KYIV BLOG: Parliamentary populism embarrasses Ukrainian government

By bne IntelliNews July 8, 2015

By Sergei Kuznetsov in Kyiv -


Ukraine's parliament has sent a series of worrying signals to the country's Western backers: it has approved a populist law that could cost Ukraine’s banks up to $4.65bn; at the same time, parliament has failed to adopt a package of bills that are meant to open the door to funding worth $3bn from the IMF and the World Bank. 

On July 2, the Rada approved a law which would oblige Ukraine’s banks to exchange foreign currency loans into hryvnia, the country’s domestic currency, at the rate that was valid when the loan agreements were signed.  According to this law, backed by 229 of the 450 members of the house, the majority of loans should be converted at a rate of around UAH5.05 to $1, while the current exchange rate stands at UAH21-23 to $1.

“The potential cost of this law across our banking system is estimated at UAH95bn  [$4.4bn]. This is more than the government will spend on defence and law enforcement in 2015,” Finance Minister Natalie Jaresko said on July 3. “This will lead to a deterioration of our banking system, facilitating bankruptcies among the banks, risking the deposits of innocent citizens, and thus making all Ukrainian citizens pay .”
"The adoption of the bill will have a devastating impact on the financial and banking system," the National Bank of Ukraine (NBU) said in a statement published the same day. The regulator “strongly urged” that the law be rejected, as it threatened “not only the stability of the banking system, but also the well-being of all citizens”.

The central bank added that the potential losses suffered by the banking system could reach UAH100bn ($4.65bn) if Ukraine's banks are forced to exchange foreign currency loans provided to individuals at a rate of UAH5.05 to $1. Yet more importantly, according to the regulator, the law would conflict with the IMF’s current bailout programme for Ukraine.

Ukrainian President Petro Poroshenko has thrown his weight behind the stance of country’s financial chiefs on the issue. "I see populist politicians who are threatening the existence of the country’s finance and banking system and making impossible promises to try to please this or that part of society. They understand that it is not fair to satisfy the needs of 65,000 people [i.e. those who will be able to convert their foreign currency loans] at the cost of all taxpayers,” Poroshenko said in an interview with Ukraine TV channel on July 3.

Over the past year, hundreds of borrowers have protested outside the parliament and government buildings in the centre of Kyiv, demanding an easing of their financial burden. The hryvnia’s depreciation was a painful blow for borrowers who receive their salary in hryvnia but must convert part of it into foreign currency in order to service their loans. In 2014, the Ukraine’s domestic currency lost 50% of its value against the dollar, and since the start of this year it depreciated by another almost 25%.


According to information published by the Rada’s secretariat, the populist law was supported not only by the pro-Russian Opposition Bloc, but also by many members of the five-party ruling coalition, which includes: the People’s Front headed by Prime Minister Arseniy Yatsenyuk; the Petro Poroshenko Bloc; the Radical Party of Oleh Lyashko; Batkivshchyna (Fatherland); and Samopomich (Self-Reliance).

What is even more confusing is that the law was proposed to the parliament by a group within Yatsenyuk’s party. This development has revived the rivalry between members of the ruling coalition that could potentially destabilise the political situation in Ukraine and therefore be a painful blow for the country’s Western backers.

While the question of why the parliament supported a populist law remains unanswered, it is clear that the main victim of the current situation is Poroshenko. The president cannot sign a law that will damage the banking system, but a rejection of this populist law will surely harm his popularity.

However, it appears the authorities have found a way out of the current impasse. “The law will be subject to a re-vote in parliament on July 9, during an extraordinary session,” Serhiy Leshchenko, an MP who represents Poroshenko’s Bloc, told bne IntelliNews on July 7. But just hours later, Volodymyr Groysman, the parliament’s chairperson, announced that the idea of an extraordinary session had been abandoned. According to the previously agreed schedule, the Rada will have its next session only on July 14.

Leshchenko underlines that the current turbulence in the parliament is not a reflection of “systematic problems” in the coalition, despite frequent examples of disagreement between its members. “Poroshenko’s Bloc and the People’s Front have the majority of votes, and [other factions] are unable to interfere in their game.”

Alexei Ryabchyn, an MP who represents Yulia Tymoshenko’s Batkivshchyna (Fatherland) party, also believes that there are no reasons to be worried, at least for now. “The parliament could vote for laws that are necessary for the country. And if one or two factions from the coalition have their own opinion, there are still enough votes to adopt laws,” he told bne IntelliNews.

Unlock the funding

Ryabchyn says that all parties that make up the coalition “take responsibility” for the most important bills. “That is why I'm sure that all the bills necessary for cooperation with the IMF will be supported,” he added.

However, Ryabchyn underlines that Batkivshchyna has suspicions that the government may, under the pretext of collaboration with donors, try to obtain parliamentary support for bills that allow the "hidden privatisation" of some Ukraine’s companies.  “We are concerned that actions in which the government has an interest could be presented as the result of compliance with IMF demands” Ryabchyn says.
Meanwhile, Jaresko slammed the Rada’s unwillingness to consider a package of four bills that must be passed in order to unlock $3bn in funding from the IMF and the World Bank, money which she says is “badly needed”. “The delays in adopting these four laws endanger financial support worth $3bn… This includes $1.7bn from the second tranche of the IMF’s Extended Fund Facility (EFF) programme, and $1.3bn from two World Bank programmes,” Jaresko said on July 3.
“Thus, our government urges Ukrainian MPs to adopt these bills as swiftly as possible when they convene for next week’s plenary session. In addition to unlocking critical international financial support for Ukraine, these laws will make our country a fairer and more attractive place to do business,” Jaresko stressed.
Oleksiy Haran, a professor of comparative politics at the Kyiv-Mohyla Academy, says that the ruling coalition is facing “interim opposition” from Batkivshchyna and Lyashko’s Radical Party. “However, even their exit from the coalition will not lead to its disintegration. The key factor is the interaction of Poroschenko’s Bloc and the People’s Front. They have enough votes to continue the coalition’s work,” Haran told bne IntelliNews.



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