Ukraine Politics: Coalition Games

Ukraine avoids elections for now, but the coalition's fate hangs in the balance

The Yatseniuk government has survived a non-confidence vote, but opponents are crying foul and claiming political collusion to the benefit of the oligarchic old system. The already-disillusioned Ukrainian public may see this as a rallying point against a potential deterioration back to the old ways, and it will be worth monitoring the temperature of the street in the coming weeks. Amid weak public support, the two largest parliamentary parties are entirely uninterested in early elections, and we believe the coalition will be reshaped in a way that leaves room for further Poroshenko-Yatseniuk cooperation. On the positive side, the avoidance of early elections and – for now – the living coalition place the IMF EFF Program on track for a 2nd review and disbursement of funds.

Government survives non-confidence vote…

Tuesday's failed vote of non-confidence in the government smacks of political collusion, which will not sit well with Ukrainians. Just minutes after securing 247 votes for a resolution calling the government's work unsatisfactory – itself a vote of non-confidence – parliament was unable to muster even 200 of a needed 226 votes to bring down the government. The votes that evaporated were from within the faction of the president, who had hours earlier publically called for PM Yatseniuk and his government to step down.

…amid allegations of political collusion to preserve an oligarchic system

Prominent reform-minded MPs (including from within the president's party) and pundits alike have pieced together a picture of political collusion masterminded by the prime minister, president, and oligarchs. The entire ploy, according to those opponents, was designed to keep the current players in power and ensure the continuation of the system that feeds oligarchic business interests. Others have claimed that Tuesday's games were the result of intervention by Ukraine's Western political and financial partners, who are strongly opposed to the instability that would arise from government collapse, coalition infighting, and/or early parliamentary elections.

Finance Minister Natalie Jaresko's next moves will be a key indicator of where the Ukrainian ship is heading. She has remained publically neutral since the Abromavicius resignation, but she is unlikely to remain on board with a government if it were to no longer be dedicated to pursuing reforms.

Coalition to be reshaped following exit of two factions last week

Fatherland and Self-Reliance, two parliamentary factions comprising 19 and 26 MPs, respectively, left the ruling collation on Thursday. The two remaining coalition factions have 217 MPs left. The required minimum number of MPs in the coalition (simple majority of 226) can be restored / maintained either via the return of the Radical Party with 21 MPs or via consolidation with independent MPs, which is also an option under the Constitution.

Cooperation with the Radical Party would result in an extremely weak and unstable coalition hugely reliant on Poroshenko's/Yatseniuk's readiness to yield to broadly populist and extravagant requests from its coalition partner. That would also entail a need to share seats in the Cabinet with the new partners with little or no political dividends in return. It would also in no way strengthen the government's still-low reform spirit – a key feature disliked by western partners. We therefore believe Poroshenko/Yatseniuk will seek a solution with the participation of individuals MPs – technically more complicated but still a feasible option.

Weak ratings leave key parties positioned against early elections

The president, who has the right but not the obligation to call early parliamentary elections after the breakup of a coalition, will definitely seek a compromise to avoid what would be the country's 4th major vote in just over two years. Owing to extremely weak public support ratings, the Poroshenko Bloc and Yatseniuk's People's Front (at just 1% support from 22% popular vote during the last election) are not at all interested in elections at this time. On the contrary, Tymoshenko (Fatherland) and Self-Reliance enjoy relatively stable, albeit not too high, approval ratings.

Prosecutor-General's resignation is no more than a red herring

The resignation of Prosecutor-General Viktor Shokin is significant, but likely also a red herring. Calls for Shokin's dismissal – both among the general public and in political circles – had gathered momentum in recent months and intensified last week after a reformer deputy prosecutor quit and accused the prosecutor's office of widespread corruption. The resignation – if approved by parliament – will help relieve pressure on the streets, but it should not be seen as a material improvement in the rule of law. The judicial branch remains an indispensable lever by which business interests manipulate the governing elite to fit its needs and we don't see meaningful change coming without a serious fight from established business interests.

Without meaningful reform in the prosecutor general's office the Shokin dismissal is yet another case of kicking the can on down the road. If history is any indicator, Shokin's successor will make a loud statement or two before returning to business as usual. In light of western partners' keen desire for real action on rule of law, Poroshenko may choose an appointee that would spend some initial period delivering results in a bid to release some pressure. Overall, however, we remain pessimistic about the likelihood of real progress in the prosecutor's office – we would view the appointment of a true non-establishment candidate or a recognized reformer as a positive step; otherwise, it's the same old story. With all that said, it may be some time before Shokin's resignation goes through. Upon resigning, Shokin took sick leave, which, by antiquated Ukrainian laws, bars parliament from approving his dismissal.

Public discontent likely to rise after perceived political collusion

One thing is certain: the shenanigans in parliament will not sit well with Ukrainians, whose already-deep mistrust of the ruling elite and governing institutions will only deteriorate further. It will be worth keeping a closer eye on the temperature on the street in the coming weeks as the fallout filters down. The outcome may now depend on how engaged the people are – will the bare-faced political collusion spur a wave of public anger or will apathy reign?

IMF ready to move forward with review, disbursement

The one positive consequence of Ukraine avoiding early elections and – for now – a coalition collapse, is that the IMF EFF Program will likely remain on-track for its 2nd review and funds disbursement. In a February 11 press briefing, an IMF representative noted that the 2nd review depends on "more clarity about the status of the government and the coalition." Provided the coalition secures its junior coalition parties and sticks together, we believe the next stage of IMF cooperation is fully on track. Any volatility, however, and the IMF could delay the next disbursement in order to keep pressure on Ukraine's reform agenda.

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