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					                    Political Risks and Political Stability in Ukraine
                                 UCIPR Document on Political Risk Assessment




 Issue 6. A Change in the Balance of Forces: the Content of the Political Process

                                  Six Months after the Presidential Elections



                                                                                                                                   October 2010

Content
Resume.................................................................................................................................................2

1. The focus of the government on the protection against political changes....................3
a) Changes in political administration of the capital of Ukraine
b) The making of the environment non-competitive at the local elections
c) The return to the government model under the 1996 Constitution

2. Risks of unbalanced political system……………………………………………….……………....7
a) A less independent government
b) The marginalization of political parties and the deinstitutionalization of the party system
c) The disregard for parliamentary procedures

3. The impact of political changes on the course of the reforms:
do the liberal reforms need an authoritarian regime?................................................9

4. The merging of business interests and government influences.....................................12

5. Political situation forecast….....................................................................................................16

6. Degree and structure of political risks..................................................................................16

7. Information about the UCIPR Project on Political Risk Assessment............................17
RESUME

The analysis of political processes evidences a change in the balance of forces between key
political groups that started right after the 2010 presidential elections has been
completed. The initiation of a power regime that would be the least affected by
political changes has become the main content of the political process.

At the first stage after the presidential elections, the gain was maximized at the
expense of minor changes in the rules (e.g. the formation of the parliamentary coalition of
non-faction MPs), whereas after the saturation of power structures at a variety of levels with the
personnel of the party in power, a transition has been made to the abolition of the existing
rules (including the constitutional ones). In this context, the return to the system of power
of 1996 means only the reduction of expenses to legitimate and to strengthen the new regime for
the formation and distribution of power.

At the current stage, the major means to achieve these goals are manifested in the following:
- Make the environment non-competitive;
- Gradually deinstitutionalize parties in the process of electing the government and parliament and
marginalize their role in the political process;
- Reproduce an insufficiently balanced system of checks and balances after the model of power of
1996;
- Decrease the level of autonomy of the government reached within 2006-2010;
- Disregard parliamentary procedures;
- Attempt to strengthen, on the international scene, the government’s interpretation of the goals of
changes in the conditions for the functioning of the political environment as the only possible
condition and, at the same time, the necessary and effective method of administrative
modernization and economic reforms.

The strengthening of the monopolistic principle of the division of power ‘the winner
gets it all’ is a political consequence of the presidential elections of 2010, which in the current
situation has become an extreme option – ‘one's own and somebody else's’.

It is possible to predict the power policy will be based mostly on narrow interest groups,
which in the long run will determine its political cycle, rather than on the broad
strata of the population and political institutions.

The presidential apparatus and political groups close to the Head of State benefit
most of all from the return to the model of power relations of 1996. Institutional political
relations are substituted for personal influences. This situation is dangerous as it contains
potential for risks of the growing number of decisions made in a non-transparent
manner and, thus, corruption. Risks of unpredictability are also linked to the entering of the
political system to the process of its own permanent transformations and segments
that form it (in particular, election procedures).

Parliament, in the current composition, is losing its position of an active independent actor guided
by the interests of the voters. The return to the centralized model of government with the Head of
State on the top turns not only the government and the Verkhovna Rada but also local self-
government bodies into technical tools to implement a policy of the President.

A dialogue with the stakeholders is needed to ensure the understanding of reform goals based on a
broad consensus. Efforts to advance reforms around their goals and means without political and
social consensus may cause the social disapproval of a policy of their initiators and discredit the
idea of changes in social relations once again.  




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           A Change in the Balance of Forces: the Content of the Political Process Six Months after the Presidential Elections
THE FOCUS OF THE GOVERNMENT ON THE PROTECTION AGAINST POLITICAL
CHANGES

The main goal of activities of power groups after the 2010 presidential elections is to achieve a
regime based on power hegemony that would be the least affected by political
changes and to ensure conditions for retaining their positions in power.

       According to data of the UCIPR expert survey carried out in October among 17 political scientists,
       over six months the power team has attempted to change conditions in the political environment
       (53%) and to set up a controllable power vertical (59%). The respondents still do not see the due
       activity and results of these reformatory efforts declared as the primary objective of political changes.
       None of the respondents marked the position ‘reformatory activity’ (see data of the expert
       survey on "The Balance of Forces in the Political System after the Return to the Model
       of Public Administration of 1996")

At the first stage (March-May 2010), this goal was attained through changes in the Regulations
of the Verkhovna Rada of Ukraine. On 6 April, 2010, the Constitutional Court of Ukraine
(CCU) recognized the right of MPs, who are not members of party factions, to join a majority
coalition. It has to be reminded that the previous ruling by the CCU of 17 September, 2008
confirmed the rule of Article 83 of the Constitution of Ukraine, under which, “A coalition of
parliamentary factions shall be formed in the Verkhovna Rada of Ukraine to include a majority of
People’s Deputies of Ukraine within the constitutional composition of the Verkhovna Rada of
Ukraine.” The new and unconstitutional, as believed by many observers, regulation on the
formation of a majority coalition allowed power groups to avoid a possible scenario of government
crisis (Y. Tymoshenko) and the early termination of powers of the Verkhovna Rada (which could
happen due to the weakness of the previous coalition) and to reach the coalition’s numerical
increase, which ensured the support of the government actions (M. Azarov).

If such changes are believed to be targeted for the strengthening of power hegemony, then power
groups attained maximum possible changes this fall.


