Global Insight Perspective

Significance

Socialist Party (SPU) leader Oleksandr Moroz has confirmed his party's unexpected and dramatic volte-face formalising the SPU's defection from the "Orange" camp and inking a coalition agreement with the Party of Regions (PoR) and the Communist Party (CPU). The nomination of Viktor Yanukovych, the leader of the PoR as prime minister is highly controversial and could result in another political stand-off similar to the scenes prior to the 2004 Orange Revolution.

Implications

The prospect of Yanukovych as prime minister leading a fractious coalition continues to leave President Viktor Yushchenko and his Our Ukraine (OU) bloc in a quandary; Moroz has indicated that he will seek to build a "grand coalition" including the SPU, PoR and Yushchenko's OU party. Such a coalition has the potential to deliver a stable, broadly pro-market reform government while giving the appearance of reconciling Ukraine's "east-west" spilt. Nevertheless, the nomination of Yanukovych is controversial and may be a step too far for those OU deputies who had been keen on forming a "grand coalition".

Outlook

There is the very real prospect now that if Yushchenko does not agree the new coalition and Yanukovych's nomination then a number of his supporters within OU will move into the new coalition anyway. At the same time, without Yushchenko's support the new coalition's prospects appear bleak. While PoR remains the largest party in parliament, the majority of Ukrainians still voted for the Orange parties and are firmly against Yanukovych and his allies. As such the PoR is prepared to cooperate with OU but in an effort to keep his party together Yushchenko may favour new elections, which raises the prospect that OU could be eliminated as a political force.

Risk Ratings

Global Insight had downgraded Ukraine's political risk to 3.00 during the September 2005 political crisis. This new tenuous coalition, allied to the prospect of a parliamentary boycott from the Orange parties warrants a further downgrade to 3.25. There is the need for consolidation among the Orange parties. While another election may lead to a situation in which the various parties can break the deadlock, calling elections could in itself herald a constitutional crisis while Yushchenko must balance his instincts for self-preservation with the interests of the Orange ideals.

Chaos in Kiev

Ukraine's political soap-opera has once again taken an unexpected turn, reviving the prospect of a return to the carnival days prior to the controversial 2004 presidential elections. Such is the ironic nature of Ukrainian politics that yesterday's formal creation of a new majority coalition,self-described as the "anti-crisis" coalition, immediately sparked a political and constitutional crisis in the 450-seat Verkhovna Rada (unicameral parliament). Having shocked the country by defecting from the Orange camp, newly elected speaker of parliament Oleksandr Moroz confirmed that 19 of his Socialist Party's (SPU) 33 deputies had agreed to form a coalition with the main opposition party, the Party of Regions (PoR) which controls 186 seats and the unreliable Communist Party (22 seats). In total, this new coalition has some 233 seats in the 450-seat parliament which means that it would enjoy a slim majority.

Moroz's announcement of the new coalition came during a chaotic scene in parliament which was met with applause from the new coalition members, and shouts of "Judas" from his former Orange allies. When coalition members tried to take the floor, deputies from the Yulia Tymoshenko Bloc (BYT) used sirens to disrupt proceedings. The new coalition also used the event to nominate Viktor Yanukovych, whose fraudulent attempts to steal the 2004 presidential elections sparked the Orange Revolution, as prime minister. As leader of the PoR, the largest party in the would-be coalition, Yanukovych is perfectly entitled to be nominated as prime minister, but he remains such as divisive figure in Ukraine and his candidacy once again threatens to expose those divisions.

Under the constitution, President Yushchenko now has 15 days to consider the nomination and return it to parliament, but he has no right of veto, and the move could spark a constitutional crisis. The announcement of the new coalition on 6/7 July had left President Yushchenko and his Our Ukraine (OU) bloc in a difficult position. As the largest party in the Rada with 186 deputies, enjoying total control of regional legislatures in the majority of Ukraine's southern and eastern constituencies, an alliance in a "grand coalition" comprising the SPU-OU-PoR had a number of potential benefits for Yushchenko and Ukraine. Despite their differences over foreign policy (with OU advocating a pro-Western foreign policy line, while the PoR is determined to maintain close ties to Russia) the two parties have a number of similar policies. Both are essentially centre-right parties with predominately liberal beliefs and an evolutionary approach despite the populist policy platforms that both parties adopted before the March parliamentary election.

Nevertheless, such an alliance, especially with Yanukovych as premier, remains fraught with danger for OU and Yushchenko. By going into coalition with the PoR, Yushchenko would have effectively given former Prime Minister Yulia Tymoshenko the freedom to move into opposition and attract all of those disenchanted OU and SPU deputies and voters who still believe that an alliance with PoR and its leader Viktor Yanukovych is a betrayal of all of the ideals of the Orange Revolution. From there she will be able to denounce the government's every move and begin preparations for the presidential election campaign in 2009.

Moreover, OU itself remain deeply divided over joining the PoR-SPU alliance. The party's powerful financial backers, who hold around one-third of OU's seats, have openly advocated joining a "grand alliance" but another third have passionately called for Yushchenko to resist and stay with Tymoshenko in opposition.

Outlook and Implications

The early indications are that Yushchenko has opted to steer his party towards Tymoshenko and away from the PoR. This could result in OU losing half of its deputies to the PoR, leaving the party in the shadow of Tymoshenko's BYT faction. However, the fact is that the PoR and the SPU need the support of Yushchenko in order for the coalition to have any meaning and potential for success. While the PoR is the largest party in parliament, the majority of Ukrainians still voted for the "Orange" parties at the 2006 elections and are firmly against Yanukovych and his allies. Indeed, a PoR-CPU-SPU coalition conjures up images of the pre-Orange Revolution period and given the fact that the CPU are unreliable allies, allied to the fact that the BYT and OU have declared that they will block parliament, this coalition is destined to be short-lived.

Both Yushchenko and Tymoshenko have now resorted to calling for repeated elections and it is becoming clear that new elections will be the only way to break the impasse. However, this in itself presents risks for all parties, but especially Yushchenko and OU. It would be strategically wise for the OU faction that chooses opposition to unite with BYT, create a new party and consolidate the Orange parties, but this does not appear to be on the agenda. After four months of protracted and bitter negotiations which have damaged the country's investment image, undermined the electorate's faith in its leaders and stalled any progress towards political and economic reform, the electorate are exasperated with OU, whose political rating has plunged into single figures.

Raul Dary

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raul.dary@globalinsight.com

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