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23 August 2017
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Ukraine’s New ‘Azarov Era’ Betokens Stable Politics

Ukraine’s new Prime Minister Mykola Azarov, who owes his appointment to a legislative fix that the opposition branded “unconstitutional,” may bring relief to investors by ending half a decade of political instability...

Ukraine’s new Prime Minister Mykola Azarov, who owes his appointment to a legislative fix that the opposition branded “unconstitutional,” may bring relief to investors by ending half a decade of political instability, according to Bloomberg.

After pushing through an amendment that eased the formation of a coalition sympathetic to President Viktor Yanukovych, a majority in the Kiev-based legislature immediately named his 62- year-old ally Azarov as premier. Azarov, who served as finance minister and Yanukovych’s deputy when the president was prime minister earlier this decade, has promised to submit a budget within a month.

“Azarov’s appointment from an investor point of view is a positive development because we probably have the most consolidated power for a long time in Ukraine,” said Dmitry Sentchoukov, an emerging markets strategist at Commerzbank AG in London.

The parliament, which yesterday dismissed Azarov’s predecessor Yulia Tymoshenko and fired her entire Cabinet, has been unable to pass a 2010 budget since October, leaving in limbo a $16.4 billion rescue loan from the International Monetary Fund. That’s put in jeopardy the government’s ability to pay for Russian gas that flows through to Europe and to cover its most basic budgetary needs.

The new government under Azarov brings Ukraine closer to receiving the next tranche of its loan than it’s been in more than six months, economists said. The IMF last year withheld $6.2 billion in disbursements and is due to release more payments this year if the program is resumed.

‘Priorities’

Azarov “has been fairly close to Yanukovych” and “Yanukovych views the re-establishment of relations with the IMF as one of his priorities,” Sentchoukov said.

Ukraine’s sovereign credit rating was raised one level by Standard & Poor’s Ratings Services late yesterday on the reduction in political risk and improving prospects for external funding. The foreign-currency sovereign ratings were raised to B- from CCC+ and local-currency rankings were increased to B from B-. The outlook on Ukraine is positive, S&P said.

Yesterday’s “formation of a new governing coalition and cabinet in Ukraine has paved the way for better policy coordination and a renewal of relations with the IMF,” S&P credit analysts Frank Gill and Kai Stukenbrock said in the statement.

Azarovshchina

The cost of insuring against the risk of a Ukraine debt default has declined, signaling improved investor perceptions of the country’s credit quality. The credit default swap spread on five-year debt fell to 724 basis points yesterday, the lowest since the Sept. 30, 2008, according to Bloomberg data.

The yield on the 2016 dollar-denominated bond fell to 8.57 percent as of 8:44 a.m. in Kiev, the lowest since August 2008.

Azarov, who became a member of the country’s parliament in 1994, led the state tax administration between 1996 and 2002, when he became first deputy prime minister and finance minister during Yanukovych premierships in 2002-2005 and again in 2006- 2007.

During his stint as head of the tax department he forced companies to pay their dues in advance and withheld tax rebates on exports for value-added tax. That period is known in Ukraine as “Azarovshchina,” or “the Azarov era,” a term recognized by Azarov himself, and is associated with crippling taxation policies.

Asset-Positive

Tymoshenko yesterday told reporters “you remember very well what Azarovshchina was: Mega-corruption and the suppression of small and medium business.”

Azarov, a geologist by training, “understands cooperation with the IMF is very important,” said Vasyl Yurchyshyn, an economic analyst at the Kiev-based Razumkov Center for Economic and Political Studies. “One of his first phone calls will be to Washington. I expect the IMF to resume lending in mid-May.”

The rapid formation of a new government is “a positive for Ukrainian assets,” Barclays Capital analysts Andreas Kolbe and Koon Chow wrote in a note yesterday. “It allows Ukraine to quickly resume negotiations with the IMF.”

Pay increases promised in a bill pushed by the former opposition and ratified by ex-President Viktor Yushchenko will be “the key controversial issues in the negotiations in the context of the 2010 budget,” Kolbe and Chow said. The IMF will also want some commitment from the government that it will push through delayed gas price increases and curb budget-swelling subsidies.

“It remains our base-case scenario that with a new, more stable political landscape, some compromise can be found,” they said.

Door Ajar

Azarov told lawmakers yesterday he wants the IMF to “broaden” the terms of its program, which call for the government to achieve a 4 percent of gross domestic product budget deficit this year compared with last year’s shortfall, which the fund estimates at 11.5 percent of GDP. Ukraine needs a package that “takes into account today’s reality,” he said.

“The IMF just postponed the disbursements but never shut the door for Ukraine,” Sentchoukov said.

The economy contracted 15 percent last year after the credit crisis left about 20 banks in need of state aid and as export demand for the country’s steel and chemicals stalled. Its economic survival relies on the resumption of the IMF loan.

“I don’t think anybody has any interest in seeing Ukraine suffer economically now, whether it’s Ukraine, Russia, the European Union or the U.S.,” said Simon Quijano-Evans, head of emerging-market research at Credit Agricole Cheuvreux in Vienna. “The interest is now to place Ukraine on a stabilization path, economically and politically. The messages coming out have been very positive.”

By Daryna Krasnolutska and Agnes Lovasz, Bloomberg

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