а) Changes in political administration of the capital of Ukraine

At the second stage (June-October 2010), efforts were focused not only on bringing Kyiv
authorities ‘under control’ through the administrative discharge of Chairman of the Kyiv
City Council Leonid Chernovetsky (who holds the office of Kyiv Mayor only virtually since
then ) from decision-making but also on changing the system of administration in the
capital of Ukraine. On 15 June, First Deputy Head of the Kyiv City State Administration from
among party mates of the President, member of the former Yanukovych Cabinet (2006-2007)
Oleksandr Popov was forced on the Mayor by V. Yanukovych and his government. On 7 September,
2010, amendments to the law “On the Capital of Ukraine, the Hero City of Kyiv” were approved,
under which the Kyiv City State Administration (KCSA) is an executive body of the Kyiv City
Council and simultaneously performs functions of a national executive authority. The Head of the
KCSA is appointed by the President of Ukraine according to the procedure established by the
Constitution and laws of Ukraine.

According to other amendments, city district councils in Kyiv are formed by the Kyiv City Council
or the community at the referendum. Two days later, the Kyiv City Council made a decision to
abolish district councils at a special plenary session. “District state administrations shall represent
interests of the executive in the districts and their chairmen shall be designated by the President of
Ukraine.” Such structure of political administration of Kyiv can be formally recognized compliant
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            A Change in the Balance of Forces: the Content of the Political Process Six Months after the Presidential Elections
with the Constitution, which provides for ‘particular aspects of the exercise of the executive power’
and ‘particular aspects of the exercise of local self-government’, but, at the same time, it runs
counter to the principles of local self-government of the European Charter of Local Self-
Government ratified by Ukraine on 15 July, 1997.

Hence, within six months after the elections, power groups strengthened their
influence in Kyiv and modified the system of political administration of the capital on
the model that retains the advantage of national authorities over local self-
government bodies.


b) The making of the environment non-competitive at the local elections

The electoral law demonstrates the ‘stable instability’. On 10 July, 2010, the new law “On Elections
of Deputies of the Verkhovna Rada of the Autonomous Republic of Crimea, Local Councils and
Village, Settlement and City Heads”, regulating procedures for elections of local self-government
bodies, was passed. And on 30 August, it was amended at a special session of the VR. The
campaign itself was launched on 11 September. Parties have no time to plan its strategy and tactics.

In general, the above novelties are viewed as more favorable for some parties because the
formation of blocs is now prohibited. This approach resulted in the fact that small parties, which
created such blocks as the Bloc of Yulia Tymoshenko or Our Ukraine-People’s Self-Defense, lost
opportunities to promote their brand in this very form. Such change should be planned in advance,
though the problem of the instable electoral law remains as every time power groups want to tailor
election procedures to their preferences.

Representatives of the parliamentary coalition (though, the term ‘coalition’ does not exist after the
abolition of the 2004 Constitution) got the overwhelming majority in territorial election
commissions.

Also, there is the problem of the insufficient access to information in the electoral process, which
hampers the conscious choice of citizens. Some candidates are nominated on closed party lists,
whereas others – in single-seat electoral districts providing personal information in compliance
with the minimum established by the law. The law does not set requirements for information
posters divulging as much as possible information about candidates for People’s Deputies of
Ukraine. Information posters should be posted only in places of electoral districts visited by the
voters mostly on the Election Day.

The absence of conditions for the exercise of the right to self-nomination makes candidates for the
offices of City Mayors to nominate themselves on the Party of Regions’ list. After the 2010
presidential elections, members of this Party held 80% of administrative offices in the system of
local executive authorities (20 out of 25 Heads of regional state administrations) and most
positions (compared to other political forces) in the system of local self-government bodies (10
Chairmen of regional councils). The PR’s major rival, the Fatherland, has twice less members in the
offices of Chairmen of regional councils (5 persons), whereas influences of all other parties in this
area are minor, if any.

The strengthening of the party of power will be fostered by some legislative regulations ‘giving’
candidates administrative preferences. Specifically, under Article 53 of the law “On Elections of
Deputies of the Verkhovna Rada of the Autonomous Republic of Crimea, Local Councils and
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Village, Settlement and City Heads”, “Employees and officials of national authorities, authorities of
the Autonomous Republic of Crimea and local self-government bodies shall have the right to carry
out propaganda in the working hours, if a respective employee or official is a candidate for the
office of village, settlement and city head.”

The law actually provides for the bribery of the voters. Article 53 reads, “The pre-election
propaganda is prohibited if the voters are given for free or on preferential terms money, securities,
loans, lotteries, goods and other material values as well as works or services. However, if these
goods bear visual images of the name, symbols or the flag of the political party, whose local branch
participates in the elections, and their value does not exceed five percent of the minimum wage,
their distribution during the propaganda campaign is permitted.” The minimum wage was UAH
901 this October (5% of this amount is UAH 45) and the number of such gifts is not limited.
Parties, whose financial positions are stronger, will certainly take advantage of this opportunity.

According to the UCIPR forecast, indicators of the administrative impact of the PR in the regions
will increase as a result of the local elections to be held on 31 October, 2010. Hence, the dominance
of the PR in the parliamentary majority will create preconditions for making it the ‘hegemonic
party’.

Also, there are other possibilities (not eliminated by the law) to manipulate voter lists. Besides, the
State Register of Voters will not be specified this year.

Hence, it is possible to state there is a trend to the political hegemony of the Party of
Regions enshrined by the law on elections to local self-government bodies at a variety
of levels. The PR’s becoming the ‘party of power’ in administrative terms will depend upon other
factors, in particular, the concentration of power in the hands of people close to the President as a
result of the abolition of the Constitution of Ukraine of 2004. Yet, there is no doubt that the local
elections will give preference to the PR and its satellites as well as to parties that are going to ‘play
on the field’ of the voters supporting the National Democrats.

