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Bumper year in the borderlands: Change and continuity in Ukraine, Romania and Poland

Bumper year in the borderlands: Change and continuity in Ukraine, Romania and Poland

They are in the headlines again, ostensibly for all the wrong reasons; Ukraine as an inadvertent victim of US politics, Poland for breaking EU law by meddling with its judiciary, and Romania for unexpectedly losing its government. However, underneath it all the fundamental growth story of the three largest markets of Central and Eastern Europe (CEE) is unchanged. 

In early March 2019, Risk Advisory hosted a roundtable discussion with three regional experts to consider the year ahead in these three countries - you can find the podcast here. Key discussion points centred around presidential and parliamentary elections in Ukraine, European Parliament elections in Poland and Romania, a general election in Poland and presidential vote in Romania. 

We also looked at what the potential results of these votes might mean for key sectors of the economy. Specifically, the potential for land reform in Ukraine, the role of the state in telecoms and banking in Romania, as well as energy security investments in Poland. And, of course, US President Donald Trump has also cropped up in our discussion, although in relation to Poland, rather than in the current context concerning Ukraine. 

On reflection, a number of our discussion points actually gave an accurate indication on the general direction of travel, despite a number of unexpected events this year.

Greenlight: A new generation in charge in Ukraine  

The election of Volodymyr Zelensky, an outsider candidate, as Ukraine’s new president in May 2019, ushered in probably the most significant change in Ukrainian political life since independence. President Zelensky brought forward parliamentary elections from October to July. The new parliament, where Zelensky’s party has a two-thirds majority, is full of people who have never been politicians before. The new government, set up in late August, also included people from a variety of backgrounds, including business, and is led by a 35-year-old former lawyer. 

While revolutionary in its composition, the new generation of Ukrainian politicians thus far is orthodox in terms of its economic policy. The new government has set about implementing an agenda which is largely in line with the recommendations of Ukraine’s creditors and Western partners. One important aspect of the MP’s job description changed, however - in September the parliament voted to strip its members of immunity from prosecution. Parliamentary immunity was one of the reasons why at one point or another, most of Ukraine’s major businessmen have been officially MPs. 

September marked another significant change in political accountability: Ukraine’s High Anti-Corruption Court (HACC), started working after years of delay. The HACC was the final piece of the new institutional anti-corruption framework whose other parts have all been set up since 2015; special anti-corruption investigators and prosecutors offices, as well as an agency tasked with preventing corruption by checking public officials’ wealth and income declarations, among other things. However, high-profile investigations and indictments of current and former politicians and government officials by these new institutions so far have ended up languishing in the regular – and notoriously unreformed – Ukrainian court system. The role of the HACC will be to remove this deadlock and be a more transparent and independent part of the judiciary. 

In the meantime, President Zelensky’s team has also pushed ahead with land reform, starting the process of lifting the moratorium on the sale of agricultural land. This is a policy supported by the international community, represented by the IMF. But it carries a high political cost: parties in opposition to Zelensky accuse him of being unpatriotic. This domestic issue has not garnered much international media attention but has the potential of seriously undermining President Zelensky’s popularity and Ukraine’s political stability next year. However, the upside of this risky policy is that the country’s main creditors and investors will trust the new Ukrainian leadership for delivering reforms. 

On the question of trust, however, international investors pay most attention recently to the fate of Ukraine’s largest bank, Privatbank. The international community seems not to trust President Zelensky to oppose the will of the bank’s former owners to overturn its nationalisation. The bank was nationalised in 2015 to avoid the collapse of the local financial system. The government accused the bank’s former owners, primarily Ukrainian oligarch Ihor Kolomoyskiy, of money laundering and embezzlement; Kolomoyskiy countered that the bank was nationalised illegally. 

The court battles in relation to Privatbank have spilt over to the UK and the US. However, it is in Ukraine where the courts might rule to overturn its nationalisation in December 2019. The former national bank governor Valeria Hontareva recently claimed that the state would automatically nationalise it again (without state support, the bank is not viable). And the state would not allow it to fail as the cost of bailing out depositors is too high, as almost half the country banks with Privatbank. The damages the state is seeking from Kolomoyskiy over the cost of refinancing Privatbank  – over $5billion – are roughly the same as the new financing it seeks from the IMF. The fund will probably drag its feet on the new tranche until the Kolomoyskiy risk factor is removed, most likely until the end of the year. 

