UPDATE 5-Ukraine economy minister quits in blow to reform hopes


* Minister accuses presidential ally of meddling

* Western powers say “deeply disappointed” by exit

* Ukrainian sovereign bonds tumble

* Resignation will undermine investor confidence – analyst

(Adds U.S. State Department comment)

By Natalia Zinets

KYIV, Feb 3 Ukrainian Economy Minister Aivaras
Abromavicius quit on Wednesday saying his ministry was being
hijacked by corrupt vested interests, dealing another blow to
Western hopes that the country can reform itself.

In his statement, Abromavicius singled out a close ally of
President Petro Poroshenko, accusing him of blocking the
ministry’s work and pressing for powerful jobs for placemen,
with the support of the president’s office. Poroshenko later
responded by urging Abromavicius to stay, adding that the
anti-corruption bureau would investigate the allegations.

Abromavicius’s exit could derail plans to privatise around
100 state-owned companies, which were a plank of a reform
programme to turn around an economy which shrank by more than a
tenth last year.

There has been mounting public anger that the new,
pro-Western government that came to power after a pro-Russian
president was toppled by protests in 2014 has not delivered on
promises to stamp out corruption. The government’s approval
ratings have fallen sharply.

Ukraine’s international backers, including the United States
and the European Union, have also become increasingly impatient
with the slow pace of change in a country into which they have
pumped billions of dollars in aid.

A group of envoys, including the U.S., German and British
representatives in Kyiv, said they were “deeply disappointed” by
the resignation, which also sent Ukrainian sovereign bonds
tumbling.

U.S. State Department spokesman John Kirby said Abromavicius
implemented tough economic policies that delivered “real reform
results for Ukraine.” He urged Ukraine’s leaders to press ahead
with those reforms but declined to speculate on the impact the
resignation would have on U.S. assistance to Kyiv.

Any threat of Prime Minister Arseny Yatseniuk’s government
collapsing would deeply worry Ukraine’s Western partners, who
have backed the coalition to keep the country from falling back
into Moscow’s orbit.

“Neither me, nor my team have any desire to serve as a
cover-up for the covert corruption, or become puppets for those
who, very much like the ‘old’ government, are trying to exercise
control over the flow of public funds,” Abromavicius said in an
English-language statement.

Ukraine has struggled economically since the 2014 revolt,
which was followed by Russia’s annexation of its Crimea
peninsula and by war in the east of the country against
pro-Russian separatists Kyiv says are supported by Moscow.

Abromavicius is a Lithuanian-born former asset manager who
was brought in as one of several foreign experts to help run
Ukraine’s new government.

He said Ihor Kononenko, a senior lawmaker close to
Poroshenko, had lobbied to get his people appointed as heads of
state companies, culminating in an attempt to appoint one of his
people as Abromavicius’s deputy. A candidate showed up,
demanding to be appointed, he said.

After that, “I received a call from the President’s
Administration, whereby I was emphatically suggested to hire
this individual, as well as another one, who would take the
position of my deputy in charge of defence industry. I responded
by declining to take part in this corrupt arrangement and by
offering to resign my post.”

Kononenko denied the accusations as “completely absurd”, and
said Abromavicius was trying to shift blame for his own failures
in running the ministry. Yatseniuk said there was a campaign to
discredit his government, and accused Abromavicius of “running
from the field of battle.”

WORSE NOT BETTER

Since coming to power in 2014, the government has pledged to
stamp out the systemic graft that flourished under former
president Viktor Yanukovich and kept Ukraine hooked on Russian
money and cheap gas.

But many Ukrainians believe corruption has not improved,
eroding support for the authorities, deterring foreign
investment and causing Western backers to question Kyiv’s
ability to deliver real change.

They have warned Ukraine not to repeat the mistakes of more
than a decade ago, when the euphoria of the “Orange Revolution”
of 2004, an earlier popular protest movement that brought
pro-Western leaders to power, eroded amid government infighting
and a failure to stamp out graft.

The slow pace of change now threatens to derail a $40
billion aid-for-reforms deal championed by the International
Monetary Fund, European Union and United States.

“Abromavicius’ initial appointment was made precisely
because, as a Lithuanian with no experience in Ukrainian
politics, he came from outside a corrupt system and could
credibly work to reform it,” said Daragh McDowell of the risk
analytics firm Verisk Maplecroft.

His exit “will fatally undermine what little confidence
investors still had in the Poroshenko administration and
Ukraine’s economic prospects in general.”

Low approval ratings for Yatseniuk’s government have raised
expectations of a major ministerial reshuffle, and the
government also could face a no-confidence vote in parliament
around the middle of February.

“It is important that Ukraine’s leaders set aside their
parochial differences, put the vested interests that have
hindered the country’s progress for decades squarely in the
past, and press forward on vital reforms,” the foreign envoys in
Kyiv said in a joint statement.

Some other cabinet members have also expressed frustration
at the pace of progress in their ministries.

Infrastructure Minister Andriy Pyvovarsky has threatened to
resign, while Health Minister Alexander Kvitashvili tendered his
resignation last summer, only to have it rejected by parliament.
Abromavicius’s resignation must also be approved by lawmakers,
and he urged them to meet on Thursday to green-light his
departure.

Poroshenko said in a statement that Abromavicius had
recognised the support the president had given him.

“As far as I’m concerned this support is guaranteed, in the
future also. I believe that Aivaras should stay as minister and
continue reforms. He went away to think,” he said.

The statement did not address the allegation of his office
meddling in appointments in the ministry.

(Writing and additional reporting by Matthias Williams;
Additional reporting by Pavel Polityuk, Alexei Kalmykov and
Alessandra Prentice in Kyiv and Karin Strohecker and Marc Jones
in London; Editing by Peter Graff and James dalgleish)