As is seen, the non-competitive environment means the use of administrative (power) and
legislative methods to create preferences for the pro-presidential party of power and its allies while
electing local self-government bodies and making legislative changes in procedures for electing
authorities, in particular in the capital of Ukraine.

It is aggravated by the concentration of power around the institution of presidency that became
possible four years after the Constitution of 2004 entered into force in 2006.


c) The return to the government model under the 1996 Constitution

On 30 September, 2010, the CCU considered the submission by 252 MPs and abolished the 8
December, 2004 law on constitutional amendments. Hence, the law has lost its effect though it is a
part of the Constitution. The CCU judged to return to the Constitution of 28 June, 1996 and
ordered national authorities to bring legislative and normative acts in line with the 1996
Constitution.

The UCIPR deems the return to the 1996 Constitution should, first of all, be considered as a
political action for the reason that the political teams, which convinced everybody of the absurdity
of the very statement of this question several years ago, now openly advocate and initiate ‘the
abolition of the political reform’.
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            A Change in the Balance of Forces: the Content of the Political Process Six Months after the Presidential Elections
There is no doubt that given the good will, any political system based on constitutional laws can be
developed into a more consistent (and even recognized) in a predictable manner. Though, the new
power chose another way – there is the simple pro-presidential majority in parliament and there is
the government, so why would MPs want to apply complex and long-lasting parliamentary
procedures provided for by the Basic Law, if they could ‘jump over’ the ‘constitutional barrier’?

The UCIPR thinks the abolition of the Constitution in the wording of 2004 should be viewed as a
means of the minimization (reduction) of expenses of dominant groups to create and
retain a ‘beneficial’ system of power.

This decision was a logical continuation of building a model, which was manifested, at the first
stage, in the appropriation of some powers by the President (the exercise of functions not listed in
the Constitution, e.g. the issue of decrees and orders to different authorities), the concentration of
the parliamentary majority around the party, whose leader was elected as the President, and the
legitimation of the said pro-presidential majority through the decision by the CCU of April 2010
recognizing the constitutionality of the procedure for the joining a majority coalition by non-faction
MPs.

At the first stage after the presidential elections, the gain was maximized at the expense of minor
changes in the rules (the formation of the parliamentary coalition of non-faction MPs), whereas
after the formation of the government and the saturation of power structures at a variety of levels
with the personnel of the party in power, a transition has been made to the abolition of the existing
rules.

On 24 August, 2010, even the President of Ukraine recognized “the need for consensus in
parliament, the need for the constitutional majority to amend the Constitution”. “We cannot do
without this,” he added. Nevertheless, in a month and a half, he explained the logic of the abolition
of the 1996 Constitution by the need to legalize the current state of affairs as a result of the
expansion of the pro-government parliamentary coalition. “The judgment by the Constitutional
Court was necessary since Ukrainian politicians were not ready to make difficult decisions to bring
our model of government in line with the Constitution,” he stated on 5 October (see Liga Business
Inform).

Ineffective activities of the previous power groups result in the reinforcement of
‘revenge’ groups and the initiation of a regime that would be the least affected by
possible changes in their positions (from dominant to non-dominant). Actions of
power groups are geared towards the retention and strengthening of their current
positions in politics and the creation of guarantees of the political hegemony in the
future; it is the essence of the political process in the period after the presidential
elections and the formation of the new government.

       In the viewpoint of the surveyed experts, it is the apparatus, the Presidential Administration (almost
       56% of respondents), that gets the most advantage of the return to the model of power of 1996. The
       President himself ranks the second (35.2%) and is followed by informal influence groups (29%)
       together with the oligarchic lobbies (12% - up to 41% in total). Institutional political relations
       are substituted for personal influences. This situation is dangerous as it contains potential for
       risks of the growing number of decisions made in a non-transparent manner and, thus,
       corruption. None of the experts see benefits from the concentration of power in the hands of the
       presidential entourage either for the foreign investors or for the society, parties and parliament in
       general. This is rather symbolic since the very model is classed as the mixed presidential-
       parliamentary one.




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            A Change in the Balance of Forces: the Content of the Political Process Six Months after the Presidential Elections
Very high risks of the reinstatement of the Constitution of 1996 are linked to the instability of
the legislation because numerous laws and normative acts at a variety of levels have been
adopted since 2004, when amendments were made, and since 2006, when they came into effect.
The Constitutional Court itself has rendered some 60 rulings since 2006 (including, by the way, the
denial to consider the identical submission by MPs in February 2008).



RISKS OF UNBALANCED POLITICAL SYSTEM

In the opinion of the UCIPR, the political system of 1996 cannot be considered balanced enough as
it allows the President to concentrate powers as to the government and the executive on
the whole bearing no responsibility for their actions. This political system created a
function of a supreme political arbitrator with concentrated powers and capacities.

Given the situation, the law on state building that should be corrected ‘without delay’ by order of
the CCU is being amended so that to give the President even more powers. Specifically, this is done
by the law “On the Cabinet of Ministers of Ukraine” of 7 October, 2010 that substituted the
previous 16 May, 2008 law (by Yushchenko). Both documents decrease the level of autonomy of
the government, which ensured the higher level of the division of power, and strengthen the
authority of the institution of presidency.


a) A less independent government
Hence, the government is no more a derivative of the collective parliamentary policy and becomes
a product of political creativity of the President.

Parliament ‘gives consent’ to the designation of the Prime Minister by the President and has no
influence on the formation of the government. Members of the Cabinet (ministers) and even
deputy ministers are appointed by the President. Earlier on, ministers were appointed by
parliament upon the submission of the Prime Minister (two ministers – the Minister of Defense
and the Foreign Minister – upon the submission of the President) and deputy ministers – upon the
submission of the Cabinet.

