Ukraine

Politics:

• Analysis

  Ukraine politics: Quick View - Amid scuffles, Azarov returns as prime minis

  Event

  On December 13th Mykola Azarov was re-elected as prime minister, amid mass brawls of MPs in the Verkhovna Rada (parliament).

  Analysis

  Despite vigorous opposition protests, the Party of Regions (PoR) was able, as expected, to garner sufficient support to reselect Mr Azarov as prime minister. Mr Azarov's resignation ten days earlier was a formality, as the president, Viktor Yanukovych, had indicated that he thought Mr Azarov remained the best candidate for the job-which in any case may have had few volunteers in the currently grim economic situation.

  The PoR on its own was unable to secure a majority of votes in the new parliament. The party won 185 seats in the parliamentary election of October 2012. However, although it has not formed an official coalition with the Communist Party of Ukraine (CPU, which has 32 MPs), the PoR can count on the support of both the CPU and a large majority of the nominally independent MPs. With their help, the PoR also voted in a new speaker, Volodymyr Rybak, a senior figure in the PoR who is considered a Yanukovych loyalist. Both Mr Azarov and Mr Rybak were elected with more than 250 votes in the 450-seat legislature, when they needed just 226. However, the inaugural session of the new parliament descended into chaos as some opposition MPs scuffled with the pro-government deputies in unsuccessful attempts to prevent the election of Mr Azarov and Mr Rybak.

  The opening days of the new parliament have shown that the PoR now faces a more challenging period in office. As a result of its reduced dominance in the chamber, the party may have to offer substantial concessions to its informal partners-the CPU and the independents-in order to secure their support for important legislative initiatives, including those necessary to make sure of obtaining an economic rescue package from the IMF. Mr Azarov has said that Ukraine is prepared to find compromises with the IMF, but the alignment of forces in parliament could make this a harder proposition than it would have been in the previous parliament.

  Impact on the forecast

  Considerable continuity between the outgoing and incoming governments, as well as the prospect that the government's control of parliament could be weaker than before, are in line with our current political forecast.

  December 14, 2012

• Background

  Ukraine: Political forces at a glance

  Current government: The government is based on a parliamentary coalition between the Party of Regions (PoR) of the new president, Viktor Yanukovych, the Lytvyn Bloc of the parliamentary speaker, and the Communist Party of Ukraine (CPU). The coalition, which has 235 votes in the 450-seat parliament, also includes a number of individual deputies from the opposition Our Ukraine-People's Self-Defence (OU-PSD; formerly aligned with the previous president, Viktor Yushchenko) and the Yuliya Tymoshenko Bloc (YTB) of the previous prime minister. The current government replaced the outgoing one, which was based on a parliamentary coalition between the YTB, the OU-PSD and the Lytvyn Bloc, in March 2010, following the January-February presidential election. In April the Constitutional Court ruled the coalition constitutional after a challenge by the opposition.

  Parliamentary election, Sep 30th 2007
  Party or bloc	% of votes	Seats (no.)
  Party of Regions	34.37	175
  Yuliya Tymoshenko Bloc	30.71	156
  Our Ukraine-People's Self-Defence	14.15	72
  Communist Party of Ukraine	5.39	27
  Lytvyn Bloc	3.96	20
  Socialist Party of Ukraine	2.86	-
  Progressive Socialist Party of Ukraine	1.32	-
  Others	2.78	-
  Against all	2.73	-
  Invalid ballot papers	1.62	-
  Total	100.00	450
  Source: Central Election Commission.

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  Next elections: The next scheduled parliamentary election is in September 2012 and the next presidential election in 2015.

