Independent Ukraine after six years: a political-economic analysis (08/24/97)

UKRAINE'S INDEPENDENCE: THE SIXTH ANNIVERSARY

Independent Ukraine after six years: a political-economic analysis

by David R. Marples

Introduction

My purpose is to examine Ukraine's performance after nearly six years of independence, with a focus on the economic outlook and political climate. This summer at Spruce Meadows in Calgary, the Canadian Ukrainian Business Initiative took place, featuring a team of Ukrainian leaders led by then prime minister Pavlo Lazarenko. Barely had Mr. Lazarenko returned to Kyiv than his departure from his post as a result of an alleged illness was announced. This event puzzled many observers and has led some in the international business community to wonder about Ukraine's commitment to a reform program and its ability to maintain some kind of political stability among the leadership. Some prominent media organs, such as the The New York Times, have also published feature articles questioning economic progress in Ukraine. Thus the question remains: Is Ukraine politically and economically stable today?

The question has to be placed in perspective. Regardless of economic outlook, Ukraine has managed to avoid civil conflict over the past six years - an achievement that should not be underestimated.

There is civil war in Tajikistan, a continuing stand-off between ethnic factions in Moldova, animosity between Azerbaijan and Armenia. Russia has conducted a brutal and unsuccessful war against one of its own autonomous territories, Chechnya. In Belarus the president has instigated a ruthless crackdown against any form of opposition, real and imagined.

Ukraine has developed a relatively peaceful and tolerant climate for its citizens and for outsiders. Political extremism is limited to the periphery of society. As we will note, the main source of violence within society remains organized crime, but thus far this element has not threatened the general civil climate.

Moreover, any transition from a Soviet republic to a capitalist or quasi-capitalist state could not be without difficulties and problems. The Ukrainian economy had been closely linked to that of the USSR as a whole.

Ukraine became independent with obsolete industries, recovering from a major industrial disaster at Chornobyl and with an energy dependence on its neighbors, particularly Russia and Turkmenistan. The power structure was such that its first leaders were former members of the Communist Party turned reformers. Few of those who had been dissidents or opponents of the Soviet system gained positions of prominence.

Basically, the power brokering and thought processes seemed to diverge very little from those of the past. In brief, the leadership did not think in terms of economic reform and privatization.

The political situation

Since the summer of 1994, Ukraine has been led by President Leonid Kuchma, an affable, businesslike man who had been an important figure in the military industry in his native Dnipropetrovsk. Though his election campaign had stressed close ties with Russia, his regime soon sought to distance itself from the giant neighbor, particularly from the CIS, to which Ukraine's commitment was never more than half-hearted.

Mr. Kuchma is a practical man who has significantly raised Ukraine's standing in the international community, and especially in Europe. Under his guidance Ukraine has signed to the START I Treaty, has relinquished its nuclear weapons, and has entered into a partnership with NATO through which each side can consult the other in times of difficulty. It has become a close partner of the United States and receives more aid from the latter country than does Russia.

The recent signing of a Treaty of Friendship and Cooperation with Russia remains as yet a paper decree. It was an important breakthrough in a protracted process that had begun in early 1995, but had been delayed because of divisions over the Black Sea Fleet and the status of the city of Sevastopol. It also reflected the subtle nature of Ukrainian foreign policy: one that, first and foremost, seeks security guarantees without relinquishing territory or influence.

No doubt, Ukraine has drawn closer to Russia in the process, but it has retained its position as a large neutral state in central Europe, on good terms with both military blocs but ultimately committed to neither. Further NATO expansion to Poland in particular may call into question this stance of the president, but thus far President Kuchma's handling of a complex situation has been skillful.

The Verkhovna Rada, as the events of this summer have illustrated, is bitterly divided between various factions and led by a man opposed to drastic economic reform, the leader of the Socialist Party, Oleksander Moroz. President Kuchma has frequently expressed his frustration with the reluctance of the Parliament to assist his reform plan, support his efforts against organized crime and approve the state budget, which finally occurred in July after some six months of wrangling and more than halfway through the year for which it is intended.

Thus far, no political party or group dominates Ukrainian politics. One could say that a majority of deputies are unaffiliated centrists, but the two leftist factions, the Communists and the Socialists, hold the main position of influence. Their policies are mainly obstructive, aimed at hindering the reform process as much as possible.

President Kuchma is currently in the process of replacing his Cabinet of Ministers in the wake of the change of prime minister. The latter position presents a rather sorry spectacle. The average longevity of a prime minister in Ukraine is slightly less than a year. Moreover, the appointment of Valerii Pustovoitenko maintains the predominance of the so-called "Dnipropetrovsk mafia" in political and economic life, despite the fact that his origins lie in the Mykolaiv region. One of the criticisms leveled at Mr. Lazarenko was his alleged connection to organized criminal elements. President Kuchma declared that Mr. Lazarenko "must himself answer charges against his honor and morality."