The President has the right to dismiss the Prime Minister and members of the government (for
political reasons).

The Head of Government lost the right to form, reorganize and abolish ministries and other
national executive authorities. This right is transferred to the President, who forms, reorganizes
and abolishes ministries and other national executive authorities upon the submission of the Prime
Minister despite that such activity should be regulated by a separate law.

The President, though upon the submission of the Prime Minister, appoints chairmen of regional
and district state administrations, thus creating his own power vertical, despite that under the
Constitution, the system of state administrations is an element of executive power in the regions.

The Prime Minister is obliged to present the President with the statement of resignation of the
Cabinet by the decision of the President. The Cabinet is politically responsible to the President and
resigns, when a new President is elected.


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           A Change in the Balance of Forces: the Content of the Political Process Six Months after the Presidential Elections
Pursuant to the law “On the Cabinet of Ministers of Ukraine” of 16 May, 2008, the Cabinet
designated, upon the submission of the PM, chief officers of national executive authorities that did
not form the Cabinet; members of collective national executive authorities that did not form the
Cabinet; first deputy and deputy ministers, first deputy and deputy chief officers of other national
executive authorities – upon the submission of ministers; and chief officers of government agencies
within the system of a respective ministry – upon the submission of a minister.

The law in force “On the Cabinet of Ministers” of 7 October, 2010 provides that the President of
Ukraine decides on the number and the list of offices of the newly formed Cabinet upon the
submission of the PM.

The designation of chief officers of government agencies within ministries is the only personnel
function that the Cabinet retained.

The Cabinet of Ministers of Ukraine supports the law-making and program activity of the
President. Under the law, “On the initiative of the President of Ukraine or on its own initiative, the
Cabinet of Ministers of Ukraine shall prepare draft presidential acts; submit them to the President
of Ukraine for consideration; and ensure the implementation of acts, orders and programs by the
President of Ukraine.” It is indicative that the text of the law on the Cabinet contains such term as
‘presidential orders’, which indicates the legitimation of relations between the Head of State and
the Head of Government as between the superior and the subordinate.


b) The marginalization of political parties and the deinstitutionalization of the party
system

In compliance with the amended Constitution and the Regulations of the Verkhovna Rada, such
parliamentary institution as the coalition of deputy factions (whose political mission was to form
the government and to support its actions) is abolished in Ukraine. Hence, the logic of the
formation of parliament on the basis of the proportional system with the nomination of candidates
on party lists (the system required a higher level of transparency) and of the formulation of a
government policy is lost.

In October 2010, local authorities are formed exclusively upon the submission of party branches.

The President suggested the return to the simple majority system with the nomination of
candidates in single-seat electoral districts. If candidates are nominated by parties, the party
structuring of parliament will be retained. Otherwise, the policy may be carried out on the basis of
individual influences, which could reduce the potential for the development of parities as tools of
political competition based on ideologically substantiated national development programs.

       Every second respondent views party perspectives as narrow. 41% of the surveyed experts are
       inclined to think the party system is being radically transformed after the Russian model with the
       hegemonic party and no one believes the party system will develop upon an open competition model
       of the European type (see data of the expert survey on "The Balance of Forces in the
       Political System after the Return to the Model of Public Administration of 1996")




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                                    Document on Political Risk Assessment. Issue 6, October 2010
            A Change in the Balance of Forces: the Content of the Political Process Six Months after the Presidential Elections
c) The disregard for parliamentary procedures

The disregard for parliamentary decision-making procedures in parliament has been observed over
the whole period after the presidential elections. This phenomenon is not new in Ukrainian
parliamentarism; though in decision-making on the revision of principles of Ukraine’s domestic
and foreign policy and political system, in the organization of the work of higher authorities, and in
the formulation of new principles of the tax and budget policy, it has become regular and gained
more importance.

The procedures, which are constantly violated, incorporate the approval of laws by the insufficient
number of MPs and even without their prior reading (e.g. on 27 April, during the ratification of the
‘Kharkiv accords’, i.e. the Agreement between Ukraine and the Russian Federation on the Status
and Terms of the Deployment of the Black Sea Fleet of the Russian Federation on the Territory of
Ukraine, 211 MPs were registered in the session hall, whereas the ratification was voted for by 236
MPs); the voting by mandates instead of personal voting; the neglect for opinions of the Main
Scientific-Expert Department of the Verkhovna Rada and special committees; and the adoption of
bills at the first reading and their immediate passage in general without the revision (e.g. the law
“On the Cabinet of Ministers of Ukraine” of 7 October, 2010).

Considerable drawbacks in the organization of the work of parliament violate decision-
making procedures and seriously threaten the substantiation and stability of the law
in view of the fact that the country’s leadership intend to legitimate, in the near future (probably,
this November), new tax and customs rules, which are very important for the conduct of business
in Ukraine.


THE IMPACT OF POLITICAL CHANGES ON THE COURSE OF THE REFORMS:
DO THE LIBERAL REFORMS NEED AN AUTHORITARIAN REGIME?

Do the achieved political changes (a higher level of the concentration of power in the hands of the
President, in particular, executive powers that he gained) depend on the expected ones (the
extension of the parliament’s term by either 1, until 2012, or 3, until 2015, years) and the success of
the announced reforms? Does a form of government depend on the course of the reforms?

Power representatives assure of the need for such dependence. They explain drastic constitutional
changes of the political system done without the participation of parliament by the need ‘to control
the course of the reforms’ allegedly opposed by the bureaucracy.