  May 06, 2010

• Structure

  Ukraine: Political structure

  Official name

  Ukraine

  Legal system

  A new constitution was approved by the Verkhovna Rada on June 28th 1996 and amended in 2004

  National legislature

  Verkhovna Rada (Supreme Council, or parliament); unicameral assembly of 450 deputies

  National elections

  October 28th 2012 (parliamentary); January-February 2010 (presidential). Next scheduled parliamentary election in 2017; next presidential election in 2015

  Head of state

  President, currently Viktor Yanukovych, sworn in on February 25th 2010

  National government

  A coalition of the Party of Regions, the Communist Party of Ukraine and the Lytvyn Bloc, together with several individual deputies from the Yuliya Tymoshenko Bloc and Our Ukraine-People's Self-Defence, appointed a cabinet in March 2010. A new government has not yet been appointed

  Main political factions in parliament

  The largest faction in parliament is the Party of Regions (PoR; 185 seats). Other factions are United Opposition (101); Ukrainian Democratic Alliance for Reform (UDAR; 40); Freedom (37); Communist Party of Ukraine (CPU; 32); independent MPs (43)

  Prime minister: Mykola Azarov

  First deputy prime minister & minister of economic development & trade: Valeriy Khoroshkovsky

  Deputy prime minister & minister of regional development, construction & housing: Viktor Tykhonov

  Deputy prime minister & minister of social policy: Serhiy Tihipko

  Deputy prime minister & minister of infrastructure: Borys Kolesnikov

  Key ministers

  Agrarian policy: Mykola Prysyazhnyuk

  Culture: Mykhailo Kulynyak

  Defence: Dmytro Salamatin

  Education, youth & sports: Dmytro Tabachnyk

  Emergencies: Viktor Baloha

  Energy & coal industry: Yury Boyko

  Environment & natural resources: Mykola Zlochevsky

  Finance: Yury Kolobov

  Foreign affairs: Kostyantyn Hryshchenko

  Health: Raisa Bohatyriova

  Interior: Anatoliy Mohylyov

  Justice: Oleksandr Lavrinovich

  Chair of parliament

  Volodymyr Lytvyn

  Central bank governor

  Serhiy Arbuzov

  December 07, 2012

• Outlook

  Ukraine: Key developments

  Outlook for 2013-17

  • Following the parliamentary election on October 28th 2012, a new government coalition is again likely to be led by the Party of Regions (PoR) of the president, Viktor Yanukovych.
  • The PoR could find it hard to keep such a coalition cohesive, however, if pursuit of austerity measures alienates the Communist Party of Ukraine (CPU), its ally in the outgoing government coalition.
  • The United Opposition and the Ukrainian Democratic Alliance for Reform (UDAR) might find it hard to work closely with Freedom, unless it tempers its extreme nationalist stance.
  • The negotiation of an IMF programme is vital, and looks likely in early 2013. Pre-election policies will make the budget target hard to meet in 2012, but a renewed phase of fiscal consolidation in likely to ensue.
  • The defence of the official hryvnya exchange rate continues to come at a high cost, and an attempt at a controlled devaluation seems likely to be delayed until early 2013.
  • Despite a marked weakening in the second half, we think that the economy will grow in 2012 as a whole-albeit by just 0.5% in real terms. It will strengthen modestly in 2013-17, to an annual average of just over 3%.
  • Inflation is estimated at below 1% in 2012, but the year-end rate is likely to be higher, owing to an upturn in food price growth. Average inflation will rise in 2013, owing mainly to devaluation, but drop to 5.5% in 2017.
  • We estimate that the current-account deficit will widen in 2012, to close to 8% of GDP. We forecast that it will shrink in 2013-17 as a share of GDP.

  Review

  • In the wake of the parliamentary election, the votes in five electoral districts in which the outcomes were indecisive are to be run again in early 2013.
  • Several currency control measures have been promulgated or proposed, including the mandatory sale of half of exporters' foreign-exchange earnings.
  • The state budget deficit recorded another steep deterioration in October, taking the shortfall for the first ten months to HRN33.2bn (US$4.2bn; 2.9% of estimated GDP).
  • Industrial production contracted by 1.5% year on year in January-October. The current-account deficit widened to US$11.1bn.

