Inside

September 20, 2016 №59 September 20, 2016 Сontent

PUBLIC POLICIES...... 1 Introduction of : chances, challenges, threats...... 1 Statements on the introduction of martial law: a real threat or muscles-flexing?...... 2 Position of the parties...... 3 Strengthening of President’s power, restriction of citizen’s rights...... 3 If martial law “yes”, then Minsk “no”...... 5 ECONOMIC ANALYSIS...... 6 The weakening of the hryvnia exchange rate: the causes and consequences..... 6 ENERGY POLICY...... 9 The future of Ukraine’s natural gas transmission system...... 9 Slowdown in energy market reform indicates its inefficiency...... 9 ‘Warlike’ rhetoric shall not effect constructive dialogue...... 10 Situation shall not be underestimated...... 10 Ukraine’s capacity vs. Gazprom’s economic calculations...... 11 Competitive gas market is Ukraine’s dire necessity...... 12 POLITICAL COMPETITION...... 13 Start of the new political season: «the war of all against all»...... 13 Towards «autocracy»...... 13 «President – ​«People’s Front» confrontation...... 14 Confrontation between new and old politicians...... 15

2 Inside Ukraine 59 September 20, 2016 PUBLIC POLICIES

Introduction of martial law in law in the case of internal destabilization and/ Ukraine: chances, challenges, or disaster at the front. threats On September 6, 2016, speaking at the open- ing of the fifth session of the Recent statements of the of Ukraine with a report “On the internal and on the introduction of martial law show that the external situation in Ukraine”, President Petro political leadership of Ukraine is considering Poroshenko stressed that the conflict in eastern such a possibility as one of the options to ensure Ukraine cannot be resolved by military means. governability of the country. It can strengthen To his mind, Ukrainian diplomacy has to per- President’s positions inside Ukraine, enhance form this function. Addressing MPs, the head of his authority in the regions due to military ad- state also noted that introduction of mobiliza- ministrations, provide immunity from possible tion or martial law depends entirely on Russia’s early elections, curb domestic opposition and actions. protest sentiment in the society. However, such a measure could potentially destabilize the in- President of Ukraine is not ternal situation in Ukraine, and on the inter- considering a military solution national stage it could turn into a full-scale war to the conflict with Russia, the loss of trust and support, in- cluding financial aid among Western partners. Therefore, given opportunities and threats, the Meanwhile, Russia conducted large-scale mil- President will probably introduce the martial itary exercises near Ukrainian borders, which

Inside Ukraine 59 1 September 20, 2016 according to the National Security Strategy of trap (August 2014). However, it wasn’t Ukraine of May 6, 2015 is a threat to our na- introduced in practice. The rhetoric of Ukrainian tional security. There are constant conflicts on officials has periodically changed becoming soft- the frontline. There are no results from the at- er. In particular, on September 1, 2016 after the tempts to establish a truce. It remains a threat to start of the new school year in Donbas, the intro- the resumption of a full-scale conflict. Although duction of a ceasefire regime was announced, and Ukrainian army has strengthened its defense ca- Poroshenko hoped that the West will strengthen pabilities, in case of involvement of Russian mil- anti-Russian sanctions in the case of the conflict itary units Ilovaisk or Debaltsevo tragedies may escalation in eastern Ukraine. The martial law be repeated. wasn’t mentioned. linked the introduction of martial law with the “pres- However, the economic situation is deteriorat- ence of threat to the sovereignty and security of ing, unemployment rates, housing and commu- Ukraine as a whole”. It should be recalled that nal services are rising, social tension is increas- during the occupation of Crimea, chairing the ing. Ukrainian citizens express their dissatisfac- NSDC as acting President, Turchynov was the tion of the deterioration of social standards and only person who advocated the introduction of lack of reforms. This can lead to increasing of martial law at that time. protest sentiment in the society and possibly to the social explosion. Speaking about martial law, Poroshenko didn’t dare take The worsening of social such a step economic situation could lead to a social explosion Today it is unclear whether these statements are the attempts to explore the ground, preparation Thus, in case of internal destabilization or sig- for the introduction of martial law or a mus- nificant deterioration of the security situation at cles-flexing, or PR-action with certain objectives. the front there are serious prerequisites for the introduction of martial law. And among the experts, there is a view prevailing that Poroshenko and Turchynov are not going to introduce the martial law but manipulate public opinion in Ukraine. Their aim is to distract atten- Statements on the introduction tion from domestic issues (new tariffs on housing of martial law: a real threat or and communal services, the slow pace of reforms muscles-flexing? or their absence) to external threat, and also to blackmail the West urging it to take a decision Ukraine’s political leadership, in particular Pres- in favor of granting a lethal weapon to Ukraine. ident and NSDC Secretary This argument is proved by the statements of Po- Oleksandr Turchynov, has repeatedly appealed roshenko, who is used to shift responsibility for to the issue of the introduction of martial law in all problems in Ukraine on the war. Ukraine depending on the operational security situation in Donbas. The last time the martial law Due to the talks about martial issue was raised during Russian provocations in law Poroshenko and Turchynov Crimea in August 2016, and before that – ​during distract people’s attention from the fighting in (February 2015) and domestic problems