Specifically, on 1 October, First Deputy Head of the Presidential Administration Iryna Akimova
explained, “The strengthening of presidential control, which is provided for by the Constitution of
1996, over the course of the economic reforms could become the political force that would turn the
political will into the political incentive.” “This gives an additional opportunity, first, to control and
to monitor the implementation of reforms and to impact... those, who do not want to advance
rapidly... We checked the implementation of the existing laws by different ministries and saw the
picture is not that rosy. Some ministries have not yet started the implementation, some have
carried out the reforms partially, some still have doubts and some impede the process,” she added.

The Presidential Administration did not explain why the course of the reforms should be controlled
by the President, not the government, why there are no personnel changes, if the government
cannot cope with the reforms and why other tools of administrative influence are not applied to
inactive officials, if someone violates the ‘existing laws’. Advocating the idea to abolish the
                                                     UCIPR Politics Division                                                      9
                                    Document on Political Risk Assessment. Issue 6, October 2010
            A Change in the Balance of Forces: the Content of the Political Process Six Months after the Presidential Elections
Constitution, the PA was guided, first of all, by the opportunity to create a system of the executive
that would be the most dependent on the Head of State, in particular, to impact personnel changes
in the government, having excluded parliament from this process.

In general, the experience of new democracies, which successfully made the transition to the
market in due time and now ensure the competitiveness of their economies as members of the EU
since 2004 or 2007, does not confirm the statement that the reforms are possible only under the
‘clear presidential vertical’ with the supreme political arbitrator on the top.

Countries ranked by GDP per capita in 2009 (data of Central Intelligence Agency, World
Factbook):

Slovenia –$27,700 (the 50th rank in the world)

Czechia – $24,900 (the 53rd rank)

Slovakia – $21,100 (the 58th rank)

Hungary – $18,800 (the 62nd rank)

Poland – $ 17,800 (the 62nd rank)

For comparison: Russia has $15,100 and ranked the 72nd, Ukraine with $6,300 – the 134th.



Countries ranked by the UN Human Development Index in 2009:

Czechia fell into the very high human development category – o.903 (the 36th rank)

Poland – 0.880 (the 41st rank)

Slovakia – 0.880 (the 42nd rank)

Hungary – 0.870 (the 43rd rank)

For comparison: Russia got 0.817 and ranked the 71st, Ukraine – 0.796 (the 85th rank).

Hungary, a member of the EU since 2004, is a parliamentary republic. The President is elected by
members of the National Assembly (parliament). Hungary ensured the decentralization of power
and conditions for the development of self-government, created the effective tax system and is
open to foreign investment.

Slovakia, a member of the EU since 2004, is a parliamentary republic. Most executive power lies
with the Prime Minister, who is usually the leader of the winning party and who is responsible for
forming a coalition in parliament. The President does not have the right of legislative initiative. The
Cabinet is highly autonomous but relies on parliament. Upon the proposal of the Prime Minister,
the President appoints members of the government. The government as a body has to pass a vote of
confidence by parliament within 30 days after its appointment.




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            A Change in the Balance of Forces: the Content of the Political Process Six Months after the Presidential Elections
Though historically, according to Dmitry Travin and Otar Marganiya, Slovakia followed the
example of Croatia1. They say authoritarian government in Slovakia was excluded, not in the last
instance, by the very format of the political system2.

Poland, a member of the EU since 2004, is a semi-presidential republic. The President of the
Republic nominates the Prime Minister, who in turn, proposes the composition of the Council of
Ministers. The President appoints the PM together with other members of the Council of Ministers
within 14 days of the first sitting of the Sejm or acceptance of the resignation of the previous
government. Though, the Cabinet relies on the Sejm. The Prime Minister, within 14 days following
the day of his/her appointment by the President, presents the Sejm with an Action Program of the
Council of Ministers together with a motion requiring a vote of confidence. The Sejm passes a vote
of confidence by the absolute majority of votes in the presence of at least half of the statutory
number of deputies. In the event that the Council of Ministers has failed to obtain a vote of
confidence, the Sejm chooses the Prime Minister as well as members of the Council of Ministers as
proposed by him/her. In the event that the Sejm failed to appoint the Council of Ministers, this
right is transferred to the President. In the event that the Sejm fails to give a vote of confidence, the
President may shorten the term of office of the Sejm. The Sejm may pass a vote of no confidence in
an individual minister. The Prime Minister shall submit the resignation of the Council of Ministers
at the first sitting of a newly elected Sejm.

Slovenia, a member of the EU since 2004, is a parliamentary republic. The President does not
have the right of legislative initiative. After consulting with leaders of different political groups in
the National Assembly (Skupšcina), the President nominates a candidate for Prime Minister
elected by the simple majority. The President can dissolve parliament, if it fails to elect some
nominees. The National Assembly appoints and dismisses members of the government upon the
proposal of the Prime Minister. Before the designation, a person nominated by the Prime Minister
has to answer questions of a commission authorized by the National Assembly. The government is
politically responsible to parliament.

Czechia, a member of the EU since 2004, is a parliamentary republic. The Head of State, the
President, is elected by a parliamentary majority in every Chamber and performs mostly
representative functions. The President does not have the right of legislative initiative though has
the exceptional impact on the formation of the judiciary (judges of the Supreme and Constitutional
Court are appointed for life by the President) and the Council of the Czech National Bank. The
instability of power is practically impossible in Czechia due to the constitutionally interdependent
responsibility of authorities for decision-making and the transfer of powers in the event of the
inability of some high-ranking politicians to exercise them. Government in Czechia is so
consolidated that in different situations, some officials – either the PM or Chairmen of the
Chambers of parliament – may take over certain functions of the Head of State.