  December 07, 2012

Economy:

• Background

  Ukraine: Country fact sheet

  Fact sheet

  Annual data	2011a	Historical averages (%)	2007-11
  Population (m)	45.6	Population growth	-0.5
  GDP (US$ bn; market exchange rate)	165.2b	Real GDP growth	0.6
  GDP (US$ bn; purchasing power parity)	329.8	Real domestic demand growth	3.1
  GDP per head (US$; market exchange rate)	3,624	Inflation	14.1
  GDP per head (US$; purchasing power parity)	7,233	Current-account balance (% of GDP)	-4.1
  Exchange rate HRN:US$ (av)	7.97b	FDI inflows (% of GDP)	5.2
  a Economist Intelligence Unit estimates. b Actual.

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  Background: Ukraine declared independence from the Soviet Union in 1991. The first president, Leonid Kravchuk, focused on state-building at the expense of reforms. Leonid Kuchma, his successor, accepted the need for IMF-backed reforms, but his tense relations with parliament hampered progress. Mr Kuchma's scandal-ridden second term was characterised by backsliding on democratisation and an increasingly powerful role for "oligarchic" elites. The election of the opposition leader, Viktor Yushchenko, as president in December 2004 led to greater political openness, but power struggles with the government and parliament severely impeded policymaking, and vested interests remain strong. Mr Yushchenko's erstwhile opponent, Viktor Yanukovych, won the presidential election in early 2010 and his Party of Regions (PoR), came first in the parliamentary election of October 2012.

  Political structure: Constitutional changes to reduce the powers of the presidency relative to parliament took effect at the start of 2006, giving parliamentarians the leading role in forming the cabinet. However, the transition to a more parliamentary system sparked power struggles between the president and the government. Following an appeal by Mr Yanukovych, in late 2010 the Constitutional Court rescinded the constitutional reform of 2006. The president can now determine the candidacy of the prime minister independently of parliament, and has the right to appoint and dismiss cabinet members. The president can dismiss the government without parliament's consent.

  Policy issues: The global financial and economic crisis hit Ukraine particularly hard, prompting agreement in late 2008 on a US$16.4bn IMF programme to help to stabilise the economy. Ukraine's compliance with the IMF's terms was poor. In July 2010 the new government sealed a new IMF programme, totalling US$15.4bn over the next two and a half years, but disbursement was suspended following a lack of compliance. Following the parliamentary election in 2012, a tightening of fiscal policy and a devaluation of the hryvnya are likely, probably in early 2013. Fiscal consolidation will require improving the situation of state energy firm, Naftogaz, by raising tariffs for domestic gas.

  Taxation: Personal income is taxed at 15% and 17%. The corporate tax rate is 23% and value-added tax (VAT) is 20%.

  Foreign trade: Ukraine remains dependent on Russia for most of its energy imports (although it is attempting to reduce its dependence), and Russia is still an important market for Ukrainian metals and machine-building. Ukraine has nevertheless made progress in diversifying into new markets, including the EU and Asia. Exports to Europe exceed those to Russia, but are dominated by products of low value added.

  Major exports 2011	% of total	Major imports 2011	% of total
  Non-precious metals	32.3	Fuel & energy, incl ores	36.4
  Food, beverages & agricultural products	18.7	Machinery & equipment	24.3
  Machinery & equipment	17.4	Chemicals	9.7
  Fuel & energy, incl ores	15.0	Food, beverages & agricultural products	7.7
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  Russia	26.9	Russia	28.7
  Turkey	5.8	Germany	8.4
  Italy	4.6	China	8.3
  Poland	3.8	Poland	5.0

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  December 07, 2012

• Structure

  Ukraine: Economic structure

  Data and charts: Annual trends charts

  
  

  

  December 07, 2012

• Outlook

  Ukraine: Country outlook

  Ukraine: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: Results from the parliamentary election on October 28th point to the formation of another government headed by the Party of Regions (PoR) of the president, Viktor Yanukovych, probably with the Communist Party of Ukraine (CPU). The PoR did better than opinion polls predicted. The strength of the new coalition government in parliament will be boosted by the addition of a large number of nominally independent deputies, as well as some from the opposition parties who will be tempted to change sides. Nonetheless, the incoming government is likely to have a reduced parliamentary majority, which could hamper its legislative effectiveness just when several urgent economic policy decisions can no longer be postponed.

