The Political and Economic Situation in Ukraine

The Political and Economic Situation in Ukraine: How ICPS sees it Presentation International Centre for Policy Studies 12 July 2006 Plan of Presentation 1. The political situation in Ukraine • State of democracy in Ukraine • Possible developments of the current situation 2. Foreign policy • Relations with Russia • EU-related policy • Policy related to the US and NATO 3. Economic situation • Current trends • Problems in economic growth • Outlook • Risks Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 2 The Political Situation in Ukraine Ivan Presniakov 3 The foundation for democracy is in place • Free media – Deliberate rejection of censorship and political pressure, the private opinions of journalists – A free media at the national level, less pressure on media at the regional level. Media track and analyze the actions of those in power. – Improved legislation on elections, political will among top officials, a distinct political opinion among most voters – Transparent election to the legislature, overall tendency to democratization at the local level as well – The principled position of voters during the elections, the understood position of NGOs in the political process • Democratic elections • Civil Society Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 4 Foundation for democracy in place (2) • Democratic process for appointing a Government – New standards in the Constitution regarding the forming of a Govenrment, deliberate refusal by the president to participate in coalition talks and pressure participants from above – Government formed by a coalition of deputy factions; conditions in place for factions and Government both to be more politically accountable • A strong opposition regardless of what the majority is – The Administration recognizes the importance of an opposition for a functional democracy, no administrative pressure on the opposition – A powerful opposition in the legislature, a victory for the opposition in local elections in most regions of Ukraine Tel. (380-44) 484-4400 Web: www.icps.kiev.ua Міжнародний центр перспективних досліджень International Centre for Policy Studies 5 Democracy has not been consolidated • An unformed Constitutional Court • Relations between Government and opposition not normalized • Coalition-building process ineffective and opaque • Voters unhappy with the political process Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 6 The Constitutional Court remains unformed • Why is the Constitutional Court still unformed? – The lack of a CC allows all politicians to interpret their constitutional powers for their own benefit • Why is the Constitutional Court especially important at this time? – The political stand-off between the president, the opposition and the coalition, and between the central government and local councils is growing • The Constitutional Court is empowered to regulate relations: – Between the president and the Government – Between the ruling coalition and the opposition – Between the central Government and locally elected councils Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 7 Relations between the Government and opposition are not normalized • Current norms do not ensure the rights of the opposition to act • There is no tradition of a coalition and opposition living side by side in democratically – The ruling coalition tends to see the opposition as an underling – The opposition, while not taking on this role, still does not always understand that it is part of the government • Finding themselves in the opposition, political forces try at any cost to join or to form a coalition, not shying from any kind of tactics: – Blocking the podium in the Verkhovna Rada – Disrupting votes – Demanding a new election • To avoid further political destabilization, the rights of the opposition need to be normalized and a portion of political power needs to be given to it (especially in the regions, where the opposition won at the local level) Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 8 The coalition-building process is ineffective and opaque • A coalition consisting of Nasha Ukraina, BYT and SPU proved untenable – The coalition failed to understand the importance of establishing the rights of the opposition, as a result of which the work of the legislature was blocked for two weeks – The mechanisms for political coordination within the coalition proved ineffective. As a result, the coalition collapsed during the first meaningful vote – Real problems within the coalition remained hidden until they wrecked the coalition itself – The formation of this coalition is not following proper rules and procedures • There is no Action Plan or Coalition Regulation • Unless it also agrees a program, the new coalition is only about handing out portfolios • A coalition consisting of PR, SPU and CPU so far is also ineffective Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 9 Voters are unhappy with the political process • Consumer Confidence (joint research by ICPS and GfK Ukraine): • The Index of Consumer Confidence, which establishes voter expectations of the country’s economic development fell noticeably in April 2006 • Opinion poll by Democratic Initiatives (June 2006): • Voters are unhappy with the way democracy is working in Ukraine (the level of satisfaction with democracy is no higher than it was in 2004!) • Voter confidence in political institutions and politicians has dropped in the last