An Orange divorce?

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Sep 4th 2008
From the Economist Intelligence Unit ViewsWire

Ukraine’s pro-Western coalition is unravelling


Ukraine’s government, comprising the allies from the Orange Revolution, is poised to collapse after the prime minister, Yuliya Tymoshenko, allied with the opposition to strip the presidency of its powers. It is not clear whether Ms Tymoshenko has done this to pressure the president to back her policies, to boost her power as an alternative to seeking the presidency herself, or to trigger her departure from government ahead of tough economic times—and with an eye on the 2010 presidential election. The coalition could yet be saved, or a new one established; failing that, a parliamentary election must be held. With political tensions high in the wake of Russia’s attack on Georgia, the timing could hardly be worse.

Falling out
On September 2nd the pro-presidential Our Ukraine-People's Self-Defence (OU-PSD) voted to leave its coalition with the Yuliya Tymoshenko Bloc (YTB), bringing the "Orange" government, which was only formed in late 2007 following an early parliamentary election, to the verge of collapse.

Amid an increasingly acrimonious conflict between the president, Viktor Yushchenko, and the prime minister, Yuliya Tymoshenko, the break-up of the coalition government has long been on the cards, especially after the loss of its slim two-seat majority in June. The Economist Intelligence Unit's assumption for several months has been that the coalition would formally dissolve after parliament reconvened from its summer break, most likely leading to another pre-term election. The political struggle between the two former allies has intensified of late, as a result of allegations from the presidential administration that Ms Tymoshenko has committed treason by not condemning Russia's military intervention in Georgia. Then, on September 1st, the YTB formed an ad hoc alliance with the main opposition party, the Party of Regions (PoR), to push through parliament a number of measures that weaken the president. These include measures that limit the president's influence over the government and facilitate the process of impeachment. Mr Yushchenko has denounced the move as amounting to a “constitutional coup d'etat”.

Although the coalition's latest troubles are not unexpected, the trigger for them—the YTB's temporary alliance with the PoR on weakening the presidency—was. Ms Tymoshenko's attempt to weaken the presidency puts into question the widespread assumption that she is preparing to contest the presidential election due in early 2010. If the post of prime minister becomes the pre-eminent one in Ukrainian politics, Ms Tymoshenko would presumably want to keep her current job rather than seek the presidency.

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Murky motives
Ms Tymoshenko’s move can be interpreted in one of three ways. First, she is indeed seeking to make the prime minister Ukraine’s most powerful political figure in order to advance her political ambitions. This, however, would surely bring to an end the Orange coalition, and she has no guarantees that she would be able to continue as prime minister either by forming a coalition with the PoR or as a result of fresh elections.

Second, Ms Tymoshenko has supported the legislation as a tactic in her power struggle with Mr Yushchenko, presumably on the calculation that this will force the president to back government policies he has until now opposed, for instance on the acceleration of privatisation—that initiative is crucial if Ms Tymoshenko is to pay for some of her populist spending programmes. Once a deal is done on policy co-operation, the YTB would not seek to override a presidential veto of the legislation to weaken the presidency.

Third, the prime minister has provoked a crisis in order to move into opposition, to help her prepare for the 2010 presidential election. Ukraine’s economy is slowing dramatically, inflation remains very high at 26.9% year on year in July, and it is probable that gas import prices will double from the start of 2009; if so, this would amount to an eight-fold increase since 2005. Potentially this could cripple swathes of Ukrainian industry, as well as triggering fresh inflationary pressures. Facing this prospect, arguably it is advantageous for Ms Tymoshenko to leave the government before the end of the year, or perhaps before the 2009 gas price is set.

Awful timing
Ukraine's latest political turmoil comes at a crucial time for the country. In the wake of the Georgia-Russia conflict, Ukraine’s perception of insecurity is at the highest level in at least a decade. Relations with Russia are fraught and there are fears that Ukraine’s territorial integrity might come into question. Continued political uncertainty in Ukraine will make it more difficult for the US and its allies to support Ukraine through closer NATO ties; already this was looking very difficult, given the reservations of Germany and other European states about the risk of closer NATO-Ukraine ties provoking Russia. Efforts to boost stability in Ukraine via EU engagement could also be stymied.

On the economic front, investor sentiment has worsened on fears that Russia might seek to stoke separatist sentiment in the Crimea. Very high inflation and a widening current-account deficit already present key risks to macroeconomic stability. These will increase substantially if Ukraine is unable to negotiate a staged transition towards the gas price paid by EU customers, and must instead pay the full rate from the start of 2009. Its chances of success, already fairly slim, will probably narrow further if Ukraine is without a government, or rather is being run by a caretaker administration, when negotiations are held.

Ways out
There are several possible outcomes to the current turmoil. First, the coalition could regroup. The OU-PSD has 10 days in which to reverse its decision to leave the coalition, leaving scope for intensive behind-the-scenes negotiations. Publicly, the YTB has said that it sees no alternative to the current coalition. Any such agreement on continuing with the coalition would be likely to require concessions from both sides: the presidential administration has demanded that the coalition adopt a unified position on the Georgia crisis, and that the YTB not side once again with the PoR to override Mr Yushchenko's anticipated veto of the legislation to weaken the presidency. The YTB for its part is demanding backing for its key policies and has accused the presidential administration of systematically sabotaging the government's activities.

Alternatively, if the Orange parties do not manage to save their coalition, Ukraine's political parties will have 30 days in which to form an alternative coalition. Until recently, the only viable alternative coalition had appeared to be one between the OU-PSD and the PoR—an outcome that is believed to be favoured both by the presidential administration and the liberal wing of the PoR led by Rinat Akhmetov, Ukraine's richest businessman. However, the recent co-operation between the YTB and the PoR has raised the possibility of a more formal alliance between these two parties. On balance, the Economist Intelligence Unit continues to believe that a formal alliance between the YTB and the PoR is unlikely, even though their positions on Russia appear to be moving closer. In particular, it would be a risky venture for Ms Tymoshenko politically, given that she has based much of her appeal on her strident opposition to the PoR and its links with big business. A coalition between OU-PSD and the PoR, meanwhile, still looks doubtful: Mr Yushchenko could lose at least half of his party if he did a deal with the PoR leader, Viktor Yanukovych.

The final possibility is another early election, which Mr Yushchenko will have the right to call should an alternative coalition not emerge within 30 days of the official break-up of the existing coalition. Given the economic and political challenges now facing Ukraine, the distraction of an election would be the worst outcome. And the election itself could take an unexpected turn, given the highly sensitive state of relations with Russia.