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Ukraine: Trends of the week

Issue N. 5/15

March 27 – April 3, 2015

Political top trend:

The Reshaping of Political Space in Ukraine Has Begun

The final determination of the local elections’ date scheduled for October 2015, will lead to the beginning of the process of restructuring and renewal of political forces and to deeper conflict of interests inside existing parliamentary “conditionally pro-presidential” majority.

Analysis: On April 2nd President Poroshenko announced about no changes in the date of local elections. They will take place on 25th of October, after which it is planned to expand the powers to local communities. Considering such statement of the President elections will be held under the old rules and within the old communities. The powers of local authorities will be changed after the elections. It seems that this statement of Poroshenko is not a surprise to former and current members of the Party of Regions that formed under the auspices of “opposition bloc” the shadow government in advance. In Parliament there had been created a new parliamentary group “Renaissance” (based on the disbanded group “Economic Development”), with ambitions to create a new political project. Group “Renaissance” in the local elections will play on the same electoral field with the “opposition bloc”.

Since the beginning of last month sociological services began to publish popularity ratings of political forces. The leadership of two political forces is being actively imposed to public opinion. Average indicators show that overcome the 5% threshold for parliamentary elections will have the ability only the “Block of Poroshenko” (about 14%) and “Samopomich” (about 10%). Activities of prime-minister Yatsenyuk led to a drop in the rating of “People Front” to less than 5%. The activity of the opposition bloc led to questionable 6% popularity. At the turn of the barrier were “Radical Party,” “Batkivshchyna” and “Right Sector”. The low rating of “Svoboda” (below 2%) is due to expanded media anti-corruption campaign against former ministers of this political force – Andrew Mohnyk and Igor Shvayka. After a public conflict between Poroshenko and Kolomoysky local elections for the former governor of the Dnipropetrovsk region is the best opportunity to start his own party project. From previous experience of Kolomoysky the geography of his interests will spread to all regions of Ukraine.

Forecast: Sociological services will continue to manipulate and speculate with popularity ratings of political forces. “Block of Petro Poroshenko” and “Samopomich” will keep their leadership. Ratings of “Batkivshchyna” and “Right Sector” will be reduced with purpose. The reverse situation will be observed with ratings of “Radical Party” and “Opposition bloc.”

Conclusions: The new Parliament has not managed to change the electoral law. The vote by proportional representation and open lists again remained unfulfilled promises. Young parliamentary reformers could not resist to majority lobby. Saving of mixed electoral system gives a chance to hit back at “big politics” people from the Party of Regions. On the eve of the local elections remains open the issue of administrative and territorial reform. The Parliament almost has run out of time for accepting appropriate amendments to the Constitution. And considering the recent statements of the President of Ukraine and its coalition acquiescence, no such changes are going to be done. Announced by high Ukrainian authorities the decentralization appeared limited to the foggy definition of “special status to certain regions of Donetsk and Lugansk regions”.

Economic top trend:

The government of Ukraine is not yet ready to ensure the protection of foreign investments

Last week there was a significant activity of European and global leaders and financiers around the investment attractiveness of Ukraine. Despite the war with Russia Ukraine remains attractive for foreign investments in alternative energy, energy saving technologies, agriculture, infrastructure projects and IT-sphere. The main obstacle of foreign companies coming in Ukraine is the inability of the country to protect investments, based on the flawed legislation and the lack of judicial reform.

Analysis: Over the last month the President of Ukraine has repeatedly stressed that the main obstacle to investment in the economy is a war with Russia. On April 2nd Poroshenko again focused on this. The main message – Ukraine’s leadership on legislative level started the process of deregulation. But it is unclear to whom this message is directed. In the context of financial assistance to Ukraine significant for the EU is recent interview of an American financier and philanthropist George Soros, that he gave to the Austrian newspaper Der Standard. In particular, he noted that Ukraine today “protects the EU from Russian aggression.” For this reason, the EU shall not be limited only with imposed sanctions against Russia, but also shall provide financial assistance to Ukraine. Ukraine’s leadership should listen to this advice and change rhetoric communication with the EU. German Chancellor Angela Merkel declared interest about German companies investing in Ukraine. However, so far there are no statements or actions from German companies. Minister of Economic Development and Trade of Ukraine Ayvaras Abromavichus said that France has promised the insurance for investors in Ukraine under its own warranty. A few months ago a similar initiative came from the side of Lithuania.

