Ukraine, the Crouching Tiger

By Sam Vaknin
UPI Business Correspondent

SKOPJE, Macedonia, Jan. 8 (UPI) -- (This is part II of a 2-part analysis of the surprising Ukraine economy.)

Inevitably, Ukraine is socially and politically strained. Its western parts are fiercely nationalistic and West oriented. Its eastern parts lean more towards Russia and are USSR-nostalgic. But this apparent schism is no bad thing. It provides Ukrainians with a secure foothold in both worlds – and no one seriously considers secession.

Unnoticed by many, Ukraine is undergoing a seismic shift, which may result in an economic revival of Chinese proportions. When Viktor Yushchenko, the popular Prime Minister and darling of the West was brutally ousted in May last year by the authoritarian President, Kuchma (himself hailed as a daring reformer by the IMF when elected in 1994), everyone predicted a calamity.  Yet, Yushchenko moved since then to the center in what appears to be an implicit reconciliation with the president. His replacement, Anatoly Kinakh, surprised everyone by proving to be an efficient and modernizing technocrat.

Ukrainian bonds returned to investors more than 60 percent net in 2001, making them the best emerging markets investment by far. Its capital markets are gradually being internationalized. The much-maligned President Kuchma has just introduced a sweeping anti-money laundering decree (later to become law). Ukraine (since its 1998-2000 series of de facto defaults following the financial meltdown in Russia) is now a model debtor. In August 2000 it has even re-paid the IMF $100 million. 

Possibly emboldened by his 1999 re-election, Kuchma seems to be making real efforts to streamline the government (which anyhow consumes a mere 18 percent of Gross Domestic Product), cut red tape, consolidate the government's fiscal stance (Ukraine had small budget deficits, excluding privatization receipts, in 1999-2001), become a WTO member, and create a legal environment conducive to private enterprise and entrepreneurship. A new Land Code - passed by a surprising ad hoc parliamentary alliance and providing for the (limited) private ownership of land - took effect on January 2 this year. Payment discipline in the critical energy sector was enforced, the agriculture Sector was revamped, non cash revenue offsets and cronyist tax exemptions were entirely eliminated, government arrears (including pensions) were substantially reduced (though new arrears have accumulated this year), a privatization law was finally introduced, and municipal finance was rationalized.

The government's contractionary fiscal rectitude (a new Budget Code was enacted and tax collection improved) was balanced by the central bank's (NBU) expansionary monetary policy aimed at increasing its dangerously dilapidated foreign exchange reserves (about $2.4 billion) and spurring growth in the real sector. Rising demand for money and the propitious existence of a thriving informal (cash) economy prevented the resurgence of inflationary pressures - though inflation has picked up in December 2001, forcing the central bank to tighten this year (it disputes the government's official figure of 6.1 percent inflation for 2001).

In 2000 the economy grew for the first time (by 6 percent). Growth was export driven and industrial output increased by 13 percent. The global recession has hurt Ukraine's export prospects but even so, it is poised to have grown by 4-5 percent in 2001. It is forecast to continue to grow by 2-4 percent each year in 2002-2003. With a labor cost of 30 cents per hour, it attracts the interest of manufacturers in the US, in Central Europe, and even in Russia. Strong import growth may swing it back to a current account deficit (currently it is in a surplus of about 5 percent of GDP, as it has been in the previous 2 years). Fiscal shenanigans ahead of the March 2002 elections (and the horse trading which will inevitably follow) may ratchet up the predicted inflation rate of 9-12 percent - but the appreciation of the hryvna is set to continue.

The economy is surprisingly modern. Only 24 percent of the workforce is employed in agriculture (and they produce a mere 12 percent of GDP). More than double that is produced by industry (26 percent of GDP) and a whopping 62 percent of GDP is generated in services (in which only 44 percent of the labor force is employed).

