Report

The Honeymoon’s Already Over

The Honeymoon’s Already Over

President-elect Petro Poroshenko successfully won over at least 54% of Ukrainian voters, but even before the official count is over, he must turn to the challengers that weren’t on the ballot.

First on that list, pro-Russian separatists that threaten to cleave off the country’s eastern regions demand Poroshenko’s immediate attention. After claiming victory, he said his first trip would be to Donbass, Ukraine’s restive southeast. Armed fighters blocked Sunday’s vote in certain areas and took over the Donetsk airport. The Associated Press reported that Ukrainian forces responded by launching an air strike against the militants. If confirmed, the assault would mark a sharp escalation of Kiev’s military operations against the rebels and risk inflaming tensions with Moscow — which has promised to protect the country’s Russian speakers — just as they seemed to be slightly cooling.

Ukraine’s weak military has battled the eastern fighters they deem terrorists for weeks without successfully re-establishing control. Poroshenko said Monday that the effort should be concluded much more quickly.

"The anti-terrorist operation cannot and should not last two or three months," he said. "It should and will last hours."

To achieve his goal of quickly making peace in the east, Poroshenko may have to give the separatists more autonomy. Many observers see Kiev giving up more regional power as an inevitability after the Donetsk and Luhansk regions voted two weeks ago to become independent.

"Ukraine is likely to go through constitutional reform with a high probability of decentralization and some form of federalization," Bank of America analysts Vadim Khramov and Vladimir Osakovskiy said in a note Monday.

If Poroshenko can resolve the immediate crisis at the Donetsk airport and broker a compromise that keeps Ukraine’s borders intact, he will still have to negotiate with Russia to make sure the deal sticks. Poroshenko said Monday he wanted to talk to Moscow and Russian Foreign Minister Sergey Lavrov welcomed the conversation. That suggests a possible willingness, once he formally takes power, to limit the military push there in favor of closer ties with Vladimir Putin’s Russia. Moscow’s initial response was a warm one.

"We are ready for dialogue with representatives of Kiev, with Petro Poroshenko," Lavrov said, according to Reuters.

That warm reception is an about-face from earlier chilly relations between Moscow and Poroshenko, nicknamed the "chocolate king" because of his Roshen confections company. Poroshenko’s vocal support of the protesters that overthrew Russia-friendly former president Viktor Yanukovych made him the target of Moscow’s ire. In March, Russian authorities retaliated against his candy business, shutting down his chocolate factory in Lipetsk, Russia.

Tim Ash, head of emerging markets research at Standard Bank Group, said he still expects Russia to make life difficult for the new Ukrainian administration.

"Russia will be waiting to see how the dust settles, and waiting for Poroshenko to deal, i.e., seeing what he is willing to offer to ensure some kind of normality in terms of the relationship with Russia," Ash said in a note Monday.

If Poroshenko can manage to keep the country together and get Russia off his back, the next challenge on his list will be the one that set off the crisis six months ago: his inheritance of a nearly bankrupt country. The International Monetary Fund has agreed to give Ukraine a $17 billion bailout, but is also requiring that Kiev impose austerity measures, such as raising taxes and cutting the gas subsidies that make it easier for many Ukrainians to heat their homes.

The cuts and changes required to fix the country’s money problems will likely be unpopular with the voters that just put Poroshenko in power. But they will be even harder if he fails to also solve the two more pressing problems of making peace with the separatists and appeasing Moscow. Any failure to solve those two conflicts will make fixing the economy much more difficult.

After years of mismanagement and alleged corruption under the Yanukovych regime, Poroshenko inherits empty state coffers and an economy in dire need for major reforms. Previous Ukrainian leaders have bought Russian gas at high prices and then sold it to businesses and individuals at lower subsidized prices, guaranteeing themselves a certain amount of political goodwill, but also bankrupting the state’s finances. The IMF deal also assumes that Ukraine’s borders remain intact, so if the separatists successfully break off, Kiev could need even more money than the IMF originally assumed.

In addition to support bringing pro-Russian separatists into line, Poroshenko also needs Russia to cut a deal over Ukraine’s outstanding debts. State-owned energy giant Gazprom holds a multi-billion dollar gas tab that Moscow has been happy to hold over Kiev’s head as a way of keeping the government in tow.  In addition, the Ukrainian government is on the hook for the first installment of Russia’s promised loan to Yanukovych, in the form of $3 billion in government bonds.

Ukraine’s new president will face a headache over gas bills, even though its summertime and demand for Russian gas is low. Gazprom charges Ukraine about the highest prices in Europe, and has said that it will not consider opening negotiations on gas prices until Ukraine pays its outstanding debt for past deliveries, which sums $3.5 billion.

What’s more, Gazprom said that Ukraine will have to start pre-paying for gas deliveries in July. That will put added fiscal pressure on the cash-strapped government as it seeks to purchase gas throughout the summer to build up storage ahead of the winter. Like Willy Wonka, then, Ukraine’s chocolate king will find petulant behavior perhaps his biggest challenge — without the option of liquidating those behaving badly.

Keith Johnson contributed to this report.