2 Inside Ukraine 59 September 20, 2016 Statements by President Poroshenko on the intro- duction of martial law have also the underlying meaning as Poroshenko is interested in increasing defense spending. It enables structures affiliated with the President and “People’s Front” to receive large state contracts increasing their profits.

President is interested in increasing defense spending

Position of the parties “doves” that mainly appeal to the violations of The position of the main political players with the international law. regard to the introduction of martial law differ. We can distinguish the so-called “party of war” Business representatives are likely to be against (“People’s Front”, Radical Party of , the idea of martial law introduction as it will “Svoboda”) that support the idea of the intro- place restrictions on business activity. duction of martial law, and the “party of peace” (“Opposition Bloc”, “Batkivshchyna”) that take On the international stage the West, Russia and an opposite position. In 2014 at the meeting Ukrainian neighbors make their stance against of NSDC on the situation in Crimea leader of martial law, supporting instead the Minsk ne- “Batkivshchyna” party, took gotiation process and considering it as a single a stance against the introduction of martial law. option. They all probably do not support the in- “BPP” faction representing President’s interests troduction of martial law. in the parliament supports a diplomatic way of the conflict resolution. “Samopomich” is consid- Both domestic and foreign ering such a possibility in the case of amending players mostly opposed the the existing laws in the military sphere, while introduction of martial law stressing on the need for a diplomatic settle- ment. The positions of deputies’ groups “Renais- sance” and “People’s Will” depend on the posi- Thus, the introduction of martial law will be tion of their sponsors. However, the experience supported by nationalistic part of the society. of forming a new coalition in the parliament has Most citizens, politicians and Western partners proven that the President, if necessary, could will not support such a decision. find a common ground with these two groups. Despite this, it will be difficult for Petro Poro- shenko to collect the necessary number of votes Strengthening of President’s in support of the introduction of martial law. power, restriction of citizen’s The position of the civil society is difficult to rights clearly identify. There is a camp of “hawks” which reflects nationalistic sentiments of the society or The authorizes the Pres- volunteer battalions. On the other side, there are ident to introduce the martial law in Ukraine or

Inside Ukraine 59 3 September 20, 2016 elimination of Ukraine’s independence; troops housing in a residential area of civilians; intern- ment of foreign nationals whose state is threat- ened of committing aggression against Ukraine; control over the media activities. At the time of martial law it is prohibited to hold elections, ref- erendums, strikes and to amend the Constitu- tion. The powers of the President, the Verkhovna Rada, the Government and courts cannot be ter- minated.

