Zelenskiy gets (almost) all the power

UKRAINE - Report 16 Aug 2019 by Dmytro Boyarchuk and Vladimir Dubrovskiy

After a new party led by comedian Volodymyr Zelenskiy gained majority power in Ukraine in the July 21st parliamentary elections, Zelenskiy stepped handily into the presidency. None of Ukraine’s previous five presidents has come close to wielding such power from the very beginning of their terms. Ukraine now has de facto one-party rule, for the first time since the dissolution of the Soviet Union.

Zelenskiy’s Sluha Narodu (Servant of the People) party took 254 seats, well above the 226 needed for a simple majority. Now SN can unilaterally pass any law, except for amendments to the Constitution. And for that, Zelenskiy could also easily recruit an extra 46 MPs from among independents, to form a constitutional majority of 300 votes.

Sluha Narodu leaders have already stated publicly that they do not plan to share power with any other party. They have distributed the key parliamentary committee posts among their ranks. The Cabinet also will likely comprise only SN members.

Seven candidates are now being considered for premier. The Deputy Chief of Staff of the Office of the President, Oleksiy Honcharuk, is seen as the likeliest candidate. Although the press and pundits keep shifting their views, Honcharuk has already positioned himself as the future PM, and has given multiple interviews discussing future reforms.

Absolute power, as we know, can turn any head. Presidential Chief of Staff Andriy Bohdan played the media and observers, with a fake resignation. We see this as a disturbing sign. No reasonable explanation for this incident was suggested and journalists proved that the initial information came directly from Bohdan’s personal assistant. It looks as though Zelenskiy’s right-hand man caught “star fever” from his patron’s giddy success.

The situation in the occupied Donbas remains complicated. A ceasefire was announced, and the withdrawal of forces has begun. But shelling on the Russian proxy side continues and 14 Ukrainian soldiers were reported killed in July, despite the new president’s efforts to make peace with Russia. In contrast to ex-President Petro Poroshenko, Zelenskiy is not hawkish on the war. He even called Russian President Vladimir Putin after four Ukrainian soldiers were killed, and asked Putin to “influence the other side.”

The economy remains in good shape, thanks to optimistic non-residents, low gas prices and employee earnings from abroad. The hryvnia keeps strengthening, on the back of non-resident demand for UAH-denominated state bonds. Successful placement of Eurobonds by Naftogaz added to this trend. In July, the hryvnia touched UAH 25/ dollar, strengthening 10% from the start of the year. Gross international reserves reached $21.8 billion, or 3.4 months of imports as of August 1st , amid non-resident cash inflow. The CAD remains narrow, at $221 million by June, vs. $652 million a year ago.

CPI dropped by 0.6% m/m (+9.1% y/y), which put it at +3.0% ytd by July. Seasonal decline in food prices, the strengthening hryvnia and falling natural gas prices are behind that trend. The appreciating hryvnia and slowing inflation keep the NBU on an easing course. The NBU board cut the prime rate by 0.5 ppt to 17%, and the rate is expected to drop at least to 16% by the yearend.

Industry remains surprisingly sluggish: - 2.3% y/y in June. Consumption is soaring: retail trade grew by 14.8% y/y in June. Despite stagnating industry, GDP in Q2 2019 grew twice as fast as expected: +4.6% y/y. Budget revenues remain in the double digits (the central budget provisionally grew 13.7% y/y by July), but the NBU dividends, as well as profit deductions of Naftogaz, keep fiscal statistics strong, while core tax collections are slow.

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