1997: THE YEAR IN REVIEW

Ukraine: instability in economy, politics

For Ukraine, 1997 was another year marked by economic and political instability. There were shake-ups in the government, foreign investors leaving the country, problems getting foreign aid, a plan to fight corruption that may have failed before it was even implemented, and preparations for elections that at times seemed would not be held.

Politicians from the political center began criticizing the programs of the president and distancing themselves from him as elections to Parliament drew near, while leftists in the Verkhovna Rada continued their battle with the president and his policies, which made the passage of every law a highly political contest.

Foreign policy

President Leonid Kuchma can, however, claim some successes. In 1997 foreign policy became his strong suit. His biggest accomplishment occurred in May with the signing of accords with all of Ukraine's major neighbors, the highlight of which was the signing of the "big treaty" on friendship and cooperation with Russia's President Boris Yeltsin on May 31 in Kyiv. Most notably, the document recognizes the sovereignty and territorial integrity of Ukraine. The two sides also signed a series of economic and cultural cooperation agreements.

The long-awaited visit by the Russian president finally took place after the two countries had agreed on the division of the Black Sea Fleet based in the city of Sevastopol on Ukraine's Crimean Peninsula. That event occurred three days earlier with the initialing of the Black Sea Fleet pact between the prime ministers of Ukraine and Russia, Pavlo Lazarenko and Viktor Chernomyrdin, respectively.

The BSF pact gives Russia a 20-year lease on three of the four bays of Sevastopol with a five-year option for renewal by permission of Ukraine. Ukraine receives more than $500 million for the portion of its fleet that had been given to Russia in 1994. Neither side would divulge the value of the actual lease agreement, other than to say that payment would be made through debt relief of money owed to Russia and on future oil and gas purchases by Ukraine.

The BSF pact was strongly criticized by national democratic leaders, led by the leader of Rukh, National Deputy Vyacheslav Chornovil, who said a day after the signing: "Given Russia's imperialistic and aggressive tendencies vis-à-vis Crimea in general and Sevastopol in particular, which is reflected in the several declarations of the [Russian] State Duma to leave the Russian Black Sea Fleet [in Sevastopol] for 20 years is to force a pervasive and permanent atmosphere of agitation and strain, not only in Crimea, but in Ukraine."

Mr. Chornovil was referring to statements by Moscow Mayor Yurii Luzhkov and Chairman of the Nizhnyi Novgorod region Boris Nemtsov (today a vice prime minister of Russia) in January 1997 that Sevastopol belongs to Russia. Mr. Luzhkov went so far as to visit Sevastopol illegally on January 17 for the opening of an apartment building for military servicemen of Russia's Black Sea Fleet based in the city's port. While there he reiterated that the city "has been, and will continue to be, Russian."

Another event that exacerbated Ukraine-Russia relations before the big treaty was finally signed occurred four days before Mr. Luzhkov's visit. Vseukrainskie Viedomosti, a Russian-language newspaper published in Ukraine, received and published a report allegedly prepared by Russia's Vice Foreign Minister for Foreign Affairs Sergei Krylov for an aide to Russian President Yeltsin that outlined a plan to cause the impeachment of Ukraine's President Kuchma. The letter called for a coordinated effort to have President Kuchma made out to look like a puppet of Russia and to use pro-Russian contacts in Ukraine's Verkhovna Rada to move to impeach the president for serving the wishes of Ukraine's eastern neighbor.

During his two-day May visit to Ukraine to sign the Treaty on Friendship and Cooperation, Mr. Yeltsin tried to show that Russia's 350-year colonial domination over Ukraine is history. At a ceremony before the monument to the "Liberator Soldier" in Kyiv, he told the assembled, "Ukraine is an independent country, and we hold this promise sacred." He added that Russia "does not lay claim on any part of Ukraine or any of its cities."

President Kuchma had begun his busy month of May by meeting in Kyiv with Belarus' controversial president, Alyasander Lukashenka, on May 12. The two sides formally delineated their 1,200-mile common border and worked to develop a repayment schedule for a $217 million debt Belarus owes Ukraine. Mr. Lukashenka was greeted by thousands of demonstrators upon his arrival in Kyiv, who lined the highway into the city from Boryspil Airport to protest the Belarusian president's strong-arm tactics in stifling domestic opposition and freedom of the press.

Then on May 20 Poland's President Alexander Kwasniewski arrived in Kyiv, where he and President Kuchma agreed to formally set aside historical animosities and conflicts between the two neighboring countries. On May 21 they signed the Declaration on Concord and Unity, which addressed two major points of contention between the two countries in the 20th century: Akcja Wisla, in which 150,000 ethnic Ukrainians in Poland were displaced by Polish government decree, and those resisting killed; and the killing of Poles in the Volyn region of Ukraine during World War II.