The introduction of martial law provides for temporary in its particular areas. In this case, the positions restrictions on rights and of the head of state and military command ap- freedoms pointed by him are largely enhanced within the country. The President is entitled on the basis of In the case of the introduction of martial law the regional and district administrations to estab- question arises: what geographical boundaries lish military administrations and appoint their it covers – ​the whole territory of Ukraine or just heads. The structure of these military admin- Donbas? During the battles near Debaltseve and istrations is formed from soldiers who are sent Russian provocations in Crimea Petro Poroshen- to them to perform duties in the interests of na- ko threatened to introduce it on the whole terri- tional defense. tory of Ukraine. This would mean the establish- ment of the military administrations that would With the introduction of martial take all power over the regions; the prohibition law the President reinforces its of early elections, the importance of which is positions within the country stressed by some parliamentary factions, trying to play the tariff theme just before the heating The martial law is introduced by the President season. Other measures will include banning of of Ukraine which is subject to approval by the any strikes and demonstrations which are fre- Verkhovna Rada of Ukraine within two days. quent in Ukraine, especially during plenary ses- The decree shall specify the territory on which it sions of the Verkhovna Rada of Ukraine and also is introduced, the expiration date and also a list control over the media whose activities threaten of rights and freedoms which are limited during national security. the time of such restrictions. In the case of the introduction of martial law During the martial law, the following meas- only in Donbas, all restrictions prescribed by the ures can be implemented: civilian duty; the use law “On legal regime of martial law” will refer of business resources for defense purposes; ex- to two regions – ​ and . There is propriation of citizen’s property; curfew; special also a chance of adding Kherson region to this regime of entrance and departure; documents list, where there is a potential threat of Russian checking; inspection of things, vehicles and invasion from the territory of Crimea. However, luggage; the prohibition of political parties and the rest of Ukraine will continue living under the civil organizations activities, if it is aimed at the laws of the peace time. Thus, it will be possible

4 Inside Ukraine 59 September 20, 2016 to increase the level of security in the territories The Minsk agreements were incorporated in of Donbas controlled by Ukrainian authorities the Security Council resolution that designat- due to a complete turn-off of the Russian chan- ed Ukraine and particular districts of Donetsk nels, banning undermining organizations and and Luhansk regions as conflicting parties, not isolation of suspicious persons. Enhancing in Ukraine and Russia. Thus, their performance Ukrainian soldiers’ rights and at the same time is binding on both parties. The introduction of the restriction of ordinary citizens’ rights will martial law would mean the rejection of Ukraine have a temporary nature. to fulfil the Minsk agreements and violation of the UN Security Council resolution. This in turn will result in the possible imposition of sanc- Martial law can be introduced on tions against Ukraine and confrontation with the whole territory of Ukraine or only in Donbas the West. Such a scenario gives the Kremlin an opportunity to use any protest in Ukraine as a casus belli and to create the next “people’s repub- lic”. In the case of the introduction of martial law, If martial law “yes”, Ukraine chooses the way of self-isolation on the then Minsk “no” international arena.

Overall, the introduction of martial law fully The introduction of martial contradicts the Minsk negotiation process and law would mean the rejection can be considered by the President as an emer- to fulfil the Minsk agreements gency measure in the case of worsening of the and will lead to isolation on the political situation in Ukraine and sudden chang- international arena es of the operative situation at the front. Petro Poroshenko may take such a step when he feels Overall, martial law is a dangerous game that can a weakening of his positions within Ukraine and both stabilize the situation or to be worth much try to use martial law to curb internal opposi- for his initiators. Any worsening of the political tion, finally usurping the power. However, it will situation may lead to this decision. have short-term advantages but for the long- term perspective it can cause unpredictable con- In our opinion, it can be said that statements by sequences both for Poroshenko’s political career Poroshenko and Turchynov on the possibility of and Ukraine as a whole. the introduction of martial law are nothing but another PR action to preserve the tension in the society and to strengthen their power. Given The introduction of martial objective reasons, such a move seems to be un- law may be considered as an likely. The introduction of martial law will lead emergency measure by the to the isolation of Ukraine on the international President arena, increase tensions in Donbas and become the spark that finally will set fire to public dissat- It should be noted that on February 17, 2015, isfaction. Martial law may be introduced in the the UN Security Council adopted the resolution case of the political instability and defeat at the 2202 that endorsed the “Package of measures for front. the Implementation of the Minsk Agreements”.