The choice of former Dnipropetrovsk Mayor Pustovoitenko as Mr. Lazarenko's replacement does not, in my view, augur well; in fact, an appointee from any other location would have been preferable. The democratic Rukh faction opposed the appointment, and Mr. Kuchma's choice suggests that the president has limited his options to a narrow circle of trusted friends.

Some observers have made the point that Ukraine is divided politically and geographically between a Ukrainophone and democratic-leaning western region and a largely Russophone and more Leftist eastern Ukraine, the traditional heartland of the former Communist hierarchy. Such a division is simplistic; it omits the south, and the situation in the capital city of Kyiv and other centers where elements of both groups are contained. It also suggests stable voting patterns, whereas, thus far in its independence period, Ukraine's electorate has been unpredictable. There is nonetheless a divide.

Ukraine has political stability without political unity in the sense that the population has no common view of how the developing nation-state should look and operate. Part of this equation is Crimea, the only area of Ukraine with a majority of ethnic Russians and which at times has clashed with Kyiv on language policy and ethnic issues. Few countries of the world, including Canada, can lay claim to political unity. In Ukraine's case the problems are exacerbated by continuing and persistent economic problems.

The economic outlook

Under the Kuchma administration, Ukraine has introduced its new currency, the hryvnia, which has stabilized against the U.S. dollar. It has reduced inflation, which was in fact hyperinflation in 1993-1994, to between 12 and 24 percent per year, and the country has seen an end to the dramatic falls in industrial output and GDP that have occurred since independence. Though growth has been minimal to date, the government must take some satisfaction over the end of what was termed an "economic crisis" or "catastrophe."

A new business elite has emerged in city life, the physical evidence of which is only too evident to the outside observer in the form of foreign cars, cell phones, Italian suits and the usual adornments of the nouveau riche. The center of Kyiv has been transformed.

Against these successes must be weighed the drawbacks, some of which have been around for some time. The first pertains to economic reform. Though numerous programs have been initiated, none thus far have made much progress. The recent wrangling over the new budget is a case in point.

According to the International Monetary Fund, many of the figures provided by Ukraine were simply unrealistic or overly optimistic prognoses. President Kuchma laid the blame directly on Prime Minister Lazarenko for what he perceived as an unsatisfactory document. After its protracted treatment in Parliament, several concessions were made to workers' interests and protection of the workforce from the impact of high prices and layoffs.

In short, government spending was significantly increased. Ukraine anticipates revenues this year of 12.72 billion hryvni, with a financial outlay of 14.98 billion hrv. The over-all budget deficit is anticipated to be 5.7 percent of GDP.

Thus, Ukraine contines to operate with a budget deficit. Key problems are payment for imported oil and gas from Russia, the supply of which is frequently interrupted because of delayed payments; and continued reliance on tranches from the IMF to meet current expenditures.

Ukraine is in fact in a vicious circle. The IMF recently refused to deliver an advance because of concerns about the new budget. If such delays continue it will mean that Ukraine would likely issue funds from the National Bank to meet its budget expenditures, which in turn will increase inflation once again, thereby distancing Ukraine even further from the IMF ideal.

The logical alternative of more fundamental and committed reforms would alienate a vital element of the electorate: the industrialized regions of the east and south, where layoffs in some industries would necessarily be high, and many enterprises would be deprived of government subsidies.

Corruption is endemic and, according to the president, particularly strong among government officials. This year the president initiated a special commission to deal with corruption called the "Clean Hands" campaign. It has done little thus far to deal with the problem. As in Russia, the economy is dominated by powerful elements in both the political and economic hierarchy.

A radical rooting out of corruption would likely antagonize some of the president's key allies for the forthcoming election campaign in 1999. The situation means that the rich elite will get richer; the majority of the population more impoverished. In 1996, there were reported to be investigations of over 4,600 crimes involving "organized structures" and over 2,500 cases of corruption by legislators and government officials at all levels.

Another predicament has been the climate for foreign enterprises. The Verkhovna Rada recently refused to permit tax breaks for foreign companies as requested by the president. Foreign businesses have to deal with a plethora of laws, many of which are introduced and amended in a bewilderingly short time. The recently concluded seventh session of the Ukrainian Parliament, for example, passed over 100 laws, and over 60 percent of them pertained to economic policy.

Foreign companies require a full-time associate simply to monitor existing laws on operating businesses. According to figures provided by Radio Free Europe/Radio Liberty, Ukraine has attracted only $1.5 billion in foreign investment since 1991. Foreign investors require some more incentives, but the measures of the president are constantly thwarted in the legislature. Even entering Ukraine has become more difficult because of visa requirements at the border.

