KIEV, Ukraine -- The new leadership of President Viktor Yanukovich has reduced a lot of the political tension in Ukraine, improved prospects of economic reform and set course for a new IMF bail-out programme.
The ex-Soviet republic now appears to be inching towards a crucial agreement with the International Monetary Fund for fresh credit of up to $19 billion which may spur renewed interest by foreign investors.
Yanukovich fulfilled many pre-election prophecies that he would tilt Ukraine back towards its old Soviet master by extending the Russian navy's stay in a Ukrainian port until 2042 -- a move which sparked riots by the opposition in parliament.
But the new cosier ties with Russia have brought dividends.
With the IMF talks dragging on longer than expected, Moscow stepped in with a short-term loan of $2 billion to help Ukraine bridge its budget deficit.
That could be repaid with a Eurobond, for possibly as much as $1.5 billion, which the Kiev government says it will issue in July once the IMF deal has been squared away.
An April deal with Moscow on the price of gas supplies enabled Prime Minister Mykola Azarov to get a 2010 budget through parliament, which should pave the way for the new IMF deal, though the government has struggled to convince the Fund that its target figures are realistic.
Whatever policy moves Yanukovich makes, he will have to bear in mind that he was elected by less than 50 percent of the electorate.
To be certain of a second term, he may have to improve his standing in the Ukrainian-speaking west and centre which voted primarily for his rival, former Prime Minister Yulia Tymoshenko.
Below is an overview of the key political risks:
Yanukovich moved quickly to bring in Azarov, an ally, and restore to government many other old faces who fell from grace under the "Orange Revolution" leadership of Viktor Yushchenko.
But protests in parliament on April 27 over the Russian navy extension in the Crimea were a reminder of the opposition's potential strength.
The 2010 budget, rammed through parliament in almost siege conditions, has been a big step toward unlocking a new multi-billion-dollar IMF bail-out. A previous $16.4 billion programme was suspended late in 2009 after promises on fiscal restraint were breached under the previous administration of Viktor Yushchenko.
What to watch:
-- The size of the stand-by credit which the IMF will offer and how tough the Fund's conditions will be. The government is seeking up to $19 billion credit and an IMF mission currently in Kiev may give its answer in the next few days.
-- How hard will the IMF press for fiscal restraint? In particular, will it push for unpopular rises in household gas prices, something the Tymoshenko government balked at?
-- Signs of an economic turnaround in key areas such as metals and chemicals, real growth and new investment.
-- The Eurobond 'road show' -- set for the first half of July -- and the yield.
-- Real commitment by Yanukovich to end widespread corruption which deters foreign investment.
While Yanukovich has tightened his hold on power, the opposition has failed to re-organise and Tymoshenko is finding it difficult to get broad acceptance as opposition leader.
What to watch:
-- Further signs of moves to prosecute Tymoshenko and her allies for alleged past misdemeanours, which could destabilise the political situation.
-- Possible moves by deputies from Our Ukraine -- Yushchenko's party -- to join the coalition backing Yanukovich, something which would substantially help him consolidate power.
Under the April agreement with Russia, Ukraine will now receive supplies of gas at a 30 percent discount, relieving huge pressure on the government which struggled every month to meet its gas bill under a January 2009 agreement.
Past disputes over gas pricing and conditions have had a knock-on effect on Russian supplies to Europe which also transit Ukraine. In January 2009, a cut-off in supplies by Russia led to millions of European householders being left without heating.
The Ukrainian government has offered Russia a role together with the European Union in revamping Ukraine's gas pipeline network which carries Russian gas to Europe.
Moscow reacted with little enthusiasm to this idea and instead took the Ukrainians by surprise on April 30 with an offer to merge gas giant Gazprom (GAZP.MM: Quote, Profile, Research, Stock Buzz) with Ukraine's state energy firm Naftogaz.
The Yanukovich camp has effectively poured cold water on the idea, by saying Ukraine would want 50 percent of any such merger.
What to watch:
-- Reawakened interest by Russia in taking part in the three-way pipeline consortium.
-- Signs of strain in Ukraine meeting gas payments.
Ukraine's risk premiums have fallen and investors have returned since the vote, making it more likely that the government will be able to borrow domestically and even abroad to replenish its coffers.
Ukraine's FX reserves are worth $25 billion, providing around six months of import cover. High payments for Russian gas are a drain on Ukraine's coffers but the hryvnia currency has been on a strong footing since the elections, so at least there is no need to spend reserves on currency market interventions.
Credit default swaps have narrowed sharply since the vote, and investors have lined up to buy domestic debt, yields for which have fallen dramatically. This should enable Kiev to secure cash to meet sizeable debt repayments due.
Large corporate debt is a potential risk, including in the state-controlled sector, and restructuring is expected.
What to watch:
-- Will corporates be able to restructure debts easily?
-- April sovereign debt repayments were not a big problem thanks to improved sentiment but any signs of falling demand/ rising yields in domestic bond auctions could signal problems for the future. An IMF deal and/or other loans are key to keeping investors on side and thus risk premiums down.
Yanukovich says he intends to take Ukraine along a middle path between Russia and Europe, improving poor relations with the former but moving his country into the European mainstream.
But he has taken major steps toward Russia and exposed himself to opposition charges that he plays fast and loose with Ukraine's sovereignty. A visit to Kiev by Medvedev in mid-May formally opened a new chapter of more intensive economic and political contacts between the two countries.
What to watch:
-- Under Yanukovich, Ukraine has pushed NATO membership off the agenda but will he limit military cooperation with the U.S.-led alliance?
-- Will U.S. Secretary of State Hillary Clinton make any oblique criticism of the Yanukovich presidency when she visits on July 2-3?
-- How far will Yanukovich go in overtures to the European Union to balance out his policy?
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