Hope for Reform in Ukraine Fades
Hope for Reform in Ukraine Fades
(Bloomberg) -- The abrupt departure of Ukraine’s central bank chief will reveal how committed President Volodymyr Zelenskiy really is to the promises of reform that got him elected. Many have already lost hope.
Governor Yakiv Smoliy quit late Wednesday, complaining of “systematic” political pressure. Reassurance from Zelenskiy about the bank’s independence did little to stop investors ditching the hryvnia and Eurobonds the following morning as faith in him wanes. The Finance Ministry was forced to halt a Eurobond sale.
Ukraine’s youngest-ever leader has endured an undeniably rough ride since taking office last May. As well as playing a starring role in U.S. President Donald Trump’s impeachment saga, there was the downing of a Ukrainian passenger plane by an Iranian missile in Tehran. And all that’s on top of the Kremlin-backed war that persists on the border with Russia.
But the disillusionment is palpable among those who backed the 42-year-old former TV comic to draw a line under Ukraine’s murky post-Soviet politics.
An ill-timed government reshuffle just before the Covid-19 pandemic struck was the first big blow, jettisoning most of the fresh-faced experts hired to reshape the economy and make a meaningful dent in corruption.
The exit of Smoliy -- who helped tame inflation, boost foreign reserves and secure billions of dollars of international aid -- is another. Zelenskiy’s choice of a successor could define the rest of his presidency.
This week’s news “couldn’t be worse,” according to Mark McNamee, practice leader for Europe at research and advisory firm DuckerFrontier.
“I’ve been extremely upset since Zelenskiy removed the cabinet back in March and the only reasons to be optimistic were that Smoliy was in place and Ukraine got another program from the International Monetary Fund,” he said by email. “After they lost Smoliy, reforms are dead to me for at least a year or, more realistically, until debt payments become unsustainable without additional foreign financing.”
The governor’s resignation puts Zelenskiy in an immediate bind: the IMF and foreign investors will insist on a competent and independent replacement. But despite his ruling party enjoying a majority in parliament, some of Zelenskiy’s own lawmakers have rebelled and he can’t guarantee such a candidate will be approved by a legislature where oligarchic interests remain powerful.
Indeed, some members of his party have sided with billionaire Igor Kolomoisky’s efforts to overturn the 2016 nationalization of Ukraine’s biggest lender, Privatbank, which the tycoon owned at the time. The takeover, after a $5 billion fraud was unearthed, was the culmination of a financial-sector cleanup led by the central bank with IMF support.
For all Zelenskiy’s pledges of a new start, he’s struggling to convince doubters as long as Kolomoisky, who denies wrongdoing, remains free. Replacing the top prosecutor, a respected appointee formerly of Transparency International, with an inexperienced loyalist hasn’t helped.
‘Big Step Back’
There’s no front-runner as yet to replace Smoliy. But whoever the candidate is, the country’s allies will be watching.
“An independent central bank is a foundational achievement for Ukraine that’s reduced corruption, driven growth and rescued a failed banking sector,” the Group of Seven said in a statement. “To undermine this crucial institution would be a big step back and jeopardize the credibility of and support for Ukraine’s reforms.”
There have been bright spots under Zelenskiy.
He reinstated criminal liability for officials discovered with illicit wealth, and pushed through a tricky -- albeit watered-down -- overhaul of the farmland market to the help the key agriculture industry continue to flourish. A law passed in May also sought to nullify Kolomoisky’s legal push on Privatbank.
At state energy company Naftogaz, once a hotbed of corruption, a reformist boss remains in place.
But the spring changes in the government, where some ministerial positions remain vacant, appear now to be a tipping point. Even some successful reforms by the previous administration -- such as making state procurement more transparent -- are under threat.
“Some investors have already put new investments on hold, as the decisions of the government don’t correspond with their intentions to attract FDI,” the American Chamber of Commerce Ukraine said in a statement of the business community.
With November’s U.S. election likely to once again focus the spotlight on Ukraine and the work of Democratic challenger Joe Biden and his son there, the potential for distractions is vast.
For Oleksandr Danylyuk, a former finance minister who left Zelenskiy’s team last September, the president is losing the opportunity to deliver the radical change he vowed.
“Reforms are highly unlikely for two reasons,” he said by phone. “First, they must be carried out quickly after elections, when one has a mandate. Second, I don’t see anyone who can actually deliver them in Zelenskiy’s team. I don’t see any bright perspectives.”
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