Economy Rebounds, As Political Tension Mounts

UKRAINE - Report 08 Mar 2017 by Vladimir Dubrovskiy and Dmytro Boyarchuk

January economic numbers were surprisingly positive. Industrial output expanded +5.6% y/y, up from +4.6% y/y in December. The CAD narrowed to a modest $26 million, driven by a 41% y/y surge in exports. The currency stabilized at UAH 27/dollar. In short, the economy is showing strong signs of a recovery. Yet all this positive news is darkened by developments in the political arena.

A continuing trade blockade of the occupied territories has triggered a tectonic shift in the Verkhovna Rada, as it destroyed one of the largest sources of funding for the legislative majority, which is absent a functional coalition. As a consequence, President Petro Poroshenko had to search for new alliances that might be supported without cash from Rotterdam+, a scheme whereby coal from Donbas was being sold to Ukrainian consumers for prices based on shipments from Rotterdam. We suspect a major political deal in progress, with rumors floating that Radical Party leader Oleh Lyashko might become Rada speaker, while Central Bank Governor Valeria Hontareva is apparently planning to resign. The next few weeks should see some intense developments in this area.

On March 2nd, the National Anti-Corruption Bureau of Ukraine (NABU) issued an arrest warrant for the head of the State Fiscal Service, Roman Nasirov, accusing him of embezzling some $100 million. With the help of his lawyers, Nasirov tried everything he could to escape arrest. He even reported to have suffered a heart attack, but was nevertheless brought to the court for judges to confirm his arrest. The judges have been reluctant to rule on the case, which instigated activists blocking the court prevent Nasirov from leaving jail. After two days, the court finally ordered a provisional 60 days of detention, or a $3.7 million guarantee.

The Nasirov developments were quite surprising. On the one hand, NABU has so far never acted independently from top Poroshenko officials, so we treated the action quite skeptically. On the other, it’s clear the Bureau is facing enormous resistance in the judiciary, with judges simply sabotaging the arrest decision. This suggested that the president’s office did not bless the move against the SFS boss, and that NABU probably was acting against Poroshenko’s will. However, the story made all the headlines, and NABU’s actions have strong support from the public, so it was difficult for the rent-seekers to walk the story back.

Tension around Nasrov’s case has been very high over the last few days, and the situation threatened to escalate into mass protests. Luckily, Poroshenko was smart enough to step aside, claiming publicly that the Nasirov was an example of anti-corruption efforts. If Nasirov is finally imprisoned, it will be a very important precedent of real punishment for a corrupt official from an acting ruling group. The case would break the tradition of untouchability for high-level corrupt figures.

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