In December 2001, S&P upgraded Ukraine's currency risk rating (both foreign and domestic) to "B" with a "Stable" long-term outlook. On the pro side, S&P cited financial stability, partly the result of a rationalized and rescheduled foreign debt structure. On the con side, it cited the usual litany of corruption, weak legislature, and problems with privatization and with structural reform and malignant oligarchs. These flaws being noted, it did upgrade Ukraine's rating - as did Fitch, Moody's and Japan's Rating and Investment Information Agency. The price of Ukraine's (mainly dollar denominated) Eurobonds appreciated dramatically on institutional buying immediately following the announcement.

Ukraine's image as bereft of Foreign Direct Investment is false. Moreover, about 80 percent of all FDI in Ukraine is Western - not Russian. U.S. investors compete with Russian (cum "Cypriot") investors - each holding 17 percent of the total stock of FDI (about $4.5 billion).

Moreover, Ukraine is now in good standing with the IMF (after a difficult year in which the IMF virtually suspended all communication with Ukraine due to falsified data provided by the NBU). It signed in 1998 a $2.6 billion arrangement (of which $1.6 billion are used). Another tranche of about $380 million was approved this past September. The IMF singled out the banking, energy, and agriculture sectors as in need of continued, pervasive, reforms.

The World Bank has committed close to $3 billion (and disbursed $2.2 billion) to projects in Ukraine (mostly in the energy, mining, agriculture, finance, and private sectors) since 1992. The new Country Assistance Strategy for Ukraine (2001-2003) is unusual in that it seeks to circumvent the hopelessly venal and discredited administration and work directly with the public, business, and NGO's towards building a civil society and its attendant institutions. "The strategy seeks to move Ukraine closer to the European Union standards, fostering environmentally-sustainable development" – says the Bank.  Though it hastens to emphasize the success the government had in implementing its reforms.

As of June 2001, the EBRD (which has a mixed track record in Ukraine) has approved 45 projects in Ukraine (34 of which in the private sector) worth 1.2 billion euro ($1.1 billion). This excludes the construction of a highly controversial and politically inspired nuclear power plant.

Ukraine has gone so low in the world that its fortunes can only improve. It is poised for a modest economic comeback as its mediating geographic position between center and east comes into play with EU enlargement. Kuchma is likely to be eased out by the very oligarchs he nurtured. They now constitute an element in a broad based coalition for reform. Having sated their appetite for loot they now seek respectability and access to capital markets and credits in the West. They want a functioning country and a larger cake.

Kuchma is a figurehead of a disfigured past. A Putin style robotic reformer is likely to succeed him. When it happens, Ukraine may yet become the region's first economic tiger.

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BBC Monitoring

USA ready for return of Russian influence in Ukraine - Russian paper

Source: Nezavisimaya Gazeta, Moscow, in Russian 29 Dec 01

When Ukrainian President Leonid Kuchma announced the "Year of Russia" at the end of 2001, he was giving a ceremonial gloss to political reality, the Russian heavyweight broadsheet Nezavisimaya Gazeta has noted. It adds that now that Russia and the USA are partners, Washington seems prepared to wind down its diplomatic offensive in Kiev, and leave the field open to Moscow. The article by journalist Taras Galyuk looks at how Russian influence is making itself felt in the run-up to the March 2002 parliamentary elections in Ukraine. It asks whether the activity of Russian PR companies is part of a concerted effort to influence the elections, and to lay the ground for the more crucial presidential election campaign in Ukraine in 2004. The following is an excerpt from an article by "and carried in Nezavisimaya Gazeta on 29 December. Subheadings have been inserted editorially.

Ukraine's new foreign-policy role was defined extremely clearly soon after the Belovezhskaya Pushcha accords [which formally put an end to the Soviet Union]. For Russia, it became the closest partner who simply could not be avoided. Ukraine blocked all Russian initiatives in the post-Soviet zone. The pattern was simple. When proposing any foreign-policy initiative to CIS states, Russia was first supposed to present it to Ukraine as the most senior of its partners. Ukraine would certainly reject the initiative, after which even the fact that it was unanimously adopted by all other CIS states could not rid it of a certain stigma. This happened to the Collective Security Treaty in May 1992 and to the CIS Charter in January 1993. Later, Ukraine refused full participation in the Economic Union Treaty. Generally, practically any collective decision made by the CIS was opposed by Ukraine. Thus, Ukraine proved to be a huge stumbling-block right in the middle of the post-Soviet zone, preventing Russia from pursuing its geopolitical development.