The president's busy month concluded on June 2, when he traveled to Bucharest and signed a general treaty with Romania that settled territorial disputes over Serpent (Zmiinyi) Island and the Bukovyna region along the southwestern border of Ukraine.

May also provided another jewel for President Kuchma's foreign policy crown. On May 29 Ukraine and NATO achieved preliminary agreement on a special partnership charter at a meeting of NATO foreign ministers in Sintra, Portugal. The special agreement was formalized on July 9 when President Kuchma and the leaders of the 16 NATO countries signed the Charter on a Distinctive Partnership between NATO and Ukraine. The charter re-emphasized the obligation and commitments undertaken by the NATO countries and Ukraine in the U.N. Charter, the Helsinki Final Act and the Budapest Accord, in which the U.S., France, Great Britain and Russia gave Ukraine security assurances against nuclear attack. Arriving in Madrid, Spain, for the signing, President Kuchma said, "Ukraine has obtained what it wanted."

During 1997 President Kuchma also met success in Mexico, where he traveled for the first time on September 24-26. He met with Mexican President Ernesto Zedillo Ponce de Leon to discuss expanding bilateral trade and facilitating cooperation between Ukrainian and Mexican corporations. The two signed several agreements and declarations on diplomatic and economic relations.

President Kuchma was not the only one making foreign policy news in Ukraine in 1997. Minister of Foreign Affairs Hennadii Udovenko, well-known in United Nations circles because of a lengthy stay there as the Ukraine's ambassador to the U.N. before the fall of the Soviet Union and after Ukraine became independent, was elected president of the 52nd session of the General Assembly on September 16. On hand was President Kuchma, who addressed the session a week later, on September 22, asking the world not to forget about Chornobyl.

Ukraine-U.S. relations

As Ukraine and the U.S. developed the strategic partnership to which they have committed, visits between leading government figures occurred more often.

On May 16 President Kuchma traveled to Washington for the first formal gathering of the U.S.-Ukraine Binational Commission, commonly known as the Kuchma-Gore Commission. The daylong meeting, which was co-chaired by President Kuchma and U.S. Vice-President Al Gore, culminated in the two men signing a joint initiative on gas sector reform for Ukraine and a far-reaching statement on the work of the commission in the areas of foreign policy, security, trade and investment, and sustainable economic cooperation.

Five weeks later he was back, this time in New York, for a special session of the United Nations on the environment called Earth Summit+5. There he met with several world leaders, including Russian Prime Minister Chernomyrdin and Vice-President Gore.

President Kuchma was in the U.S. a fourth time on November 19 to witness the liftoff of the space shuttle Columbia at Cape Canaveral, Fla., in Ukraine's first collaborative space mission with the U.S. Aboard the flight was Ukrainian cosmonaut Col. Leonid Kadenyuk.

Afterwards, President Kuchma traveled to New York, where on November 20 he took part in a Chornobyl Pledging Conference organized by the United States as this year's chairman of the G-7 industrialized countries. The conference was attended also by Vice-President Gore, who seemed to be everywhere President Kuchma went in the U.S. in 1997. Thirteen countries pledged $36.25 million for the rebuilding of the sarcophagus encasing reactor No. 4 at the Chornobyl nuclear complex.

That sum was in addition to the $300 million that the G-7 pledged at its annual summit, this year held in Denver. Although President Kuchma did not attend the talks, Ukraine figured prominently. In a strongly worded statement, the seven member-countries called on Ukraine to tackle the challenges of economic reform and make itself more investor-friendly.

Meanwhile at the United Nations, Ukraine's Foreign Affairs Minister Udovenko criticized the pace at which the G-7 was disbursing promised aid for the closure of the Chornobyl complex.

U.S. officials also traveled to Ukraine in 1997. Two days after the signing of the special charter between NATO and Ukraine, U.S. Secretary of Defense William Cohen visited the western region of Ukraine where he took part in the closing ceremonies of joint military exercises held within the framework of the NATO Partnership for Peace program. The exercises, called Cooperative Neighbor '97, involved 1,200 troops from eight countries.

More controversial was a second series of Partnership for Peace exercises held in Ukraine on August 23-31. Sea Breeze '97, a mock sea-landing exercise by PFP countries that border the Black Sea and the U.S., whose aim was to bring humanitarian relief to the Crimean Peninsula after an earthquake in a fictitious country dubbed the "Orange Republic," elicited a strong protest from Russia, which refused to take part in them. Russia did not like the concept that the troops' fictitious mission was to quell an uprising of separatists sponsored by a neighboring state.

