You're reading: Investors hope new president will unite nation, move to cure economic woes

Top challenges include persuading International Monetary Fund to restart critical lending.

Investors have long looked at the presidential election as a possible source of stability for Ukraine’s recession-hammered economy and overextended public finances.

Analysts say that if presidential election winner Victor Yanukovych can consolidate power quickly and form a compliant government, he could push through measures to help pull Ukraine out of recession and keep it financially afloat, foremost by convincing the International Monetary Fund to restart its lending program.

But with Yulia Tymoshenko contesting the election results in court and defending her wobbly coalition government, and uncertainty over Yanukovych’s chances of swiftly forming a new alliance, it looks like they’ll have to wait a little longer.

Ukraine’s economy has already started to show some signs of recovery, including modest industrial output growth and increased budget revenues in January.

But if talks on a new coalition fail, Yanukovych faces the possibility of muddling through with Tymoshenko, or trying to call snap parliamentary elections, as he has promised. This would be bad news for the economy.

“It would be a real blow to Ukraine’s hopes of economic recovery, with another two to three months of political campaigning, leaving economic policy to drift in the interim,” said Tim Ash, head of emerging markets research at the Royal Bank of Scotland.

“Yanukovych will surely want to cultivate these green shoots of recovery, rather than risk them in further political intrigue around yet more elections,” Ash added.

Tymoshenko’s legal challenge to the election results could also delay what many see as an inevitable outcome, given the positive assessment of the election by international and domestic observers.

“There could be some volatility in the markets as it’s unclear how long the challenge will delay him taking office,” said Anastasia Golovach, an analyst at Renaissance Capital. She added that this volatility should be minimal, however, given the limited possibility of success in overturning the vote.

The main battle is taking place in parliament, where Yanukovych’s Party of Regions is seeking to oust Tymoshenko’s government and form a new coalition. Deputy Prime Minister Oleksandr Turchynov, Tymoshenko’s right-hand man, said on Feb. 11 that it made no sense for her government to resign unless Yanukovych’s camp mustered enough support in parliament to form a new ruling coalition.

For Yanukovych, persuading coalition members to join a new alliance isn’t looking easy. Parliamentary Speaker Volodymyr Lytvyn scored less than 3 percent in the first round of elections – not enough to get a party into parliament – so dissolving the coalition and risking new elections is a gamble.

Meanwhile, the Our Ukraine-People’s Self Defense bloc is also split on whether to join the Regions in a new government.

With parliament in limbo, measures to unfreeze crucial lending by the IMF would be harder to push through.

However, analysts are optimistic that a deal will be reached to form a new coalition, and then to push through measures to bring back the IMF.

Jorge Zukoski, president of the American Chamber of Commerce in Ukraine, said there is an expectation that Yanukovych will find consensus among the political elite to implement key reforms.

“The faster Yanukovych is sworn into office, the bigger the chance the IMF will come back as early as in April,” said Olena Bilan, an economist at Dragon Capital.

Ukraine needs the IMF money to cover its budget deficit – the most critical challenge for the authorities. Concerns about foreign debts are less urgent, as the next repayment of $400 million falls due in December.

A compliant government would aid the new president in passing crucial economic legislation. A consolidation of power by Yanukovych would give the IMF a clearer picture of who the decision makers are, and who is making the promises on behalf of Ukraine.

“If there is some minor degree of consent between the president and the government, the situation will be better than under Yushchenko and Tymoshenko,” said Bilan. Disputes between the former allies last year hamstrung attempts to push through measures demanded by the IMF

Yanukovych is already looking ahead to working with a new government to develop policy aimed at rebooting IMF cooperation. “The new cabinet has to audit Ukraine’s financial and economic situation and work out the state budget as soon as possible,” he said in a statement on Feb. 10. “It also needs to address our creditors, our neighbors and economically developed countries to ask for financial help to combat the economic crisis.”

But a key condition the resumption of the $16.4 billion program is that parliament pass a tough budget for 2010, which could be undermined by Yanukovych’s promise to implement budget-busting social spending rises that put a halt to lending late last year. Yanukovych has said he wants to work with the IMF, and there was a sign of backtracking in the Regions on pre-election populism: They didn’t vote in second reading for a bill raising certain social payments – which the Finance Ministry estimated would add Hr 11 billion to the budget. The Regions Party had itself proposed the bill before the ballot.

Golovach said Yanukovych would find it easy now the election is over to step away from previous populist demands. “He could easily find an explanation, such as: ‘The last authorities stole all the money.’ He is interested in renewal of negotiations with the IMF and external credit institutions, so his government will make all possible efforts to meet their expectations,” she said.

Kyiv Post staff writer James Marson can be reached at [email protected].