By Richard Balmforth

KIEV, Oct 4 (Reuters) - Ukraine's Constitutional Court has strengthened President Viktor Yanukovich's control by returningkey powers to the presidency, lost to parliament in 2004. This should give him extra authority to push ahead with reform.[ID:nLDE6900J9]

His opponents have criticised the landmark ruling, whichwill return Ukraine to a presidential republic, seeing it aspart of growing authoritarianism under Yanukovich.

With Ukraine now bogged down in constitutional red tape,international lenders and foreign investors seem prepared forthe moment to give him the benefit of the doubt and will wait to see how he puts his enhanced powers to use.

A new deal with the International Monetary Fund has broughttemporary relief, but painful reforms could still erode thepopularity of the cash-strapped government later this year.

A call by Prime Minister Mykola Azarov for Russia to accepta lower price for its supplies of gas indicates the governmentstill sees the cost of its gas imports as a drag on the economydespite a much-trumpeted agreement last April. [ID:nLDE67O0NM]

Analysts say the government has vacillated over the issue ofgrain exports, relying on arbitrary customs checks to controlthe flow rather than a policy of quotas. [ID:nLDE67016K]

Under the deal with the Fund, the ex-Soviet republic willreceive credit of $15 billion over two and a half years, whichcould spur renewed investor interest. [ID:nN28230291]

But implementing the deal could be costly in raw politicalterms: the Azarov government has had to cave in to IMF demandsto raise domestic gas prices and reform the pension system.[ID:nLDE66D0CH]

His election, after a bitter campaign against ex-PrimeMinister Yulia Tymoshenko, has defused much of the politicaltension. The appointment of Azarov, an old ally, as primeminister, has brought an end to the infighting that paralysedthe previous administration of Viktor Yushchenko.

Yanukovich fulfilled many pre-election prophecies that hewould tilt Ukraine back towards its old Soviet master byextending the Russian navy's stay in a Ukrainian port until 2042-- a move which sparked disorder in parliament. [ID:nLDE63Q0NL]

What to watch:

-- Will Yanukovich use his new powers to push reform?.

-- Fresh moves by the government to introduce grain quotas.

-- An economic turnaround in key areas such as metals andchemicals, real growth and new investment.

-- New loans from external lenders linked to the IMF deal.

-- Any social discontent when the government announceswidely expected retirement age increases.

-- Any indication the government is losing its resolve andretreating from reform pledges to the IMF.


Under an April agreement with Russia, Ukraine now receivessupplies of gas at a 30 percent discount, relieving pressure onthe government which struggled every month to meet its gas billunder a January 2009 agreement. [ID:nLDE63K0GM]

But Azarov now says the base price for Russian gas is stillway too high and must be brought down.

Though there has been no formal reaction from Moscow tothis, Russia's gas giant Gazprom <GAZP.MM> is now pressing itsidea of a merger with Ukraine's state energy firm Naftogaz,saying this could cut gas prices for Ukrainians. [ID:nLDE67Q109]

The Yanukovich camp has up to now been cool to the idea of amerger -- first mooted on April 30 -- saying Ukraine would want50 percent of any such amalgamation.

The Ukrainian government has offered Russia a role togetherwith the European Union in revamping Ukraine's gas pipelinenetwork which carries Russian gas to Europe, though Moscow hasbeen unenthusiastic about the idea. [ID:nLDE6310DD]

What to watch:

-- Signs of strain in Ukraine meeting gas payments.

-- Renewed pressure by Moscow on the merger idea.

-- Reawakened interest by Russia in taking part in thethree-way pipeline consortium.


The Constitutional Court's Oct. 1 ruling overturned a 2004law and returned Ukraine to the constitution of 1996. Thoughthis has triggered confusion over how to draft a new nationalblueprint, Yanukovich now exerts a far tighter grip on powerthan the pro-Western Yushchenko.

The opposition around former prime minister YuliaTymoshenko, who say old-style authoritarianism is growing underYanukovich and is reflected in shrinking media rights, havecondemned the ruling as a step towards dictatorship.

Western governments have largely given Yanukovich thebenefit of the doubt up to now and have been equally unruffledby his decision to drop NATO membership as a foreign policyobjective. [ID:nLDE6501EO]

But the European Union and the United States, under pressurefrom media and human rights groups, have urged Yanukovich tohonour his pledges to defend a free press in Ukraine.[ID:nLDE68J199]

The opposition in general has failed to re-organise andTymoshenko is finding it difficult to get acceptance asopposition leader. But violent protests in parliament on April27 over the Russian navy extension in the Crimea were a reminderof the opposition's potential strength. [ID:nLDE63Q0NL]

What to watch:

-- Local elections, expected to be held on Oct. 31, which will be the first official measure of how much popular supportYanukovich now enjoys.

-- Any signs of growing authoritarianism in Yanukovich'sstyle of rule. Are media freedoms under pressure?

-- Any signs of strain in relations between Yanukovich andAzarov over the pace of economic reform.

-- Any signs that Ukraine's power brokers such asbillionaire oligarch Rinat Akhmetov or former gas trader DmytroFirtash are dissatisfied with Yanukovich's policies.


Yanukovich says he intends to take Ukraine along a middlepath between Russia and Europe, improving poor relations withthe former but moving his country into the European mainstream.

But he has pushed NATO membership off the agenda and taken amajor steps toward Russia.

He has also issued a downbeat assessment of progress towardsan Association agreement with the EU, the core of which isestablishment of a free trade zone. [ID:nLDE6901SS]

What to watch:

-- How far will Yanukovich go in overtures to the EuropeanUnion to balance out his policy ? What progress will there be intalks on a free trade zone with the EU?

For political risks to watch in other countries, pleaseclick on [ID:nEMEARISK]

(Writing by Richard Balmforth, Editing by Ralph Boulton)