Special Ambassador to the CIS Richard Morningstar visited Ukraine several times. On October 22 he led the U.S. delegation in the latest round of the Kuchma-Gore Commission meetings and praised Ukraine's progress in reforms.

Less than a month later he was back, this time with Hillary Clinton, who visited Lviv during a whirlwind tour of countries of the former Soviet Union.

In Lviv, U.S. President Bill Clinton's spouse spent a busy day and a half on November 17-18 visiting historic, cultural and religious landmarks.

Politics and corruption

The year in Ukrainian domestic politics was much more turbulent than on the foreign affairs front, and much of it centered on corruption and how to clean it up. In 1997 Prime Minister Lazarenko came under strong criticism from President Kuchma and resigned after a convenient illness, only to reappear as a major critic of the presidential administration.

As problems associated with corrupt government officials, including the decision by Motorola to cancel a large contract to build a mobile phone system, became more public, President Kuchma tried damage control by coming out forcefully for an anti-corruption campaign.

On February 14, days after a meeting with World Bank Chairman James Wolfensohn, during which the banker noted the increase in corruption in Ukraine, President Kuchma fired his vice minister of transportation and minister of agriculture, and replaced the chairman of the committee on corruption and organized crime with First Vice Prime Minister Durdynets. He also hurled the first dart at his prime minister, Mr. Lazarenko, stating that he had been soft on corruption.

Then, on April 11, just after the Foreign Operations Subcommittee of the House Appropriations Committee was holding hearings on corruption in Ukraine and how it has affected foreign investment in a review of its support of foreign aid for Ukraine, Kyiv announced a "Clean Hands" anti-corruption effort.

Justice Minister Serhii Holovatyi, whom the president had charged with developing the plan, said his program would target not only the individual corrupt bureaucrats but also the heavily bureaucratized system. "How many levels of bureaucracy must a business go through to receive all the permits and licenses it requires?" asked Mr. Holovatyi when announcing the campaign.

Even then it was clear that the effort would take an extraordinary effort against a well-entrenched bureaucracy. As Mr. Holovatyi announced his ambitious program to revamp government structures and set stringent guidelines for accountability and oversight, he acknowledged that certain Cabinet ministers had done their utmost to resist changes. "Many simply do not want a battle against corruption. It does not further their own interest," said Mr. Holovatyi.

Meanwhile, after returning from a trip to Canada on June 18, Mr. Lazarenko is said to have taken ill and was hospitalized. But most political observers believe the prime minister used the cover of illness for a face-saving resignation from the government. He and his longtime ally, President Kuchma, had been at odds for several months. The president had criticized Mr. Lazarenko several times for not leading the fight against corruption more forcefully and for failing to put together a passable 1997 budget, which at the time of his resignation still had not been approved.

The president appointed First Vice Prime Minister Vasyl Durdynets the acting prime minister during Mr. Lazarenko's illness, which doctors said was thrombophlebitis. The prime minister officially resigned two weeks later, on July 1.

The impediments to the anti-corruption campaign became larger and larger, and on July 8 Mr. Holovatyi called a press conference to accuse factions of the Cabinet of Ministers of sabotaging the effort. He said he could not publicly reveal who was derailing the process, but did accuse Acting Prime Minister Durdynets for threatening him after he had criticized certain ministries for resisting the anti-corruption program during the introduction of the Clean Hands campaign. He also said government funds were not being allocated, the executive branch was not cooperating and the implementation of many measures had been delayed.

Mr. Durdynets remained acting head of government until July 16, when Valerii Pustovoitenko, formerly the minister of the Cabinet of Ministers, was named to head the government. Mr. Pustovoitenko, like his predecessor, is from Dnipropetrovsk and a confidante of the president.

Mr. Lazarenko, around whom accusations of corruption continued to swirl, quickly moved back into politics, joining the Yednist faction of the Verkhovna Rada and taking over the leadership of the Hromada Party.

On August 21 newly confirmed Prime Minister Pustovoitenko, who as minister of the Cabinet of Ministers had headed the bureaucratic organization that Mr. Holovatyi was trying to reform, replaced the justice minister with Suzanna Stanik, previously the minister of families and youth in the Lazarenko Cabinet.

