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Newly-elected speaker of parliament Oleksander Turchinov speaks with opposition leader Arseny Yatsenyuk during a parliament session in Kiev (Reuters/Alex Kuzmin)

Yanukovich ouster will not restore stability in Kiev

The Oxford Analytica Daily Brief ® - Monday, February 24 2014

Parliament yesterday appointed Olexander Turchinov as interim president and scheduled early presidential election for May 25. Over the past three days, members of Ukraine's former opposition parties and street protesters (dominated by the Right Sector movement) have occupied Kiev's administrative buildings and prompted parliament to pass a series of initiatives that reduced executive powers, replaced a number of government officials with opposition-friendly figures and ousted President Viktor Yanukovich. Although the move has put an end to violence for the time being, instability in Kiev is far from over.

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Impact

  • Ukraine's decisive turn towards the EU makes additional aid from Russia highly unlikely in the near term.
  • Kiev's efforts to distance itself from Moscow, such as ending Moscow's lease on the Black Sea fleet, may fuel tensions in the south-east.
  • Parliament will be keen to solidify links with the EU through an association agreement.

What next

The economy will enter a period of either a sharp collapse -- should Kiev not receive external aid -- or a more gradual decline in the case of assistance from the West. Infighting between members of anti-Yanukovich factions may escalate, driven by the crisis of governance with no clear leader to consolidate power. Risk of a territorial split has reduced but could intensify depending on the ability of the population in the south-eastern regions to mobilise. The Kremlin is unlikely to intervene actively now, although it will face pressure to do so from its domestic constituency.

Analysis

Ukraine is currently facing two key longer-term challenges: a crisis of governance and high risk of an economic collapse.

Crisis of governance

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Yanukovich has eliminated virtually any chances of being reinstated as president

On February 22, parliament voted to oust the president, foregoing impeachment procedures and replacing him with an interim president -- opposition figure Turchinov. Although Yanukovich's departure from the capital -- and an alleged attempt to flee the country -- undermine whatever domestic support he had left and make a reinstatement virtually impossible, given procedural breaches during the process, he formally remains Ukraine's president.

Rushed legislative amendments

In addition to ousting the president, parliament voted on a number of other measures including:

The anti-Russian nature of some of these initiatives, along with the speed with which they were passed, has alarmed ethnic Russians and Russian-speaking parts of the population, particularly across the south-eastern regions of Ukraine.

Re-aligning the parliament

Any new governing coalition is now likely to be led by the largest faction among the former opposition, the Batkyvshchyna party. Its representative, Turchinov, has also been appointed Speaker. The coalition will embrace its recent allies: the UDAR party and the Svoboda party. The pro-Yanukovich Party of Regions has now become significantly smaller due to the ongoing exodus of its parliamentarians and, along with the Communist party, has announced that it will not join the coalition.

Lack of coordinated action

The opposition and street protesters -- key actors responsible for Yanukovich's ousting -- continue to have divergent aims and lack an aligned leadership structure:

  • Opposition . Leaders of the three opposition parties yet again demonstrated their lack of influence over the crowd in Independence Square when the latter refused to disperse despite opposition leaders' requests.
  • Street protesters. Leaders of the radical Right Sector movement have refused to recognise the February 21 agreement and leave the streets.

Tymoshenko adds another variable to the equation. Since the three opposition leaders carry limited weight with the protesters on Independence Square, Tymoshenko's expeditious release was likely driven by the need to install an authority figure on the Square who would be recognised by both ordinary protesters and the radicals. The stability and outlook for any future coalition will, in part, depend on Tymoshenko's position in the new government and whether she will be recognised as an acceptable compromise leader.

Risk of economic crisis

The risk of an economic crisis remains high. Yesterday Turchinov characterised Ukraine's economy as "catastrophic", alleging that the joint treasury account was virtually empty, as was the pension fund. The state budget has been continuously under-fulfilled over the past few months with a January revenue shortfall of almost 3 billion hryvnas (340 million dollars) due to a sharp reduction in tax collection that was, in turn, a consequence of both the political unrest and weak economic performance.

Poor fundamentals

The economy ended 2013 with no real GDP growth, the worst annual result since the crisis-ridden 2009. In January industrial output contracted 5.0% year-on-year. After the escalation of violence in February, it is expected to shrink further, undermining chances for a resumed overall growth anytime soon.

Large-scale market interventions by the central bank (NBU) and the absence of aid from Russia resulted in a resumed fall in foreign reserves. In January, the NBU sold 1.7 billion dollars to stabilise the local currency, bringing down the level of reserves by 13% to a new eight-year low of 17.8 billion dollars.

Ukraine's sovereign external debt stood at 27.9 billion dollars as of January, or 15.5% of GDP, representing a slight annual increase (14.8% in 2012). As of early February, Ukraine was due to remit 4.5 billion dollars this year, mostly to the IMF (3.7 billion), well below the 9 billion dollars paid out in 2013. Debt servicing costs make up another 1.2 billion dollars. The reserve depletion and uncertainty over external financing have increased debt pressures and the sovereign default risk.

Likelihood of default

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Lack of EU or IMF aid would lead to a sovereign default

Should Ukraine receive no substantial aid either from the EU or from Russia, it is at risk of a rapid and sharp economic collapse that would affect its pension system and banking sector.

An IMF loan would forestall the crisis. However, a Western loan would have a number of clauses placing restrictions on Ukraine's trade and likely require an increase in domestic gas prices. If Ukraine accepts an IMF loan, Russia is also likely to place certain economic restrictions, which would intensify the deterioration of the economy in the medium term.

Risk to territorial integrity

The risk of a split between the western regions and the east is still there, preserved by the crisis of governance, parliamentary initiatives directed against ethnic Russians, and the prospect of an economic collapse ((see UKRAINE: Split unlikely despite regional divides - January 22, 2014)).

While south-eastern regions have been relatively complacent, the passage of anti-Russian parliamentary initiatives has already led to an increase in popular discontent in the Russian-dominated Crimea and some of the south-eastern cities. Should additional initiatives targeting ethnic Russians or Russian speakers be approved in parliament, popular discontent may be sufficient to prompt action among the heads of regions with a large Russian population.

Follow up

This article is drawn from the Oxford Analytica Daily Brief®, which analyses the regional and global implications of key geopolitical, economic, social, business and industrial developments. It provides government, corporate and financial clients with timely, authoritative analysis every business day.

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