NEWS ANALYSIS: Ukraine: a summer of discontent (10/05/97)

NEWS ANALYSIS

Ukraine: a summer of discontent

by Taras Kuzio

The resignation of Pavlo Lazarenko as Ukraine's prime minister did not provide President Leonid Kuchma with the calm that he had probably hoped it would. Valerii Pustovoitenko, Mr. Kuchma's candidate to replace Mr. Lazarenko, was the safest choice the president could have made in the circumstances since Mr. Pustovoitenko possesses three strategic assets in view of Mr. Kuchma's eye towards the upcoming parliamentary and presidential elections in 1998-1999.

First, the 50-year-old Mr. Pustovoitenko was head of Mr. Kuchma's election team in the presidential elections in 1994 and is regarded as one of his closest associates. Second, Mr. Pustovoitenko has no personal presidential ambitions of his own. He is therefore unlikely to use the Cabinet of Ministers as a springboard to launch a move for the presidency in two years' time. Third, the new prime minister is a member of the pro-presidential "party of power" - the Narodna Demokratychna Partiia (People's Democratic Party). The head of the Presidential Administration, Yevhen Kushnariov, also is a member of that party. Both of these state structures will prove to be invaluable in helping Mr. Kuchma's likely re-election bid in 1999.

Mr. Kuchma's actions also show evidence of his concern about the impact of the economic crisis upon voting behavior during the forthcoming elections. Although he was the first to put himself forward as a presidential candidate more than a year ago, Mr. Kuchma now conditions that upon the future state of the Ukrainian economy.

Here there is a mixture of good and bad news for Ukraine. Success in launching $450 million of Eurobonds on the Luxembourg securities market, approval of a $542 million IMF stand-by credit, 5.2 percent inflation during the first five months of 1997 (lower than in most of the CIS and Poland) has to be tempered by continued bad news. Growing unemployment (hidden unemployment stands at an estimated 25.2 percent of the labor force), a growing balance of payments, deficit which the IMF projects will reach $4.2 billion this year, and continued decline in GDP, which was 7.5 percent lower than in mid-1996.

It is therefore little wonder that Mr. Kuchma and his entourage made indirect calls to sound out Parliament's views about postponing the parliamentary elections for another year. This, though, was unlikely to ever get off the ground because the left was eager to fight the elections in the middle of an economic crisis while reformers understood that one year would have made little difference to the economy. The public would not have been too happy with postponing the elections either. In a recent Democratic Initiatives/Institute of Sociology poll only 3.8 percent believed their elected deputy represented their interests in Parliament while nearly a third could not remember who their elected representative was.

Mr. Kuchma, like his predecessor Leonid Kravchuk, has consequently sought to back the old majoritarian election law (minus its turnout requirement) in the fear that a mixed proportional-majoritarian system would serve to help only well-established political parties on the left and Rukh in gaining the bulk of seats elected on party lists. The left meanwhile have sought to sabotage tax reform in revenge for Mr. Kuchma's hostility to a mixed election law. Mr. Pustovoitenko was approved in office only by the slimmest of margins (226:91), an approval that requires 50 percent of parliamentary deputies (225) plus one.

Eleven of the 23 members of the Cabinet of Ministers remained in their positions from the Mr. Lazarenko government, therefore, it can hardly be described as a "new government." In contrast to the Lazarenko government, new ministerial appointments will allegedly be based upon professional competence and "loyalty to the Ukrainian state." This latter requirement clearly rules out members of the Communist Party from being considered for ministerial posts.

The Lazarenko government was accused of arrogantly not attempting to cooperate with Parliament, a pitfall that Mr. Pustovoitenko wishes to avoid. But it is difficult to see how Prime Minister Pustovoitenko can avoid coming into conflict with a Parliament that includes the left, which is disinterested in reform, and centrists, who are more interested in maintaining Ukraine in an economic no man's land where rent-seeking remains highly profitable.

Almost as soon as Mr. Pustovoitenko stepped into his new position, the legislature and executive were dueling over two issues. Parliament attempted to launch impeachment proceedings against President Kuchma under Articles 94 and 111 of the Constitution because he had on three occasions vetoed the law "On Local Self-Administration," but these proceedings are unlikely to command sufficient support. Cause for impeachment is ill defined and it is not clear how Mr. Kuchma's actions in disagreeing with the law that grants greater autonomy to the regions and ends the prerogative of the executive in appointing governors constitutes either "state treason or [some] other crime." Parliament also failed in what Mr. Kuchma denounced as an attempted "constitutional coup" when it attempted to muster two-thirds support for constitutional changes that would have clearly tipped the balance of power in favor of the Verkhovna Rada.

