Ukraine goes to the polls in just over a month and currently outsider and comic Volodymyr Zelenskiy is in a comfortable lead according to the latest polls, but the race remains wide open and no one has a clue who will win in the end. 

An actor with no experience in government at all, analysts are asking what that will mean for Ukraine’s development if he wins. However, Zelenskiy’s lead is indicative of the wide spread disappointment among voters with all Ukraine’s existing political elite and its manifest failure to deliver on any of the promises for a better life that the Maidan protestors fought, and died, for.

While it seems that Zelenskiy will get through to a second round of voting in April – none of the record 44 candidates has any hope to winning 50% of the votes needed to win in the first round – it is unclear who he will meet.

The other two leading candidates are incumbent President Petro Poroshenko and opposition leader, former Prime Minister and head of Batkivshchyna (Fatherland) party Yulia Tymoshenko. But while Tymoshenko had a strong and early lead, she has fallen back to third place in the most recent polls – and Ukraine’s polls are notoriously inaccurate to begin with.

Veteran emerging markets analyst Tim Ash, Senior Sovereign Strategist at BlueBay Asset Management, runs through what is known, what is likely, and what remains anyone’s guess in the upcoming elections.

Q&A on Ukraine

Ukraine goes to elections on March 31 for presidential, with likely a second round run-off vote three weeks later on April 21, and then parliamentary elections are due by October. I thought it perhaps useful to discuss how a foreign investor views this set of elections, and the Ukraine story.

Q? What do you make to these elections?

Answer: Well I think we should celebrate the fact that despite everything Ukraine has been through over the past few years, it remains a vibrant, functioning democracy. We can debate the effectiveness of the constitution and the election law, which has elements of the British “rotten borough” about it with the single mandate constituencies, which unduly benefit oligarchic business interests. But with 40-odd candidates, we have a genuinely contested presidential election, from, which we really don’t know who is going to emerge victorious. And unfortunately the trend in too many Emerging Market countries of late is in an entirely different direction, towards “managed democracy” or even more authoritarian rule – and sadly, too many people seem to be celebrating that as somehow optimal from a development perspective. I just don’t agree.

I think it is also refreshing when all the media talk is about a crisis in liberal Western market democracy, that opinion polls show strong support – two thirds – for Ukraine’s Western orientation, towards the European model with respect for human rights, democracy and the rule of law. This is despite difficult economic times: recession, devaluation, default, foreign annexation and invasion. Ukrainians are voting with their feet – well unfortunately actually many are doing literally that, with 4-5 million thought to be working overseas, mostly in the EU. But they know the model of development they want, and its orientation is Westwards.

Q? And what about the result, who is going to win?

Answer: No idea. I have now covered Ukraine for over thirty years and I hold my hand up and admit that these elections are genuinely impossible to call. But I guess my saving grace is that I am pretty sure that no one else either really knows who is going to win either.

I had been in the camp of thinking that Ukraine would benefit from a Macro factor, with a new fresh face emerging victorious. I thought that was the pop star Svyatoslav Vakarchuk, but after much soul searching he opted not to run – shame. A fresh face could still win, but now that looks more likely to be the comedian Volodymyr Zelenskiy, but whose real orientation is much less easy to discern than that of Vakarchuk.

I try not to read that much into opinion polls in Ukraine, as they seem to be manipulated by Ukraine’s business and political elites. But the torrent of opinion polls do suggest at this stage it is a three horse race between the “incumbent” President Petro Poroshenko, the “disruptor” former PM, Yulia Tymoshenko, and the “joker”, literally, in the pack, Zelenskiy.

Poroshenko clearly has the benefit of incumbency on his side – the considerable weight of the state apparatus, and the state budget to wield, and there have been clear signs of fiscal pump priming early this year.

The power of patronage in Ukraine, given the dominance of oligarchic groups, should not be under-estimated. Poroshenko is also playing up his achievements, including macro stability/recovery, security – halting Russia’s encroachment in Donbas, and the resurrection of the Ukrainian military into a fairly formidable fighting force – and autocephalous status for the Ukrainian Orthodox Church, the latter of, which is a huge victory against Moscow. He is pushing the idea that while he has his faults, he is a stable hand on the rudder at a still difficult time, and the greatest assurance of Ukraine’s Western orientation.

