Our Ukraine (OU), the bloc supporting President Viktor Yushchenko, has decided to move to the opposition benches and formally oppose the governing coalition. Prime Minister Viktor Yanukovych controls the largest Party of Regions (PoR) parliamentary group, but will be reliant on the smaller and more volatile Socialists and Communists for support. Few will be surprised at the crumbling of the alliance, dubbed the "anti-crisis coalition", which was at best a patch-up job.

OU controls the parliament's third-largest group and has three ministers in the cabinet as well as the Justice, Health, Family and Culture portfolios, although it is not a formal part of the cabinet. The announcement was made following a meeting with Yanukovych and leaders of the Socialist and Communist parties, Oleksandr Moroz and Petro Symonenko, which rather than paving the way for OU to join the coalition, effectively ended adherence to the national unity pact that was agreed in August (see Ukraine: 7 August 2006: Ukrainian PM Endorsed as New "National Unity" Cabinet Approved). It was hoped that the pact would find a way to end the hamstrung parliament that had failed for four months following March elections to agree on a new government, offering the compromise of pro-Western policies being implemented whilst pro-Russian Yanukovych was installed as premier. However, the chances were always slender considering the opposition of the bedrock of OU supporters who see Yanukovych as emblematic of what was struggled against during the Orange Revolution, and the chasm between the parties' aims.

In the weeks subsequent to the agreement, the pro-Western policy of Yanukovych has perhaps predictably failed to appear, and he has pulled back from promises to pursue quick NATO and World Trade Organization (WTO) membership, as well as encroaching on Yushchenko's remit in foreign policy, offering up hawkish words to the European Union (EU). Last month Yanukovych indicated that the pursuit of NATO membership would be slowed to avoid aggravating tensions with Russia, including remaining outside the Membership Action Plan, a pre-accession programme (see Ukraine: 18 September 2006: Pro-Presidential Party Condemns Ukrainian PM Over NATO Stance). Yushchenko gave Yanukovych a "political warning" over his stance, which was partly designed to warn him off the foreign policy territory and partly to appeal to OU supporters who had been turned off by the party's decision to collaborate with PoR; NATO membership for 2008 would have been unlikely to be approved at the upcoming summit in Latvian capital Riga.

Some believe that Yanukovych's stance is intertwined with negotiations on energy prices, with Russia a major supplier and with talks having stalled on price increases. Energy Minister Yuriy Boiko indicated yesterday (4 October) that natural gas will be imported not from Russia but from central Asia in 2007; from Uzbekistan, Kazakhstan and Turkmenistan. The government has also reportedly negotiated a decrease in energy prices at major energy firms to reflect recent drops in global prices. However, the Turkmen gas was bought up in bulk by Russia earlier this year, and Russia will continue to use Ukraine as a supply route to European markets. Major supplier Gazprom indicated that gas prices would not be increased until 2007, but opposition leaders including Yulia Tymoshenko are claiming the government is misleading the public on the issue. Tymoshenko claims evidence that the price rises have already been implemented, with the shortfall for the remainder of 2006 being covered in 2007.

In addition, one concern arising from the loss of OU ministers will be that the Yanukovych regime will descend into the kind of corruption seen during his first 2000-2004 administration. As a former head of the state oil and gas company Naftogaz Ukrainy, Boiko was intimately involved in the opaque practices of a series of gas intermediaries responsible for bringing natural gas from Russia to Ukraine, and a controversial appointment to the ministry. OU had insisted on some checks and balances in the government through an oversight committee chaired by members from an alternative party, and what happens on these committees now is unclear. OU controlled none of the economic ministries, just the "heavyweight" foreign, interior and defence portfolios.

Outlook and Implications

At the time of the approval vote, fewer than half the 81 OU deputies voted in favour of the government, and the move to opposition could help to unify the party, which has been in danger of a damaging split in recent weeks. It is not necessarily a good move for stability though, which was the main benefit of the unity coalition's approval, and the basis of an upgrade in the Political Risk Rating to 3.25. It remains to be seen whether the other parties central to the Orange Revolution can overcome the infighting that has divided them and diluted their power.

Both President Yushchenko and his party on the one side and the rest of the so-called "anti-crisis" coalition have been antagonised over the draft budget for 2007, which is scheduled for the first reading in the Rada on 20 October, and which is likely to undergo significant amendments during the parliamentary procedure. If OU opts out of the coalition altogether as it has signalled, the budget will very likely be amended more to the benefit of PoR and the party's powerful industrial magnates. Yushchenko, who has already slammed the budget draft for its lack of transparency, the channelling of funds to the regions, and the privatisation schedule which he regards as highly unrealistic, will likely carry out his threat and the veto the bill in this case. Inevitably, this will lengthen the budgetary procedure, leaving the business environment in a state of uncertainty. Indeed, crucial measures are pencilled in for 2007, including the abolition of simplified VAT taxation, which could adversely affect small and medium business in particular. The rate hike of the personal income tax from 13% to 15%, planned for January, is largely undisputed, though, and will come into force regardless of the outcome of the budgetary struggle. Since it was questionable whether the Communist Party would remain in the coalition when the agreement was signed, the security of the government is fragile; the situation increases the influence the smaller parties can demand.

The power wielded by Yushchenko has increasingly ebbed away, opening the way for OU leader Roman Bessmertniy to assert himself. Yushchenko's lack of ability to stamp authority on the government could partly be excused by him not wanting to repeat the mistake of an authoritarian presidency, but it has become more apparent that he is a man with good intentions but no basis to follow them through, and exposes the strength of clan control that remains over politics; OU was partly pushed into the government through supportive business interests among its supporters, but OU holds little sway in the PoR area of influence, the Donetsk clan. The recent clashes between Yanukovych and Yushchenko over regional governors (see Ukraine: 29 September 2006: Ukrainian President Calls for Coordination with Government over Dismissals of Regional Governors) indicated the latter was less well armed for the battle, with OU left to accuse the PoR of usurping power as it watched OU governors removed from their posts.

The situation indicates that a new level of political confrontation is likely to emerge, with the opposition intentionally or unintentionally now able to destabilise the government if it can be more cohesive, and if Yanukovych encounters trouble with his smaller partners. Global Insight maintains the political risk rating at 3.25 for the present, however, the coming days may indicate whether a more protracted crisis might emerge.

Raul Dary

24 Hartwell Ave.
Lexington, MA 02421, USA
Tel: 781.301.9314
Cel: 857.222.0556
Fax: 781.301.9416
raul.dary@globalinsight.com

http://www.globalinsight.com/ and http://www.wmrc.com/