Inside Ukraine 59 5 September 20, 2016 ECONOMIC ANALYSIS

The weakening of the hryvnia Since mid-August it has been observed a gradual weakening of exchange rate: the causes and the hryvnia to the US dollar consequences Since mid-August a gradual weakening of the hryvnia to the dollar has been observed. In the During August – ​early September in Ukraine the previous months it was a surplus of foreign cur- weakening of the national currency has been rency due to the seasonal improvement of trade observed. As a result hryvnia exchange rate in- balance. It allowed the National Bank of Ukraine dex fell to 27 UAH per 1 USD. On the informal (NBU) to redeem foreign currency in reserves. market it has grown more than the official rate. However, at the beginning of September, the The increasing of volatility of the hryvnia ex- NBU has announced auctions to sell foreign change rate on the interbank market is due to currency. The surplus of the foreign currency the following reasons. Among them: seasonal enabled the NBU to increase its reserves to $14,1 increase in demand for foreign currency, the billion at the end of July, increasing them to 5,9% correction of prices on grain, and also negative compared to the beginning of the year. expectations caused by the delay of the next IMF The surplus of the foreign tranche. The weakening of the hryvnia could in currency enabled the NBU to turn lead to a slight increase in prices, especial- increase its reserves to $14,1 ly for imported goods and fuel. billion at the end of July

6 Inside Ukraine 59 September 20, 2016 It is worth to remember that from February 2015 in Ukraine there is a free exchange rate and some fluctuations are not the exception but the normal situation. There are two groups of causes with re- gard to the weakening of the hryvnia. The first – ​ the current fluctuations in demand and supply of foreign currency due to the necessity of paying the external contracts, e. g. foreign debts. Today some funds are moving out from Ukraine in the form of dividends. These factors are short term, and therefore after these fluctuations of demand the previous levels have to be recover.

The second group of reasons are of economic na- the ICPS forecast, by the end of the year official ture. It is difficult to clearly tie them to daily fluc- exchange rate will be 27 UAH / 1 USD, as laid tuations but they set certain trends. One of the down in the State Budget for 2016. reasons that contributed to the devaluation of the hryvnia was the collapse of world prices for However, given the lack of limits on exchange grains – ​wheat and corn. These products are the rate, in practice it may deviate from the fore- foundation of our food exports, which amount- cast. It is possible that by the end of the year ed for $15 billion or 40% of foreign exchange we will see a lower as well as higher above this earnings in Ukraine last year. So, unless there is rate. It is worth to recall that in February 2016 recovery in prices for grain, Ukraine for all equal the exchange rate was above 27 UAH / 1 USD conditions can fall short about $3–4 billion. (e. g. as of February 25, 2016 it was 27.25), but then hryvnia strengthened to 24.8 UAH / 1 USD. Therefore, even a temporary excess of these indi- The collapse of world prices for cators is not a reason for panic. grains – wheat and corn has led to the devaluation of the hryvnia This weakening of the hryvnia could lead to higher prices, especially for imported goods and One more trend is the increase in imports of gas fuel (10%). However, this growth should not be during the heating season, which will increase significant, since prices of many manufacturers demand for foreign currency until next spring. and suppliers have already laid devaluation ex- Another trend is the traditional increase in eco- pectations. If the seller will expect that devalu- nomic activity in autumn. According to available ation will continue, he can lay such devaluation statistics, in recent times there were an increase expectations in the price. Today the fluctuations of salaries and other incomes. It has affected the are commensurate with predicted inflation at 12–15%. Therefore, they are not capable of caus- growth of retail sales, part of which are imported ing significant price increases, unlike tariffs or goods. So, expected possibility to sell more leads seasonal rise in prices on fruits and vegetables. to more imports and, consequently, increase of demand for foreign currency. The weakening of the hryvnia This seasonal increase in demand for foreign first of all could lead to higher currency driven by economic recovery will lead process, especially for imported to the weakening of the hryvnia. According to goods and fuel

Inside Ukraine 59 7 September 20, 2016 There are three key factors that can cause a sig- destabilization, increasing foreign exchange re- nificant drop in the hryvnia exchange rate in the serves and will be ready to go out with interven- short term: early elections; the destabilization of tions, having more than $14 billion in a “penny the banking system and the escalation of conflict bank”. in Donbas. To keep control over the situation it is important for government and the National There are three key factors Bank to continue conducting responsible fiscal that could cause significant and monetary policies, avoiding artificial not devaluation of the hryvnia: early secured income growth of public expenditures elections, the destabilization and irresponsible ”money printing”. In this case of the banking system, the there should be no destabilization which would escalation of the conflict in negatively affect the exchange rate. It is expected Donbas that the NBU will continue the foreign exchange

