Ukrainian Weekly Highlights April 04–10, 2016

Ukrainian Weekly Highlights April 04–10, 2016 from Digests & Analytics Ukraine

Panama Papers scandal is gaining momentum – Prime Minister Yatsenyuk resigned – National Bank buys up dollars – Khreshchatyk bank collapsed – "Big" privatization and Odessa Port Plant – Who owns the Ukrainian media? – Polish "Open Skies" – Imitation of the Minsk peace process – Will Russia release political prisoners to Ukraine? – Ukraine is on the side of Azerbaijan in the Nagorno-Karabakh conflict – Dutch referendum on the EU–Ukraine Association

President Poroshenko and the Ukrainian elite in the Panama Papers scandal

Publication of journalists' investigation dedicated to the evasion of politicians and businessmen from different countries from taxes using Panamanian offshore companies has already resulted in a number of high-profile resignations and financial investigations. President Poroshenko, head of the NBU Hontareva, Poroshenko's business partner Kononenko and the Mayor of Odessa Trukhanov are in the middle of the scandal in Ukraine.

According to the published documents, Poroshenko, through financial advisors, opened in Panama and other offshore jurisdictions the companies having the right to control Roshen confectionery company owned by Poroshenko. President's press-service published on his behalf information on his Facebook page that he no longer manages his assets, which were transferred to a "blind trust". Poroshenko's lawyers argue that his offshore companies were established in accordance with the Ukrainian legislation.

Journalists noticed that the information on offshore is absent from the president's declaration. Human rights organization Transparency International demanded that Poroshenko provides a "real" declaration.

In addition to Roshen corporation, the president owns a number of large companies, a TV channel, and a bank, which is also contrary to the provisions of the Constitution of Ukraine.

Prosecutor General's Office did not see corpus delicti in the documents on Poroshenko's offshore companies and claims that his actions are not the investigative jurisdiction of the GPO. The National Anti-Corruption Bureau also stated that it has no authority to investigate the information about the president's offshore accounts.  Special Anti-Corruption Prosecutor's Office and NABU will check the information of Panama Papers, including with respect to the head of the NBU Hontareva. National Bank denies her relationship with the Russian bank VTB.

According to Panama Papers, Odessa Mayor Trukhanov has several Russian passports. However, the SBU has not found any violations in his actions.

Petro Poroshenko Bloc sees no reason to create a temporary investigative commission on the offshore scandal, since "there is no damage to the budget," but a number of the Verkhovna Rada MPs are determined to conduct an investigation, which would improve their rating in the case of early parliamentary elections.

According to the Atlantic Council analyst Aslund, the US and the IMF position with respect to Ukraine will be tougher after the publication of the Panama Papers, although the positive rhetoric in the official statements will persist. His words were confirmed by the statement of the White House Speaker Ernst, who believes that it is too early to draw conclusions about Poroshenko's involvement in the scandal.

According to analysts, Poroshenko's key electorate will be only slightly affected by the information of the journalistic investigation. Nevertheless, the overall decrease of the president's confidence rating is obvious. Most of the surveyed experts believe that he has not become the president of Ukraine, remaining the president of Roshen corporation. Poroshenko's team tries to silence the scandal and create a smoke screen with stovepiping, but the president's rating cannot be saved.

Prime Minister Yatsenyuk resigned

Coalition talks in the parliament with the participation of Batkivshchyna party failed. Its leader Tymoshenko announced her joning the opposition. Petro Poroshenko Bloc Representatives claimed that they already have the 226 votes needed to form a coalition. Experts agree that if the coalition is created, it will not be viable, since many laws will not get the necessary number of votes, taking into account the low attendance of sessions by MPs. The ranking of the two main factions is plummeting, which in the case of the early parliamentary elections gies a chance to smaller parties significantly consolidate their representation in the Parliament. For President Poroshenko and Prime Minister Yatsenyuk such a result is unacceptable, so they will try to maintain the illusion of the Parliament's functionality at any cost.

Ukraine's partners and financial donors demand the prompt resolution of the government crisis and resolute fight against corruption, therefore, the Ukrainian authorities will try to sign a coalition agreement during the next week.

According to opinion polls conducted by KIIS and the Razumkov Center, in the case of early parliamentary elections Petro Poroshenko Bloc would lose half of its supporters, and its result would decrease to 10-11%, while the People's Front would not get into the Verkhovna Rada. Batkivshchyna Party and the Radical Party would significantly improve their results, while the Samopomich ranking would remain almost unchanged. The support for the Opposition Bloc in Parliament would increase, Svoboda party could get into the Parliament, as well as Saakashvili's party, in case it is created.

