This week’s clear-out of Ukraine’s government barely six months after it took office has raised fears among investors and political reformers that President Volodymyr Zelensky has abandoned his efforts to overhaul the economy and tackle corruption.
Mr Zelensky removed finance minister Oksana Markarova and chief prosecutor Ruslan Ryaboshapka, both respected reformers, and ditched the prime minister Oleksiy Honcharuk. Tymofey Mylovanov, a US-educated economist who had been spearheading a long-awaited land reform as economy minister, also quit in the shake-up.
Mr Zelensky said he was changing his government out of frustration at the slow pace of reform. But investors were sceptical, particularly over the ousting of Mr Ryaboshapka, who has been praised by Kyiv’s western backers and anti-graft campaigners for trying to clean up a corrupt prosecutor’s office. The judicial system has often been abused by Ukraine’s oligarchs to pursue business interests and settle scores.
Dragon Capital, a Kyiv-based investment bank, described the reshuffle as “dubious”, adding: “The composition of the new cabinet, which failed to include the previous government’s key market-oriented ministers, and little policy detail offered by the new PM thus far, are raising questions about the continuation and quality of reforms, despite Zelensky’s pledge of no reversal.”
“[Mr] Zelensky was supposed to be serious about addressing the rule of law issue and reining in oligarchs,” Timothy Ash, an analyst at BlueBay Asset Management, said in a note. “Events this week, and the seeming sop to oligarchic interests in the cabinet reshuffle, raise major concerns therein whether [Mr] Zelensky is serious about actually changing anything.”
Foreign investors have poured into Ukrainian debt since Mr Zelensky’s election, persuaded by his promises to modernise the country and tackle corruption and reassured by the calibre of his ministerial team. The hryvnia appreciated 19 per cent against the US dollar last year.
In January Ukraine sold €1.25bn of debt at a record-low yield of 4.375 per cent. One emerging debt portfolio manager said at the time it was “a rare country where serious reforms are happening”. But after Thursday’s reshuffle the yield on Ukrainian dollar bonds due in 2032 rose by half a percentage point.
The timing of the reshuffle was all the more puzzling because the government had been closing in on a deal with the IMF for a $5.5bn loan programme. The loan is a regarded by international investors as an essential financial cushion for Ukraine, which is in the sixth year of a war with Russian-backed separatists in the east and faces hefty foreign debt payments against the backdrop of a global economic slowdown.
“I do not understand the purpose of replacing the government at this particular time,” said Oleksander Danylyuk, a former finance minister. Mr Danylyuk briefly served as Mr Zelensky’s national security adviser last year before quitting over doubts about the president’s commitment to tackling corruption.
He suggested Mr Zelensky had changed his team to reverse a sharp drop in popularity since winning the presidency by a landslide last spring on promises to crack down on graft, raise living standards and end the war in the Donbass.
The new prime minister is Denys Shmygal, a little-known 44-year-old regional official from western Ukraine. From 2017 to 2019 Mr Shmygal was an executive in an energy company owned by Ukraine’s richest oligarch, Rinat Akhmetov.
The appointment has fuelled speculation that Mr Zelensky could be seeking to distance himself from rival billionaire Igor Kolomoisky, whose television channel turned Mr Zelensky into a star and gave him huge airtime during last year’s election campaign.
Mr Kolomoisky has become an obstacle to a deal between Kyiv and the IMF. PrivatBank, Ukraine’s largest lender which Mr Kolomoisky used to own, had to be nationalised in 2016 after regulators found a black hole in its accounts because of fraudulent lending. The state was forced to inject capital worth 6 per cent of gross domestic product.
Mr Kolomoisky, who has repeatedly denied wrongdoing, is seeking to have the nationalisation overturned in Ukraine’s supreme court. The IMF insists the government must legislate to prevent this.
Before he was forced out, Mr Ryaboshapka told Ukrainian news outlets he had “made good progress on the PrivatBank case, and that prompts some people to move quickly and in a cynical way”.
In a statement after taking over, Mr Shmygal reaffirmed Ukraine’s intention to engage with the IMF.
“The change of the government means that we want even better and faster reforms in Ukraine,” he said. “The government will continue [its] prudent fiscal policy and constructive co-operation with the IMF and other foreign creditors of Ukraine.”
Mr Danylyuk said that with a new administration taking office it was “understandable” that the IMF would “take a pause”.
“I believe there is a grave misunderstanding of the situation by the president’s team, who offer solutions that only make things worse,” he added.