8 Inside Ukraine 59 September 20, 2016 ENERGY POLICY

The future of Ukraine’s natural term support in gas supplies and transit from gas transmission system international partners concerned unless the country makes progress in this area. Naftogaz reform plans elaborated by the Gov- ernment provide for separating gas transmittal pipelines and underground gas storages, though Slowdown in energy market they lack for future vision of how Ukraine’s gas reform indicates its inefficiency transmission system (UGTS) will be exploited. Russia’s active efforts to construct pipelines by- Russia’s recent statements on constructing Turk- passing Ukraine pose a real threat to Ukrainian ish Stream and Nord Stream 2 pipelines make national economy and domestic political stabil- Ukraine to consider its lingering inability to work ity. As there is no alternative to Russian gas in out UGTS exploitation strategy and manifest its terms of volumes necessary for an efficient ex- competitiveness on European transit market. ploitation of UGTS, Ukraine will have to search for compromising conditions in mutually bene- Ukrainian authorities have made no progress ficial gas transit. towards breaking up Naftogaz monopoly on na- tional market pursuant to the EU’s Third Energy Kyiv will be unable to take a reasonable nego- Package and reforming National Commission tiating position towards Moscow unless UGTS for State Regulation of Energy and Public Util- increases its competitiveness in the near future ities – ​a body responsible for equitable energy and UGTS long-term exploitation strategy is tariffs, though they go on making pro-European worked out. Ukraine will receive only short- declarations.

Inside Ukraine 59 9 September 20, 2016 The Government demonstrates bring these contracts in conformity with Eu- the lack of political will to real ropean standards’ Kobolev said explaining the energy reforms company’s ‘immunity’. “Liquidation of Naftogaz may be an objective of those who seeks to derail The EU still confirms its support for Ukraine’s the arbitration process”. Thus, Kobolev stressed gas market reform, though it looks lukewarm. on arbitration, on the one hand, and unpredict- Both parties declare their commitments to Euro- able Naftogaz reforms and UGTS separation, pean principles, however the EU is forming the on the other hand. The question arises where a Energy Union while Ukraine is showing reluc- strategy is. tance to demonopolize national energy markets. Andriy Kobolev makes In addition to regulatory effect, the reform has negotiation process with Russia also to ensure that Ukraine’s national interests deadlocked are advanced to the end of efficient use of energy assets. UGTS is one of strategic assets which may contribute to EU energy security and Ukraine’s budget revenues at the same time. Situation shall not be Despite political environment, Russia is Ukraine’s underestimated major partner in energy transit. No matter how appealing a refusal from consuming Russian gas Russia does not stand aside and exerts pressure. is, Ukraine can hardly afford to exploit its transit Russia claims that it will cease gas transit via assets efficiently without Russia’s involvement. Ukraine after the contract expires in 2019 while new gas pipelines may compensate for transit losses. In particular, in early September Gaz- Currently Ukraine has no prom was quick to say that Turkey’s authorities alternative to Russian gas had issued initial permits to construct Turkish to secure favourable transit volumes Stream that provides for 63 bln cubic metres of gas supplies per annum running from Russian town of Anapa across the to a town of Ipsala located on Turkish-Greek border.

