Ukraine is undergoing a major domestic political shakeup as Ukrainian President Viktor Yanukovich reshuffles key political, economic and security figures and moves loyalists into important positions while attempting to balance the country’s powerful oligarch class. This shift is significant as it affects several major ongoing and interrelated trends in Ukraine — natural gas negotiations with Russia, the country’s wider economic situation and an attempted balance in foreign policy orientation between Russia and the West. These processes will only intensify as Yanukovich continues trying to consolidate his power base, especially with parliamentary elections scheduled for later this year.
Analysis
Ukraine has undergone a major political shift in recent years, especially as it has transitioned from the Western-oriented administration of former President Viktor Yushchenko, who came to power in 2005 following the Orange Revolution and ruled for five years, to the current administration of President Viktor Yanukovich, who took office in 2010. Yanukovich has reversed many of the previous government’s pro-Western policies, most notably by making NATO membership for Ukraine illegal and extending the lease of Russia’s Black Sea fleet in Ukrainian territory. But the most dramatic change in the country has been domestic, as chaotic and often paralyzed politics characterized by the struggle between Yushchenko and former Prime Minister (and presidential contender) Yulia Timoshenko have given way to a more consolidated and centralized presidency under Yanukovich.
In the past two years, Yanukovich has increased his power in many key institutions — including parliament, the regions and the judiciary — and sidelined key opposition members. More challenging for Yanukovich’s consolidation efforts is the oligarch class, a group of powerful industry leaders and businessmen upon whom Yanukovich — and most of his predecessors — have depended for political backing and financial support. But even this has begun changing in recent months, as Yanukovich has made several reshuffles among Ukraine’s political elite as well as the economic and security elite. Each move has implications for Ukraine’s strategic position in the future.
Recent domestic shifts
Among the recent reshuffles was the Feb. 9 sacking of Defense Minister Mykhailo Yezhel. He was replaced with Dmytro Salamatin, known as a Yanukovich loyalist. Additionally, Yanukovich appointed former Deputy Prime Minister and Economy Minister Andriy Klyuev to the National Security and Defense Council on Feb. 14. The most notable shift occurred Feb. 22, when Finance Minister Valeriy Khoroshkovsky was appointed first deputy prime minister just weeks after he was appointed finance minister. Prior to that, the former prominent media mogul headed the Security Service of Ukraine.
These moves mark the increased influence of a group of Yanukovich supporters known as the "gas lobby," consisting of Khoroshkovsky, natural gas firm RosUrkEnergo co-owner Dmitri Firtash (one of Ukraine’s most prominent oligarchs) and Energy Minister Yuri Boiko, among others. The gas lobby is in charge of Ukraine’s natural gas transit system, one of the country’s most strategic assets. It controls any natural gas dealings with outsiders like Russia and the European Union, giving the group significant influence in Ukrainian politics and economics. Stratfor sources in Kiev said that Khoroshkovsky’s recent promotion is an attempt to increase the president’s power and suggests that Khoroshkovsky is considered a top contender for the prime ministerial post in the October 2012 elections.
Khoroshkovsky’s appointment boosted the gas lobby’s power, but Yanukovich has been trying to balance this group with his own "family group," which consists of Yanukovich’s sons, Alexander and Viktor, and their associates. This group also has a large economic portfolio — they are active in Ukranian construction, banking and media, among other sectors — which has been growing since Yanukovich’s presidency.Yanukovich appears to be engineering a situation in which the gas lobby and his family group share power and influence. This will allow the president to keep their support in the short term and use their power and financial backing to secure longer-term guarantees that he will not be prosecuted if he loses re-election (much like deals former Ukrainian presidents Leonid Kuchma and Yushchenko struck during their terms).