half-year Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 10 Democratic consolidation: Outlook The democratic situation is guaranteed by the position of key top officials (the president), but has not yet been transformed into a system of institutions and mechanisms • The short term risk of democratic regression is low • The democratic system is still shaky and somewhat ineffective, which is affecting the voter mood negatively • Should relations among the branches of power remain unregulated, this could threaten the effectiveness of democracy and its support among voters Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua – The president has enough options to counter any kind of Government should there be a reversion towards authoritarianism – Any coalition will have a strong opposition in the legislature and will be unable to control all the national media 11 A PR-SPU-CPU coalition: Outlook The fate of the new coalition currently depends on whether it can work effectively with the president. The situation could evolve in a number of ways: 1. The president rejects the new coalition, leading to a new election • • • Nasha Ukraina and BYT insists on new elections The president fails to nominate the coalition’s candidate for premier and dismisses the Rada for not forming a Government Party of the Regions makes no objections to the dismissal of the VR • • The nature of a future coallition is hard to anticipate The future Rada could become polarized: Nasha Ukraina and BYT draw up a joint election list; in order to survive, SPU and CPU form a joint election list with PR Tel. (380-44) 484-4400 Web: www.icps.kiev.ua Міжнародний центр перспективних досліджень International Centre for Policy Studies 12 A PR-SPU-CPU coalition: Outlook (2) 2. The president rejects the new coalition but is unable to dismiss the Verkhovna Rada • • • • Nasha Ukraina and BYT insist on new elections The president fails to nominate the coalition’s candidate for premier and dismisses the Rada for not forming a Government The ―anti-crisis‖ coalition insists on its legitimacy and opposes new elections The unformed Constitutional Court cannot arbitrate this situation • A war of attrition between the president and the coalition regarding the political course, portfolios and the division of powers between Government and president Tel. (380-44) 484-4400 Web: www.icps.kiev.ua Міжнародний центр перспективних досліджень International Centre for Policy Studies 13 A PR-SPU-CPU coalition: Outlook (3) 3. The president accepts the new coalition and works with it • The president guarantees constitutional process and stands against new elections and further destabilization President and coalition agree to the division of posts and powers The legislature is not dismissed The coalition meets the president halfway on his demands (completing the Constitutional Court, putting together a program) Possible re-formation of coalition: Nasha Ukraina joins while CPU, and possibly SPU, leaves • • • • • • The coalition’s program and that of the president become more similar Instability in the coalition remains a serious risk due to destructive actions on the part of BYT in the opposition and centrifugal tendencies among factions in the coalition Tel. (380-44) 484-4400 Web: www.icps.kiev.ua Міжнародний центр перспективних досліджень International Centre for Policy Studies 14 State policy: Outlook Unconsolidated democracy and heavy competition among different government elements for a presence in the coalition reduces the likelihood of effective state policy • Politicians will engage in establishing the rules of the game among themselves and focus on gaining maximum power – Normalizing relations between the Govenrment and the opposition, legislative guarantees for the activity of the opposition – Delimiting the powers of the president, Govenrment and coalition, by adopting related legislation and testing separate provisions of the Constituion in the Constitutional Court • Economic reforms will be put off yet again. Reforms already in the works will not see much progress Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 15 Foreign policy Natalia Shapovalova 16 Foreign and defense policy • In the absence of a law defining the basis of foreign policy, foreign and defense policy remain the purview of the president • As long as Viktor Yushchenko remains president, Ukraine’s strategic goals of integration into the EU and NATO will remain unchanged • The actual probability of carrying out this strategic course will depend on the actual position of the ruling coalition formed by the coalition in the Rada and the Cabinet of Ministers • A PR-SPU-CPU Government will adjust foreign policy rhetoric regarding Ukraine’s main international partners, but will be relatively passive in foreign policy itself Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 17 Foreign and defense policy (2) • Until 2005, there was no political will to carry out Ukraine’s strategic goals: foreign policy served as an instrument in the battle over domestic policy • Since 2005, the government has tried to carry out the country’s foreign policy objectives without regard to domestic realities or needs • The Ukrainian government lacks the understanding that external policy should be an instrument for attaining internal goals Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 18 Russia The key problem issues in Ukrainian-Russian relations: • • • • • The gas transport system and energy trading State boundaries and