Parliament passed a no-confidence motion yesterday to remove the Cabinet over the recent gas agreement between Ukraine and Russia, though President Viktor Yushchenko has dismissed the action as unconstitutional, and the current Cabinet appears set to remain in office until legislative elections scheduled for March.
Global Insight Perspective
The Verchovnaya Rada (parliament) has overwhelmingly passed a no-confidence motion to remove the Cabinet following mounting dissatisfaction with the government's actions over last week's gas agreement with Russia.
The no-confidence motion will have little impact on the day-to-day running of government as the existing Cabinet is likely to continue, albeit in a caretaker capacity, until the March parliamentary elections. However, it has raised serious concerns over the recent constitutional changes, in addition to refocusing attention on the energy fallout from the deal.
The gas deal is still expected to be finalised and implemented, but the no-confidence vote has exposed widening differences between Yulia Tymoshenko's bloc (BYT) and President Yushchenko's Our Ukraine People's Nation (NSNU) which could have a serious impact on the effectiveness of any future coalition government. Moreover, with the opposition Party of the Regions still enjoying a narrow lead over the NSNU there is a distinct possibility that it could form a coalition with the Communist Party and the Socialist bloc, leaving both Our Ukraine and Tymoshenko out of government.
Global Insight downgraded Ukraine's political risk rating from 2.75 to 3.00 during the September 2005 political crisis that culminated in President Yushchenko removing the Cabinet, including former prime minister Tymoshenko. At the current time, despite the constitutional reforms, we do not believe that the political risk rating warrants a further downgrade, although we will monitor the situation and review it in light of the March election results.
Barely a week after signing a five-year gas deal with Russia's gas monopoly Gazprom, following a protracted stand-off that gave the government the opportunity to play the populist card with the electorate and recreate the siege mentality present during last year's Orange Revolution, President Yushchenko and his Our Ukraine People's Nation (NSNU) were brought down to earth with an almighty bump yesterday. Parliament has overwhelming passed a no-confidence motion and moved to dismiss the entire Cabinet.
The gas deal, which essentially raises the price of Russian gas deliveries from US$50 per 1,000 cubic metres (cm) to US$95 per 1,000 cm had been vigorously defended by Prime Minister Yuri Yekhanurov, who claimed that the government had secured a good price in defending Ukraine's national interests (see CIS Regional: 4 January 2006: Ukraine and Russia Agree Complex Price Scheme, Resolving Gas Dispute and CIS Regional: 5 January 2006: Ukraine Upbeat After Gas Agreement, Questions Remain Over Intermediary and Implementation of Deal). Nevertheless, the no-confidence motion was passed with 250 votes, 24 more than the 226 required. While nearly half of the NSNU's deputies abstained from the vote or were not present in the Verchovnaya Rada (parliament), a host of political blocs, opponents and supporters of the government alike massed to express their dissatisfaction with the gas deal. The main opposition Party of the Regions, led by former presidential candidate Viktor Yanukovych, and President Yushchenko's former ally Yulia Tymoshenko's parliamentary bloc (BYT) were the most vocal critics of the deal, but joining this unlikely alliance were the Communist Party, the Socialists and the centrist Popular Bloc, the faction of parliamentary speaker Volodymyr Lytvyn who had hitherto firmly supported the government since the September 2005 political crisis (see Ukraine: 23 September 2005: Cooperation Deal With Opposition Seals Ukrainian Prime Minister's Approval).
Questions of Legality
The move to dismiss the Cabinet immediately re-opened questions on the effectiveness of a series of constitutional reforms that took effect on 1 January. Prior to the 2004 presidential election, when it became clear to the then-ruling elite that Yushchenko and the opposition would win, they forced a series of constitutional reforms through. These serve to weaken the executive's powers, effectively transforming the country from a semi-presidential republic to a parliamentary democracy. Under the reform the president loses the right to appoint the prime minister and the Cabinet, which are now appointed by parliament. The only exceptions to this are the interior, defence and foreign ministers, who are nominated by the president. Nevertheless, the reform is ambiguous and the no-confidence vote has exposed a number of flaws in the amendments that have divided politicians and analysts. The amendments do not actually specify whether the parliament has the right to remove the Cabinet, even though it now has the right to appoint the majority of Cabinet ministers. This technicality has resulted in President Yushchenko declaring the no-confidence vote 'unconstitutional'.
Outlook and Implications
Lingering Doubts over Ukraine's Political Stability
While the vote has exposed the flaws in the constitution and the division of powers, the real motives for Tymoshenko, Yanukovych and Lytvyn to move to dismiss the government is much more calculated. With crucial parliamentary elections scheduled for 26 March this was a clear attempt from all parties to distance themselves publicly from the gas deal which, following the election, could have a knock-on impact on domestic fuel bills. At the same time, accusing the government of compromising national security is an effective way of negating any political advantages Yushchenko and the NSNU gained in the eyes of the electorate for appearing to take a firm line against Russian President Vladimir Putin.