Prime Minister Yatsenyuk on Sunday announced his resignation. Instead, Petro Poroshenko Bloc faction plans to appoint Parliament Speaker Groisman as the new head of government. In this case, his post would be taken by the partners in a coalition from the People's Front. President Poroshenko says that the coalition would be created on April 12, otherwise he promised to dissolve the Verkhovna Rada. Members of the coalition talks have not yet decided on the candidates for the Ministerial and the Attorney General posts.

At a time when the president is in the midst of a corruption scandal involving offshore companies, the appointment of Groisman as the Prime Minister jeopardizes Poroshenko, if the government fails to do its work. According to most analysts and political scientists, the president himslef would actually run the government, in this way he takes the full responsibility for the situation in the country.

According to the Constitution, if something happens to Poroshenko, the the Parliament Speaker becomes first person in the state, so the transfer of this key position to partners (and, at the same time, competitors) in the new coalition carries the risks of the uncontrollable decision making by the Parliament, including the establishment of a temporary investigative commission to investigate the President's offshore schemes.

Besides, the two main factions of the Parliament don't have enough MPs to ensure votes on any laws proposed by the new government, therefore the efficiency of the government and the Verkhovna Rada will be extremely low.

Yatsenyuk's resignation actually opens a new political season, which, depending on the results of the work of the president and the government, can bring about early parliamentary and presidential elections.

"Big" privatization and Odessa Port Plant

The government intends to compensate for the lack of money in the budget by selling large state-owned companies. The Cabinet proposed to halve the list of enterprises that are not subject to privatization.

The largest transaction was to become the sale of Odessa Port Plant, however, oligarch Firtash, who had planned to buy the company at a knockdown price by creating an artificial debt, intervened in the process. At the claim of his company Ostchem, Stockholm arbitration imposed a ban on the alienation of the plant's property. State Property Fund Chairman Bilous said that the arrest imposed on the assets would not stop the process of selling shares in the plant. The fund is considering several options to address the debt problem: restructuring, sale of the debt or its replacement by a state loan. Firtash is not among the possible contenders for the purchase of the company.

The government is currently holding a competition for managerial positions of several of the largest state-owned enterprises, but the process is disrupted by court decision prohibiting such competitions. Claims are being submitted by the contenders related to financial and industrial groups planning to gain control over the enterprises in the process their preparation for sale.

The financial market is stable

The Ministry of Finance has successfully held an auction to place government bonds in national and foreign currency for the amount of UAH18.24 billion (over USD700 million). NBU bought from banks over $177 million at a low rate. The excess of foreign currency in the market could be related to its sale by the banks to replenish capital requirement according to the NBU requirements. At the exchange offices, the dollar fell by almost 1 hryvnia (or about 4%).

State Fiscal Service reported that in March it raised a record amount of taxes, exceeding by more than a third the amount received by the budget in March 2015. Experts predict economic growth in the range of 1% per year, and the industrial output grew by 7% in two months. However, the country's financial stability is heavily dependent on export revenues, and prices for Ukrainian products on world markets have tend to decrease.

Naftogaz took a step toward independence from Russian gas supplies

Naftogaz managers made an important step to ensure energy independence of Ukraine. Gas supplies between Ukraine and Slovakia in April may be carried out in a bilateral mode, which would allow European operators to use Ukrainian underground storage facilities. Gazprom does not provide the Ukrainian operator with shipper code pairs, thus preventing the switch to the full virtual reversal of gas, which would allow not to pump the gas physically.

Due to the warm winter, Ukraine used only half of the gas pumped into its underground storage facilities. Naftogaz announced that could do without the Russian gas, but may resume purchases if the price is significantly reduced. Today Russia offers Ukraine gas at a price higher than the one at which Naftogaz buys gas from European operators.

In Q1 of 2016, the transit of Russian gas through Ukraine to Europe increased by half, however, it falls short of the figures stipulated in the contract. Naftogaz was taken to Stockholm arbitration for failing to pump the planned volumes of gas and lowering transit costs.

Khreshchatyk bank collapsed

Khreschatyk bank, handling salary and pension cards of a large number of Kyiv residents, was declared insolvent. National Bank has introduced temporary administration after it experienced liquidity problems and non-payments at the box office and ATMs. As of the end of 2015, the bank's loss amounted to over UAH1 billion (with declared assets of UAH10 billion). NBU negotiations with its shareholders on capital increase had no results, after which the bank was declared insolvent. Such cases do not increase the confidence of Ukrainians in the banking system and lead to the outflow of money from the economy.

The bank was founded in 1993, ranked 18th among Ukrainian banks, a quarter of its shares is owned by the Kyiv city administration.

After the NBU announcement, most of Kyiv municipal enterprises closed their accounts there and to open them with the International Investment Bank, owned by the President Poroshenko and his business partner Kononenko.

Poland and Ukraine signed an agreement on "open skies"

Ukraine and Poland abolished all restrictions on flights between the two countries, irrespective of their number and the types of aircraft. After the USA, Italy and Spain, Poland became the fourth country with which Ukraine agreed on the "open skies" policy.

