Political Rivalries Put Ukraine's Economy at Risk

A $10.6 billion bailout from the International Monetary Fund has pulled Ukraine back from what many feared was near-default this spring. But with fiercely contested presidential elections set for January...

A $10.6 billion bailout from the International Monetary Fund has pulled Ukraine back from what many feared was near-default this spring. But with fiercely contested presidential elections set for January, the next big economic risk looks to be political as potential candidates fight over economic policy.

Parliament is paralyzed as the opposition heaps political pressure on Prime Minister Yulia Tymoshenko by blocking the chamber`s work and demanding a rise in social spending. The national currency, the hryvnia, has slid almost 15% in the past two months, with the president and prime minister at loggerheads over key policies.

"Everyone is saying something different -- the government, the president and the opposition. When there`s no consensus on the policies that will pull the country out of the crisis, there is limited confidence in the currency," said Ceyla Pazarbasioglu, the IMF`s mission chief to Ukraine, in an interview Monday.

January`s vote will pitch Ms. Tymoshenko against bitter rival sitting President Viktor Yushchenko, her former ally during Ukraine`s pro-Western Orange Revolution in 2004. Also on the ballot is Viktor Yanukovych, leader of the opposition, the largest party in parliament, and the defeated candidate from 2004.

The economy of Ukraine -- a France-size country to Russia`s southwest -- was hit hard last year. After demand for major steel and chemicals exports dried up, output contracted 20% in the first three months of 2009, among the harshest European contractions of the global crisis.

With government finances stretched to breaking point, banks wobbling and the hryvnia plunging, Ms. Tymoshenko managed to push through policies required by the IMF despite chronic political infighting. The funds helped stabilize the economy, and Ms. Tymoshenko says improved industrial production figures in July show recovery is under way.

The crisis has eroded Ms. Tymoshenko`s popularity, with Mr. Yanukovych, her main rival for the presidency, now leading the way with 26%, compared with Ms. Tymoshenko`s 17%, according to an August poll by Research & Branding Group. Mr. Yushchenko trails with only 2%, behind up-and-coming former parliamentary speaker Arseniy Yatsenyuk with 13%. Surveys show that the economy will be the key battleground in the election.

The budget is already under severe strain as revenues have dropped. But after a bill proposed by Mr. Yanukovych`s party to raise pensions and the minimum wage was voted down last week, the party`s lawmakers physically blocked the podium in parliament, effectively shutting it down. The blockage has continued since then, and parliament`s speaker has threatened to withhold their salaries in order to get the chamber working.

Increasing social spending has been a major vote-winner in the past but would break the budget and fuel inflation, given the country`s precarious finances. Hryhoriy Nemyria, Ukraine`s deputy prime minister, vowed to hold the tough fiscal line.

Concern that politicians can`t overcome their rivalries is already weighing on the currency. The hryvnia is approaching this year`s low at almost nine hryvnias to the dollar, after what the Ministry of Finance called "panic and speculation" coincided with a high burden of foreign-debt repayments for companies in August.

UNIAN in Google News