KYIV -- I have been in Kyiv this week meeting with officials and politicians alike.
Big take out is that I think Ukraine is heading for early elections - although on Friday Poroshenko seemed to rule that out.
And despite Poroshenko's denials (so did Teresa May albeit it did her no good) today I still see good reason for the president to go to the polls early.
First The macro story looks solid this year: the return of growth (2-3%); inflation falling (likely into single digits); the currency stable; FX reserves rising ($17bn -- four months of import cover); the budget in surplus; and the current account deficit contained (3-4% of GDP). He can thus sell a story to the electorate that under his leadership the economy is poised for take off, as recently argued by Anders Aslund. It might be argued about that the global economic outlook and geopolitical settings are uncertain, and it might be better to take the current positive macro setting while you can.
Second The strong fiscal position leaves lots of scope for fiscal pump priming. The budget has been bolstered by dividends from SOEs (Naftogaz), one off receipts from return of Yanukovych assets, and strong nominal GDP growth helping the revenue side.
A supplementary budget, due for approval in the Rada, should increase spending this year on the back of better revenue performance. We might even see pension reform this year. This would boost pensions in the short term, with the pain, in terms of tightening of contributions, only felt from next year.
If pension reform is passed even in the first reading in (July 11-13) this might be enough for the Ministry of Finance to come to market with a Eurobond issue to further bolster MOF coffers. It is highly unlikely that this will be enough to get IMF sign off for the next review of the EFF any time soon. But in a still liquid global market the mere promise of IMF related reforms and a fresh reform mandate might still ensure investor demand - at the right price. Talk still is of any new issue laying the ground for liability management easing the debt hump in 2019 - also a reason to go early with elections.
Poroshenko could also then hail Ukraine's successful re-entry onto international capital markets as a success, only two years after the completion of the 2015 restructuring.
We might even see an attempt to anchor the market by a near term announcement over a replacement of Valeria Gontareva as NBU governor, with Lavrenchuk still in the driving seat there. This would temporarily appease the IFIs if we are heading into a period of delayed structural reform, pending elections or beyond. By finally appointing Lavrenchuk, Poroshenko would win some reform plaudits, and perhaps cut him some slack in other areas where reforms are lagging.
Third Poroshenko can acclaim a number of recent successes: EU visa free travel; final ratification of the EU FTA; the first round and preliminary victory of Naftogaz against Gazprom in the Stockholm courts; a positive meeting and reset in the relationship with President Trump; and perhaps some looming "wins" for Ukraine in the context of the Trump-Putin meeting. There is talk of codifying US sanctions on Russia and of US arming of Ukraine.
Fourth The opposition are in a state of some disarray. Poroshenko outplayed Samopomich leader, Andriy Sadovyi, over the Lviv trash crisis. Tymoshenko seems to have peaked in terms of popularity and is being countered at the moment by the populist Oleh Lyasko. He seems to have been tasked to target the same populist support base of Tymoshenko.
The Opposition Bloc, meanwhile, seems riven by divisions with weak and ineffective leadership. A section around the oligarch Rinat Akhmetov seems closer now to Popular Front leader Yasteniuk and has reasonable relations with the president himself.
The biggest threat to Poroshenko likely would come from new political forces and leaders. The largest threat comes from the musician, Svytoslav Vakarchuk. He could challenge Poroshenko hard in a presidential poll, on a clean reform ticket. But so far he lacks a party movement and base which he would need to govern as president. If Poroshenko moves first with an early parliamentary election, securing control there he might deter Vakarchuk from running in the 2019 poll, delaying any bid until 2024, if then.
I would add here that the current dual PR and single constituency system favors the ruling party as pro government business elites tend to dominate in the latter. We may also see the Bloc Petro Poroshenko and the People's Parties running on a single pro-European ticket to maximize votes for the presidential party of power. Recent efforts to rein in the domestic media in Ukraine suggest an emerging election strategy.
Fifth Difficult and potentially unpopular reform decisions lie ahead, including land reform, health reform, anti corruption, and education reform. By 2019 Poroshenko will need to show progress in returning $6bn lost in the Privatbank case. If he fails to address this issue before the 2019 elections, he could be exposed.
Charitably, it could be argued that Poroshenko wants to arm himself with a fresh, strong mandate before embarking on these reforms. A less charitable interpretation is that there is little will to address the anti-corruption agenda or take on entrenched vested interests and holding elections would just stall delivery, pushing out further implementation.
Sixth There maybe be a window in the conflict in the East where Trump, and German elections, keep Russia on the sidelines or back foot at least till later this year. This would suggest a manageable situation in the East.
The on-going effort to reclassify the ATO as a Russian invasion/war and the prospect of declaring martial law in Donbas would likely play well among the nationalist vote. Russia might favor elections in Ukraine as it would hope to see a strong showing by the Opposition Bloc with Tymoshenko seen as a potential coalition partner against Poroshenko - unlikely in practice.
It is conceivable that the Trump - Putin meeting around the G20 yields some Russian concessions, with perhaps another ceasefire agreed. Poroshenko could claim some credit as a result of his meeting with Trump in DC. The longer the conflict drags in the East in the run up to the slated 2019 presidential poll the more Poroshenko will face questions as to what he has done to stem the still constant Ukrainian casualty count.
Timing? Autumn seems most likely, arguably driven by fissures caused by structural reform. This would also allow pension hikes to hit accounts and while the faint glow of summer holidays is still within memory.
Timothy Ash is senior sovereign strategist for Blue Bay Asset Management in London
Posted July 1, 2017