Assessing the connection between the change in the form of government, which concentrates
power around the institution of presidency, and the success of possible reforms in some sectors of
the system of public administration as well as economic and social relations, it has to be mentioned
that the concentration of powers and the centralization of government are not necessary for
successful transformations. Specifically, Hungary, Czechia, Slovakia and Slovenia succeeded as
parliamentary republics, whereas Poland – as a semi-presidential system. As the experience of all
new democracies shows, the social consolidation around the liberal democratic values, clear

                                                            
1 In Croatia, Franjo Tuđman (1990-1999) established rigid autocratic government because, in his opinion, he could rule
as he thought best since he founded this state.
2 See D. Travin, O. Marganiya, European Modernization, in 2 vol. /М.: AST Publishing House Ltd, Terra Fantastica,

2004.
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                                               Document on Political Risk Assessment. Issue 6, October 2010
                       A Change in the Balance of Forces: the Content of the Political Process Six Months after the Presidential Elections
goals of the reforms and the confidence in the political course of the government are
the preconditions for the reforms. Liberal reforms became the result of the
departure from authoritarian regimes and approaches, which was manifested, in
particular, in the change of power elites at the initial stage of democratic transformations.

Although GDP per capita in such countries is lower than in the ‘old’ ones and they also experience
government crises, manifestations of social discontent and problems of various deficits, which can
be analyzed, new democracies are historically on another socio-political platform than Ukraine; the
nature of their political culture is based on democratic principles of political pluralism and political
competition is institutionalized.

The change in conditions for the political environment, which became the main achievement of the
power team in Ukraine over more than six months, is not liberal in nature and will not promote
either the principles of the political (ideological) competition or the success of the institutional
reforms.

First of all, it is because a moderate authoritarian regime is incompatible with the liberal reforms.
Second, the merging of interests of representatives of the large capital and power (the
representation of mostly interests of the large capital owners in government decision-making) may
lead to effective decisions in their personal interests (to a kind of competition) but cannot result in
efficient public administration in the social interests. This is also confirmed by the consequences of
the policy carried out for 10 years by President Leonid Kuchma, not remarkable for democratic
achievements and the economic growth.

The longer the authoritarian power exists and the stronger it gets, the higher
paternalistic expectations grow, the lower the level of the civic consciousness gets
and the poorer the chances of social consolidation are.



THE MERGING OF BUSINESS INTERESTS AND GOVERNMENT INFLUENCES

It is possible to state that the change in the balance of forces between key political groups that
started right after the 2010 presidential elections has been completed. However, the process of the
identification of influences of each group in the control of economic resources is not over.

Interest groups oriented to losing parties appeared to be removed from the control of resources,
which makes them look for ways to ensure the political protection by winners. Though, even inside
a winning team, interest groups may compete and this competition may intensify with the
strengthening of positions of the current power.

Specifically, the experts expect the intensification of competition inside power groups for
the consumption of gas and the price for it. The gas consumers, owners of metallurgical and
chemical plants, are interested in the reduction of the gas price, whereas the gas suppliers would
like to raise it. For the time being, the government managed to balance between the parties, having
placed the burden of the price rise on households. The situation will probably not change. It has
become known that Ukraine’s gas market will be liberalized. This means the Ukrainian state-owned
oil and gas producers (Ukrnafta and Ukrgazvydobuvannya), which now have to sell Ukrainian gas
to households, will have an opportunity to sell it to the industrial consumers at the market price.
Statements by PM M. Azarov about a 50% gas price rise evidence the process will begin in 2011.
Now a pool of companies that can count on privileges in the gas supply is being created. Most
likely, those interest groups, which have the opportunity to impact authorities responsible for
respective decision-making, will have privileges.
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                                    Document on Political Risk Assessment. Issue 6, October 2010
            A Change in the Balance of Forces: the Content of the Political Process Six Months after the Presidential Elections
Besides, a group, whose positions on the gas issue are extremely strong, lays hands on enterprises
dependent on the gas supply. Other participants in the process are unlikely to accept such practice.

In this context, one has to consider the increase of the influence of the so-called Firtash Group that
got control of Ukraine’s largest chemical plant, Horlivka-based OJSC Stirol, which joined D.
Firtash’s OstChem Group also incorporating Ukrainian-based nitrogen fertilizer producer OJSC
Rivneazot.

Former managers of Firtash’s companies headed several titanium giants: JSC Sumykhimprom,
Titan Ukrainy and Zaporizhzhya Titanium and Magnesium Integrated Works. The experts believe
this was the way D. Firtash got control of the largest enterprises of Ukraine’s titanium industry.

Consolidation processes are observed in metallurgy as well. In 2010, representatives of the Russian
business have become active in Ukraine’s gas and metallurgical sector (GMS). It has to be
reminded that in the initial six months of 2010, Russian companies participated in the two biggest
deals in the sector: the purchase of a 50 percent-plus-two-shares stake in ISD valued at $ 1 billion
and the purchase of Zaporizhstal for $ 1.7 billion. Besides, Dniprospetsstal is also owned by Russia.

Metinvest Holding owned by R. Akhmetov holds one of the leading positions in Ukraine’s GMS.
With regard to the repeated predictions of the takeover of Zaporizhstal and Mariupol Ilyich
Metallurgical Mill by Metinvest (it got only the latter), it is possible to predict а new reformatting of
the steel market. The issue of Zaporizhstal has not yet been decided. Metinvest Holding also has
conflicts with ISD structures over the supply of raw materials.

An attempt to accuse Arcelor Mittal that owns a 93.02% stake in Kryvorizhstal of delays in the
implementation of its investment commitments should be viewed in the same context. However,
on his visit to France, V. Yanukovych said, “This question will most likely not reach court and the
question of re-privatizing or cancelling the agreement on privatizing this plant will not arise.” On
12 October, 2010, the Office of the Prosecutor General withdrew the lawsuit against Arcelor Mittal.
Hence, there are options.

