Growing in spite of the politics

Quote: While it has not made any fundamental changes in Ukraine’s geopolitical position, the post-2004 leadership has also managed to secure admission to the World Trade Organisation, the promise of an early start to talks on a free trade agreement with the European Union and a vague pledge of future Nato membership. Russia has increased gas prices and raised the volume on its anti-Ukrainian rhetoric but has proved unable to stop a perceptible westward shift in the country’s external relations.
For the pro-western Mr Yushchenko and Ms Tymoshenko this is clear progress. For the Moscow-friendly supporters of Mr Yanukovich, the picture is less positive. But they too are happy with the country’s economic advances and support Ukraine joining the WTO and getting closer to the EU – although Nato is a different matter.
Many Ukrainians end up ignoring politics altogether – or wishing that they were better served by their leaders. As Oleh Rybachuk, president of the Euro-Atlantic University in Kiev, says: “Our country is welcome in the world. But those who are running the country at the moment get a vote of no confidence.”
To be fair, Ukraine’s leaders are not entirely to blame for the lack of political stability. They are working in a system created during the Orange Revolution, with built-in political and legal contradictions. Mr Yushchenko triumphed in the disputed 2004 presidential election by a fairly narrow margin, backed by voters in the west and centre, but opposed by Mr Yanukovich’s supporters in the Russian-speaking east. The Orange team of Mr Yushchenko and Ms Tymoshenko then split, with Ms Tymoshenko winning the lion’s share of the political support, leaving the president bitter and increasingly vulnerable to political attack.
Under the deal which settled the 2004 election dispute, the presidency lost a considerable chunk of its powers to parliament, but not nearly enough to turn Ukraine into a parliamentary democracy. There are constant arguments about the relative powers of president, government and parliament.
Four changes of government and two parliamentary elections have failed to clear the air. Now, Mr Yushchenko is pushing for a constitutional reform to recover some of the president’s lost powers, while Ms Tymoshenko and Mr Yanukovich want to go in the opposite direction and boost parliament’s prerogatives. Hryhoriy Nemyria, the pro-Tymoshenko deputy prime minister for international integration, says: “The most successful countries from central and eastern Europe all adopted a parliamentary system. The alternative system in the post-Soviet region is the super-presidential system. It is important for Ukraine to avoid this temptation.”
At a recent press conference, Mr Yushchenko said he was not against a pure parliamentary system in principle, but insisted Ukraine was not ready for it. He referred to a parliament in which many lawmakers function as agents of influence for oligarchs as an “unstable institution”. The motivations driving politics in the parliament are “not yours or ours”, he said at a press conference on April 24.
It is impossible to predict how this debate will end. The only certainty is that the next presidential election, due in early 2010, is already figuring prominently in the minds of the leading forces. According to opinion polls, Ms Tymoshenko would have a good chance of unseating Mr Yushchenko, with a 25 per cent support rating, compared with the president’s 7 per cent. Mr Yanukovich is her most serious contender with about 23 per cent support, according to a March poll conducted by Kiev’s Research & Branding Group.
But, in all the confusion, it is important to recall that the Orange Revolution has ushered in a genuine multi-party democracy with real conflicts and a free media. The fear that officialdom inspired under the presidency of Leonid Kuchma has gone.
That said, the courts have yet to be brought into the post-Orange Revolution world. Political leaders have failed to deal adequately with the criminal legacy of the past, notably the killing of muckraking journalist Hryhoriy Gongadze, the fraud involved in the 2004 election and Mr Yushchenko’s near-fatal poisoning.
People complain that corruption can be as bad as it was in Mr Kuchma’s time, especially on questions linked to the booming property and construction markets.
Moreover, the business oligarchs who acquired influence under Mr Kuchma have by and large retained their political influence.
Rinat Akhmetov, Ukraine’s richest man with assets of $7.4bn, according to Forbes, the US magazine, stands behind Russia’s wealthiest men in absolute terms. But, with Russia’s economy five times bigger than Ukraine’s, Mr Akhmetov has more domestic clout than his Russian counterparts.
Nor does he face the same pressures from the authorities that Russian oligarchs do from the Kremlin.
