support for decentralization among lawmakers (particularly some of those who voted “yes” on the first vote) has waned. Samopomich could provide it’s 26 votes IF the President could assuage their fears that the decentralization is merely a Trojan horse to the federalization of the Donbass. However during the first vote, the six members of Samopomich who voted in favor of the bill were expelled from the faction. In addition, Deputy Speaker Oksana Syroid from Samopomich has been an outspoken critic of decentralization claiming that it would be the end of the country. Thus, Samopomich’s votes don’t appear to be in play. That leaves the President scrambling to shore up 15 votes more from People’s Will and Renaissance factions, which surprisingly provided 25 votes in favor on August 31st. In addition there were five members of Opposition Bloc who did not for the bill last time either. Thus, with ample financial incentive, 20 members of People’s Will, Renaissance and Opposition Bloc could be persuaded to vote in favor of decentralization as well (provided the other members of the faction who voted in favor last time were adequately “reminded” of the need to vote for it again). That would leave the President just 15 votes short of a constitutional majority. Those votes could be provided by Yuliya Tymoshenko’s 19 member faction – but at a heavy price (mostly political, although the financial aspect would not be cheap either). Suffice to say that the math will be difficult for the President and will require his “Enforcer”, Deputy Faction Leader Ihor Kononenko, to pull out all the stops in the quest for 300 votes. To the government’s credit, separating the decentralization vote from the Special Status Law vote was smart as the latter requires only 226 votes. Thus, it is feasible that some MP’s will vote “for” decentralization, and against the Special Status Law – but with both having the possibility to pass. Despite the war, recession and political infighting, the President has yet to fail on any major vote. The vote on decentralization will put his perfect record to the test, and require a massive lobbying effort of key MPs. Failure to pass the legislation by January 31st would be an embarrassing defeat and invite speculation about early Presidential elections. Under Ukrainian law, the bill must be passed in two different sessions of Parliament and if the legislation is not passed by the end of this month, it will be dead and the process will have to begin anew. Given that the current legislation is already two years in the making, and resulted only after a decade long hiatus on reforming local government, a failed vote is likely to be the death knell for such efforts for another decade. The stakes are high and at the moment, the odds are against passage of the legislation. Thus, the President will struggle to pass decentralization and has a 45% chance of doing so. Hope you enjoyed the blog post. Please take two minutes to complete our survey so that in 2016 this blog can continue to serve your interests. Thank you! Click here to take the survey.