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Ukraine Politics: A Fresh Start with New Faces

Ukraine's new government is starting its life under inauspicious conditions. Stiff macroeconomic, fiscal, monetary, and military headwinds are prevailing, while the Ukrainian public and international lenders continue to demand swift and sweeping reforms. March 12, 2015 will mark the 100-day period traditionally granted to new governments to deliver results, but that milestone seems a lifetime away in today's Ukraine. The pending reforms promised in the governing coalition's agreement are already due to start this month and to continue in 1Q15; both international financial support and the longevity of the government based on domestic support depend on the implementation of those reforms.

The government was proposed to parliament last Tuesday and a strong majority of 288 of 423 sitting MPs voted in favour. Fourteen MPs from the governing coalition voted against or abstained from the vote, citing two main stumbling points: the establishment of the Ministry of Information (media censorship concerns) and the government being presented for the parliamentary vote as a package deal instead of individual ministerial candidates. We actually take that as a positive sign of MPs (mainly young reformers) willing to buck the party line and vote against less-than-ideal initiatives (individual candidates in this case).

Meanwhile, the two presidential appointments to government – Foreign Affairs and Defense – received support from 351 and 347 MPs, respectively. Both are holdovers from the previous government – Foreign Minister Klimkin was appointed in June and Defense Minister Poltorak in October.

Of the 20 government posts, roughly half can be considered independent technocrats and half political appointments. On the upside, the non-political ministerial appointments include a number of key ministries like Finance and Economic Development and Trade, which will bring benefits on the international stage and help Ukraine continue to secure much-needed international financing. Three of the newly appointed ministers are foreigners – one of them is of Ukrainian heritage – that were granted Ukrainian citizenship through an accelerated process just hours before the parliamentary vote. On the next page we take a look at some key government ministers.

The government is now in a position to restart a full-fledged dialogue with the IMF and other IFIs after the process slowed during the lengthy post-election political bargaining process. Drafting a realistic 2015 budget with a reasonable deficit of 3-4% of GDP will be a key test of political will to move on with reform commitments. Another near-term challenge is the acute shortage of energy coal for power stations, a problem that is already causing short rolling blackouts in some regions. The government will have to make a politically sensitive decision to buy coal either from Russia or from the war zone – no other plausible alternative is available in the coming months.

The government has already taken steps to demonstrate its commitment to progress by announcing privatization auctions for minority stakes in chemical producer Odesa Portside Plant (a 5% stake) and electricity generating companies Centrenergo (10%), Dniproenergo (25%), and Donbasenergo (25%). The small sales are an attempt to raise money to partly cover the budget gap, however in the cases of Centrenergo (CEEN) and Odesa Portside Plant the Government is likely testing the waters ahead of full privatizations planned for next year. Several international players have reportedly already begun the due diligence process.

Minister of Economic Development and Trade – Aivaras Abramovicius

A former partner at Swedish private equity firm East Capital, Abramovicius is an expert in emerging and frontier markets, notably Ukraine and Russia. The appointment of an EU citizen to the ministry responsible for cooperation with the EU is noteworthy.

Minister of Finance – Natalie Jaresko

A 20-year resident of Ukraine, the US citizen (now also a naturalized Ukrainian citizen) is a former US State Department economist at the embassy in Kyiv and most recently CEO of Horizon Capital, a private equity firm in Ukraine. Jaresko has experience in government dealings in Ukraine, having worked in various government advisory roles over the years, and her appointment to a vital ministry is a positive signal to international creditors.

Minister of Energy and Coal – Volodymyr Demchyshyn

A former investment banker, Demchyshyn holds an MBA from the University of Kansas. He most recently worked as the head of Ukraine's national energy and utilities regulator.

Minister of Internal Affairs – Arsen Avakov

A controversial figure, he is seen as responsible for the government's inability to prosecute those involved in the Maidan killings, which continues to be a key undercurrent of discontent in society. Avakov is by no means a real reformer, but he is a staunch ally of PM Yatseniuk and there was little real discussion over his return to the post. Pending appointment and approval, Avakov will have to work with a reform-minded deputy minister in Eka Zguladze, who designed and oversaw the implementation of the reform of the police force in Georgia, which was a vital move that allowed Georgia to improve adherence to the rule of law and break with its corrupt post-Soviet past.

Minister of Agriculture and Food – Oleksiy Pavlenko

The new minister of agriculture holds an MBA from Nyenrode Business School in the Netherlands. From 2003 to 2006 he was CEO at Ukrainian crop grower Rise, which was later acquired by Oleh Bakhmatyuk's UkrLandFarming. Previously worked in management consulting at ABN Amro, KPMG, and Deloitte.

Minister of Defense – Stepan Poltorak

A 49 year-old career military officer, Poltorak was first appointed to head the Defense Ministry in October 2014, with 245 MPs voting in favour, and was reappointed now with 347 MPs in favour.

Minister of Foreign Affairs – Pavlo Klimkin

The 47 year-old career diplomat was first appointed as Ukraine's foreign minister in June, and reappointed this week with 351 MPs voting in favour. Klimkin previously served as Ambassador to Germany, has held other top positions in embassies across Europe, and has served as deputy foreign minister and as the director of the Department of the European Union at Ukraine's Foreign Ministry.