Yet, despite the political conflicts, the economy is growing fast, with gross domestic product growing at more than 7 per cent a year since 2000. This year, economists foresee a modest slowdown to 5-5.5 per cent, as investment decelerates slightly.
With GDP per head of only €2,100 ($3,200) there is still scope for further rapid economic growth. WTO membership is forecast to expand trade and investment as will closer ties with the EU. Foreign investors see opportunities similar to those in central Europe five to 10 years ago. Banking and construction are prime targets and rising world food prices are increasing the attractions of the agricultural sector, despite the bureaucratic hurdles facing investment in land.
Net capital inflows last year hit a record $15.8bn, including a 60 per cent increase in foreign direct investment (FDI) to $9.2bn. This year, FDI is expected to remain high, but inflows will decline due to the global credit crunch.
However, officials’ biggest concern is not declining GDP growth but soaring inflation, which hit 30 per cent in April. Global food and energy price increases are having a serious impact, as are domestic developments, including spiralling annual credit growth of 50 per cent in recent years, and sizeable increases in public spending on pay, pensions and welfare.
The government is revising the budget to cut the planned deficit from 2 per cent of GDP and the central bank has raised interest rates. The International Monetary Fund would like to see firmer action but the prospect of the next presidential election campaign leaves politicians reluctant to squeeze very hard.
Electoral considerations are also holding up structural reforms, including the long-planned liberalisation of the arable land market. It is also unclear how aggressively the government will pursue its privatisation programme, which includes plans to sell strategic stakes in energy companies and in Ukrtelecom, the telecoms utility.
For business, the biggest challenge is rising energy prices. Russia has raised the gas price from below $100 per 1,000 cubic metres in 2005 to nearly $180 this year. The price is expected to increase again next year.
So far, industry has coped, assisted by record prices for energy-intensive exports, including steel, pipes and chemicals. Companies have invested in energy efficiency but there is still room for improvement with output per unit of energy standing at one-third of central European levels.
In foreign policy, Ukraine’s biggest achievement is WTO membership which Kamen Zahariev, Ukraine country director for the European Bank for Reconstruction and Development, hails as “a historic event for Ukraine”.
As well as the economic benefits, there is the political gain of entering deeper into international trading networks and of doing so before Moscow, because now Kiev will have a say on Russia’s entry terms.
WTO accession will also trigger the start of intensive talks with the EU on a wide-ranging free trade agreement that will include steel and chemicals. Mr Yushchenko and Ms Tymoshenko hope that growing economic integration with the EU will eventually lead to political integration, though they accept this may be a long way off.
Nato accession is more problematic. Mr Yushchenko has pushed hard for Nato, knowing that it can, in the right conditions, be achieved much quicker than EU membership, which involves years of reforms.
Ukraine, together with Georgia, this year applied for a pre-accession Membership Action Plan. The MAP bids were turned down at Nato’s summit in Bucharest but they were given instead promises of future Nato membership and commitments to review the MAP applications late this year. Mr Yushchenko hailed this as “a victory” but he knows there is much to do if Ukraine is to make further progress towards Nato membership.
For a start, opinion polls suggest that most Ukrainians oppose membership, even though they back EU entry. They favour the neutrality written into the constitution and are wary of irritating Russia. Mr Yanukovich’s Regions Party acts as a powerful focus for these sentiments.
Mr Rybachuk and other Nato supporters argue that opinions will change once the authorities roll out an information campaign.
They also expect to gain support from Russia’s persistent sabre-rattling towards Ukraine. Most Russians, including liberals, see Ukraine’s Nato moves as a betrayal of hundreds of years of common history. The Kremlin is also concerned about maintaining Russia’s military links with Ukraine, not least its presence in the Ukrainian Black sea naval port of Sevastopol where the Russian fleet is stationed under an agreement that expires in 2017.
Mr Yushchenko’s strategy is to talk softly where Russia is concerned but to work steadily towards fulfilling his country’s European ambitions.
His job would be a lot easier if he and political rivals could cooperate a little more.
The prospects of this happening before the 2010 presidential election seem minimal.

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