Another powerful group led by oligarch Rinat Akhmetov has not yet been significantly affected by the reshuffling. Akhmetov controls more than 50 percent of the country’s lucrative electricity, coal, ore mining and steel markets, in addition to major investments in media, real estate and oil and natural gas. Akhmetov has remained powerful politically and financially, and he received rewards for past support in the form of recent privatizations in which he gained control of several multi-billion-dollar power generators at a cumulative price of $400 million. However, this does not mean Akhmetov and his group (which includes Deputy Prime Minister Boris Kolesnikov and Donetsk Oblast Gov. Andriy Shyshatsky) are immune from government shakeups. For example, there has been some competition over assets and banking tenders between Akhmetov and Alexander Yanukovich’s group, and Stratfor sources say Akhmetov might be financing oligarch-friendly opposition candidates such as former Foreign Minister Arseniy Yatsenyuk to keep his options open.
Implications of these shifts
The recent shakeups could substantially affect three significant issues: Ukraine’s natural gas negotiations with Russia, Ukraine’s economic position and the country’s wider foreign policy orientation toward Russia and the West (particularly the European Union).
Ukraine and Russia have been in a standoff over natural gas prices since 2011.Kiev asked Moscow for lower natural gas prices since the current rate ($416 per thousand cubic meters) is straining Ukraine’s budget. However, Russia is holding out on lowering prices until Ukraine agrees to a merge state-owned energy company Naftogaz with Russian state-owned energy company Gazprom or until Ukraine joins Russia’s customs union — concessions Ukraine does not want to give.
A parliamentary vote had been scheduled for Feb. 24 over the restructuring of Naftogaz, a process which could make it easier for Russia to gain access to parts of the company without a merger. However, Ukraine’s opposition blocked the parliamentary rostrum for the session during which the vote was scheduled to take place. The next plenary session is scheduled for March 13-16. Given the recent strengthening of the gas lobby and Khoroshkovsky’s promotion, this vote — if and when it does occur — will be heavily influenced by the interests of this group. The gas lobby couldstand to gain financially if a deal passes since it oversees Naftogaz and natural gas negotiations.
Meanwhile, the high Russian natural gas prices are creating another major issue: uncertainty over the country’s economy in the coming months. Adding to these pressures is a standoff with the International Monetary Fund (IMF), which refuses to restart its financing program with Ukraine until the government raises household natural gas prices, which Yanukovich has resisted doing due to election-year political implications. According to Stratfor sources, a lack of cooperation with the IMF in 2012 will harm Ukraine’s relations with other potential lenders, especially those that give low-interest loans.
Khoroshkovsky said recently that Ukraine can service its sovereign debt without a new IMF loan, while other notable officials such as National Bank of Ukraine Governor Sergiy Arbuzov have been pressuring the government to agree to IMF conditions and raise natural gas prices. This issue could create a standoff between Khoroshkovsky and Arbuzov. Without the IMF loan — and with obstacles to other sources of financing — Ukraine could get pulled further into Russia’s orbit, as Moscow previously has given Ukraine loans and offered other forms of financial assistance. Because Moscow rarely offers such assistance without strings attached, Khoroshkovsky’s promotion therefore could serve Russia’s interests.
All of these factors together could affect Ukraine’s strategic orientation toward Russia and the European Union.Since Yanukovich came to power, he has sought to shift Ukraine’s foreign policy away from Yushchenko’s pro-Western strategy and toward a more balanced policy between Russia and Europe — with an emphasis on his own consolidation of domestic power.However, this plan began unraveling last year with Timoshenko’s imprisonment, which distanced Ukraine from the European Union politically and led the IMF and European Union to withhold economic assistance.
Tensions have also increased between Ukraine and Russia due to the Naftogaz situation, but Kiev’s intransigence is likely unsustainable due to its economic conditions and lack of alternatives. The Khoroshkovsky appointment could further strain Ukraine’s relationship with the Europeans, as he spearheaded efforts to jail Timoshenko. This could alienate Ukraine from the West even further and push it toward Russia, though Yanukovich will be careful to not let Ukraine’s orientation shift too far given his desire to consolidate power.
The next few months leading up to Ukraine’s elections will see Yanukovich maneuvering significantly within his domestic power circles as well as with the European Union and Russia.
