Ukraine Elections: Pro-Europe agenda wins, significant problems loom

On Sunday, October 26, Ukraine held parliamentary elections that will help stabilize the country’s political situation and will give the newly elected government a strong mandate to institute pro-EU reforms. However, major problems loom over the country and the new Rada may yet disappoint both Ukrainians who are hoping for a stabilization of the situation in the country, as well as foreign companies that are looking forward to a quick economic recovery and a slew of reforms that would improve Ukraine’s operating environment.

Election results: a clear win for pro-European parties

Based on preliminary results as of Monday morning, President Petro Poroshenko’s party – Petro Poroshenko Bloc, and PM Arseniy Yatsenyuk’s People’s Front have approximately equal percentages of the vote (21.5% and 21.6%, respectively). This is sufficient for the two parties to form a strong coalition government that will no doubt have a decidedly pro-European policy. Importantly, the other parties that also made it into parliament (see chart below) are all more or less supportive of European integration as well. Extreme rightist parties, particularly Right Sector, did not make it into parliament.ukraine elections

Two elements of the elections could be cause of concern. Firstly, half the seats in parliament are elected through single-district winner-takes-all elections, i.e. local politicians have a chance of getting a seat in parliament without being part of a party organization. It is likely that a number of former members of former President Viktor Yanukovich will make it into parliament in this way as many have strong local constituencies. Secondly, elections were not held in rebel-held parts of eastern Ukraine as well as in Crimea. While Russia and, no doubt, Western observers will consider the elections legitimate, the reality remains that parts of the country’s population did not get to participate, including Ukrainian soldiers fighting in Eastern Ukraine. This casts a shadow over the new parliament, albeit one that might take a while to become truly problematic for its ability to maintain legitimacy.

What happens next?

Next, we’ll likely see a coalition between Petro Poroshenko Bloc and the People’s Front, likely with Arseniy Yatsenyuk staying on as prime minister, take on some of the country’s economic issues, accelerate stalled reforms, and continue negotiations with Moscow over the fate of Donetsk and Luhansk. In the meantime, however, rebel-held Donetsk and Luhansk are set to hold their own elections on November 2 for local and regional governments. These are unlikely to be recognized by Kiev and could become the next flashpoint in Ukraine’s conflict.

What can MNCs expect?

MNCs need to carefully manage their expectations about Ukraine in 2015. The country continues to face massive financial and economic problems, and the conflict in the east is not necessarily over, especially with a pro-EU government that is likely to pursue policies to which Russia strongly objects. The economy is unlikely to begin any sort of recovery before some point in 2016 and the longer the conflict continues, the later the recovery is likely to begin.

Currency depreciation, power shortages, rampant inflation, an unstable banking system, double-digit public spending cuts, and all-but-stopped production in the country’s industrial heartlands of Luhansk and Donetsk are just a few of the problems the country faces. None of these are easy or quick to fix, much less so with having a looming military conflict in the east.

It will take an extraordinary government to overcome these problems and it is unclear yet that Ukraine’s new parliament is up to the challenge, especially as vested oligarch interests will continue to loom large and, in some cases, stall much-needed reform. MNCs that believe in the opportunity in Ukraine should not revise plans to stay on in the country, but should assess carefully the timelines of their expectations.

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