Ukraine parliament takes first step to calm violent unrest

Ukraine’s parliament approved at noon today a law that cancels the so-called “dictatorship laws” adopted on January 16, which severely restricted protest activity with limitations to freedom of speech and assembly. 361 MPs voted in favor, out a needed quorum of 226. The Rada also agreed to consider later today amendments to legislation providing amnesty to protesters and to create a commission to draft amendments to Ukraine’s Constitution.

Concorde Capital: This move is an important step on the way to calming the violent clashes that have erupted throughout Ukraine, but it merely resets Ukraine’s legislation to pre-January 16 (recall, the EuroMaidan protest started on November 22 and escalated for the first time on December 1, 2013). After the “dictatorship laws” were adopted, the EuroMaidan’s area doubled in Kyiv and similar maidans cropped up in most of the nation’s cities.

Yet the opposition activists are unlikely to calm down now as their key demands – punishment of police who have beat and killed protesters, dismissal of the government – are far from being met (even though PM Mykola Azarov submitted his resignation today). Now the EuroMaidan is awaiting President Viktor Yanukovych’s signature on the adopted laws and Azarov’s resignation letter. Given the unpredictability demonstrated by the guarantor of the Constitution in recent months, it is hard to predict what he will do with the adopted laws. The law gives him 15 days to sign it or impose a veto (and the parliamentary speaker has five days to file it with the president).

Among the most important goals of opposition political parties is to return Ukraine to a parliamentary-presidential republic, as established by the 2004 constitutional amendments. Had they not been canceled in 2010, all the violence could have been avoided because the parliament would have served as a check against Yanukovych’s absolute power. In the most successful future scenario, the return to the 2004 Constitution would be followed by elections of a new prime minister in the parliament and a popular vote for the president. Another important issue is who will dare to take responsibility over Ukraine’s precarious economic situation if Azarov resigns and what authority would a new government have right now.

A lot has yet to be done for the EuroMaidan protesters to fold their tents. The special police forces and state-sponsored thugs have to stop terrorizing activists throughout Ukraine, all those responsible for the tortures and killings need to be punished, the police divisions responsible for the terror need to be dissolved, all arrested and imprisoned activists must be released, and changes must be introduced to the Central Election Commission and the election code to ensure an honest presidential election. Meanwhile, the threat of a state of emergency remains looming over the EuroMaidan, especially considering Yanukovych is capable of pulling vicious surprises. Harsh Arctic weather is being forecasted for the next few days, which the government might decide to take advantage of.

We expect the conflict’s de-escalation will be welcomed by equity investors in Ukraine and Ukraine-related stocks will benefit in the next few sessions. At the same time, the situation on fixed income and currency markets has become less predictable now. Recall, the current government relies on its good relations with Russia to control macroeconomic stability in the country (having gained Gazprom’s valuable natural gas discount and a promised purchase of up to USD 12 bln of Ukraine’s debt in 2012). Now that the political configuration could shift away from the Russian “partners,” Russian President Vladimir Putin may rescind his “generosity.”

The first test of which way the political winds are shifting will be whether the already announced USD 2 bln Eurobond placement will be executed in the coming days. If Russia decides not to buy the new Eurobonds, that can stimulate expectations of a currency crisis and Ukraine’s insolvency (unless Ukraine secures funding from the IMF or the EU). Meanwhile, a possible Russian decision not to renew the gas discount would be good news for Ukraine-focused gas producers like Serinus Energy (SEN PW), Regal Petroleum (RPT LN) and JKX Oil & Gas (JKX LN). But any Russian decision to rescind its Dec. 17 deals would depend on a pro-EU government coming to power, which is hard to predict at this point.