Ukraine Politics


Ukraine: Ongoing violence in Ukraine continues to threaten political stability and economic progress

October 7, 2014

Ongoing violent clashes in Eastern Ukraine continue to threaten what had been seen as a promising ceasefire agreement between the Ukrainian government and pro-Russia separatist rebels that was signed on 5 September. Even if the ceasefire agreement does continue to hold, a resolution to the conflict is still far from clear as the Ukrainian government and the rebels remain divided on the country’s territorial future. While the agreement envisioned a devolution of power to the Eastern regions, the government and the rebels appear to have widely diverging interpretations of what that entails.

Security issues and the territorial devolution of Ukraine are set to dominate the election campaign this month. In an effort to remove pro-Russian supporters, President Petro Poroshenko dismissed the parliament in August and called for early elections to be held on 26 October. Recent polls have indicated that a pro-Poroshenko political bloc will win 27% of the vote, with the second-placed nationalist Radical Party poised to earn 6%. However, a large number of Ukrainians remain undecided. The outcome of the parliamentary election could help or hinder the country’s political stability and economic progress moving forward. A pro-Poroshenko majority in parliament will make it easier for the President to move ahead with peace negotiations, as well as any necessary additional legislative measures under the IMF program, and his Strategy 2020 reform program.

Poroshenko’s Strategy 2020 reform plan, designed to fulfill part of the country’s commitments to the Ukraine-European Union Association Agreement, would modernize the economy and do away with some of the Soviet-era bureaucracy. However, Poroshenko’s agenda could be jeopardized if any of the political groups that reject all concessions to the separatists make large gains.

A revitalization of the economy is desperately needed; the conflict has had a devastating impact on the country’s economic performance. The majority of fighting has taken place in the eastern regions of Luhansk and Donetsk, Ukraine’s industrial heartland, which combined represent over 15% of the nation’s GDP. In addition, tax revenues have fallen and the Ukrainian government has had to turn to the IMF to prevent default. In August, the IMF unlocked the second tranche of its USD 17.1 billion bailout program that was agreed in April, which brought total disbursements under the arrangement to USD 4.51 billion. Economists at UniCredit, in their Q4 2014 Quarterly Report, explained UniCredit’s expectation for the impact of the election:

Our baseline, though subject to rapid change, is that Ukraine moves towards parliamentary elections in late October, with President Poroshenko’s bloc likely to significantly lead all others in parliament. This should provide the President with more influence in parliament, allowing for more progress on IMF conditionality. But none of the above will keep the programme on track without a lasting resolution to geopolitical tensions in the East.

With a large fraction of Ukrainians still undecided and the crisis constantly evolving, the election result is not entirely clear. The new parliament will need to make tough decisions regarding both the territorial and economic future of the nation once in power, but, lasting peace will be the key to curbing the country’s economic decline.

Author: Angela Bouzanis, Senior Economist

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