Ukraine Politics


Ukraine: Parliamentary election result eases path for economic reforms and EU integration

November 4, 2014

For the first time since the former-Soviet republic became independent, Ukraine’s parliament will be dominated by pro-European parties. The 26 October parliamentary snap elections produced a clear victory for pro-European integration political parties and marked a significant shift in the attitude of voters. Prime Minister Arseniy Yatsenyuk’s party, People’s Front, won the largest number of votes with 22.2% and a pro-President Poroshenko political bloc came in second with 21.8%. A coalition government is expected to be formed between the two parties along with third-placed Self Reliance Party. It is largely expected that Yatsenyuk will remain Prime Minister. All three groups campaigned on a platform of pro-EU integration. The pro-Russia Opposition Bloc won just 9.4% of the vote, while the Communist Party of Ukraine failed to win a single seat. The separatist-held regions of Eastern Ukraine did not vote and their seats will remain empty.

The result is promising news for Poroshenko, who dismissed the parliament in August and called for early elections in an effort to remove pro-Russian supporters. The new government should make it easier for Poroshenko to move forward with peace negotiations and economic reforms, as Ukraine tries to cope simultaneously with the military conflict in the east and a downward economic spiral. A resolution to the conflict between the Ukrainian government and pro-Russia separatist rebels is still far from clear as the two groups remain deeply divided on the country’s territorial future. While the September ceasefire 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. Further, the conflict has had a devastating impact on the country’s economic performance and government finances, and it is widely expected that Ukraine will need more financing on top of the IMF USD 17.1 billion bailout program.

According to a preliminary estimate released by State Statistics Service Ukraine, GDP contracted 5.1% in Q3 over the same period last year. The contraction was greater than Q2’s 4.6% decrease and cemented the country’s continued downward economic spiral. In addition, Central Bank reserves have fallen to a nearly-nine-year low and the hyrvnia has plunged in value since the beginning of the year. In order to receive needed additional IMF funding and to fulfill part of the country’s commitments to the Ukraine-European Union Association Agreement the government will have to implement some tough economic reforms. An IMF mission is scheduled to visit Ukraine after a new government is formed to assess increasing the loan.

Despite the deteriorating outlook for the country, the announcement of an agreement with Russia to resume deliveries of natural gas represented a glimmer of hope for Ukraine’s future. The two countries had been negotiating for months over Ukraine’s inability to pay its gas debts and to pay in advance for the winter. Under the terms of the agreement, Ukraine will pay Russia USD 4.6 billion with money from the IMF and EU. In addition, the EU will act as guarantor for Ukraine’s payments to Russia. Ukraine depends on Russia for approximately 50% of the nation’s gas, and with winter approaching the country would have faced a crisis situation if it had been unable to close an agreement.

Although the Russian gas deal is positive news for the country, the military conflict and downward economic spiral weigh heavily on Ukraine’s economic outlook. FocusEconomics panelists expect GDP to plummet 7.5% in 2014. For 2015, panelists expect the economy to contract 1.0%, which is down 0.4 percentage points from last month’s forecast.

Author: Angela Bouzanis, Senior Economist

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Ukraine GDP Q3 2014

Note: Year-on-year variation of GDP in %.
Source: State Statistics Service of Ukraine and FocusEconomics Consensus Forecast.

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