Forecast: It is likely that proposal for EU expressed by Soros about assistance to Ukraine through financing at EU rates will not find broad support in the European business community. The main obstacle will be the resistance of the Russian lobbyists in donor countries of the EU. There is a high probability of Soros own investment plans in Ukraine. Only inefficient Ukrainian government activities can prevent Soros’ willingness to invest about $ 1 billion in agricultural development and infrastructure projects.

Conclusions: The current leadership of Ukraine is repeating mistakes of its predecessors. The authorities once again are ignoring the level of civil society in Ukraine. President, Government and Parliament are focused on holding paper reforms. The society has become tired of explaining all authorities’ problems by the “factor of war.” Demonstrative arrests at the government’s meeting suggest amateurish approach and scope of the fight against corruption. The success of this “special operation” showed that without the judicial reform, the fight against corruption is a fiction. Practice has proved that the judges in Ukraine are the caste of untouchables. The activities of its members are the biggest obstacle to the existence of any business in Ukraine. Foreign investors in Ukraine require protection of their own investments. Today Ukrainian legislation and the judicial system cannot provide it. For private investors in Ukraine there is no clear rules on the market. In the present context Ukraine can count only for investments from international financial institutions and funds. Management of leading European countries and the business community are sufficiently aware of the risks of investing in a country with which Russia is fighting. Ukraine should not ask, but demand from EU financial assistance. Otherwise – tomorrow may be too late. Putin clearly described the geography of possible territorial claims, which are in close proximity to the borders of the EU member states.

Energy top trend:

Russia agreed on temporary agreement with Ukraine with a reduction in the price of gas supply

Temporary three months period of Russian gas supply at 248 dollars per thousand cubic meters. is not a victory for any of the sides but is the coincidence business interests: Russia – not completely lose Ukrainian market; Ukraine – depoliticize gas topic and get a lower price. Gas relations between Ukraine and Russia are becoming less dependent from the political context, which is the result of direct efforts by the EU.

Analysis: Signing on April 1st three months lasting contract for the supply of Russian gas at 248 dollars per thousand cubic meters. m. price between “Naftogaz of Ukraine” and “Gazprom” was mutually beneficial step for both sides, and the EU, who will try to help in the negotiations about the medium-term (up to the Stockholm arbitration, expected in 2016) a contract for the supply of Russian gas to Ukraine at market conditions and depoliticized demands. At this time, Russia is selling at least some of its gas volumes to Ukraine as Kyiv was really ready to give up the import of Russian gas from April 1, 2015 by going to completely reverse gas supplies from EU countries. In addition, its positive decision on new agreement Russia gave after the special request of assistance from the European Commission. In such way, the Russian government and “Gazprom” demonstrated their will to negotiate and openness to new agreements with hope on softening EU’s sanction policy towards Russia.

Forecast: During the second quarter Ukraine will accurately pay for Russian gas supplies. Considering the current problems with financial resources and the completion of the heating season, the volume of imported Russian gas in the second quarter will not be significant. Ukrainian government is waiting for the third quarter and further price cuts in it (in the regional and global contexts), to enter into a long-term gas agreements with Russia with the lowest gas prices. Only after that the government of Ukraine will start actively pumping gas into underground storage facilities. New gas agreement with Russia will not greatly affect the amount of imported reverse gas to Ukraine from the EU.

Conclusions: Russia finally realized that is losing Ukrainian gas market, which is still 3-4 years ago was its biggest in the world. As a result, “Gazprom” began to show steps aimed at least on partial saving of Ukrainian market. This gives grounds for the creation, negotiation and signing of mutually temporary gas contract between “Naftogaz” and “Gazprom” for the period of 2015-2016 years until the decision on gas relations between parties in the Stockholm arbitration. EU is likely to become guarantor of the agreements between the parties to consolidate the gas compromise between Ukraine and Russia. Disruption of gas dialogue between Russia and Ukraine can happen in case of activation of Russian military activity in eastern Ukraine.

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