‘Warlike’ rhetoric shall not As Turkey is the second largest consumer of Rus- effect constructive dialogue sian gas in Europe after Germany (Turkey im- ported 27 bln cubic metres of gas in 2014) and its A speech made by Naftogaz CEO Andriy market has increased twice for a recent decade, Kobolev to address MPs on September 7, 2016 both parties are unlikely to put off the project. can demonstrate how Ukraine is willing to di- Moreover, Turkish leader Recep Tayyip Erdoğan alogue with Russia. ‘Naftogaz plays a role of praised his Russian vis-à-vis for support following professional and efficient weapon in gas war. coup attempt. The nearest battle in this war will take place in the Stockholm court of arbitration for USD50 It is worth avoiding underestimations of Russia’s bln soon. Naftogaz is a contracting party with options to launch Nord Stream 2, taking into ac- Gazprom on gas import and transit. Only Naf- count that the first line has been already opera- togaz may demand repairing damages, caused tive. The second line running from Russian Len- by Gazprom according to these contracts, and ingrad region across the Baltic Sea to Germany

10 Inside Ukraine 59 September 20, 2016 is expected to be launched exactly at a time when with its obligations and stressed on prospects for a transit contract with Ukraine expires in 2019. significant reduction in gas transit. ‘Capacities of A number of Western partners (BASF/Winter- gas transit via Ukraine in the central corridor are fall, ENGIE, Uniper, OMV and Shell) have al- 10–15 bln cubic metres. Nowadays these capa- ready supported Nord Stream 2. Its transit ca- bilities may be regarded as a potential to be ex- pacity estimated at 55 bln cubic metres per an- ploited in case a new transit contract via Ukraine num (a joint capacity of Nord Stream and Nord is effective since January 1, 2020’, said Gazprom Stream 2 is 110 bln cubic metres per annum) is Chairman Alexey Miller in June 2016. Accord- an appealing opportunity for EU consumers giv- ing to his statement, this prospect is driven by en risky transit via Ukraine. economic efficiency since the transportation tariff via Nord Stream is USD2.1 for 1,000 cubic As Russia promotes energy meters per 100 kilometers while the current rate projects in Europe, UGTS for gas transit via Ukraine is USD2.5 for 1,000 becomes less attractive to the EU cubic meters per 100 kilometers. Thus, if 20% price difference is compared with costs invested in Nord Stream 2 construction and exploitation, Gazprom will expect to gain over USD7 bln of Ukraine’s capacity vs. revenues over the next 25 years. Gazprom’s economic Gazprom presented another argument against calculations gas transit via Ukraine linked with high oper- ating costs. According to Miller, if the company It is worth analyzing how Ukraine can respond signs a new contract for the transit of 30 bln cu- to Russian’s plans. UGTS capacity is 302 bln cu- bic meters via Ukraine after 2020, it will require bic metres at entry points, including 21 bln cubic additional operating costs of USD25–43 bln in metres on Ukraine-EU border, and 178 bln cu- 25 years. Moreover, Miller emphasized environ- bic metres at exit points. In addition, 12 under- mental risks like 112 mln tons of CO emissions. ground gas storages have a total capacity of 31 2 bln cubic metres. Loosing gas transit assets will An efficient exploitation of UGTS requires that lead to significant budget and the most part of its capacities should be utilized. social damages However, UGTS is currently far from being ex- ploited to the fullest. Russian gas transit dropped Thus, Ukraine cannot ensure the UGTS future. to 59.4 bln cubic metres in 2014 and then rose to The Government may secure financial support 67.08 bln cubic metres in 2015. For January-Au- for the UGTS over the next 3 years by means gust 2016 Russian gas transit via Ukraine com- of transit tariff (up to USD2 bln), Ukrtransgaz promised 48.35 bln cubic metres. A total volume of gas transit is expected to amount to nearly 70 activities (up to UAH 31 bln) and taxes (up to bln cubic metres in 2016. UAH 6.5 bln). However, Ukraine’s lack for clear vison and actions plan will help to fulfill Russia’s According to the contract between Gazprom ambitions. Moreover, uncertainty over transit and Naftogaz, the Russian energy giant obliged capacities may result in social implications since to transit nearly 110 bln cubic metres of gas via 20,000 persons are employed in UGTS and feed Ukraine. However, Gazprom does not comply their families.

