Hasty government reshuffle sows disquiet at home, abroad

It wasn’t a secret that President Volodymyr Zelensky had been dissatisfied with the Ukrainian government for some time. He disapproved of the high salaries of ministers, was unhappy with the performance of some agencies and told his then-Prime Minister Oleksiy Honcharuk to replace ineffective officials with new ones.

In February, after Zelensky shook up his own administration, appointing former aide Andriy Yermak as chief of staff to replace Andriy Bohdan, rumors began circulating that Honcharuk would be fired soon.

But the 35-year-old prime minister denied he was going anywhere, even after Zelensky confirmed he was interviewing candidates for the government.

Then, on March 4, at a special parliament session convened by the president, little-known Lviv businessman and former Ivano-Frankivsk Governor Denys Shmygal, 44, became the prime minister. Honcharuk was effectively forced to resign after less than seven months in office.

The next day, parliament also dismissed Prosecutor General Ruslan Riaboshapka, who enjoyed strong support from civil society and the Western diplomatic corps.

The rapid government reshuffle left Ukraine’s Western partners and advocates for reform concerned about the country’s future, and it appears to be shaking investor confidence. The most common early emotion is worry.

Falling ratings

Several political analysts attributed Zelensky’s loss of confidence in Honcharuk to falling approval ratings.

Public trust in Honcharuk’s government stood at 28% in February, according to a recent survey by the Razumkov Center. This was a significant drop since September, when 57% of respondents expressed trust in Honcharuk’s government.

In February, 53% said Ukraine was moving in the wrong direction, while six months earlier the majority of respondents, 57%, believed the country was moving in the right direction.

Zelensky’s personal approval rating has also dropped from a high of 79% in September to 51.5% in February. The number of people who don’t trust the president has risen from 13.5% almost fourfold to 41%.

“Whatever the government does, it affects Zelensky’s rating,” political expert Volodymyr Fesenko told the Kyiv Post, naming the shortfall in the budget, debts to coal miners, and public discontent with rising utility prices as main culprits.

“Utility prices were a traditional problem that destroyed the approval ratings of the two previous prime ministers, and they buried Honcharuk, too,” Fesenko said.

Public demands

In his speech to the parliament on March 4, Zelensky talked at length about the shortcomings of Honcharuk’s government. It couldn’t stop the decline in industrial production and the Hr 16 billion (just under $648 million) shortfall of budget revenues in the first two months of 2020.

Honcharuk faced criticism for paying high salaries to members of supervisory boards in state companies at a time when millions of ordinary Ukrainians are just scraping by. Ukrainians have become a minority on those boards, which are predominantly filled with foreigners who “come to Ukraine two or three times a year,” Zelensky said.

In his words, Honcharuk’s cabinet failed to communicate to the population that their heating bill was cut and didn’t raise pensions. It imported electricity and coal and contemplated closing unprofitable coal mines while miners are still owed their salaries and need retraining for new jobs.

Svitlana Zalishchuk, a former lawmaker and Honcharuk’s adviser on foreign policy, told the Kyiv Post that she hoped he would be given a year. “Six months just isn’t enough to deliver on reforms,” she said.

Honcharuk’s government was the first in Ukraine’s history free of any oligarchic influence, Zalishchuk said. “I have not seen a single meeting that was influenced by vested interests, not national interests.”

Oligarchs

The government shakeup sent shockwaves through Ukraine’s Western backers and its pro-reform circles. Some saw it as backsliding toward pre-EuroMaidan times and a move that plays into the hands of oligarchs and can derail cooperation with the International Monetary Fund ahead of a new $5.5-billion loan deal.

Many regretted the dismissal of the reformist, technocratic Cabinet, including widely respected Finance Minister Oksana Markarova.

Zelensky, who came to power on a pledge to bring new faces, kept Interior Minister Arsen Avakov and appointed Health Minister Illia Yemets, who held the same job under Viktor Yanukovych.

Rumors of subservience to billionaire oligarch Ihor Kolomoisky, Zelensky’s former business partner, have haunted him throughout his election campaign and into his presidency.

One of the most lauded moves by Honcharuk as prime minister was his draft bill that would make the return of insolvent banks to former owners impossible. The bill was meant to stop Kolomoisky from getting back PrivatBank, which was nationalized in 2016 after $5.5 billion were allegedly siphoned from its coffers.

Serhiy Fursa, a specialist on sales of debt securities at Dragon Capital, said Honcharuk’s removal benefitted Kolomoisky and that the deal with the International Monetary Fund would definitely fall through.

A senior source close to Ukraine’s state-owned banks, who lacked authority to speak publicly, called the March 4 changes “extremely grim” and said “it’s all collapsing.”

However, political analyst Andreas Umland called for caution, “though I also fear a fundamental change of direction in Ukraine’s development, such a deep reorientation is still to happen,” he wrote.

The fact that Prime Minister Shmygal is largely unknown to the wider public has been one source of concern.

Shmygal’s past job as a top executive at DTEK energy holding, which belongs to billionaire oligarch Rinat Akhmetov, has led to speculation about his independence.

Andy Hunder, president of the 600-member American Chamber of Commerce in Ukraine, spoke positively of Shmygal, whom he met when the official served as governor of Ivano-Frankivsk Oblast. “He was one of the most business-friendly governors I had met in Ukraine. He is a coolheaded, prudent, no-nonsense kind of guy,” he said.

Investors

Hunder said that investors have not taken the news of the reshuffle well. The process was rushed and poorly prepared. “It was awkward that ministerial portfolios couldn’t be filled, with no one willing or available to take on the jobs at such short notice,” he said.

Several candidates refused positions in the new Cabinet. And some ministers who were initially meant to stay instead followed Honcharuk and resigned.

The reshuffle also comes amid the international coronavirus outbreak, a global market downturn and looming foreign debt repayments. In 2020, Ukraine has to repay $17 billion, while negotiations with the IMF over additional lending has stalled because of lack of progress on banking and agricultural land reform, among other issues.

Meanwhile, holders of Ukrainian government bonds are getting nervous. Following the reshuffle, Ukraine’s dollar-denominated sovereign bonds suffered sharp declines, Reuters reported on March 5.

The Morgan Stanley investment bank advised its clients to sell their Ukrainian eurobonds. It cited concerns over risks of a slowdown on reforms and delays in IMF cooperation.

In its client newsletter sent out on March 5, Morgan Stanley said that the new government’s commitment to ambitious reforms is yet to be tested. The budget deficit may grow since, during the first government meeting, Shmygal said he plans to raise pensions and pay off salary debts to coal miners.

Olena Tregub, secretary general at the Independent Defense Anti-Corruption Committee (NAKO), said that such an abrupt dismissal of the Cabinet could harm Ukraine’s international image, proving the country to be unstable and scaring off foreign investors.

She wrote on Facebook that Zelensky acted like an actor who wants to bask in people’s love and not as a statesman who cares about governing in a way that will yield long-term benefits.

Expecting results from the cabinet after six months was too soon, she said.

“At least a year should be given to test the new people for their ability to deliver results. Some individual people who underperform can be replaced fast, but not the whole cabinet,” she wrote.

Kyiv Post staff writers Oleg Sukhov and Jack Laurenson contributed to this report.