Poroshenko though suffers big negative ratings – even higher than Tymoshenko – reflective I guess of the fact that most Ukrainians have not seen much of an improvement in their living standards over the past five years, and want something different – there is a sense the country wants change, something different, and I guess in an age when anti-establishment figures/movements (Trump, Five Star, Brexit, Syriza) are dominant.

Poroshenko is the archetypical representative of the Ukrainian oligarchic establishment – everything that many Ukrainians simply abhor. He has been in around power/the heights of the Ukrainian economy for much of the past two decades – serving as minister of foreign affairs, head of the national security-council, NBU council chair, et al, before becoming president in 2014.

And remember back in 2014 there was little enthusiasm for his presidency, even though he won a first round victory with 54% - rather he was seen as a safe pair of hands who could manage a crisis war economy.

And to give him huge credit, he did that – he stabilised the macro, and went for peace (the Minsk accords) at a time (2014-2015) when many people pushed for outright war with Russia, which likely Ukraine would have lost. But as noted above, it looks like Ukrainians want something different, which means Poroshenko is fighting an uphill battle to win re-election, and remember only one president in Ukraine’s independence era has won a second term – Leonid Kuchma.

Tymoshenko, meanwhile, is hardly something new or that different, to Poroshenko, for voters. She has been in/around Ukrainian politics for as much time as Poroshenko, but actually only in office for 4-5 years (as dep PM, then PM). I guess therein she can claim not to be wholly responsible for Ukraine’s current state – albeit she is part of the oligarchic political class (like Poroshenko), which have failed Ukraine over the past 30 years.

But perhaps what marks Tymoshenko out, unlike Poroshenko, is that she is seen as a disruptor – a women, in still a man’s political world in Ukraine – much more of a populist (we can debate this, given the past two years of Poroshenko rule has been much more populist, as reflected in the IMF programme going off track for 18 months). And let’s not forget that Tymoshenko is one of the few oligarchs who have served jailed times for their sins – but in Tymoshenko’s case it was for something she did not do.

Tymoshenko is selling a message of change, of populism, which seemed to be selling well at least earlier in the campaign, if opinion polls were to be believed – as up until very recently she headed polls and seemed a dead cert to be in the second round. Tymoshenko is a political dynamo, a political phoenix – never write her off, as I think we have all learned in the past to our costs.

Zelenskiy is the new kid on the block, a relative political unknown. He is the new fresh face, and taking the space that many of us thought would be occupied by Vakarchuk (whom I incorrectly called as the next president). But he has captured the imagination since his launch, playing on his youth, political inexperience, and his strong media presence already from his career as a successful comedian. He is currently topping the polls, in the 20% plus range, seemingly taking some votes from Tymoshenko, and suggesting now a dog fight for second place, and a run off place, between Poroshenko and Tymoshenko.

Opinion polls suggest that Zelenskiy would beat Poroshenko and Tymoshenko in any run-off vote, albeit many suggest his political and economic policy naiveté will cost him as the campaign develops. There are also question marks around his geopolitical orientation – given alleged business links to Moscow – his business orientation given his comedy show has appeared on the channel of the controversial oligarch, Igor Kolomoisky. He denies he is in the pocket of Moscow, Kolomoisky, or big business, but all this will be tested in the campaign.

If I had to put probabilities on the three candidates’ chances of winning at this stage, I would cautiously put it 25:30:40 on Poroshenko, Tymoshenko and Zelenskiy in that order, with a 5% probability attached to some other outcome.

Q? What will you be watching for in the first round?

Answer: All the focus is who will come first or second, and hence gets thru to the run-off vote, but equally important will be who comes third and then the horse trading, which will go on for these votes. Remember the 2010 elections when [banker, oligarch and former National Bank of Ukraine governor] Serhiy Tigipko came a surprise third and then traded with Yanukovych to ensure his second round victory.

Assuming Zelenskiy secures first or second place, and then Poroshenko and Tymoshenko vie for second and third places, I just wonder what deal either would be prepared to do, to back other candidates in the run-off vote.

