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Op-ed

Ukraine's New Government Sign of Increasing Yanukovych Weakness

by Anders Aslund, Peterson Institute for International Economics

Op-ed in the Kyiv Post
December 25, 2012

© Kyiv Post


On Christmas Eve, Ukraine's President Viktor Yanukovych finally appointed a new government after the parliamentary elections on October 28. Essentially, this government consists of only two oligarchic clans, the Yanukovych family and Rinat Akhmetov, Ukraine's richest man. It appears even less likely than the previous government to govern, to ease Ukraine's international isolation, and to improve Ukraine's financial situation.

This delay of almost two months indicates his problem in appointing a new government. Moreover, two of the 23 cabinet posts were left vacant. Yet, rather than reaching out, Yanukovych has further narrowed his already so slim power base.

The government formation can best be explained in terms of clan competition. The Yanukovych family clan made a significant gain from five to nine cabinet members out of a total of 21, but the big winner was Rinat Akhmetov, who jumped from two to six ministers. Everyone else was marginalized.

Two loyalists of gas trader Dmytro Firtash stayed in the government, but they were kicked upstairs as deputy prime ministers (former Minister of Energy Yuri Boiko and former Foreign Minister Kostyantyn Hryshchenko), while three relatively independent loyalists of Yanukovych stayed on (Prime Minister Mykola Azarov, Justice Minister Oleksandr Lavrynovych, and Education Minister Dmytro Tabachnyk).

Before the October elections it was widely rumored by the young friends of businessman Oleksandr Yanukovych, the president's older son, that they would take over the government. Chairman of the National Bank of Ukraine Serhiy Arbuzov would become prime minister and Interior Minister Vitaliy Zakharchenko would become presidential chief of staff, but neither of them achieved what they wanted.

Admittedly, Arbuzov became first deputy prime minister, which is naturally interpreted as him being the crown prince. But the two most recent first deputy prime ministers (Andriy Klyuev and Valery Khoroshkovskiy) lost out from that senior but ultimately powerless position. Zakharchenko stayed interior minister. Finance Minister Yuriy Kolobov and Agriculture Minister Mykola Prysyazhniuk also retained their jobs, while former Minister of Ecology Eduard Stavitskiy advanced to minister of energy and Aleksandr Klimenko, head of the state tax administration was promoted on his post to become Minister of Revenues and Duties. Thus Yanukovych keeps his control over finance and agriculture, while expanding into energy. Similarly, Yanuovych keeps direct control over the Interior Ministry, the Defense Ministry, even if he switched minister of defense, and the security services. He also appointed his loyalists to foreign minister, Leonid Kozhara (who like Hryshchenko is a career diplomat), and Olena Lukash as his minister of the Cabinet administration.

The big change was the reinforcement of Akhmetov's representation in the cabinet. Previously, he had only two loyalists in the cabinet, deputy prime ministers Borys Kolesnikov and Raisa Bohatyreva. Kolesnikov departs, while Bohatyreva stays as minister of health.

But Akhmetov's people march into the government taking over five economic posts. Dnepropetrovsk Governor Oleksandr Vilkul took Kolesnikov's job as deputy prime minister for infrastructure. His deputy Hennadiy Temnyk became minister of regional development, housing, and utilities. Akhmetov's former CEO Ihor Prasolov became economic and trade minister, and the head of the state railways Volodymyr Kozak became infrastructure minister. Finally, Natalia Korolevska, who headed a fake opposition party in the elections that failed, became social policy minister.

This government formation does not bode well for the president. It faces three big tasks: to govern, to break Ukraine's foreign isolation, and to salvage the country from a vulnerable financial situation. There is little reason to believe that it can solve any of these three tasks.

First, this is a government of only two oligarchic clans, the Yanukovych family and Akhmetov. It could have reached out to three other clans—Klyuev, Firtash, and the Communist Party, whose support Yanukovych needs for a parliamentary majority.

To judge from the government formation, Klyuev and the Communists have obtained nothing, while the Firtash faction remains in marginal posts.

Former heavyweight ministers with a standing of their own have departed, seemingly at their own will: Deputy Prime Minister Serhiy Tyhypko, Economy Minister Petro Poroshenko, and Emergency Situations Minister Viktor Baloha.

At present, Yanukovych's Regions Party has only 208 seats out of 450 in the parliament. With this government formation he has not broadened but narrowed his power base. The questions are whether he will be able to hold a majority in parliament and whether this government can govern.

Second, there is no reason to believe that this government will have any greater success in breaking its isolation in foreign policy.

The European Union will continue to demand that Yanukovych release former Prime Minister Yuliya Tymoshenko, and this seems to be what the president is least keen on doing.

Russian President Vladimir Putin demands that Ukraine join the Customs Union for any significant cooperation, but the main loser from the Customs Union, which would block a free trade agreement with the European Union, is Akhmetov.

The International Monetary Fund (IMF) will demand not only substantial gas price increases and a freer foreign exchange policy, which Arbuzov has opposed more than anybody else. It does not help that hardly anybody but Gryshchenko and Kozhara speak English in the new government, fewer than in the old government with internationally respected personalities such as Poroshenko and Khoroshkovskiy. Thus, this government is likely to dig itself into an even deeper international hole than the previous one.

Finally, this government is unlikely to do anything to improve Ukraine's financial situation. The possibly most harmful policy pursued has been the draft law on a foreign exchange tax of first 15 percent and later 10 percent that Arbuzov pushed so hard. Fortunately, Azarov has so far blocked it.

Arbuzov has also severely aggravated Ukraine's already excessive currency regulation and maintained an overvalued exchange rate of the hryvnia so that everybody expects a devaluation of at least 10 percent in 2013, but it can become much more because the currency market has been drained by the regulatory policies of the National Bank. If steel and coal prices continue to be low, Ukraine can face a serious financial crisis, essentially caused by incompetent economic policy.

This government formation is quite perplexing. With its narrow base and limited competence, it is likely to weaken the president's standing both in the parliament and in Ukrainian politics at large. Has Yanukovych overestimated the strength of his hand, or have other political forces concluded that they had better stay away from him and his government? Regardless which is the case, this government appointment is a sign of the increasing weakness of the Yanukovych presidency.


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