  ELECTION WATCH: The PoR came first in the election, with 30% backing on the party lists and around one-half the seats in the single-mandate constituencies in the mixed electoral system. This will take its total representation in the 450-seat parliament to around 185. Its most likely ally in a new coalition, the CPU, saw the number of its seats rise to 32, from 25 in the election in 2007, and its share of the popular vote more than doubled. However, the PoR may prefer to rely primarily on the nominally independent parliamentarians who between them won 43 seats. The votes in five electoral districts in which the outcomes were indecisive are to be run again in early 2013.

  INTERNATIONAL RELATIONS: Ukraine's uneasy relationship with the EU has been brought back into focus by the election. The country signed an EU association agreement earlier in 2012, but its ratification has been delayed because of EU concerns about a deterioration in democratic practice under Mr Yanukovych. The EU sees the treatment of Yuliya Tymoshenko, a jailed former prime minister, as symptomatic of a politicisation of the judiciary.

  POLICY TRENDS: Fiscal and exchange-rate policies have returned to the top of the agenda. In the run-up to the election the budget balance was allowed to deteriorate. The fixing of the hryvnya against the US dollar has cost around one-third of foreign-exchange reserves over the past year. The relatively high interest rates needed to support the currency have deterred borrowing, even as the external economic picture has worsened. The postponement of the formulation of a budget for 2013 should produce a more realistic fiscal plan. This will include cuts in spending and tackle the thorny issue of domestic gas price tariffs. An attempt at a controlled devaluation of the hryvnya is also likely, to support economic growth and to begin to redress the widening external imbalance. For the moment, the authorities have introduced or proposed several administrative methods, including mandatory sales of one-half of exporters' foreign-exchange earnings, and a 15% tax on conversions of foreign currency into hryvnya. The government probably hopes to put in place the conditions to prevent external destabilisation first, before it eases its grip on the currency. Core among these conditions would be the resumption of a lending programme with the IMF.

  ECONOMIC GROWTH: In 2011 real GDP growth accelerated to 5.2%, driven by the recovery of the household sector, a pick-up in investment and an expansion in industrial exports. In the second half of 2011 industrial growth slackened as external demand weakened.

  INFLATION: Average inflation slowed to 8% in 2011 from 9.4% in 2010. Inflation was low and decelerating in early 2012, reflecting slowing or declining food price inflation. A fall in headline inflation that began in May deepened in June, but deflation weakened markedly in July, and in August-October year-on-year inflation was flat. However, high energy costs and a return of some food price growth in the remainder of the year will keep price growth positive for 2012 as a whole. The Economist Intelligence Unit estimates average annual inflation at just below 1%.

  EXCHANGE RATES: The official rate of the hryvnya has been broadly steady since May 2011. Intervention by the National Bank of Ukraine (NBU, the central bank) reflected government concern in the run-up to the election about the impact of a devaluation, as large shares of public and private loans are in foreign currency. The hryvnya came under stronger downward pressure after the parliamentary election at the end of October 2012, reflecting concerns over the deterioration of the budget, the external account and economic growth, amid rising expectations of devaluation.

  EXTERNAL SECTOR: The strengthening of demand for investment and consumer goods widened the trade deficit in 2011, along with the current-account deficit, which grew to US$10.2bn (6.2% of GDP). In 2012 the high cost of fuel imports has continued to weigh on the external balance. Lower average steel prices and weaker global demand have reduced returns on exports. The shortfall on the current account widened to almost US$11.1bn in January-October, compared with around US$7.5bn in the year-earlier period. Exports are unlikely to receive a boost from currency depreciation. We have therefore revised our estimate to a current-account deficit of almost 8% in 2012. The current-account deficit is forecast to shrink as external demand recovers weakly, but to average around 6% of GDP in 2013-17.

