Last week, the Ukrainian parliament voted to dismiss Prime Minister Oleksiy Honcharuk and most of his government after they had spent only six months in office. In an extraordinary session, it also voted to remove Ruslan Ryaboshapka, a highly regarded prosecutor general who was appointed in late August 2019. Given Ukraine’s sluggish economic growth in recent months, the global recession likely to result from the spread of Covid-19, and the country’s stalled negations with the International Monetary Fund (IMF), the decision to fire pro-market cabinet members such as the finance minister and the economic minister sent a troubling signal to foreign powers, domestic observers, and investors. The resulting uncertainty quickly led to a fall in the value of Ukrainian government bonds.
This radical reshuffle even raises questions about the pro-reform and pro-Western orientation of Ukraine. Kristina Berdynskykh, a renowned Ukrainian journalist, summed up the mood of many by tweeting: “shame is the only word I can use to describe what has happened in parliament over the past two days. [President Volodymyr] Zelensky has made a sharp turn in what is obviously the wrong direction.” Whereas both the change of government and the dismissal of Ryaboshapka are worrying, they are distinct in nature and raise different levels of concern.
The dismissal of the prosecutor general is highly problematic for Ukraine’s effort to strengthen the rule of law, which is crucial to attracting much-needed foreign investment. The move was mainly instigated by a group within Zelensky’s Servant of the People parliamentary faction allegedly linked to oligarch Ihor Kolomoski. The group attempted to justify the decision by claiming that Ryaboshapka’s performance had been mediocre. Yet its focus on the prosecutor general was dubious given that other law enforcement institutions – such as the allegedly corrupt Security Service, led by an old friend of Zelensky, or the National Police, which remains unreformed – are hardly known for their efficiency. Ryaboshapka, in contrast, forced through reforms, generally earning praise from domestic and foreign experts for his independence.
According to the head of Zelensky’s parliamentary faction, one of the reasons for Ryaboshapka’s dismissal was his unwillingness to support investigations into former president Petro Poroshenko. That justification is particularly alarming because the State Bureau of Investigation has opened more than a dozen cases involving Poroshenko. Ryaboshapka simply refused to sign off on investigations that were based on weak evidence. Similarly, he was unwilling to back investigations into energy company Burisma, which formerly employed the son of US presidential candidate Joe Biden. It seems that Ryaboshapka’s fate was sealed by his independence and his unwillingness to back what seem to be politically motivated investigations. It is unclear whether parliament will now appoint a weak political loyalist or someone independent in his place.
Markets, investors, Western governments, and observers of Ukraine are closely watching the government’s policy and personnel choices
Unlike the dismissal of the prosecutor general, the government reshuffle had been the subject of discussions in Kyiv for some time. In mid-January, Honcharuk offered his resignation in response to the publication of leaked audiotapes in which he insulted Zelensky. The president initially rejected the resignation because, at that time, there was no alternative candidate for the post.
But the reshuffle that followed was more drastic than anyone anticipated. Not only was Honcharuk replaced by Vice-Prime Minister Denys Shmyhal – who, between 2017 and 2019, worked as a regional manager in oligarch Rinat Akhmetov’s energy firm DTEK – but most ministers were sacked. One such minister was Oksana Makarova, a respected reformer who, as leader of the Finance Ministry, oversaw important negotiations with the IMF. The Shmyhal cabinet includes ten new ministers and six who have remained in post – with five ministries still vacant. The new line-up drew sharp criticism because it includes only one woman, no known reformers, and old faces such as a former health minister in the Yanukovych administration.
In a speech before parliament, Zelensky acknowledged the successes of the former government but said that its removal stemmed from factors such as lost customs revenues, economic decline, a lack of improvements in healthcare, chaos over utility bills, non-payment of miners’ salaries, and a failure to increase pensions. Indeed, the government made some mistakes and did not live up to the sky-high expectations of the president and the electorate. By February, its approval ratings had fallen to less than 30 percent. So, one of the main reasons for the government reshuffle was to reverse the sharp decline in its popularity, which increasingly affected Zelensky’s approval rating.
The president also made clear that the new government had a strict mandate: to quickly deliver changes to the people. However, there is a severe lack of fiscal space for quick fixes, higher public spending, or populist economic policies. The economic challenges the new cabinet faces are compounded by the lack of economic, energy, and agriculture ministers. And the government will have to adjust the 2020 budget given Ukraine’s previously high inflation rate, which reduced exports and, as a consequence, state revenues. As such, there is no guarantee that Ukraine will stay on its pro-Western course and engage in further reforms.
After the reshuffle, Shmyhal and the new finance minister, Ihor Umansky, quickly tried to reassure wary markets and confirmed their commitment to comply with IMF requirements. In fact, much depends on the $5.5 billion three-year loan programme the IMF and Ukraine agreed on in December 2019. Ukraine will have to service $16 billion of debt in 2020. This realisation and the first IMF instalment hinge on Ukraine’s adoption of a banking law that would render it nearly impossible for Kolomoski to regain control of PrivatBank or receive compensation for its nationalisation. On 7 March, in an interview with Bloomberg, Zelensky restated his commitment to the banking law and to opening up the market for farmland, another crucial demand of the IMF and international investors. However, failure to secure the IMF deal could lead to much higher borrowing costs, scare away foreign investors, and make Ukraine more vulnerable to a return of the oligarchs.
At this point, verbal reassurances are insufficient by themselves. Markets, investors, Western governments, and observers of Ukraine are closely watching the government’s policy and personnel choices. The impact of the IMF negotiations goes beyond Ukraine’s fiscal stability: the independence of the Anti-Corruption Bureau of Ukraine and the National Bank of Ukraine – a signal achievement of the country’s post-Maidan reform movement – is now at risk. With the judiciary becoming politicised once more and efforts to reform law enforcement breaking down, the European Union should be worried. It remains to be seen whether a government that makes a sharp turn towards the past can be an effective partner on structural reforms and the implementation of a Deep and Comprehensive Free Trade Area.
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