In addition, it is important to note that Russia could not ignore Ukraine or strongly pressurize it, because on each occasion it was confronted with the resistance of the Western patrons of the "independent state", which fact the Ukrainian political elite deftly exploited.

Gleb Pavlovskiy, a noted expert on Russian-Ukrainian Relations, accurately defined the main principle of cooperation with the [Ukrainian] elite: "Let us stop trying to look for pro-Russian forces in Ukraine - they will surely let us down". Nevertheless, Russia's Ukrainian policy has often boiled down specifically to attempts to find a pro-Russian element within the Ukrainian elite. The problem was that all the people it identified were equally pro-Russian and anti-Russian.

New US-Russian friendship returns Ukraine to Moscow's sphere

The sea change in Russian and US politics has significantly altered the balance of forces on the Ukrainian issue. The national-technocratic Putin regime appeared in Russia and then George W. Bush won the presidential elections in the United States. The recent events - terror attacks in New York, the triumphant advance of the antiterrorist coalition, and the virtual amnesty announced by Russian on the Chechen issue - can be considered as signs of a radical change in the international climate, a new situation both for Russian diplomacy and for Russia's erstwhile "best enemies".

The new US administration is embracing the "Rice doctrine" [that of National Security Adviser Condoleezza Rice]. According to the logic of this, Russia has a right to special interests outside its borders and, consequently, to the special handling of Ukraine. The United States has abandoned its adherence to the old concept of the post-Soviet zone, which viewed Ukraine as an exclusive zone for American interests. Moreover, the analysts dealing with Russian diplomacy issues have recently mentioned something that, by analogy to a famous document which once determined the fate of Eastern Europe, can be called the "Ivanov-Rice pact" [Russian Foreign Minister Igor Ivanov and Condoleezza Rice], a package of accords between the United States and Russia on the post-Soviet zone. Naturally, it does not require the United States to abandon Ukraine completely or give up all levers of influence there. It seems, however, that the ostentatious interest in the Ukrainian issue once displayed by America is history now. This means that Ukraine has less room to conduct its uncomplicated games.

Although the game on the Ukrainian field has become tougher and more organized, Moscow's position itself has also become tougher. Strange as it may seem, Russian influence on Ukraine started to increase after the two countries and peoples got a kind of psychological divorce, and the Russians stopped perceiving the Ukrainians as simply "our own people". It is hard to say when exactly this happened. Most probably it was when Russia acquired its own "experience", which Ukraine lacks, namely, the Chechen war experience.

Today Russia is a country that has conducted and won a war. Ukraine has not gone through this. And now Ukraine has gone from being "native blood" to a "zone of influence", where Russia has started unsentimentally to apply all the political technologies it has devised in the past grim decade.

Ukrainian elections: Are Russian PR companies part of a concerted strategy?

The 2004 presidential elections are the main intrigue on which prospects for Russian-Ukrainian relations depend. It is not certain at this point whether Leonid Kuchma will run for a third term: Legislation offers him such a possibility, while the vague declarations that he makes every now and then on his departure and possible successors can be retracted at any time.

The relatively low popularity rating of Yuliya Tymoshenko [former Ukrainian deputy prime minister] and her associates from the antipresidential coalition shows that the protest potential of the Ukrainian population has run out of steam. Events are likely to unfold in similar fashion to the Yeltsin-Putin scenario, which means that we will see a smooth, painless but no less revolutionary succession of power. The main point of difference from the Russian transfer of power is that the aforementioned foreign-policy context is more important in Ukraine.

