Ukraine’s new government

Ukraine finally has a new government, but fighting in the east is continuing and the economy is near collapse

Senior Policy Fellow

Ukraine finally has a new government. The fact that it took over a month to form after the elections on 26 October is wantonly irresponsible; meanwhile fighting in the east is continuing, and the economy is near collapse. Only the Presidency was around to respond when rival ‘elections’ were held in the Donbas in November. Ukraine’s economy risks falling into a vicious cycle of devaluation and inflation, strangling growth. Foreign exchange reserves are heading down towards a mere $11 billion, after a $1.45 billion payment to Gazprom, with an even bigger payment of $1.65 billion due in December. The state’s budget deficit is forecast to be at least 10 percent of the GDP, which is itself predicted to fall by 10 percent in 2014. The banking system is on the verge of insolvency; only five of the fifteen largest banks passed an NBU stress test in October.

Ukraine’s economy risks falling into a vicious cycle of devaluation and inflation, strangling growth.

It was obvious on election night that there was only one coalition option, the only novelty was to have five parties rather than three. This gives the coalition 302 MPs, more than the two-thirds majority needed to change the constitution. But the point was probably more to have everyone ‘inside the tent’, apart from the pro-Russian Opposition Block. The two extra parties may not hang around for long. Yuliya Tymoshenko, head of the Fatherland Party, retains her ambition, while Oleh Lyashko’s Radical Party is a true wild card; both will make easy populist noises destabilising the coalition until they leave it. Meanwhile, local elections are scheduled for spring 2015. It is probably a good thing to use them to complete the ‘reboot’ of Ukraine’s post-Yanukovych political system, but there is a risk of further constant campaigning until then.

To be honest, however, the new government could do without either party. All that matters is that the two parties of President Poroshenko and Prime Minister Yatsenyuk do not fall out as dramatically as Viktor Yushchenko and Yuliya Tymoshenko did during the period of ‘orange’ government. 

A Coalition Council is to be formed with three representatives from each of the five parties. This might be a good thing in terms of driving an ambitious reform agenda through parliament. But it might subvert the power of parliament.

That reform ‘programme’ is poorly defined. The coalition agreement is almost seventy pages of stifling bureaucratese. There is little indication of how the government plans to make sense of the Lustration Law passed just before the elections; nor how to implement the supposed anti-corruption programme. The pledge to drop MPs’ blanket immunity from the law is in the document’s preamble, but not in its action points.

Putin is probably hoping that support for the new government is soft and will rapidly dissipate if either the economy collapses or the government does nothing.

The most interesting proposals are in the security sector. Ukraine’s security doctrine is to drop the pretence that Ukraine is a neutral country with no enemies. The armed forces are supposed to adopt ‘NATO standards’ within five years. A National Police force with numbered badges is to replace the old militia and Ukraine’s notoriously corrupt traffic cops. A ‘Ukrainian Military Organisation’ is to be formed, either out of or alongside the volunteer battalions that fought in the Donbas. The choice of name is evocative to some, controversial to others. The original Ukrainian Military Organisation was founded in 1920 to fight against Polish rule in West Ukraine, and was one of the founders of the Organisation of Ukrainian Nationalists in Vienna in 1929.

The programme makes some of the right noises about economic reform. There will be some deregulation and some simplification of the taxation system, but without much sense of its strategic purpose in reviving the SME sector. The whole document is written with no real sense of urgency or impending fiscal crisis. One significant feature, however, is the threat to end the subsidisation of the mining industry. It won’t happen until 2021 but mines are supposed to be privatised or closed in the next two years anyway, which amounts to the same thing. Coming on top of the decision to end most state services to the occupied areas of the Donbas, Kyiv seems increasingly locked into the rhetorical position that Moscow should pay to ‘fix what it has broken’, with huge consequences for both formal sovereignty over the region and the rapidly unfolding humanitarian crisis on the ground.

Meanwhile the Opposition Block lurks in opposition. Putin is probably hoping that support for the new government is soft and will rapidly dissipate if either the economy collapses or the government does nothing, and especially if both occur. The optimistic scenario would seem to be that the new government puts together a more purposeful programme that would make it worthwhile for a supposedly newly patriotic public to endure short-term sacrifice. But even that would face difficulties. Russia has shown that it does not want a consolidated pro-European Ukraine.  So a successful Ukraine might paradoxically require more Western support.

The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of its individual authors.

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Senior Policy Fellow

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