VAT refund arrears to Arcelor Mittal worth some UAH 4.8 billion and a criminal case on the fact of
smuggling of 40,000 tons of coking coal for the mill prove that actions against owners of former
Kryvorizhstal were premeditated.

The return to the centralized model of government with the Head of State on the top turns not only
the government and the Verkhovna Rada but also local self-government bodies into technical tools
to implement a policy of the President. This situation is dangerous as it contains potential for risks
of the growing number of decisions made in a non-transparent manner.

Given the situation, not only the public but also some interest groups are removed from the actual
participation in decision-making. Their competition turns out from the public rivalry carried out by
market and informational means into the behind-the-scenes fight, in which corruption and
criminal ties in power circles gain extreme importance.

The consolidation of power backed by the creation of a more favorable environment should
facilitate the solution of Ukraine’s main problem – to meet the need for money – through the
attraction of foreign investments. Yet, despite the global market recovery and a 6.3% economic
growth in Ukraine within the initial six months of 2010, the inflow of foreign direct investment
(FDI) in the country continues to reduce. According to data of the State Statistics Committee,
within the initial six months of 2010, FDI amounted to just $496 million, 77.8% down from the
same period of 2009. This demonstrates the big foreign investors do not trust the capacity of
                                                     UCIPR Politics Division                                                      13
                                    Document on Political Risk Assessment. Issue 6, October 2010
            A Change in the Balance of Forces: the Content of the Political Process Six Months after the Presidential Elections
Ukrainian authorities to use presidential powers for the reforms, which could solve structural
problems.

The above figures show the foreign investors are not certain they will work under the legislative
framework corresponding to the European standards. Under such a framework, national interests
must prevail over private economic ones, though, in case of Ukraine, the government meets only
individual private interests.

Earlier on, the foreign investors were scared away by the political and economic instability,
whereas the current situation proves the stability without the reduction of corruption and the
administrative pressure on the business means nothing for them.

First Vice PM A. Klyuev has recently stated the investment climate in Ukraine is now the most
favorable over the whole period of independence ‘because of the key factor impacting the
investment climate in the country – the stability’. Nevertheless, data of the European Business
Association (EBA) show one third of the surveyed top executives of EBA member companies
reported no qualitative changes in the investment climate after the presidential elections. The
perception of the situation with the VAT refund improved though the evaluation of the
simplification of customs procedures and technical barriers to trade continues to worsen. On 29
September, 2010, the EBA announced Ukraine’s Investment Attractiveness Index in the 3rd quarter
of 2010: 3.20 (by a 5 point scale), a little down from 3.25 registered in the 2nd quarter. The
evaluations of the current investment climate and investment climate dynamics expectations for
the next three months slightly dropped from 3.8 to 3.6 and from 3.4 to 3.2 respectively.

The investors think Ukraine needs to get the IMF’s second tranche, to launch the
pension reform, to combat corruption, to repeal the moratorium on the sale of land
and to renew privatization in order to improve its investment climate.

As far as cooperation with the IMF is concerned, it will most likely continue. The pension
reform is possible though in Ukraine, it means only the raising of the pension age.

Despite that V. Yanukovych said in Yalta a package of laws on the land market has been
already developed and he expects it to be adopted in late 2010 or in early 2011, there are no
grounds for this now. Hence, the probability of the removal of the moratorium on privatization
of agricultural land until 2012 remains low.

As for privatization, the tender for the sale of Luhanskteplovoz in June 2010 evidenced all the
problems typical for ‘large’ privatization are retained.

In October, the Ukrainian government formally launched a privatization tender for a controlling
stake in fixed-line telephone monopoly Ukrtelecom with a starting price of UAH 10.5 billion.
According to Chairman of the State Property Fund of Ukraine O. Ryabchenko, a 92.791% block is to
go on sale on 28 December, 2010.

Just on the eve of privatization announced by the government, Ukrtelecom lost its license for fixed
long-distance telecom services. Most likely, the problem would be solved but with regard to
Russian Sistema, Alfa Group, Rostelecom and Ukrainian SCM listed by experts as potential
bidders, the incident with the license could be viewed as the ‘short sale’.

V. Yanukovych and his closest entourage continue to use the potential of the state, first of all, to
gain advantages (administrative, political and economic) over other main groups. Those, who have
access to government orders, state funds and the share of state property redistributed through

                                                    UCIPR Politics Division                                                      14
                                   Document on Political Risk Assessment. Issue 6, October 2010
           A Change in the Balance of Forces: the Content of the Political Process Six Months after the Presidential Elections
privatization and who have the highest level protection in the processes of mergers and takeovers,
will posses definite advantages over other economic entities, since they have access to resources.

The formation of the so-called power vertical and the suspension of the constitutional reform have
to be viewed in this very context.

Given the return to the presidential model of government, a narrow circle of persons close to power
acquire property due to preferences of the participation in power but not at the expense of effective
administrative or other business decisions. This allows to conclude that risks of the merging of
power and the business are high and tend to grow.

In this situation, it is possible to expect an increase of the main economic risks: a lack of
transparency in decision-making (the law on the Cabinet is adopted with procedural violations,
nothing is known about the final wording of the Tax Code, etc.); the continuation of the
paternalistic practice (only the government knows and decides how much to pay as a
salary/pension and how much to deduct as a tariff/tax, due to inflation, etc.); and a stake of
authorities on ensuring the stability of the ‘power vertical’, which makes power maintain
corruption ties with interest groups from the ranks of large corporations.

The legitimation of the ‘presidential vertical’ by the CCU made a political conflict between the
President and the PM impossible. Yet, the absence of reasons for the institutional crisis does not
make the decision-making process more transparent and understandable as its corruption element
is not removed.

