Ukraine Stability Lures Investors, Europe Ambitions Fade

Ukrainian President Viktor Yanukovych’s probable victory in parliamentary elections sparked a rally in the nation’s debt and equities as investors focus on political stability over fading hopes of closer European ties.

Ukraine’s dollar Eurobond due 2017 climbed today, cutting the yield to the lowest level since it was sold in July, and credit-default swaps narrowed for a second session after partial results suggested Yanukovych’s ruling party won more votes than rivals in a ballot monitors deemed unfair.

The government, which trumpets stability and economic growth among its successes, had wanted the election deemed democratic to thaw a planned Association Agreement with the European Union. Investors were attracted by continuity in the former Soviet republic where the Orange Revolution helped overturn Yanukovych’s presidential ballot win in 2004.

“The good news is that political instability has been kept to a minimum and we haven’t seen a lot of protests,” Liza Ermolenko, an emerging-markets economist at Capital Economics Ltd. in London, said yesterday by phone. “The markets have been pretty happy about this.”

Ukraine’s 2017 Eurobond rose, cutting the yield 23 basis points to 7.11 percent by 11:10 a.m. in the capital, Kiev. That’s the biggest decline since Oct. 16.

Stocks, Hryvnia

The benchmark Ukrainian Equities Index (UX) was down 1.4 percent to 862.74 after rising 6.2 percent yesterday. The hryvnia declined 1.3 percent to 8.1803 per dollar.

The cost of insuring Ukraine’s government debt for five years using credit-default swaps dropped 67 basis points this month to 638, reflecting an improved perception of risk. The swaps cost 849 basis points at the end of last year, according to data compiled by Bloomberg.

After expanding 5.2 percent last year and 4.7 percent in 2010, gross domestic product will contract in the second half because of lower prices for steel, Ukraine’s main export earner, Erste Bank AG and HSBC Holdings Plc have predicted.

Ukraine’s authorities face “some difficult decisions at a time of weak growth,” Gillian Edgeworth, a London-based economist at UniCredit, wrote yesterday in an e-mailed note. Before the 2015 presidential elections, Yanukovych has time “to put in place measures to at least improve his chances of keeping the economy on a relatively stable path.”

Monitors’ Verdict

Yanukovych’s Party of Regions had almost a third of party- list votes and was leading in almost half of the 450-seat legislature’s 225 single-mandate constituencies, partial results showed.

State media favored the governing party in election coverage, while campaign financing was opaque, administrative resources were abused and opposition candidates imprisoned, the Organization for Security and Cooperation in Europe said.

The elections “were characterized by a tilted playing field,” OSCE mission chief Walburga Habsburg Douglas told reporters yesterday in Kiev. “Considering the abuse of power and the excessive role of money in these elections, democratic progress appears to have reversed.”

The verdict suggested no boost to ties with Europe, which nosedived after ex-Premier Yulia Tymoshenko was jailed for seven years in 2011.

‘All Shortcomings’

The observers’ remarks will be analyzed and “all shortcomings” will be taken into account to improve electoral laws and practices, Foreign Minister Kostyantyn Gryshchenko said in a statement.

The Party of Regions garnered 31.68 percent of votes, compared with 24.23 percent for opposition groups united under Tymoshenko, with 88.62 percent of ballots counted in party-list voting as of 11:19 a.m. in Kiev, the Central Electoral Commission said on its website.

Heavyweight titleholder Vitali Klitschko’s UDAR won 13.49 percent of ballots, the Communists, Yanukovych’s current coalition partner, received 13.84 percent and the nationalist party Svoboda had 9.63 percent. Ukraine Forward, for which soccer star Andriy Shevchenko campaigned, didn’t meet the 5 percent parliamentary entry threshold, the figures showed.

The Party of Regions was leading in 116 single-seat constituencies, with the Tymoshenko-led opposition winning 43 races, according to the Central Electoral Commission’s website.

“The election results allow us to state that the essence of Ukraine’s domestic and foreign policy won’t change,” Gryshchenko said.

The International Republican Institute, which sent a delegation to Ukraine to observe more than 160 polling stations, said that while the elections were held “in an orderly manner,” they featured an “uneven” playing field.

“Ukraine continues to fall short in ensuring voters a campaign in which candidates have an equal opportunity to be heard and they can be confident that their individual votes count,” it said yesterday in an e-mailed statement. “After more than 20 years of independence, Ukraine still faces significant obstacles to its democratic development.”

To contact the reporters on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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