ANALYSIS: Ukraine's security, political and economic prospects for the new year (01/12/97)

ANALYSIS: Ukraine's security, political and economic prospects for the new year

by Taras Kuzio

In 1996 Ukraine continued its "two-vector" security policy vis-à-vis the CIS and the West. This is likely to continue into 1997 due to domestic factors that, at this stage, prevent Ukraine's full-scale integration into the West. At the same time, Ukraine will continue its drift westwards because of Russian policies that preclude Eurasian integration on terms that would not harm Ukraine's sovereignty. Belarus and Ukraine, therefore, will continue to drift in opposite directions, the former towards Eurasia and the latter towards Europe.

Throughout 1996 Ukraine's leadership and the Ukrainian media continually raised the question of Ukraine's integration with the West in terms of "Ukraine's return to Europe." There seems no question that Ukraine's strategic orientation is now firmly set on with the West. Ukraine's openly proclaimed strategic goals are membership in the European Union, the West European Union, the Central European Free Trade Area and GATT.

In 1997 NATO will announce candidates for the first echelon of its membership expansion that will take place by the end of the decade. At least two of these countries - Poland and Hungary - border Ukraine. Ukraine, unlike Russia and Belarus, will continue to support NATO's evolutionary enlargement, provided two factors are taken into account (both are likely to be implemented in 1997): first, the agreement to not deploy nuclear weapons on the territory of new member-states; second, the signing of a treaty (or charter) between Ukraine and NATO to deal with Ukraine's security fears.

Although Ukraine has ruled out applying for NATO membership at this stage, the policy of neutrality and non-bloc status cannot be assumed to be fixed. Kyiv will apply for NATO membership if the Yeltsin leadership supports the territorial claims advanced by its legislature, or if President Boris Yeltsin is replaced by someone of the Aleksandr Lebed or Gennadii Zyuganov mould.

Relations with Romania are likely to improve after the election victory of Emil Konstantinescu in November 1996. Both Romania and Ukraine have vital interests in removing any territorial problem between themselves in order to be eligible for integration into Western structures, especially NATO. Relations with Ukraine's four key Western backers (the U.S., U.K., Germany and Canada) will continue to evolve into strategic partnerships - particularly with the U.S.

Ukraine's strategic importance to European security is no longer in doubt. For the second year running, Ukraine receives a larger amount of U.S. assistance than Russia. If Russia's relations with the U.S. continue to deteriorate, one can expect that Ukraine's strategic significance will grow even more.

Within the Commonwealth of Independent States, Ukraine will continue to limit integration to economic issues, although even here Kyiv will continue to run into three problems with Russia. First, Russia will continue to apply pressure upon Ukraine to join the CIS Customs and CIS Payments Unions, to both of which Kyiv is unlikely to agree. Ukraine will also remain an associate member of the CIS Economic Union (just as it is likely to remain only an associate member of the CIS). Second, although Ukraine and Russia have normalized their energy relations, problems will remain. Ukraine and Russia will continue to search for alternative suppliers and alternative supply routes. In the case of Ukraine, this means developing Ukraine's strategic alliance with Turkmenistan and Azerbaijan (both oil and gas producers) and Georgia (as an energy route to the Black Sea and the Odesa oil terminal). In the Russian case, this means strengthening relations with Belarus (whose energy sector is already de facto under Russian control). Third, Russia will continue to utilize economic pressure in pursuit of its strategic agenda in Crimea (pressure such as the unilateral September 1996 imposition of import taxes solely on Ukrainian goods, and refusal to provide components for Ukrainian military exports that would allow Kyiv to become a major arms exporter and serious competitor to Russia).

Russian-Ukrainian relations actually worsened in many respects during 1996. It is unlikely that there will be a breakthrough during 1997 in Ukrainian-Russian relations over an inter-state treaty or the Black Sea Fleet. 1996 witnessed a convergence of policies in Russia between the executive and the legislature vis-à-vis Ukraine. This will continue in 1997, and Russian policy will harden over its attempts to assert sovereignty over Crimea and Sevastopol.

