Ukraine: Break down or break-through?

The recent political turmoil in Ukraine is as fascinating as it is discouraging. It is incredibly puzzling and painstakingly clear at the same time. It has new features, while being depressingly familiar. It has little to do with Russia, yet Moscow remains as important as ever.

The surprising and demonstrative resignation of Aivaras Abromavicius, our former colleague and outgoing Minister of Economy in Ukraine, kicked off a new round of political turmoil in Kyiv. Abromavicius claimed that he and his team could no longer do their jobs because of high level corruption and abuse of office. His resignation set off a series of seemingly complicated events, resignations and declarations, leading up to a vote of no confidence in parliament in late February, which proved to be the ultimate twist, as the government unexpectedly survived. But one thing remains constant amid all the drama, complications, conspiracy theories and political infighting, and that is that Ukrainian politics remain tremendously oligarchic, ultimately driven by deep-vested interests.

This does not mean that there are no reformers in power or that the Ukrainian people do not have a genuine desire to live in a rule-based democracy. The problem is that the reformers are too few and isolated, while the will of the people is constantly ignored. It is – with a few notable exceptions – the same old elite that runs Ukraine, and many of them continue to be driven by personal interests rather than the public good. It is now popular to make references to the infighting that took place among pro-Western politicians after the Orange Revolution, as there are some notable similarities. Surprisingly little has changed at the top, especially as several of the technocratic reformers have now left the administration. President Petro Poroshenko is not only a billionaire but also previously served as a minister while both Viktor Yushchenko and Viktor Yanukovych were presidents. Prime Minister Arseniy Yatsenyuk is only 41 years old but has a long history and was a minister already back in 2005. And yes, Yulia Tymoshenko is still around and oligarchs like Rinat Akhmetov, Igor Kolomoyskiy and Viktor Medvechuk remain politically influential.

There is a complicated web of relations between various politicians, parties, fractions and oligarchs, but rather than dwelling upon these relations, a more pressing question is what will happen next. Abromavicius pointedly argued that this turmoil may lead to a break down or break-through for Ukraine. Although we all hope for a break-through, possibly with a technocratic administration that not only pushes through reforms but also starts to prosecute criminals, such as those openly accused by Abromavicius for corruption. The political landscape is completely open but it is interesting to note that reformers like Abromavicius, Finance Minister Natalie Jaresko and former Georgian Prime Minister Mikhail Saakashvili are not only mentioned as potential prime ministers but seem to be popular with ordinary voters. This is remarkable, as voters have mostly seen the negative consequences of reforms so far, due to necessary austerity and gas price hikes.

It is, however, easier to envision a break down, given the domestic political chaos combined with economic weakness and geopolitical uncertainty. But there is a real possibility that Ukraine will avoid the extreme scenarios and continue to muddle through. The IMF is unlikely to cut off the financial lifeline completely (even though it may continue to delay disbursements), and the EU and US are unlikely to push for new elections, as that might lead to more domestic turmoil and potentially an even less reformist government. Muddling through may sound like a better option than a break-up, but corruption and insider interests tend to thrive in halfway reform environments, while outsiders are discouraged from entry. In the meantime, the risk premium keeps soaring, with the currency depreciating steadily.

The fact that Moscow, which was historically the lender of last resort, is in conflict with the current regime in Kyiv, also complicates the situation. Russia is unlikely to lend any political or monetary support to Ukraine in a muddle through scenario. It should thus be clear that Ukraine needs a real break-through, but it is depressingly difficult to see how that should come about. This is very saddening, as Ukraine has so much potential. It is a huge country with fertile black soil and fantastic farmland. It has abundant natural resources, large industries, a sizeable domestic market, well educated people and a strategic geographical location. The problem is that no one has been able to release that potential during the past twenty years.

Marcus Svedberg (pictured), chief economist  and Jacob Grapengiesser, senior advisor and partner at East Capital

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