  December 07, 2012

• Forecast

  Ukraine: Country forecast summary

  Country forecast overview: Highlights

  • Following the parliamentary election on October 28th, a new government coalition is again likely to be led by the Party of Regions (PoR) of the president, Viktor Yanukovych. The PoR could find it hard to maintain a cohesive coalition, if pursuit of austerity alienates the Communist Party of Ukraine (CPU), its ally in the outgoing government coalition.
  • The PoR has won 185 seats in the 450-seat parliament. The United Opposition came second, taking 101 seats. Two other opposition parties-the Ukrainian Democratic Alliance for Reform (UDAR) and Freedom-took just under than 80 seats between them. The Communist Party of Ukraine (CPU) has 32 members of parliament (MPs), up from 25 previously.
  • Some initial negative assessments of the election by international observers could jeopardise Ukraine's EU prospects. However, compromises are likely to be made to allow progress on Ukraine's association agreement.
  • Relations with Russia have been strained. In October Mykola Azarov, the Ukrainian prime minister, said that Russia had offered a cut the gas price in return for joining the customs union, but the Ukrainian elite are wary of joining a Russian-dominated organisation. Greater economic co-operation with China may give Ukraine additional room for manoeuvre.
  • In 2010 the IMF executive board approved a new, two-and-a-half-year lending programme, worth US$15.4bn. Disbursements have been frozen because of the government's reluctance to raise gas tariffs. The negotiation of an IMF programme will be vital for dealing with a range of urgent economic problems.
  • The defence of the hryvnya continues to come at a high cost, and an attempt at a controlled devaluation may be delayed until early 2013.
  • Pre-election polices will make the budget target hard to meet in 2012, but a renewed phase of fiscal consolidation in likely to ensue.
  • The Economist Intelligence Unit estimates that real GDP will grow by just 0.5% in real terms in 2012. It will strengthen modestly in 2013-17, to an annual average of just over 3%. Inflation should fall to an average of just below 1% in 2012, but pick up considerably in 2013.
  • The current-account deficit widened in the first ten months of 2012. It is therefore likely to widen in 2012, but it will shrink as a share of GDP in 2013-17.

  Country forecast overview: Key indicators

  Key indicators	2012	2013	2014	2015	2016	2017
  Real GDP growth (%)	0.5	2.1	2.9	3.4	3.5	3.5
  Consumer price inflation (%)	0.8	7.9	6.5	6.3	5.7	5.5
  Consolidated budget balance (% of GDP)	-3.5	-3.3	-3.1	-3.0	-3.2	-3.0
  Current-account balance (% of GDP)	-7.9	-7.2	-6.1	-6.6	-5.6	-4.8
  Commercial banks' prime rate (av; %)	16.0	15.0	13.0	12.0	12.0	12.0
  Exchange rate HRN:US$ (av)	7.99	8.71	8.65	8.54	8.41	8.19
  Exchange rate HRN:€ (av)	10.26	10.99	10.83	10.57	10.60	10.32

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  December 07, 2012

View detailed map

Country Briefing

Land area

603,700 sq km, of which about 55% is cultivated

Population

45.8m (end-2009)

Main towns

Population in '000 (December 2001 census)

Kiev (capital): 2,602

Kharkiv: 1,470

Dnipropetrovsk: 1,065

Odessa: 1,029

Donetsk: 1,016

Climate

Situated in the central part of the northern temperate zone, Ukraine has a moderate continental climate with four distinct seasons. The southern coast of Crimea has a Mediterranean climate. The average annual temperature in Kiev is 7.2°C. The coldest month is January, when the average temperature is 5.8°C, and the hottest month is July, when the average temperature is 19.3°C. Precipitation in the Kiev region averages 600 mm per year

Language

Ukrainian, a member of the East Slavonic group, is the official language; however, Russian is equally widely spoken in eastern Ukraine, Kiev and parts of the countryside

Measures

Metric system

Currency

The hryvnya replaced the karbovanets on September 2nd 1996 at a rate of HRN1:Krb100,000

Time

Two hours ahead of GMT

Public holidays

January 1st (New Year); January 7th (Christmas, Orthodox Church calendar); March 8th (International Women's Day); April 15th (Easter), May 1st (Labour Day); May 9th (Victory Day); June 3rd (Trinity Day), June 28th (Constitution Day); August 24th (Independence Day)

March 12, 2012