Since decisions are now made without procedures for adjusting different positions, violations of the
law are expected to increase. Specifically, the draft national budget for 2011 is scheduled to be
approved on a new tax basis despite that a new Tax Code is being considered and adopted with
numerous procedural violations. Parliament is to give the budget bill its second reading only after
the local elections, on 4 November. Besides, under the Budget Code of Ukraine, amendments in the
tax system should be made no later than 6 months before the beginning of a new budget year. If tax
amendments are approved after 15 July, they should come into force in the next budget year.

Notwithstanding the reform rhetoric, any actions of the President and the government not backed
by drastic anti-corruption measures, the reform of public administration and the judicial reform
will be doomed to failure. Given the situation, efforts ‘to put things in order’ will only entail a rise in
the ‘cost’ of services provided by officials, the strengthening of positions of those, who control
respective government structures, and, as a result, the intensification of the fight between influence
groups for the appointment of their protégés to key administrative positions.



POLITICAL SITUATION FORECAST

The monitoring of the development of political events within the period after the presidential
elections of 2010 and expert assessments of power processes make it possible to state that a change
in the rules during the game is taken by its participants for granted. This means, first of all, the
extreme instability of the rules, even the constitutional ones.

There is no reason to doubt that the situation of legislative and constitutional uncertainty will be
retained (at least, up to the parliamentary elections, which may potentially change the majority
composition in the Verkhovna Rada). The issue of the date of the parliamentary elections remains
on the agenda: under the Constitution of Ukraine of 1996, the elections should take place in the last

                                                     UCIPR Politics Division                                                      15
                                    Document on Political Risk Assessment. Issue 6, October 2010
            A Change in the Balance of Forces: the Content of the Political Process Six Months after the Presidential Elections
week of March 2011. Though, power groups will certainly look for a new date that politically varies
from March 2012 – fall 2012 – spring 2015 – to fall 2015 and that will become a product of political
agreements, not the constitutional procedure.

Legislative proposals on the regulation of relations in the political system and in the system of state
power contain a number of procedures that create preconditions for the curtailment of democratic
processes.

The political environment motivated mostly by business interests can serve as a mobilization
catalyst of social discontent only in weak segments and only for a short time. The social protest
cannot be resolved also because of the weakness of trade unions and NGOs.

Risks of the merging of power and the business are retained and tend to grow. The impact of risks
linked to giving interest groups close to power the access to economic resources will continue to
increase according to the escalation of conflicts among such groups for the access to the
distribution of the budget and for the place in the process of the acquisition and redistribution of
property.


DEGREE AND STRUCTURE OF POLITICAL RISKS

Assessment of decision-making procedures and analysis of positions of active economic agents in
the system of political representation (the political decision-making process) allows assessing the
degree of political risks in Ukraine at the current stage (October 2010) at the level of 6-7 points.

7 – Unpredictability is high.
Regional instability,
Inclusion of the country into the zone of conflict of interests,
Polarized politics,
High level of the “human factor” in decision-making,
Instable political ties,
Voluntarism in decision-making,
Closed decision-making in the interests of decision-making parties,
Disregard of procedures and the need for their recognition,
Unpredictable decisions,
Interference of the government with corporations,
High level of corruption

6 – Unpredictability is higher than average.
Polarized politics,
High level of the “human factor” in decision-making,
Voluntarism in decision-making,
Closed decision-making in the interests of decision-making parties,
Disregard of procedures and the need for their recognition,
Unpredictable decisions, interference of the government with corporations,
High level of corruption

The structure of political risks in Ukraine tends to be retained in the medium - (6-8
months) and long-term period (leading up to the parliamentary elections).


                                                     UCIPR Politics Division                                                      16
                                    Document on Political Risk Assessment. Issue 6, October 2010
            A Change in the Balance of Forces: the Content of the Political Process Six Months after the Presidential Elections
INFORMATION ABOUT THE UCIPR PROJECT ON POLITICAL RISK ASSESSMENT

In 2008, having many-year experience of analysis of political processes and activity of political
system institutions, the Ukrainian Center for Independent Political Research (UCIPR) launched a
new project linked to the identification of factors of political risks in Ukraine.

In the context of goals of this project, a political risk means tendencies that provoke uncertainty in
the process of political and government decision-making and impede planning of actions on the
country’s markets. Political risks grow from political relations, i.e. relations concerning power and
property, lie in the area of political decision-making and influence positions of agents in other
areas.

The term “political risk” does not coincide, by its content, with the term “political stability” and
concerns action/inaction of the government that rapidly changes conditions of the work of
economic agents on markets and adversely affects positions of different social groups. Political
instability is viewed as an element of the structure of political risks.

The project objective: to predict, on a basis of political risk assessment in Ukraine, a probability of
the retention of their impact in the short- and medium-term period.

The subject: to evaluate the alignment and correlation of groups of political influence both inside
and outside the country and to analyze proposals of these groups.

The methodology: expert survey (questionnaire poll) on the assessment of the impact of the
determined factors, monitoring of decisions and draft decisions of national authorities in Ukraine
and abroad (relating to Ukraine), monitoring of decision-making procedures and assessment of
positions of political influence groups.

Assessments are regularly revised.

The project is implemented by the UCIPR Politics Division. Division Head – Svitlana Kononchuk;
Project Expert – Ihor Nemchynov, Candidate of Philosophy; Expert Survey – Svitlana
Gorobchyshyna

The previous issues of the Document on Political Risk Assessment are available on the UCIPR’s
site.




                                                     UCIPR Politics Division                                                      17
                                    Document on Political Risk Assessment. Issue 6, October 2010
            A Change in the Balance of Forces: the Content of the Political Process Six Months after the Presidential Elections

				
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