Interestingly, therein I guess Tymoshenko will be more prepared to deal, as she has made clear she favours constitutional reform, to move more powers to the Rada, plus electoral reform to go back to a full PR system. I guess she would cut a deal with either Poroshenko or Zelenskiy to ensure that. Guess her problem is that Zelenskiy lacks any deputies in the Rada to ensure passage of any such constitutional reform, and while Poroshenko could deliver such reform via his parliamentary backing (BPP), it’s hard to see Tymoshenko trusting Poroshenko on anything given their long history of rivalry and bad blood. Equally, would Poroshenko want to head a government, with Tymoshenko as president, when he has been president – it seems unlikely.

And what exactly would Zelenskiy demand for his support in a second round vote, if he came third? Hard to say – some deal around banking, to satisfy his oligarchic backers, but which would derail cooperation with the IMF?

Note though that if Tymoshenko or Zelenskiy are elected president, they would have little legislative room to manoeuvre, given they would not control a majority in parliament, could note change the structure of the [Ukrainian Prime Minister Volodymyr] Groysman government much before those elections (sway only over the ministers of foreign affairs and head of the national security council).

Q? What about the economy, and economic policy?

Answer: Poroshenko is banging the line that only he can be trusted with the economy, and macro stability and investment are only safe in his hands, while denigrating Tymoshenko et al for populism.

I think here it is important to focus on Poroshenko’s achievements on the economy front, and I think it is fair to say that Ukraine is in a much stronger position today than in 2014, with macro-stability –the resumption of real GDP growth at over 3%, inflation back in single digits, the UAH stable and reserves back to around USD20bn, with much reduced fiscal and current account deficits (around 3% of GDP each). Contrast that with the recession, devaluation and default in the period 2014-2015.

And there have been some landmark reforms, including NBU reform, banking sector reform, energy sector reform, fiscal consolidation, pro-Zorro, pension reform et al. But many of these reforms were due to the reform zeal of the Yatsenyuk administration and due to the ‘blood and tears’ of key reformers such as [former Finance Minister Natalle] Jaresko, [former NBU governor Tatiyana] Gontareva, [current NBU governor Yakiv] Smolii, Kobylev, [former Ukraine Finance Minister Oleksandr] Danylyuk, [Economics Minister Max] Nefyodov, [head of UrkInvest Daniel] Bilak, et al – they might argue fighting against opposition elsewhere in the Poroshenko administration. These are all heroes in my mind.

But I think it is also fair to recognise that reform slowed under the Groysman premiership, and as reflected in the fact that the IMF [programme] was off track for 18 months until late last year with its revamp to a much smaller Stand by agreement (SBA).

Why? The answer is that there seemed to be vested interests at play to prevent key structural reforms such as the anti-corruption effort, land reform, and backtracking again around energy sector reform. And Poroshenko just did not do enough to fight those battles on key structural reforms. On that he failed.

Poroshenko’s legacy is hence mixed – he did some great things, but failed in other areas, such as the fight against corruption. True the anti-corruption court should be up and running soon, but let’s see how successful it is, and whether it will be allowed to function and not “captured” as seems to be a big risk. But the failure to address corruption, and push on with land reform, which should have been two slam-dunks and great positives about Ukraine to sell to the world, have undermined the business environment, and stalled inward investment. Ultimately these have stalled the pace of real GDP growth, recovery – while officials acclaim 3%+ real GDP growth, the truth is that the economy should be growing at a much higher pace, given the low base (4-5% at least), and this reflects the failure of the Poroshenko administration to address corruption in a meaningful way.

Q? But what about economic policy under Tymoshenko and Zelenskiy?

Answer: Well we simply don’t know that much about Zelenskiy’s economic programme as he does not seem to have an economic policy team – he has been talking about crowd sourcing policy, which really is a joke. That’s how the UK got the Brexit disaster. So if he wins he’d better learn fast, and get a decent team around him. He could, and he talks about being in favour of Ukraine’s Western orientation, so let’s hope. But my concern is that his experience means he will hire the wrong people, and under Zelenskiy we will see policy drift, policy error and time wasted, again. And Ukraine does not have this time.

Tymoshenko at least has a team, and the policy message has been more populist, albeit all the main candidates seem to agree on the idea of low taxes – talking about the exit capital tax hated by the IMF – holding energy prices low, and re-negotiating terms with the IMF, plus debt restructuring.