We should hardly expect any global changes from the parliamentary elections that are to be held in Ukraine in late March of 2002. Everyone is more inclined to see them as a rehearsal before the future presidential elections. Election campaigns reveal not only the internal political balance of forces but also a configuration of forces that influence Ukrainian politics from the outside, including from Russia.

 The Kiev weekly Polityka i Kultura [Politics and Culture], which is published in Ukrainian and known for its quite radical pro-independence orientation, offers an interesting, even if not indisputable, theory. Its observer believes that three well-known Moscow groups of consultants, who now work for three mutually competing political movements, have managed to coordinate their activity and support different stretches of the same front (the Kremlin front, to be sure). The For a United Ukraine bloc brings together representatives of the present political nomenklatura, such as Prime Minister [Anatoliy] Kinakh, the head of the presidential administration, [Volodymyr] Lytvyn, and others. They seem to be an exact analogy to the Russian Unity party: a party of power doomed to victory. There is some suspicion, however, that the bloc is serving as a "place of exile" for high-level officials: So far, it has not climbed to the top of the popularity ratings and will hardly manage to boost its popularity significantly before the elections. The bloc will most probably get over the 4-per cent threshold required to make it to the Supreme Council [Ukrainian parliament] but it will hardly achieve spectacular results. This will allow the president some time in the future to purge the executive on the quite legitimate grounds that "the people do not support you". This bloc's election campaign is managed by the Niccolo M group. Considering the particular reputation of this Russian company, the journalist supposes that its role is to act as a "team of undertakers" for that part of the Ukrainian elite that has outlived its operational life.

The campaign of the Ukrainian social democrats (which is quite energetic and extensive, particularly in the hinterland) is handled by the Russian company FEP. The head of the United Social Democratic Party, Viktor Medvedchuk, who recently stepped down as deputy speaker of the Ukrainian parliament, is thought likely to stand for president. Unlike For a United Ukraine, his party unites not the outgoing but, on the contrary, the young, up and coming members of the state elite - first and foremost, the regional high-and medium-level leaders. The observer believes that the role that Gleb Pavlovskiy plays as United Social Democratic Party consultant is to "bind his clients to their commitments to Moscow and use them in the future as Russian agents of influence".

Finally, Polityka i Kultura mentions the bloc of Valeriy Khoroshkovskyy, although under its old name NLO [New Liberal Union], which was invented by journalists [NLO is the Russian acronym for UFO]. The bloc's main consultant is Petr Shchedrovitskiy, who is known for his close relations with the Russian Union of Right Forces, particularly Sergey Kiriyenko. Polityka i Kultura believes that it is planned to mould the young entrepreneur with impressive movie-star looks into a Ukrainian Kiriyenko, the leader of the country's emerging business elite who would certainly have pro-Russian orientation. Let us note that Khoroshkovskiy's campaign is remarkable not only for is showy advertising but also for its working methods, unusual for Ukraine. It announced a contest, in which anyone can compete for a place on the party's electoral ticket. According to the devisors, this should make a striking contrast to the closeness and clannish nature of the Ukrainian political elite.

It is known, however, that similar contests are held in Russia as well. In particular, they are organized by the same Sergey Kiriyenko in the Volga District. Announced after the semifinals of the personnel contest, the new, and this time official, name of the union proved to be quite perplexing: the Winter Crop Generation Team.

Decades of Russia?

The theory described in the weekly is too logical and symmetrical to be quite credible. Fear always exaggerates and there is nothing surprising about the fact that the Ukrainian journalist perceives the actions of political consultants from Moscow as components of the same wily plan. But the article at least expresses the Ukrainian expectations and fears arising from the presence of Moscow political consultants. Russia has lost much in the past decade but there is also much it has learnt. One of its new assets is its ability to set realistic goals both in its domestic and foreign policies, as well as to achieve them by pragmatic means. The elections in March will hardly usher a new generation into Ukrainian politics or make the general attitude towards Russia friendlier. There is no doubt, however, that for many currently influential politicians on the ballot papers, the "Year of Russia", which was announced recently by President Kuchma, will extend for decades.

Last updated January 19, 2004