Inside Ukraine 59 11 September 20, 2016 Competitive gas market is When the question arises if Ukraine will bene- fit from the above prospects, the answer is posi- Ukraine’s dire necessity tive. The current situation makes Ukraine agree, though effects will be temporary. Ukraine has to Ukraine can make two proposals in the current reform natural gas market and establish a com- situation: either appealing transit tariff or part- petitive market. Deoligarchization of energy ner’s share in business. As the latter option is market and access by third parties shall be car- unlikely nowadays, Ukrainian-Russian energy ried out pursuant to national interests and with- dialogue may be a way out. In this regard, arbi- out oligarch’s share. Ukraine needs to exploit tration process creates additional tensions as one advantages of underground gas storages to the party delivers an ultimatum to another. Ukraine fullest, work out bonus scheme for gas transit via may lose arbitration since Kyiv does not influ- UGTS and improve tariff policy. ence on volumes of Russian gas purchased by the EU. Even if Ukraine proves its case in the Stock- holm court of arbitration, the obtained compen- A real means of preserving UGTS strategic role is increasing its sation will not strengthen its competitiveness. competitiveness Nowadays the EU has to maneuver between Ukraine and Russia. Prior to the launch of Rus- Only Ukraine’s transparent and deliberate pol- sia’s aforementioned projects, the EU is expected icy will preserve UGTS significance and force to maintain a typical position, namely provide Russia to invest more resources in Asian energy Ukraine with financial support for purchasing projects. Open, competitive and stable gas mar- Russian gas in winter and engaging Ukraine in ket will be the best argument for international resuming trilateral negotiations. partners to support Ukraine.

12 Inside Ukraine 59 September 20, 2016 POLITICAL COMPETITION

Start of the new political litical uncertainty and permanent risks of pos- season: «the war of all against sible early elections strengthen internal centrif- ugal processes which prevail in the «BPP», «PF» all» and «Opposition bloc».

In the new political season confrontation will occur amid multiple lines: between the Presi- Towards «autocracy» dent and the «People’s front», a corrupt politi- cal class and contra-elite, authorities in general Petro Poroshenko has opened the political sea- and a wide opposition. Political competition son with replacement of Head of the Presiden- will escalate against the background of a large- tial administration Borys Lozhkin with the ac- scale privatization and increased tariffs rates, curate executor and clerk Ihor Rainin, whose most players will monitor the outcome on the «Firtash case». main task will be strengthening of the executive vertical and recruitment of loyal state secretar- Amid recent events a gradual distancing of ies. Formally, Borys Lozhkin will facilitate in- Prime Minister from vestments and improve the investment climate President is more noticeable, as PM builds his in Ukraine. However, according to available own architecture and relies on the proven busi- information, now Lozhkin is responsible for es- ness environment and loyal military forces. Po- tablishing President’s «information shield» that

Inside Ukraine 59 13 September 20, 2016 party and play by own rules. It should be also mentioned that relationships of Groysman with ministers from “BPP” quotas are conflict-rid- den. As an example the recent cross talk be- tween Groysman and Zubko can be recalled, which happened within the «question hour» to the government.

Volodymyr Groysman is carefully disassociating himself from the President and his entourage. includes a number of TV channels, websites and other media sources loyal or neutral in covering the activities of Petro Poroshenko and his en- tourage. «President – ​«People’s Front» confrontation The President has fully concentrated overall authority in his hands – ​executive vertical and In the eyes of Poroshenko, the Parliament re- local public authorities, courts, prosecutor’s of- mains the last island of political instability in fice, intelligence agencies, the army and gained Ukraine. And if he manages to cancel politi- loyalty of oligarchs. The only thing he lacks for cal immunity, then there would be no need for his total influence is a stable coalition in the the President to cling to his partner in the co- Parliament in addition to controlled Ministry of alition – ​«People’s front» and its protégé Arsen Internal Affairs and Ministry of Justice. In this Avakov. regard, the Presidential administration plans to cancel parliamentary immunity soon in order Recently there are a lot of contradictions be- to curb the Parliament and make it obedient. tween Avakov and Poroshenko. The Minister President’s business environment helps him to of Internal Affairs frankly annoys the President fulfill these tasks, because it controls courts, with his behavior and ties to the nationalist prosecutor’s office and law enforcement agen- «Azov». This fact gives all grounds for security cies. forces to expect a possible coup and street pro- tests against the power architecture. Even be- Petro Poroshenko continues to build up the fore the session of the Parliament was opened, political and business configuration under the the non-affiliated people’s deputy Serhii Kaplin, same scheme, which was successfully operated with the mediation of the presidential executive during the presidency of . office had registered a resolution on dismissal of Therefore, Volodymyr Groysman realizes that , which will be probably put to a in the case of next elections, or changes in ex- ternal conditions, it will be very difficult to re- vote soon. turn to politics. In this regard, Prime Minister began to disassociate himself from the toxic Petro Poroshenko’s entourage President and, according to available informa- worries that Arsen Avakov might tion, contemplates to launch his own political arrange a military coup.