To be fair, the new IMF SBA is just a bridging loan, and I think the IMF would want to re-negotiate terms with whoever wins the presidential election and then the parliamentary elections. On energy prices, this would be a deal breaker with the IMF – but remember the Groysman team was equally populist in stalling agreed energy price hikes for 18 months from July 2018. And on debt restructuring, Tymoshenko seems to be talking about renegotiating the terms of the GDP warrants, which I think no one would object to, given their perverse initial structure, much to the benefit of bond holders.

Net-net, I think whoever wins the presidential election will have limited options on the policy front. Ukraine is not yet in a strong enough position in terms of public finances and external financing (FX reserve cover) to stand alone without the IMF. Indeed, without IMF financing for 2019-2020, it’s hard to see Ukraine being able to service its liabilities, unless global market conditions are set extremely fair. So all might make populist commentary in the run up to elections, but the hard reality is once in office they would have to play the IMF tune.

Perhaps the biggest issue with respect to the relationship with the IMF will be candidate’s plans for the NBU and the banking sector more generally. I think there is concern that Tymoshenko and Zelenskiy are backed by Kolomoisky and the price for that will be the return of Privatbank to former owners and then higher level personal changes at the NBU. In either case I think that will be a deal breaker for the IMF and official creditors, as banking sector reform including the nationalisation of Privatbank, and NBU reform (establishing and assuring its independence) have been amongst the biggest reform wins since independence. Returning Privatbank to its owners, after a cost of over 5% of GDP to the state in bailout costs, I think will/should be an anathema to the official creditors – and indeed, any new government will be required to recoup some/all of these bailout costs as a requirement of future cooperation with the IMF.

Q? What about Russia, is there a risk of Russian intervention in these elections?

Answer: Unfortunately Moscow is unlikely to be a constructive force, in and around these elections. Look let’s not forget what Moscow’s agenda is in regard to Ukraine – simply put, Moscow wants Ukraine back in its geopolitical orbit/sphere of influence. And the reality is since 2014 the country (Ukraine) has moved decisively, perhaps terminally, out of that orbit and into that of the West. Kyiv hence presents a clear challenge to Moscow. From these elections Moscow wants a government in Kyiv who will respect its views/wishes, and understands where its ultimate geopolitical orbit should rest – at least from Moscow’s perspective. The political reality though is that after the annexation of Crimea and Russian military intervention in Donbas, no political leader in Kyiv can ever show allegiance to Moscow, without risking their own position at home. Indeed, any Ukrainian leader to try this now I think would risk social unrest at home, and perhaps risk being removed from office. I am not sure that Moscow understands this – but look at the latest opinion polls, which show two thirds of the population wanting a Western orientation and just single digits now wanting closer ties with Moscow. Perhaps Moscow is holding back from further intervention in Ukraine, but what happens once the realisation dawns that who-ever wins the presidential elections in Ukraine, they will continue the Western orientation. At that point Moscow will have to accept the permanent loss of Ukraine from its orbit, or look to escalate. This could be through further military intervention in eastern Ukraine, or through efforts to destabilise the domestic political scene in Ukraine, perhaps by seeking to challenge the election results, perhaps even by promoting street protests. But my strong sense is that Putin is not done with Ukraine, he is simply biding his time, waiting for new opportunities to present themselves to undermine Ukrainian sovereignty, and to try and pull all or bits of Ukraine back under Russia’s orbit. Watch that space.

Q? Could the election result be challenged? Street protests?

Answer: Well after the Orange revolution, and the Euromaidan, I don’t think such outcomes can ever again be entirely discounted in Ukraine. I think Ukrainians would protest in a scenario where one particular candidate ends up winning the election by administrative means even though the strong popular consensus is that they actually lost. In that scenario I think the reform vote would demonstrate and I think the pro-Russian constituency would seek to exploit any such scenario. The hope thus is that such administrative means are not used as they would be very destabilising – let’s hope that all candidates realise this, and don’t give outside actors an excuse to intervene in the domestic political scene more forcibly.

 

Tim Ash is the Senior Sovereign Strategist at BlueBay Asset Management. This comment first appeared as an email sent to clients