Global Insight Perspective

Significance

The legislative elections were the first real test for the country, after the Orange Revolution of 2004 seemingly heralded a new phase in its journey towards democratisation. Two years on however, Ukrainians have shown their dissatisfaction with the government by punishing leader Yushchenko.

Implications

Although the opposition Party of the Regions has so far amassed the most votes, it does not have enough for a parliamentary majority, meaning that a coalition will need to be formed among two or more parties. A variety of alliance options are being touted, with second placed Yulia Tymoshenko's BYT expected to be the key in any coalition.

Outlook

The preliminary results come as a huge blow to President Yushchenko, who has seen his popularity erode over the last two years. Having come in third place, his party will now seek to enter into an uneasy alliance, which could jeopardise the ambitious reform programme, and significantly delay attempts to forge closer relations with the West.

An Expected Yet Surprising Result

Ukrainians went to the polls yesterday to elect a new parliament. Although the counting of the votes is still under way, and final results will probably not be available until tomorrow, exit polls have indicated a victory for the opposition, pro-Russia Party of the Regions, led by Viktor Yanukovych. So far, the party leads with 31% of the votes cast, followed in second place by the former prime minister Yulia Tymoshenko's Bloc (BYT) on 24%. In third place is Yushchenko's Our Ukraine party, with just 16% of votes counted so far. The results are preliminary, with over 10% of total votes cast counted so far, but the top three parties are expected to retain their respective positions. The third place finish is a humiliating blow for the president, who will now have to embarrassingly realign his party with Tymoshenko (who he dismissed as PM six months ago) in order to form a parliamentary majority. The president accepted his defeat, choosing to focus instead on hailing the ex-Soviet Union country's first real democratic elections.

Pre-election surveys had already indicated a poor showing for President Viktor Yushchenko, who swept to power in 2004 on the back of the country's Orange Revolution. Since then however, Yushchenko's Our Ukraine has been unable to deliver on several election pledges, for which it was punished yesterday. Following exit poll results, a spokesperson for Our Ukraine was quick to issue a statement agreeing to an alliance with BYT, led by the ambitious Tymoshenko, who is likely to make the merger conditional on being reinstated as prime minister. Tymoshenko has made no secret of her own political ambitions, which had been the source of many a disagreement with Yushchenko.

A reunited Orange Alliance could also include the Socialist Party, which gained around 3% of the votes. If exit polls are to be believed, the three forces would hold some 255 seats in the 450-member Upper Rada chamber, compared with about 195 seats for Party of the Regions and its likely allies, the Communists. Despite its first place finish, the pro-Russian leader of the party, Yanukovych, will then still find himself relegated to the opposition in parliament, albeit a strong opposition.

Outlook and Implications

The preliminary results of yesterday's elections confirm the persistent political divisions still prevalent in post-revolutionary Ukraine. The need for coalition-building in the aftermath of yesterday's elections underlines the failure of the Orange Revolutionaries to deliver on promises, and improve the everyday lives of ordinary Ukrainians, for which the Our Ukraine party of Yushchenko was duly punished. Following the preliminary results, an uneasy alliance to form a parliamentary majority is inevitable, at least in the short term. For the defeated Yushchenko, it is now a case of choosing the lesser evil.

An alliance with Our Ukraine is also a strategic one for the BYT. Having taken second place in the election, the former prime minister is now in a much stronger bargaining position than first expected. Despite ruling out any alliance with Our Ukraine in the pre-election run-up, she must also realise that it is the only viable option in order to realise her political ambitions, advance the party, and remain committed to the Orange Revolution's principle of an increased alliance with the west, including eventual Ukrainian membership of the North Atlantic Treaty Organisation (NATO) and the European Union (EU). Further, these ambitions will be boosted by recent constitutional reforms, which have significantly decreased the president's powers to the advantage of the parliament. Any coalition government formed with Yanukovych would stall reforms, and risks isolating the country from the west.

For Yanukovych, who lost in 2004 to Yushchenko, the results are a double-edged sword. His party did not manage to get as many votes as expected to allow him to form a parliamentary majority. He is expected to remain in opposition, as the Orange Revolution parties snub his appeals for an alliance.

Tymoshenko, known for her zeal against Kuchma-era tycoons, the issue of revisiting privatisation auctions, and a distinct anti-Russia stance, alienated many of Ukraine's business elite during her days as head of the government, and even took some highly suspicious measures when confronted with acute economic problems, such as a fuels crisis that occurred in May 2005, as the price ceilings that were imposed only resulted in a production shutdown from refinery companies. The question is, whether she will resort once more to such policy measures, and resume a much tougher stance against cronies of the former regime. The Yekhanurov government, meanwhile, was much more consensus-oriented, trying to find a way to work with the former enemy. Another big question is how Russia will react to a likely re-emergence of Tymoshenko as Prime Minister. The possibility that Russia will play hard-ball again in terms of gas prices, thus threatening the nascent stabilisation of the Ukrainian economy after the protracted slowdown in 2005, should not be ruled out.

After all, though, the political scene for the next three years has now been set, and the uncertainty about the election outcome that gripped Ukrainian political and economic life throughout 2005 and in early 2006 is waning – probably a benefit in itself in the eyes of many investors - although the course of the new government is still far from clear. But the personnel line-up is already emerging, at least. Radical policy changes are quite unlikely in any case, but, given their history of growing mutual distrust and rising tensions, the potential for dissent within a BYT-Our Ukraine-coalition is considerable, and one should be prepared for a rough road ahead.

Contact: Raul Dary

24 Hartwell Ave.
Lexington, MA 02421, USA
Tel: 781.301.9314
Cel: 857.222.0556
Fax: 781.301.9416
raul.dary@globalinsight.com

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