14 Inside Ukraine 59 September 20, 2016 In response, «PF» began media attacks on the President and his entourage, which have only in- tensified after the incident with the «Inter» TV channel and the scandalous construction with participation of «Azov» in Svyatoshinsky dis- trict.

First, this is aimed at withdrawing corruption accusations against Mykola Martynenko, Arse- nii Yatseniuk and Maksym Burbak.

Secondly, the «PF» wants to put pressure on the President to maximize his isolation in the West in order to do even more dependent on the Alli- «BPP» people’s deputy purchased a luxury $310 ance with the radicals. thousand apartment in downtown district of Kyiv which has led to serious media scandal. Thirdly, radical rhetoric of the «PF» regarding the All political forces without exception – ​«BPP», «Inter» TV channel and the Minsk agreements «PF», «LRP», «Opposition bloc», «Samopom- could be interpreted as the need to mobilize the ich» and «Batkivshchina» launched a wide maximum number of the electorate, which ulti- media campaign against Serhii Leshchenko. mately should result in ratings increase up to the 10% level. «Old elites», which were many times critisized by Serhii Leshchenko, demanded from him to lay down his parliamentary mandate and to “PF” takes specific actions to return to his journalist job. However, Lesh- increase its rating up to 10%. chenko himself appealed to the NABU, so that anti-corruption authorities would carry out an To this end, the «PF» structures invest a signifi- impartial investigation. Luxury real estate pur- cant part of financial resources to the media as- chase not only does not comply with the Lesh- sets purchase, distribution of sponsored publica- chenko’s image as a fighter against corruption, tions in the media, as well as establishment of but it also demonstrates the attitude of the old new think tanks and expert centers. political class to the new generation of politi- cians willing to struggle for power through the elections. Confrontation between new and old politicians Despite great media resonance, the ”Leshchen- ko’s apartment” issue appears on and on in Exacerbation of confrontation between the Ukraine’s political discourse and, it is expected old political elite and new politicians em- to get intensified, as auctions on privatization of bracing eurooptimists from Demalliance and large industrial objects e. g. the Odesa port plant, fighters against corruption from the Chu- Turboatom, the State Grain Corporation etc ap- mak-Kasko-Sakvarelidze party dubbed “Khvy- proaches. In this context, the interests of «PF», lia” is one of the major trends. The main politi- «BPP» and Saakashvili’s team will meet again, cal event of recent weeks was the topic devoted which will accuse each other of corruption and to the «apartment of Serhii Leshchenko». The violation of procedures.

Inside Ukraine 59 15 September 20, 2016 Speculating on “the high tariffs in terms of tariffs and social security to be re- and low social standards” viewed. The government will manage to keep the theme, the wide opposition aims current socio-economic situation by all means. to achieve the early elections The epicenter of confrontation will be located in the Parliament, therefore, all legislative activities Another struggle line – ​between the authorities will be likely blocked soon, and all the players and the wide opposition – ​includes the issue of including the non-parliamentary parties, except high tariffs and social standards improvement. for the government, will strive for early parlia- The opposition will require the state policy mentary election.

16 Inside Ukraine 59 The aim of the publication is to provide objective information on current political events in Ukraine and thorough analysis of major tendencies in domestic politics. Such analysis will assist in setting priorities in the process of implementing reforms in Ukraine and in evaluating quality of state deci- sions from the viewpoint of their impact and sustainability. Special attention is paid to evaluation of political competition in Ukraine and ability of key political players to address challenges.

© 2016 International Centre for Policy Studies (ICPS) If citing please give reference on the ICPS

Responsible for the project: Viacheslav Holub

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