With the Rada scheduled to begin its winter recess next week and reconvening on 7 February, all of those who voted against the government were fully aware that there would be no time to nominate and approve new candidates. Therefore, the current Cabinet will continue until the March elections and the vote should not affect the day-to-day running of the government. There is no question that President Yushchenko and the NSNU have acquired some political capital from the gas crisis and yesterday's piece of political theatre will do little to seriously affect the political benefits achieved by the government. Nevertheless, by concentrating on any potential consumer price hikes the Party of the Regions, the Communists and the Socialists are appealing to their core electorate, while by concentrating on the opacity of the deal and the potential for corruption in the RosUkrEnergo trading vehicle, Tymoshenko is appealing to those who turned out during the Orange Revolution demanding transparency within the government.
The outcome of the election itself remains in the balance and much will depend on various election strategies in the intervening period, but yesterday's actions have just made an already-bitter contest that much more hostile. It certainly raises questions over the potential for the BYT to work with the NSNU in a coalition. In spite of Tymoshenko's removal from the prime ministerial office, she has hitherto been hesitant about personally attacking President Yushchenko and has not allied with the Party of the Regions at all for any attack on the government. This represents the first multiple attack on Yushchenko and could seriously damage relations between the BYT and the NSNU.
At the same time the move has exposed the weaknesses of the constitutional changes on the political system. President Yushchenko himself has said that he will fight to reverse the amendments but this will be difficult as the vast majority of parliament is satisfied with the changes. A referendum is probably the only tool that can change the situation and restore some executive powers, but only after the country has suffered a series of short-lived governments, which looks increasingly likely under the reform, will his proposals be acted upon.
No Immediate Threat for the Ukrainian Economy
Lawmakers and the government alike were quick to assure that energy prices for private households will not be raised immediately after the deal, and might even be held steady in 2006. While this assertion is likely to hold until the elections in March, there is little doubt that industrial customers will eventually have to bear the brunt of the price hike. Profit margins in Ukraine's important metals sector will surely decrease further, having been strained by the end of the steel boom in 2005, and it remains debatable whether the companies would raise the money needed for energy-saving measures in the current political situation. Fixed investment in general, which figured prominently in our rebound scenario for 2006, is unlikely to gather momentum soon. However, the price hike is surely not high enough to impose an immediate threat on the economy as a whole, triggering a collapse or an outright crisis. Global Insight had forecast that projected GDP growth would hit 6.5% in 2006, but this has turned out to be rather too optimistic after the deal, and we have now cut back our expectations to 4.5% as a consequence.
Ukraine's external balances, which suffered after the export slump in 2005, cutting back the current-account surplus from 10.5% of GDP in 2004 to somewhere around 2% of GDP in 2005, will not be affected much as well by the gas deal, although the hryvnia's tendency to appreciate, which was evident in 2005 with foreign exchange reserves piling up, will not be continued in the short term. There is fairly limited depreciation risk against the U.S. dollar likewise, though, as the National Bank of Ukraine's reserves stock should be sufficient to iron out short-term exchange-rate fluctuations. Thus, a prolongation of the current de facto dollar peg at 5.05 hryvnia seems the most reasonable scenario.
The Energy Fallout
Noticeably absent from yesterday's parliamentary debate was Fuel and Energy Minister Ivan Plachkov and Oleksiy Ivchenko, head of Naftogaz, the state oil and gas company that was at the forefront of the bruising negotiations with Gazprom. Yanukovych and Tymoshenko have focused their attacks on the gas deal on these two figures, but while the deal has yet to be sealed with an intergovernmental agreement, the fact that the present Cabinet will continue until March means that the deal should be completed.
When Ukraine and Russia announced the gas deal last week, European policymakers breathed a sight of relief, albeit refocusing their attention on the security of Europe's energy supplies and questioning the wisdom of the continent's growing reliance on Russian gas. For Ukraine, the impact of the compromise agreement was more immediate, ensuring a stable flow of gas during the winter heating season. However, with the gas import price nearly doubled, Ukraine's energy-intensive economy will be forced to become more efficient, lest the higher-priced gas inputs undermine Ukraine's chemical and steel industries.
Higher gas prices will force Ukrainian industry, which is likely to bear the brunt of the price hikes, to adapt new technologies to save energy and rationalise consumption. In addition to providing the impetus for structural and economic reforms, the higher gas prices could prompt a shift in Ukraine's energy policy to emphasise alternative fuel sources; already, policymakers have promoted the idea of increasing Ukraine's use of nuclear power at the expense of imported gas. Implementation of the complicated agreement will be difficult enough, given the increasing role of RosUkrEnergo as an intermediary between Russia and Ukraine, but with prices subject to renegotiation after a period of as little as six months, further battles between Naftogaz Ukrainy and Gazprom - and potential additional price increases and/or supply disruptions - loom for whatever Ukrainian government takes shape after the March parliamentary elections.
Contact: Raul Dary
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