Ukraine Politics

Ukraine

Ukraine: Pro-European Petro Poroshenko wins elections; violence continues in the east

June 3, 2014

Petro Poroshenko was elected President of Ukraine with 54.7% of the votes in the presidential elections that were held on 25 May and thus will avoid a second run-off. Yulia Tymoshenko, who was Prime Minister from 2007 to 2010, was Poroshenko’s closest rival, coming in second place with 12.8% of the votes. Oleh Lyashko, from the Radical Party obtained 8.3% of the votes. The day after the election, Poroshenko stated that his priorities are to pacify the south-east of the country, begin dialogue with Russia, and promote parliamentary elections to take place this year.

Poroshenko, who was Head of the Council at the National Bank of Ukraine (NBU) and Second Minister of Trade and Economic Development in the first years of the Yanukovich administration, ran in the elections as an independent candidate. A well-known businessman, Poroshenko is owner the confectionery firm Roshen, a TV channel and several other industrial enterprises. He is expected to support the current government, on both the political and economic fronts and to continue to strengthen links with the European Union.

National average voter turnout was 60.0%, which was down from 68.0% in the 2010 presidential elections. The lowest turnouts were registered in the Donetsk (15.0%) and Lugansk (39.0%) regions, where referendums where held on 11 May in order to legitimate the creation of the People’s Republic of Donetsk and the People’s Republic of Lugansk. In both regions groups rallied against the elections and tried to impede voting, thus bringing down turnout in these regions.

The new president faces a series of extraordinarily difficult political challenges within a context of dramatic economic deterioration. Regarding the situation in the eastern regions of the country where violent clashes continued in May, Poroshenko said that he would travel there in the coming days to analyze the situation and find a quick and lasting solution to address the escalation of violence. Simultaneously, Poroshenko announced the formation of a stronger and more professionalized Ukrainian army.

On the economic front, Poroshenko showed that, although the integration of Ukraine within the European Union remains his priority, he will also seek to reestablish relations with neighboring Russia. Although Russian President Vladimir Putin said he respects the results of the elections in Ukraine, he has also questioned the legitimacy of the elections. In addition, political and military tensions persist following Russia’s annexation of Crimea. Moreover, the two countries are still engaged in disputes over outstanding gas debts between Russia’s Gazprom and Ukraine’s Naftogaz. Poroshenko is also expected to support current Prime Minister Arseniy Yatseniuk and his government in implementing the International Monetary Fund (IMF) reform program that was approved in April.

Following the approval of the IMF financial aid program, the hryvnia (UAH) regained some of the stability that it has lost since February when the escalation of the political conflict caused the currency to start depreciating sharply. In addition, the UAH stabilized after the NBU raised the discount rate from 6.50% to 9.50% (effective from 15 April), announced net foreign exchange inflows, and restricted the amount on foreign exchange funds that could be withdrawn from deposit accounts on 1 May. On 14 May, the NBU held a meeting in which it decided the Bank’s Monetary Policy Fundamentals for 2014. However, it has not yet provided detailed information on the objectives. Nevertheless the Bank restated that it would be vigilant in order to stabilize inflation and reaffirmed its commitment to ensuring the stability of the financial system. In this sense, the Central Bank introduced a restriction on foreign currency holdings for firms and individuals that will be in place until 20 August. Regarding these interventions, on 19 May, Director of the General Department of Monetary Policy at the NBU Olena Shcherbakova said that:

“In light of the tense geopolitical situation and turbulent external conditions, it is logical that the National Bank has resorted to such instruments […]. Envisioned as temporary measures, they will help ensure smooth inflows of foreign exchange into the foreign exchange market of Ukraine and take some pressure off the exchange rate of the hryvnia[…].”

The depreciation of the hryvnia continued to ease in May. The exchange rate closed May at 11.80 UAH per USD, which was slightly below the 11.60 UAH per USD recorded at the close of April. However, the currency depreciated 1.72% in May, which was smaller than the 4.32% depreciation tallied in the previous month, and a far cry from the double-digit depreciations that were registered in February and March. FocusEconomics panelists have taken into account the financial improvements that follow the IMF program approval as well as the NBU’s recent intervention and they now expect the hryvnia to trade at 11.17 UAH per USD by the end of 2014. The panel sees the exchange rate closing 2015 at 11.35 UAH per USD.

FocusEconomics Consensus Forecast panelists continued to cut their projections for the Ukrainian economy. For 2014, the panel expects the economy to contract 4.7%, which is down 0.6 percentage points over the previous month’s projection. For 2015, the panel sees the economy benefiting from a rebound and expects GDP to expand 1.4%.


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