Event

It was a tight race in October’s legislative election between the ruling party and the opposition. President Yanukovych’s party, the Party of Regions, won approximately 30% of the votes. Opposition party Fatherland of Ms Tymonshenko won around 25% of the seats and another opposition party, led by boxing champion Mr Klitschko, had approximately 14% of the votes. The Communists, with 13%, stated in a surprising move that they would not be joining the ruling party as they had done previously. The final results will be known in several weeks as the election was carried out according to a  mixed proportional (party list) and a  majoritarian single-mandate system. The Party of Region is likely to benefit from single-mandate system to secure a disproportionate share of parliamentary vote as it dominates in some eastern regions. International observers said that, considering the abuse of power and the excessive role of money in this election, democratic progress appears to have reversed in Ukraine. The opposition threats to challenge the election outcome. However, street protests are unlikely to reach the scale of 2004 Orange revolution as opposition domestic support is weaker than in 2004.

Impact on country risk

Ukraine is facing serious challenges in terms of economic and foreign policy. As, relations with the EU are likely to remain tense due to poor democratic progress. The EU has frozen a political-association agreement and free-trade deal to protest against Ms Tymoshenko’s incarceration. As a result, Russia is likely to exert pressure on Ukraine to join its customs union with Kazakhstan and Belarus and release control over its strategic gas transit network in exchange for less expensive gas prices. On the other hand, Ukraine was one of the countries that was hit the hardest by the global crisis as a plunge in steel prices and an increase in Russian gas lead to a balance of payment crisis. Now, with access to the capital market lost, the widening current account deficit and looming large foreign debt repayments expose Ukraine to a new balance of payment crisis, especially as the prospects of a resumption of suspended IMF support are bleak. In this context, foreign exchange reserves are under pressure and cover less than three months of imports. Hence, the authorities are likely to let the hryvnia depreciate in the coming months as the strategy aimed to defend the domestic currency by heavy intervention entails a high liquidity risk.

Analyst: Pascaline della Faille, p.dellafaille@credendogroup.com