The work force in general is rather disgruntled by the lowering of living standards and particularly by the failure of state enterprises to pay wages on time. In several spheres, such as coal mining and steel, a drastic restructuring of industry is needed, but the government has made only tentative steps, ostensibly because of the powerful influence wielded by workers in these spheres. The state has had problems collecting taxes. Sectors such as the traffic police supplement their income by acting like petty tyrants on the streets of the capital and elsewhere in urban centers. Such actions enhance the impression of a rather authoritarian regime both within and outside the country.

Ukraine has frequently maintained that international aid has been slow in arriving, particularly on the acute question of shutting down the Chornobyl nuclear power station by the year 2000, a timetable that appears increasingly unrealistic.

There is no question that the Chornobyl factor has hindered Ukraine's ability to resolve its energy dilemmas. In addition to the questionable future of nuclear power stations in Ukraine, which have provided up to 45 percent of electricity output at peak times, there is that of the future maintenance of damaged fourth reactor at Chornobyl, which requires a new roof and long-term monitoring. Economic needs have directly affected politics since Russia has consistently used Ukraine's economic dependence to its advantage, particularly regarding the Black Sea Fleet.

I will mention here only briefly the demographic situation.

In recent years, Ukraine's population has begun to decline, as the death rate is now higher than the birth rate. Similar situations are found in Russia and Belarus, particularly among the Slavic population. This factor can be attributed to falling living standards, poor diet and lifestyles, an inadequate health care system and perhaps also to significant levels of environmental pollution, particularly in the major cities. Infant mortality rates are about double that of Canada and rising, and there has been a notable rise in infectious diseases over the past few years, including cholera and diphtheria.

These are worrying statistics that reflect in part the inability of the government to finance adequate health programs, a declining rural sector, and a reduction in purchasing power for most of the population.

Conclusion

Ukraine's situation is difficult but not insuperable. For three years, the Kuchma presidency has concentrated primarily on foreign policy and it has achieved some important results. Above all it has achieved a balance between adherence to a Europe-first and a Eurasia-first policy.

Ukraine's acceptance as a valued member of the Council of Europe and as an international player, however, is offset by the government's failure thus far to advance and develop a consistent policy of economic reform. The president has to date refused to countenance the short of shock therapy applied in Poland, evidently because of pressure from vested interest groups.

Indeed the president is part of the former power structure and on close terms with many of the people anxious to limit the extent of reforms. They encompass many of the people who voted him into office and whose support will be required to see him return for a second term in 1999.

According to a much-touted July survey conducted across the country (albeit with a small pool of respondents), 44 percent of Ukrainians support the notion that Ukraine should join the Russia-Belarus union, a move that would surely be tantamount to the relinquishment of many of the gains of independence.

The figure reveals the extent of disillusionment in the country after six post-Soviet years. It reflects perhaps less a desire to give up independence than a quest for economic security. Russia is perceived to be stronger economically and to be further advanced on the road to a market economy. The high support for such a union should serve as a warning light to the new Cabinet of Ministers and the president. It indicates the need for short-term sacrifices for long-term gains - Ukraine cannot afford to delay longer with its reform program.

To date, however, residents of Ukraine remain to be convinced of the benefits of capitalism, which appear to many (particularly in the over-40 age group) to have promoted the rise of a new "mafia" to the detriment of the majority of the population.

As one who travels to Ukraine frequently, my observation is that a key area for concentration is the hostile attitude of the population toward a wholesale swing to privatization. Many see the transition of Ukraine from a communist to democratic capitalist state as resembling less the situation in the United States or Canada, and more that of Brazil or Nigeria. Others see capitalism as tantamount to the empowerment of a criminal class.

As in all the post-Soviet countries, reforms must be initiated from the top rather than from the grassroots. One reason is the Communist Party legacy of a period in which all decisions were taken at the state level. Aside from the Baltic republics, all the former Soviet republics have witnessed some form of power struggle between the president/executive and the legislature. Thus far in all cases, the executive has ultimately emerged victorious, though in Ukraine's case the success was more limited and qualified. The personality of the president under these circumstances becomes a critical factor in the reform process.

In Ukraine, the new Constitution solidified Mr. Kuchma's position. Only the president is in a position to initiate radical changes or reforms, but he will require the support of the Verkhovna Rada to see them through. As long as Mr. Moroz heads the Parliament, however, some conflict is certain, and consensus on key issues appears unlikely. There is no indication that a new parliamentary election - which could theoretically be called - would produce a more favorable situation for the government. Indeed the opposite could well be the case.

From this observer's perspective on the sixth anniversary of independence, the cautious optimism of even one year ago has been replaced by some serious concerns. The final two years of this Kuchma administration are likely to be tempestuous and they are the most critical to date in this period of Ukrainian nation-building.

David R. Marples is professor of history, and director of the Stasiuk Program on Contemporary Ukraine, Canadian Institute of Ukrainian Studies, University of Alberta.

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