With relative front-runner Yulia Tymoshenko suggesting Ukraine hold a referendum on joing NATO in June - exactly the event that Putin has expressed grave concern about - this weekend's elections in the troubled nation are considerably more crucial to global geopolitical anxiety than the record low levels of implied volatility across FX, bond, and stock markets would suggest. AS Deutsche explains, Ukraine's new president will face challenges in almost all key spheres – in particular, de-escalating tensions within Ukraine, especially in the eastern provinces; conducting deep economic reforms in order to move Ukraine on the path of recovery along with dealing with the international lenders; finally, improving relations with Russia and the European Union. Below we outline the policy agendas of the candidates and assess the probable scenarios of further political development.
Via Deutsche Bank,
Ukraine: preview of 25 May presidential elections
The early presidential elections in Ukraine are scheduled for 25 May. The candidate becomes president in the first round of elections if he/she obtains a simple majority of votes. There is no requirement for a minimum turnout. If there is no clear winner in the first round, there will be a second round run-off between the two leading candidates, which is likely to take place in June.
According to the schedule of Ukraine’s Central Electoral Committee, the official results should be published not later than 4 June. The new president will face challenges in almost all key spheres – in particular, de-escalating tensions within Ukraine, especially in the eastern provinces; conducting deep economic reforms in order to move Ukraine on the path of recovery along with dealing with the international lenders; finally, improving relations with Russia and the European Union. Below we outline the policy agendas of the candidates and assess the probable scenarios of further political development.
According to the most recent polls in Ukraine (conducted by KIIS on 29 April - 11 May, see Figure 1 and Figure 3), out of 23 candidates Petro Poroshenko remains the most popular candidate in the presidential race (33.7% of total: 53.0% of votes in western regions, 41.4% in central regions, 25.3% in southern regions and 10.5% in eastern regions) followed by Yulia Tymoshenko (5.9%: 7.9%, 8.6%, 4.8%, 1.2% in the respective regions) and Sergei Tigipko (4.1%: 1.1%, 2.4%, 8.1%, 5.6% in the respective regions), while the remaining candidates have significantly lower support margins. The share of those who do not intend to participate in elections varies significantly across regions: 3.6% in western regions, 6.5% in central regions, 13.4% in southern regions and 32.2% in eastern regions.
Despite the economic and civil turmoil, in particular, in the eastern regions of the country, the results of other polls conducted recently suggest a broadly similar level of support for the main candidate; however, the variance of results for Tymoshenko and Tyhypko is quite high ranging from 6-17% and 4-9%, respectively (see Figure 1). The share of those, who did not decide yet, ranges from 10-20%, which increases the probability of largely unexpected outcomes to take place in the first round.
The importance of the presidential elections on 25 May is magnified by the defacto conditionality advanced by the West vis-à-vis Russia in which attempts to undermine these elections would be met with an escalation of sanctions. Accordingly, apart from the electoral outcomes per se, the key issue is Russia’s response to the results of Ukraine’s elections. The outcomes and the degree of Russia’s recognition of the election results in Ukraine will be based on who makes it into the second round, what the turnout is going to be, especially in eastern Ukraine as well as the scale of hostilities in eastern Ukraine in the run-up and during the elections.
In this regard, our base-case scenario is that Russia will tacitly accept the results of the elections (de facto but likely not de jure) in case the turnout is broadly in line with rates of participation observed in the previous presidential elections. Earlier this week, Ukraine’s Minister of Interior Arsen Avakov declared that the conduct of presidential elections will be difficult to control in a very significant part of the territory in eastern Ukraine, most likely referring to the regions of Luhansk and Donetsk. At the same time, he noted that some of the localities in these two regions may participate in the electoral vote.
In terms of the candidates, we see the following scenarios as per the recent KIIS (29 Apr - 11 May) poll results:
Poroshenko and Tymoshenko in the second round (most likely): in this case the second round will not feature any pro-eastern candidates, which may lead Russia towards a harder line on the results of the elections.
Poroshenko and pro-eastern Tyhypko in the second round (least likely): this may change the dynamic of the elections in the second round with some potential for more active participation from the voters in the east.
Another factor that may impact Russia’s reaction to the presidential elections is the scale of hostility in eastern Ukraine. Depending on this factor, as well as the rate of participation (they are to some degree interrelated), we see the following scenarios:
Base case (65% probability): de facto, not de jure recognition – hostilities moderate towards the start of elections, rate of participation is relatively high in eastern Ukraine.
Optimistic scenario: de jure and de facto recognition (15%) in case of a significant de-escalation of military tension, progress in engaging the eastern representatives of pro-Russian forces in the peace process, relatively high rate of participation.
Pessimistic scenario: military escalation, eastern Ukraine boycotts elections; Russia’s meddling becomes significant (20% probability).