But Mr. Holovatyi did not go out quietly. At a press conference on September 17 he blasted President Kuchma for saying one thing and doing another when it came to the corruption fight and economic reform. He said that even though the president had initially supported the campaign, support had become increasingly hard to find. "In June an order came from Bankivska Street (the presidential administration offices) that I should be muzzled," explained Mr. Holovatyi. He also said the president had repeatedly refused to meet with him after the program was met with resistance.

Criticism of the president's half-hearted anti-corruption effort was heard also from the international community. On December 3 a World Bank representative said the organization was not pleased with the results of a symposium on corruption it co-sponsored with Ukraine's Ministry of Justice in Kyiv on November 28-29, and would review its commitment to Ukraine's anti-corruption program.

"Ukraine must do more than express a desire to work, it must follow the action plan," said Volodymyr Omelianenko, economic development representative for the World Bank. "It depends on who is leading the effort. The committee (on the fight against organized crime and corruption headed by Mr. Durdynets) is currently working poorly; it is not serious."

Two killings of journalists in Ukraine in 1997 also appeared to be connected to the fight against corruption. Petro Shevchenko, a reporter stationed in Luhansk for the large daily newspaper Kievskie Viedomosti, was found hanged in an abandoned building near the Kyiv train station on March 14. Although Ukraine's Security Service said it was a suicide, friends and relatives said that in his last days Mr. Shevchenko had not acted like a person preparing to kill himself. Mr. Shevchenko, who was in Kyiv to collect money owed him by the newspaper, had been investigating Secret Service corruption in Luhansk.

Then, on August 11, the founding editor of Odesa's leading newspaper, Vechernaya Odesa, was shot four times during his morning walk. The procurator general of Odesa explained that "critical statements in the paper about the situation in Odesa and Odesa Oblast" may have prompted the killing. Odesa has several very active organized crime syndicates.

Economy

This was the year in that President Kuchma hoped the free fall of the economy would cease and stabilization would take place. About all that stabilized was the currency, which held its ground against the dollar until the last quarter of the year, when the currency quakes of Asia caused the hryvnia to drop some. But inflation was kept under control and remained much lower than the 25 percent rate that had been predicted. At year's end it looked as if the rate would not exceed 14 percent.

The major economic problems centered on the Verkhovna Rada, which took half the fiscal year to approve a budget chiefly because it resisted tax reform.

Vice Prime Minister for Economic Reform Viktor Pynzenyk undertook an ambitious effort in late 1996 to reform the tax structure of Ukraine. Dubbed "Economic Growth '97," the tax package consisted of a series of bills, including a value-added tax of 20 percent and the reduction of corporate and personal income taxes, reform of unemployment and disability compensation, and a debt write-off for state-owned enterprises. The effort was met by resistance in the Communist-Socialist-controlled Verkhovna Rada, which took its time reviewing the bills, a situation not helped by Prime Minister Lazarenko's tepid support for Mr. Pynzenyk's tax package, particularly his stand against tax breaks for foreign investors.

But the government did stand firm on its refusal to resubmit the budget, which had been approved in its first reading in December 1996, until the Parliament had acted on the tax bills. By March there still was no budget.

To shake-up the process and to give impetus to an economic reform program that had bogged down in fights with the Verkhovna Rada over its pace and purpose, President Kuchma replaced his ministers of finance and the economy with Ihor Mitiukov and Yuri Yekhanurov, respectively. The two had been part of a team of young, reform-oriented economists that had pushed through initial reforms in 1995.

On March 21, still with no budget and with the economy continuing its downslide, President Kuchma gave his state of the state speech, coming down hard on Prime Minister Lazarenko and on the Verkhovna Rada. He called the budget that Mr. Lazarenko's government submitted "unrealistic" and the work of the ministers "unsatisfactory." He termed the failure to pay wages and pensions an "economic crime."

He also accused the Verkhovna Rada of doing all in its power to upset the budgetary process, and said he would consider dismissing the legislative body.

The president's speech did not have the intended effect of breaking the budget logjam, and on April 2 the chief architect of economic reform, Vice Prime Minister Pynzenyk, resigned, stating that he did not feel economic reform could proceed further in the current political environment. After trying to bring his young reformer back into the government, President Kuchma accepted his resignation several days later. His replacement was Serhii Tyhypko, a young banker who is president of PryvatBank, headquartered in Dnipropetrovsk.

With only the VAT tax bill of the tax package approved by the legislature and no end in sight to the budgetary battle, President Kuchma asked the Verkhovna Rada to approve a second emergency budget based on 1996 expenditures for the term of April 1- July 1. An initial emergency budget had been approved for the January-April period.

