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Ukraine: Reasons to be Cheerful

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The country's economic situation is not quite as dire as lately advertised, and the new government includes seasoned professionals in key posts.

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When the freshly minted prime minister of a strategically important country himself declares that nation to be "on the brink of disaster," that is legitimate cause for worry. All the more so when the driver of that potential disaster is Russia, the world's top oil and gas producer and still No. 2 nuclear power.

The head of government in question is, of course, Arseniy Yatsenyuk of Ukraine, and the outside world, not least the outside financial world, has become duly frightened. Stock markets sold off heavily around the globe Monday as investors divined that Russian troops in the southern Ukrainian province of Crimea somehow made shares of US blue chips like General Electric (NYSE:GM) or 3M (NYSE:MMM) appreciably less valuable.

Yatsenyuk and his colleagues, drafted hastily into office last week by a tempest-tossed Ukrainian parliament following President Viktor Yanukovych's astonishing flight from power, certainly have their work cut out for them. If they ever mange to get Vladimir Putin's boots off their sovereign ground, or even if they don't, they will urgently need to address their country's parlous finances and potential bankruptcy. Yet there are good reasons to believe that Ukraine will avoid the sort of disaster its new premier envisions: a widening Russian invasion, more Russian-speaking regions following Crimea's secessionist example, and massive fraternal Slavic bloodshed.

One big cause for optimism is the new government itself. Though propelled into office by the victorious masses who had battled Yanukovych's regime physically in downtown Kiev, the cabinet managed to place seasoned professionals from the ex-opposition Batkivshchyna Party in all the key posts, and keep the hotheads from the streets on the periphery. This was no easy trick as the interim ministers had to clear an ad hoc plebiscite on the Maidan, the Independence Square that was the epicenter of three months of protest. Crowds there were understandably in a mood to throw all the old rascals out.

Yatsenyuk & Co. finessed this issue by taking on a number of Maidan activists in harmless roles like minister of culture or sport. Yatsenyuk himself seems as respectable a figure as one could be after 15 years at the heart of Ukrainian politics. He has served his country under three administrations as economics minister, foreign minister, and central bank chairman, emerging as the sort of technocratic realist that current conditions very much demand.

The new finance minister, Oleksandr Shlapak, has also been in and out of office since 2000 or so, serving among other things as economics minister and deputy head of the national bank. Incoming central bank chief Stepan Kubiv is an economics Ph.D. who ran a respected commercial bank in the western city of Lviv for eight years, then risked his life as a "commandant" in the Maidan uprisings to boot.

Ukraine would ideally have a unity government at this point that included Yanukovych's Party of Regions alongside Batkivshchyna. But that may be politically impossible so soon after dozens of protestors died at the hands of Yanukovych's elite police units. At least the best available grown-ups are in charge.

The situation in Crimea is hairy but ultimately manageable. The beautiful sub-tropical peninsula is geographically and economically isolated from the rest of Ukraine, with a stand-alone tourist industry fed mostly by visitors from Russia. (Crimea has been tragically bypassed by Turkey as middle-class Russians' beach destination of choice, but that's another story.)

The territory already has a loose autonomous status within Ukraine, and the Russian navy, as everyone knows by now, has long occupied the Crimean port of Sevastopol. All this leaves plenty of room for a fudge whereby the Crimeans would run their own affairs without formally exiting Ukraine. The Russian-backed renegade authorities have themselves pointed in this direction with the ambiguous wording of the referendum they plan to hold on March 25. It asks voters to yea or nay the proposition: "The Autonomous Republic of Crimea enjoys state status and is included in Ukraine on the basis of treaties and agreements." Hardly the language of Jefferson and Adams.

More important than Crimea is the so-far muted backlash in the Russian-speaking eastern industrial heartland around Yanukovych's home base of Donetsk. The metals barons who control this region, tough but pragmatic billionaires like Sergei Taruta of Industrial Union of Donbass and Rinat Akhmetov of Systems Capital Management, want no part of Mother Russia. Reunification would mean bending the knee to Putin's ruling clique and defending their assets from even richer Moscow-based billionaires. Yanukovych himself was a disappointment to these grandees, who nurtured and financed him for most of a decade only to see him steal everything that was not nailed down for himself and his son once he gained power.

The new authorities in Kiev shrewdly appointed Taruta as acting governor of Donetsk Oblast this weekend (and rival tycoon Ihor Kolomoyskyi in neighboring Dnipropetrovsk). Taruta quickly paid them back with interest, issuing a call for all Ukrainians to "consolidate our strength to preserve the integrity of our state."

Russia's still-influential oligarchs cannot be much loving the Kremlin's Ukrainian adventure, either. While Western governments flailed about for ways to punish Russia, markets did the job swiftly and severely. Russian stocks fell by 7% Monday, their worst session in five years. That's billions straight off the net worth of a number of the country's richest businessmen. Into the bargain, the ruble dropped 2% against the dollar and the central bank was forced to hike its key interest rate from 5.5% to 7%.

Ukraine's own financial condition, though hardly robust after two decades of multipartisan mismanagement, is not quite as dire as lately advertised. Prime Minister Yatsenyuk's estimate that the country needs $35 billion in external assistance looks like a fat bargaining chip placed on the table before the European Union and International Monetary Fund come to town soon to talk bailout. In fact the government has to pay around $6.5 billion on sovereign bonds this year, and scored $5 billion in low-interest refinancing from Russia before Yanukovych was toppled. Today, US Secretary of State John Kerry arrived in Kiev and offered $1 billion in American loan guarantees. The US is also offering to send technical experts in banking and finance and other key functions.

None of this means that Ukraine or its burgeoning roster of followers around the world, can breathe easy just yet. Any number of small miscalculations could yet have the ugliest consequences, with Russian state media heavily stoking the public on visions of "fascism" resurgent across the border. Under the best circumstances, the interim government will work for three months then cede the floor to a new round of conflict and confusion. Elections have been set for May with no candidate who looks likely to unite the country's near equal-strength opposing political camps.

Yet Ukraine has somehow muddled through its first 23 years of independence, and the further it muddles the more incentive both sides have to maintain its independence and somehow balance its destiny, like its geography, between Russia and Europe.
No positions in stocks mentioned.

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