During 1996 Ukraine began a concerted effort to broaden its export markets with a view toward lessening its dependence upon Russia and the CIS. This policy will be speeded up and broadened. New target areas for Ukrainian exports will include Latin America, the Middle East (particularly arms exports) and Asia (arms exports, space technology and investment in Ukrainian high-tech industries).

Political and economic issues

1996 saw a breakthrough in unresolved domestic issues in Ukraine: the adoption of the country's first post-Soviet constitution (June), and introduction of the long-awaited new currency, the hryvnia (September). In addition, Ukraine finally decided to close the Chornobyl nuclear plant. Ukraine completed small-scale privatization in 1996. However, medium-and large-scale privatization will continue to be haphazard and slower, in view of the strategic enterprises removed from the list of those eligible for privatization.

A key priority for the Ukrainian government in 1997 will be to reduce the size of the shadow economy by lowering taxes and providing inducements for legalizing shadow businesses. The shadow economy in Ukraine accounts for up to 50 percent of its GDP. By December 1996 Ukraine had completed the process of transferring land from state ownership to collective forms of ownership. This is an important first stage on the road to land privatization, which the parliamentary left will attempt to block

In October 1996 the Verkhovna Rada adopted a subsidy-heavy economic program for the period 1997-2000. It outlines plans to aid large producers in areas of Ukrainian industry that are considered important for reinvigorating its exports (aviation, automotive, telecommunications and agriculture). In addition, the goal of the program is to boost industrial output and GDP by 1.7 percent in 1997, as is also forecast within the draft 1997 budget. It is hoped that this, in turn, will raise average wages by 29 percent.

Over all, this government plan is probably unrealistic. Although the rate of decline of industrial output will undoubtedly continue to slow, it is still not certain whether 1997 will witness Ukraine's first year of growth.

On the inflation side, Ukraine's prospects look far better for 1997. The ideological underpinning of the government's economic program reflects the Kuchma-Lazarenko approach to reform by supporting domestic producers through state (nomenklatura) capitalism.

The adoption of the Constitution marks Ukraine as following the Central European/Baltic - not Eurasian - path of political reform. In contrast to CIS member-states, Ukraine's Constitution has not divested Parliament of power or created an authoritarian executive. President Leonid Kuchma, therefore, will have to continue to take heed of the Verkhovna Rada as a policy-making and policy-commenting institution. President Kuchma will continue to rely upon both the center-left (his constituency) and the center-right in the Rada to ensure legislative majorities in favor of reform.

Key areas of conflict with the left in Parliament are likely to be cuts in social welfare, monetary restraint to maintain low inflation, land privatization and reduction of the number of strategic enterprises from the list of firms ineligible for privatization (this includes over 5,000 firms). The Ukrainian Parliament is also likely to follow the path of other post-Communist countries by introducing a new election law that would provide for 50 percent of the seats elected by majority and 50 percent elected according to political party lists. During 1997 there will be much jockeying on the eve of parliamentary elections scheduled for March 1998. Rukh has already launched its election campaign; discussions undoubtedly will be heated about the need for mergers and the formation of election blocs.

Crimea will continue to remain pacified after the collapse of support for separatism in 1994-1995. Kyiv has continued to consolidate its grip over Crimean affairs, which largely precludes a resumption of large-scale separatist agitation. A new Crimea Constitution is likely to be adopted in 1997 that will confirm Ukrainian sovereignty over the peninsula for the first time. Nevertheless, Russian rejection of Ukrainian sovereignty over Sevastopol, which is likely to grow into claims towards the entire Crimean peninsula, may revive some local separatist sentiment. This, though, is unlikely to become a serious security threat to Ukraine's territorial integrity, unless 1997 witnesses a change in the Russian leadership.

Taras Kuzio is research fellow, Center for Russian and East European Studies, the University of Birmingham, England, and senior research fellow, Council of Advisers to the Ukrainian Parliament. The article above was written for Oxford Analytica.

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