The paralysis held until June 27. Then, with the prospect of the government shutting down after the second emergency budget expired on July 1 and with a pronouncement by the IMF that it might cancel $3 billion in promised loans if no budget was approved soon, the Cabinet of Ministers decided to resubmit the budget, even though only the VAT portion of the tax reform package had been passed, and the Verkhovna Rada quickly approved it.

Two weeks later, as many had predicted, the IMF refused to release the next tranche of its extended loan of approximately $2.8 billion, citing the Verkhovna Rada's failure to implement tax reform and to approve a budget along the guidelines that the IMF had directed, including a deficit under 5.7 percent.

The budget deficit was in part exacerbated by the government's inability to find a way to bring Ukraine's shadow economy out into the open, which meant that about half of the taxes owed by Ukrainian businessmen in 1997 were not collected.

The government also had problems bringing foreign investment dollars into Ukraine. Even with the allure of Ukraine's large market, and inexpensive and trained workforce, international firms were hesitant to enter the Ukrainian marketplace because of widespread graft and the instability of business legislation, including the withdrawal of tax subsidies to foreign investors.

On April 14 President Kuchma initiated a foreign investment council to engage government officials and leaders of major multinational corporations in an open exchange of ideas and proposals to make doing business in Ukraine easier. The council officially met for the first time on October 3, with 21 business leaders, representing the largest corporations in the world, present.

Even though economic reforms had slowed considerably from the initial push of 1995, incremental gains were still being made. Towards the end of the year, Volodymyr Lanovyi, the acting chairman of the State Property Fund, announced that the SPF would revamp its privatization program for 1998, to move away from the sale of government-owned enterprises via share vouchers (whose outcome was deemed unsatisfactory by the government), to one of direct cash payment, and would allow foreign banks to market the sale of individual enterprises. By the end of 1997, 6,500 medium- and large-scale government enterprises had been privatized, with another 2,500 slated for privatization in 1998.

Then, on December 4, the deputy chairman of the Ukrainian State Committee on Land Resources, Volodymyr Kulinych, said the liquidation of collective farms from the Soviet era was "virtually complete." He said that 8 million hectares of government land had been handed to workers' collectives and individual farmers. But he also stated that infrastructures and markets, and the legislation that would support them, had to be fully developed.

Elections

Although elections to the Verkhovna Rada will not take place until March 1998, the election pre-season began during the budgetary process, when President Kuchma repeatedly accused the Verkhovna Rada of election-year political posturing in the way it handled the tax package and the budget.

The Verkhovna Rada had haggled since the beginning of the year over a new election law to supplant the old system still in place from the Soviet era. It took 13 attempts over six months - six votes alone at the September 24 parliamentary session during which the bill was finally approved - before a new mixed electoral system was introduced. The new system partially replaces the old majoritarian system where individuals were elected from 450 electoral districts on a first-past-the-post basis. It redivides Ukraine into 225 electoral districts that will elect half the Verkhovna Rada national deputies based on the majority system and leave 225 seats to be chosen through a popular vote for parties. Parties that gain at least 4 percent of the electoral vote will divide up the seats proportionally to the percentage of the vote they get.

The push for a law, any law, was spurred by a fear that as elections neared the old law could have been rejected by the Constitutional Court as unconstitutional, which would have left too little time to pass a new law cancelling next year's elections as a result.

President Kuchma, who had said that he supported the new mixed electoral system, did an about-face. On October 14, after holding the bill for two weeks, the president sent it back to the Parliament with suggested changes attached, without which he said he would be compelled to veto the bill. Although the president said he wanted to make sure the law passed constitutional muster, political pundits suggested the president wanted to sink the law because a mixed electoral system favors political parties. The president's political base does not lie within any political party but within the local political structures that he has developed in the regions. But the Parliament quickly removed the threat of veto by approving 13 of the 15 changes.

President Kuchma went on national television a week later to sign the bill, after which he openly admitted that he had just signed a bill he didn't like. He also spent 10 minutes explaining to the nation the dangers of a Ukrainian Parliament up for election, among them the passing of certain laws that are unworkable but popular in an election season, which he called "psychotic acts."

The September 24 passage of the electoral bill for all practical purposes marked the opening bell of the election season. Political parties and organizations held conventions and picked their candidate lists in the following weeks. By November 28, 32 political parties had held conventions and received official petitions to gather the 200,000 signatures to officially qualify for the March elections. That process was completed on December 19, with 30 parties fulfilling all the requirements to field candidates in the March 1998 elections.

Copyright © The Ukrainian Weekly, December 28, 1997, No. 52, Vol. LXV

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