Can Ukraine Say 'Ni' to Political Squabbles?By and
It's not even February yet, and 2010 is shaping up to be a bad year for Viktor Yushchenko, who survived a poisoning attempt by political opponents in 2004 and went on to be elected president of Ukraine. Voters are tired of Yushchenko and seem far fonder of two other candidates vying to succeed him this week: opposition leader Viktor Yanukovych and populist Prime Minister Yulia Timoshenko.
Yushchenko, 55, feuded with Russia and cozied up to the U.S. and the European Union, so should Western policymakers and investors be worried about a Ukraine tilted more toward Moscow? Probably not. Both Yanukovych, 59, who is ahead in the opinion polls, and Timoshenko, 49, say they want better ties with both Moscow and Europe. Political stability under a new president could unfreeze a $16.4 billion bailout loan from the International Monetary Fund, ease conflicts with Russia, and improve the prospects for a free-trade accord with the European Union, predicts Sacha Tessier-Stall, head of foreign policy at Kiev's International Centre for Policy Studies. "No matter who wins, there will be an improvement," he says.
The election may also improve Europe's energy security. The EU relies on Russia for a quarter of its natural gas, and 80% of that passes through Ukraine, a country of 46 million that's about as big as France. Disputes over prices led Russia to turn off the gas to Ukraine in January 2006 and January 2009, which in turn caused fuel shortages in the EU. In November, Timoshenko and Russian Prime Minister Vladimir Putin renegotiated the two countries' gas contract for 2010, easing concerns about a shutoff. "The risk to Europe has decreased," says Gergely Varkonyi, an energy analyst at Deutsche Bank (DB) in Budapest.
With 18 candidates competing, no one is likely to gain the 50% majority needed to win outright. That means Yanukovych and Timoshenko will likely face each other in a runoff on Feb. 7. Whoever emerges triumphant already knows how bad the path forward is. Ukraine's gross domestic product shrank an estimated 14% in 2009. The country's currency, the hryvnia, was the world's worst performing vs. the U.S. dollar in the year ended in September. And Ukraine is the world's second-least creditworthy economy behind Argentina, as measured by the cost of credit-default swaps that protect bondholders.
High on the agenda for the new president will be unfreezing IMF money. Ukraine secured the loan in late 2008 after the global credit crisis crippled its exports and financial sector. But the IMF delayed a $3.4 billion installment in November after lawmakers failed to pass a 2010 budget while raising social spending. "The political infighting that has paralyzed the country has to stop," says Jorge Zukoski, president of the American Chamber of Commerce in Ukraine.
If Ukraine stabilizes its politics after the election, the country stands a chance of returning to growth. That could give foreign investment a boost. Since Yushchenko took over the presidency in early 2005, Ukraine has attracted some $36 billion in foreign direct investment from companies such as Luxembourg's Arcelor-Mittal (MT), Italy's UniCredit Group, and French retailer Groupe Auchan. Between 1999 and 2004, the country pulled in just $5.7 billion in foreign direct investment.
Under Yushchenko, the country won membership in the World Trade Organization and the EU declared Ukraine a market economy. Now, both Yanukovych and Timoshenko support signing an association agreement with the EU, which includes a free-trade pact. Says Ivan Tchakarov, an emerging markets analyst at Nomura Holdings in London: "Ukraine can be a positive surprise this year."