Fourth time lucky: The government falls in Romania 

A momentous change came to Romania earlier than expected. As the country was gearing up for the direct presidential elections in November 2019, the government was ousted via a no-confidence motion that unexpectedly passed in early October. 

Over the past eight years, Romania had eight cabinets, albeit four led by the same prime minister. The Social Democratic Party (PSD) has been in power since 2012, either in coalition or on its own. Since 2016 the PSD commanded a seemingly stable majority with its coalition partner (ALDE) in both houses of parliament. However, the ruling party was under attack from both outside and within. The PSD has faced internal divisions and power struggles that resulted in a lack of coherent strategy regarding the state’s participation in strategic sectors such as telecommunication, banking and energy. In addition, the PSD’s leader since 2016, Liviu Dragnea, has been a subject of a long-running corruption case. The parliamentary opposition tried to bring down the PSD-led government through no-confidence motions three times since 2017, all unsuccessful. What changed in October? 

Earlier this year, in May 2019, Dragnea was sentenced to three years in prison and was forced to leave the leadership of the PSD. In the same month, PSD saw its support drop in the European Parliament elections, which also served as a boost for the opposition. Against this backdrop, the opposition was able to convince enough MPs to vote against the PSD-led government, including ones from its coalition partner. 

In November, the incumbent president, Klaus Iohannis, won re-election for another term. President Iohannis was supported by the liberal PNL party, whose leader, Ludovic Orban, will lead the new Romanian government until next year’s general election. Which also means the new PNL-led government is treading carefully around topics such as privatisation, and key questions about the role of the state in the economy remain open. 

Despite the political turbulence, Romania continued to be one one of the fastest-growing EU economies and one that still attracts a record number of inward foreign direct investment. But this year Romania was also noted for its exports and in particular, for exporting its corruption-fighting expertise. 

Laura Codruta Kovesi, the former head of Romania’s famed independent anti-corruption agency, known by its Romanian acronym, DNA, was appointed as the first head of the European Public Prosecutor’s Office (EPPJ) in October 2019. It was a hard-won appointment, and one surprisingly opposed by Romania’s previous PSD-led government. Kovesi has certainly won few friends by doing her job and influenced quite a few Romanian politicians: the DNA indicted both Dragnea, as well as Victor Ponta, Dragnea’s predecessor at the helm of the PSD and a sitting prime minister in 2016. And Dragnea no doubt applauded Kovesi’s removal as head of the DNA in 2018. Now, as Dragnea serves the first year of his three-and-a-half-year term, Kovesi is preparing the EPPJ to be fully operational from the end of 2020. It will be in charge of investigating and prosecuting fraud and corruption in the EU countries that accepted its jurisdiction. But there are five EU countries who have not; Ireland, Denmark, Sweden, Hungary, and Poland. 

More of the Sejm: The old guard in Poland 

Poland’s governing Law and Justice Party (PiS) have been successful in entrenching itself by using opposition to the EU as leverage. While some of these steps – such as not joining the EPPJ or changing the rules over the retirement of judges – have gained notoriety, domestically the PiS government has been a responsible manager. 

The government’s unwavering focus on issues such as increasing benefits to young families and lowering tax rates seemed to have successfully countered any potential fallout from corruption scandals in late 2018. The party comfortably retained its lead in both the EP elections in May 2019, and the parliamentary elections in October. While it lost its majority in the Senate, the upper house, it retained its majority in the Sejm, the lower house. And after the victories, the party’s leader, Jaroslaw Kaczynski, has stressed continuity and responsibility, pledging that the PiS government will prioritise the sustainability of public finances. Some Polish commentators suggest this is a message ahead of next year’s presidential elections when the current PiS-nominated president hopes for re-election. 

Kaczynski’s assurance about continuity and stability was also underpinned by more subtle messaging on Warsaw’s streets this year. Kaczynski featured prominently in a photo exhibition this summer on the capital’s main promenade, Krakowskie Przedmiescie, that commemorated the 30-year anniversary of 1989 when Communist regimes fell across the CEE region. And the theme of cutting all ties with the past is also about changing the economy: this year Poland announced it will not seek to renew its long-term contract for buying Russian natural gas. Instead, Poland will increase its role as a transit state for US LNG destined to Ukraine, which had stopped buying Russian gas directly earlier. All the while, Ukrainian workers have become a significant factor in the Polish labour market. Three decades on from 1989, the CEE region is finally becoming economically integrated in a way that overrides the artificial divides of the past.

Published: 5th December 2019