In addition, two other problems will continue to bedevil the new prime minister. First, outgoing Justice Minister Serhii Holovatyi has pointed to how the Cabinet leadership and apparatus, the majority of which is inherited by Mr. Pustovoitenko, blocked the creation of a legal basis for a market economy. Although administrative reform is now recognized as vital to Ukraine's reform strategy, it is unclear how committed the Ukrainian leadership is to such a policy and whether it can produce results in the short term. A presidential edict on administrative reform issued on July 10 did not give grounds for optimism when it appointed former President Leonid Kravchuk as its head. The major failings of the Kravchuk era, he himself admits, were precisely in the field of cadres.

Secondly, the removal of Mr. Holovatyi does not bode well for the struggle against corruption. Since being effectively sacked and replaced by an unknown quantity loyal to the president, Mr. Holovatyi has spoken out about how the "Clean Hands" program he was told to draft "came completely out of the blue." In other words, its purpose was less to clean out the stables, than to reduce international criticism while leading to the justice minister's own downfall by infringing upon a wide-ranging array of corrupt interests.

The demotion of Hryhorii Vorsinov as prosecutor general, an ally of Mr. Lazarenko, is also unlikely to lead to the implementation of the "Clean Hands" campaign.

Upon his confirmation by Parliament as prime minister, Mr. Pustovoitenko repeated the standard phraseology meant for both Western and domestic consumption about his government continuing to promote centrist reform based upon five "pillars" (industry, agriculture, finance, social welfare and culture). All eyes on the approaching elections were also evident in the government's emphasis upon repaying wage arrears, which now amount to $2.6 billion (4.7 billion hryvni). Mr. Kuchma is particularly concerned that growing social tension in eastern Ukraine will be capitalized upon by the left in the elections.

Mr. Pustovoitenko's other policies of accelerating privatization, tax reform, reduction in subsidies and industrial restructuring were the standard pledges spoken by all new prime ministers. Also, it is not at all clear that the newly created Economic Council will be able to accelerate economic reforms because it is a heterogeneous body devised to generate political consensus from those who hold opposing views about the scope and pace of reform.

Although Messrs. Pustovoitenko and Kuchma have both criticized Mr. Lazarenko since his forced resignation, this seems more for public show than actual outright displeasure. After all, Ukrainian politics has again reverted to its retinue of musical chairs. Mr. Lazarenko now occupies the post of head of the Dnipropetrovsk Oblast Council, which Mr. Pustovoitenko himself previously occupied in 1991-1993. The replacement of Dnipropetrovsk Oblast Chairman Mykhailo Derkach by Victor Zabara is an attempt by Mr. Kuchma to place his man in place as a counterweight to Mr. Lazarenko in that strategic oblast.

Mr. Lazarenko therefore could only have risen from obscurity as head of a Dnipropetrovsk raion to higher positions with the patronage of those such as Mr. Pustovoitenko. The Unity parliamentary faction that Mr. Lazarenko heads had always been a bedrock of support for both Mr. Kuchma and the Dnipropetrovsk clan (although Mr. Kuchma is now attempting to distance himself from Unity).

The political party recently created by this faction, Hromada, is also likely to stand on the same centrist platform in the forthcoming elections as that created by the pro-presidential NDP. Although Mr. Kuchma was visibly irritated by Mr. Lazarenko assuming control over the Unity faction so soon after losing his post, they are unlikely to see each other as rivals unless Mr. Lazarenko decides to stand as a candidate in the 1999 presidential elections.

Both Hromada and Unity have close financial connections to United Energy Systems (UES), a British-Ukrainian joint venture, which can readily provide the estimated $10,000 to $20,000 required to elect a national deputy. After all, as a joint venture UES paid only $12,000 in taxes on its $11 billion turnover last year, a tax loophole that may have been instrumental in winning parliamentary support in favor of canceling this tax privilege in July. Mr. Lazarenko has been accused of protecting UES from investigations into its de facto monopolization of fuel imports and metallurgical exports.

Taras Kuzio is a research fellow at the Center for Russian and East European Studies at the University of Birmingham and editor of Ukraine Business Review.

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