April 24, 2019 / 9:59 AM / 4 months ago

Five challenges for Ukraine's new president

LONDON (Reuters) - Ukraine has entered uncharted political waters by choosing Volodymyr Zelenskiy, a comedian with no previous political experience and few detailed policies, as its new president.

FILE PHOTO: Ukrainian presidential candidate Volodymyr Zelenskiy reacts during a news conference at his campaign headquarters following a presidential election in Kiev, Ukraine April 21, 2019. REUTERS/Valentyn Ogirenko/File Photo

Zelenskiy is the latest anti-establishment figure to unseat an incumbent leader, both in Europe and further afield, but he has a lot to get to grips with. Below are five big questions investors and the international community have.

1/STRIKE WHILE THE IRON IS HOT?

Zelenskiy is expected to take office next month and his ability to work with Ukraine’s parliament, the Rada, will be crucial to meeting the expectations of his voters.

The president appoints the head of the state security service, the head of the military, the general prosecutor, the central bank governor and the foreign and defense ministers. But parliament must confirm each appointment — and there’s the rub.

While Zelenskiy beat incumbent Petro Poroshenko decisively in Sunday’s presidential vote, parliamentary elections are not due until October and opinion polls suggest he is unlikely to win an outright majority.

That means he would need to ally with at least one other party if he is to get many of his policies and appointments through. The other alternative is to try to bring the elections forward in order to capitalize on the momentum from his presidential victory.

2/TEAM BUILDING EXERCISE

With no political experience himself, investors want Zelenskiy to build a team with enough know-how to avoid any policy missteps.

He does not actually have a full slate of policies yet but he brought in two former ministers as advisers for his campaign: former finance minister Oleksandr Danylyuk and former economy minister Aivaras Abromavicius.

Danylyuk is rumored to be in line to become either foreign minister or the head of the presidential administration, which would give him a powerful gatekeeper role.

“Zelenskiy might be inexperienced in foreign affairs but I think he will have plenty of choice of experienced individuals to serve as foreign minister, and will receive plenty of support, advice from Western governments,” wrote Timothy Ash of BlueBay Asset Management.

3/IMF

International Monetary Fund aid has kept Ukraine’s economy above water so its ongoing support is seen as crucial, especially with around $3 billion (about 2 percent of GDP) of external debt obligations, including interest, coming due in the remainder of 2019. Another $5.5 billion (about 4 percent of GDP) must be repaid in 2020.

But Ukraine’s patchy reform efforts led to repeated delays in its previous IMF program that ended up disbursing only $8.7 billion of a planned $17.5 billion.

That was replaced by a new $3.9 billion Stand-By Arrangement (SBA) in December. While Kiev hopes for another tranche of that money as early as next month, investors will want to see a fuller program put back in place soon.

It could be an interesting negotiation. Zelenskiy already wants to talk the IMF about reversing some gas price rises the Fund saw as crucial to mending Kiev’s finances.

Ukraine’s economic backdrop has improved in recent years though, with much smaller twin deficits (2-3 percent of GDP), lower public sector debt (just over 60 percent) and a stable currency. It also has over $20 billion in FX reserves, which is over four months of import cover, according to S&P Global.

4/PRIVATBANK PROBLEMS

One concern is Zelenskiy’s ties to oligarch Igor Kolomoisky, the former owner of Ukraine’s biggest lender PrivatBank, which was nationalized in 2016.

With the international community already concerned about corruption and influence, some have raised questions about what their relationship might mean for the future of PrivatBank and other interests of Kolomoisky in Ukraine.

A court ruling last week could threaten to overturn the nationalization of PrivatBank.

The central bank has said it will appeal — in fact there could be many appeals as well as other legal manoeuvres — but any sign that Zelenskiy might be in Kolomoisky’s camp on this could do serious damage, not least to relations with the IMF.

5/RUSSIA RELATIONS

As world leaders clamored to offer their congratulations to Zelenskiy, one notable name was absent: Russian President Vladimir Putin. How the Russian-speaking Zelenskiy handles Ukraine’s relationship with Moscow will go a long way to determining the success of his term in office.

He has already suggested taking a fresh perspective to try to secure peace with Moscow, while pushing ahead with European Union-friendly moves. That could prove a difficult path to tread.

Ukrainian presidential candidate Volodymyr Zelenskiy reacts following the announcement of the first exit poll in a presidential election at his campaign headquarters in Kiev, Ukraine April 21, 2019. REUTERS/Stringer

For its part, Russia has signaled it intends to respect the vote of the Ukraine people, although Putin is not planning talks with Zelenskiy.

Also rumbling in the background is a legal dispute between the two surrounding Ukraine’s $3 billion Eurobond, which Moscow wants repaid in full but which Kiev argues should have been written down along with most of its other debt in 2015.

Any repairing of ties could also bring rewards for Ukraine. Improved relations could help it regain control over the separatist-controlled east, as well as cheap gas and major investment, a Kremlin ally in Ukraine said last week.

Additional reporting by Matthias Williams in Kiev, Graphics by Karin Strohecker, Editing by Catherine Evans

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