the territorial integrity of Ukraine The basing of the Black Sea Fleet in Crimea Ukraine’s role as a regional leader in unresolved conflicts Commercial trade relations Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 19 Russia (2) • Regardless of what Government is formed in Ukraine, Russia’s interests in Ukraine remain unchanged: to keep the country within its sphere of influence • Russia will continue to influence Ukraine through economic levers and energy, through manipulating internal conflices and through its military presence • The political tactics Russia uses towards Ukraine will depend on how the Ukrainian government acts Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 20 Russia (3) The policies of a PR-SPU-CPU coalition: Outlook • There will be a gap between what is said and what is done: foreign policy rhetoric will soften • The approach to economic and energy issues will be less politicized. Still, there will remain a risk that back-room deals continue • Risk: The conservation of the main problems without any efforts to resolve them, which carries longer-term risks for Ukraine Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 21 The European Union • All of Ukraine’s political parties agree that European integration is on the agenda, although they have different notions of what this actually means • The current priority is to establish the format for Ukraine-EU relations for the next decade in the agreement that will replace the APC after 2008 • The current leadership in the Foreign Ministry is focused on a demand of membership • The EU is ready for ―anything but‖ Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 22 The EU (2) • Given the EU’s possibilities and Ukraine’s needs, economic integration is a mutually beneficial, realistic form of relations • In terms of an economic integration strategy, the EU is ready to propose deeper free trade, which will become the cornerstone of the new agreement • However, the protracted process of acceding to the WTO is making it impossible to complete this new agreement Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 23 The EU (3) The policies of a PR-SPU-CPU coalition: Outlook • PR is interested in economic integration with the EU but will do so selectively, keeping in mind the business interests of its members • The risk is that SPU and CPU will be against this Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 24 The United States • US policy towards Ukraine will not be affected by the change in Government. The US wants to have as many reliable partners near Russia as possible. The guarantee of good relations with the US is Ukraine’s president • Challenge: The Government cannot convey to its voters its US and NATO policies • Regardless of who forms the Government, accession to NATO will slow down because of the lack of support both in the Rada and among rank-and-file Ukrainians Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 25 The Economic Situation Oleksiy Blinov 26 The current situation • • • • Over January-April 2006, Ukraine’s GDP grew 4% Y-O-Y, inflation was 6.7% in June Foreign investment grew at a record pace over Q1’06 The trade and current account balances grew negative Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 27 The Ukrainian paradox • Despite an inactive Government, the economy is picking up pace • The unsystematic ―reforms‖ of 2005 led to a drop in investment • Growth depends strongly on the situation on external markets • A serious portion of the economy remains in the shadows—25-60% of GDP according to various sources Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 28 Politicians care little about economic reform • Neither of the competing coalitions has clear plans for reform • Political debate is not focusing on economic policy • Budget limitations are making expensive reforms impossible Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 29 The economy will grow at a moderate pace • Over 2006, 2007 and 2008, GDP will grow 3.5%, 3.9% and 4.0% • Investments will grow faster than consumption. Gross fixed investment will grow 7%, 9% and 7% in 2006, 2007 and 2008 • Household spending will grow more slowly as the growth of disposable income slows down Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 30 Domestic demand will spur economic growth Over 2006–2008, the share of domestic demand in the growth of GDP will be higher than the share of external demand Domestic demand will be spurred by: • A high propensity to consume • Reduced risks for the development of consumeroriented sectors • Increased bank lending Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 31 The export component of GDP will grow more slowly than domestic demand • Three factors will restrain the growth of exports: – Rising energy costs – A poorer external situation – Worsening trade relations with Russia • Imports will continue to outpace exports • The balance of trade will remain negative Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 32 Risks to economic growth in 2006 • The new Government adopts an economic policy that considerably worsen the business climate and reduce the inflow of investment • A sharp cut in world prices for metal and chemical product prices • Growing ―trade wars‖ with Russia, that is, Russia bans certain Ukrainian imports or uses other protective measures against them • Growing prices for imported natural gas in H2’06 Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 484-4400 Web: www.icps.kiev.ua 33