Zelenskiy’s Gravity-Defying Act Is About to Test Reality in Ukraine

(Bloomberg) -- It’s become a familiar story in European politics: a charismatic outsider captures the imagination of a nation fed up with a stagnant and bumbling political class. He rises quickly, at the head of a movement that sweeps out the old elite, and gains access to all the levers of power.

So far, that fits Ukrainian President Volodymyr Zelenskiy to a tee, an unexpected victory margin in Sunday’s elections having put him on track for unprecedented control in the post-Soviet nation. But the next chapter has often been disappointment. From Alexis Tsipras in Greece to Emmanuel Macron in France, examples abound of leaders whose plans for radical change were thwarted by outsize expectations.

And Zelenskiy, who just a year ago only played president on television, was dealt a more challenging hand than perhaps any of his precursors. He is facing a simmering military conflict, endemic corruption and a struggling economy -- which he all promised to fix. For any modicum of success, he’ll have to pick his way through the minefield of powerful oligarchs and corrupt officials, while negotiating with the likes of the International Monetary Fund and Russian President Vladimir Putin.

“It is never easy to push through reforms because of the colossal resistance inside the organizations and on all levels of state bureaucracy,” said Valeriya Gontareva, the former head of the central bank. “Reforms are discredited through mass media, which is owned by oligarchs. They persecuted me personally, as well as the whole team at the central bank.”

Gontareva’s own experience is a cautionary tale itself. She was part of a wave of officials who took on oligarchs but left in disappointment as the momentum of the previous administration petered out. Petro Poroshenko rose to power and led his new party to victory after Ukraine’s Kremlin-backed president was ousted in 2014. But in a few years, the inertia of the old guard won out and reform-minded leaders left from key posts including the central bank and the Finance Ministry.

Yellow Vests

Zelenskiy’s party won about 42% in the party-list portion Sunday’s vote, according to results with 55% counted. It was also on track to win as many as 120 individual mandates, which would hand it more than 226 seats, the first full majority by a party in Ukraine’s history. He has invited the two-month-old Holos party for coalition talks, but it won’t be clear whether that will be necessary until final results are released later this week.

In Macron’s case, his efforts to tackle sprawling bureaucracy and push through laws to benefit companies ran head-on into the so-called Yellow Vest protesters. For Tsipras, a promise to negotiate new terms with the IMF and ease off on austerity measures ended with him mostly caving to the lender’s demands and he was voted out in elections this month.

Zelenskiy’s first task is to crack down on dirty officials --Ukraine is ahead only above Russia and Azerbaijan among European countries in Transparency International’s corruption perception rankings -- after Poroshenko pushed through reforms only slowly and under pressure from the IMF.

“It’s inevitable that there will be obstacles,” said Volodymyr Fesenko, head of the Penta research institute in Kiev. “There are deep ties between business and politics, and it’s clear that some people don’t want these changes.”

Zelenskiy has so far talked a tough game, badgering officials during campaign stops and insisting some resign. While his entourage included reformist ex-ministers popular among international investors, business links to exiled billionaire Igor Kolomoisky, whose television channel airs Zelenskiy’s shows, worry many, particularly after he named the mogul’s lawyer as his chief of staff.

IMF Demands

One of Zelenskiy’s first acts as president was to pledge to resume talks with the IMF to secure new financial aid as Ukraine faces $28 billion in debt service costs this and next year. That will probably require the next government to stick to tough budget targets, a continuation of years of austerity measures.

With voters clamoring for better living standards, Zelenskiy announced a 21% reduction in natural gas prices, which can contribute to heating costs that eat up a large chunk of normal Ukrainians’ salaries during bitter winters. While a concurrent drop in global prices of the fuel mean the IMF hasn’t complained, the cut will be difficult to reverse if costs rise.

“Zelensky’s team has little room to maneuver if it wants to keep the Western financial support flowing,” said Lilit Gevorgyan, a senior analyst at IHS Markit. “Ordinary Ukrainians are tired of economic hardships but the painful measures normally take years to rebalance and heal Ukraine’s mismanaged economy.”

All of this is happening against the backdrop of the conflict with Kremlin-backed separatists in Ukraine’s eastern regions, which has killed about 13,000 people since 2014. Zelenskiy has said he’ll engage Putin, but he has already encountered difficulty. Moscow rejected his demand for the release of Ukrainian sailors captured in international waters in November.

“Negotiating with somebody who has been running Russia for the past 20 years from the position of complete political novice would be difficult on any day, even with the backing of Germany, France and even possibly the U.S.,” said Otilia Dhand, an analyst at political-risk consultancy Teneo Intelligence in Brussels. “When it comes to real outcomes, if we consider the red lines on each side, nothing has really changed. There’s very little Zelenskiy can negotiate.”

To contact the reporters on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net;Kateryna Choursina in Kiev at kchoursina@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net, ;Scott Rose at rrose10@bloomberg.net, Michael Winfrey

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