Who owns Ukrainian media?

Contrary to the requirements of the Ukrainian law demanding the disclosure of the beneficial owners of media assets, TV Channel 5 owned by the president Poroshenko, Channel 112, and Radio Vesti refused to provide such information. Some TV channels posted on their websites offshore schemes, showing front persons as their owners, thus fulfilling the formal requirements.

The law follows the fate of the bill demanding the disclosure of the beneficial owners of legal persons adopted by the Parliament in 2015, when most companies in order to conceal the information on their real owners announced the nominal owners of offshore companies as such.

Minsk talks have turned into a farce

Advisor to the Russian President Surkov believes that the leaders of the "LPR" and "DPR" would remain in office until the expiry of their "presidency". In this way, the Russian government intends to finally legalize self-proclaimed republics and make them full-fledged parties to the negotiations.

The situation in the combat area in Donbas remains extremely tense. The militants and the Russian army failed to clear the Avdiyivka industrial area, from where they control the strategic Donetsk-Horlivka highway, of the Ukrainian troops. The attackers suffer heavy losses, officials have also reported casualties among the Ukrainian troops. The militants have renewed shelling across the front line from heavy artillery, mortars, and assault guns. Аrmored and mechanized groups are being used against the Ukrainian army. Because of the renewed attacks, checkpoints into the occupied territory in the Luhansk region were closed.

One more meeting of the Minsk trilateral contact group on the settlement of the situation in Donbas ended without results. The ceasefire is not respected by the militants. For this reason, minefields are not being cleared. The Ukrainian delegation intends to hold talks on economic, humanitarian and political issues only after the truce and the removal of weapons from the line of fighting, confirmed by the OSCE observers. The militants refuse to negotiate on the release of illegally detained persons and to provide access to them to the International Red Cross personnel. The elections in the occupied territories remain subject to the complete ceasefire, the withdrawal of the Russian troops and the restored Ukrainian control over the border.

OSCE representative Saydik said that his organization has not yet prepared any proposals for the introduction of the OSCE police mission in Donbas. Russian representative Gryzlov spoke strongly against the introduction of the police force.

The next meeting of the contact group is scheduled for April 20.

Will Russia release political prisoners to Ukraine?

The Russian Ministry of Justice announced that it was preparing to release four Ukrainian prisoners, including Crimeans Sentsov and Kolchenko, to Ukraine "for further service of sentence in their homeland." According to the Ministry's press release, the decision on the release is to be taken by Russian federal courts.

Hope Savchenko announced a dry hunger strike after the entry into force of the Russian court decision. Russian authorities do not give access to her to the Ukrainian consul. Batkivshchyna party leader Tymoshenko said the question of Savchenko's release was being resolved at the highest level. According to her, US President Obama and Chancellor Merkel reached an agreement on Savchenko's return to Ukraine. The Presidential Administration and the Ministry of Foreign Affairs have repeatedly made statements that Savchenko's issue would be resolved in the coming days, but there have been no official response from the Russian authorities yet.

Conflict in Nagorno-Karabakh

A ceasefire has been announced in Nagorno-Karabakh, but Armenia and Azerbaijan keep accusing each other of violating the ceasefire. Ukraine, Turkey and Iran have declared their support for the territorial integrity and sovereignty of Azerbaijan. Russia and Armenia are members of the military unit of the Collective Security Treaty. However, Russia is supplies arms to both Ukraine and Azerbaijan, and, besides, is not interested in the escalation of the situation in its North Caucasus region. Observers in Armenia and Azerbaijan believe that for this reason the conflict's escalation into a full-scale war is unlikely, but the confrontation itself could go into a protracted phase.

The Dutch voted against the EU-Ukraine Association Agreement.

In the Netherlands, a consultative referendum on the signing of the EU-Ukraine Association Agreement was held. It was recognized to be valid, since the turnout exceeded 30%. More than 60% of voters voted against the signing of the Association Agreement. Dutch Prime Minister Rutte said that the authorities would carefully reconsider the EU-Ukraine Association Agreement in order "to satisfy all parties."

Political analysts estimate the situation as a stalemate. The Dutch government will be forced to negotiate with the European Commission on the implementation of the referendum results and the future steps. It would deal another serious blow to the "United Europe" concept and strengthen the position of the "eurosceptics". French President Hollande said that his country, together with Germany, would continue to support the EU-Ukraine Association Agreement. EU representatives believe that the referendum would not affect the development of Ukraine's relations with Europe.

President Poroshenko said that the referendum would not be an obstacle in the way of Ukraine to Europe. Ukrainian experts believe that such a result is largely a consequence of the policy of Ukrainian authorities, which Europeans consider to be a third world country, terminally ill with corruption.