Can Ukraine's government wield new powers wisely?

By bne IntelliNews July 20, 2010

James Marson in Kyiv -

On July 14, the Ukrainian government hiked the gas price for households and power stations by 50% in order to secure more International Monetary Fund money. On the same day, lawmakers from the ruling coalition submitted a request to the Constitutional Court to check the legality of changes made to Ukraine's constitution in 2004, the annulment of which could lead to greater powers for President Viktor Yanukovych.

That one day encapsulated the two main strivings of the ruling authorities: an effort to push on with economic reform and a desire to consolidate political power. The question is how compatible these are - will the increased authority be used to push through crucial overhauls, or to line the pockets of Yanukovych's backers and silence his opponents?

The decision to raise gas prices has been hailed as a step toward sorting out the parlous finances of state energy company Naftogaz, which for years has been lumped with providing large energy subsidies to consumers and so acted as a constant drag on the state budget. The tough decision was taken with a clear aim - to secure the thumbs-up for a $14.9bn, two-and-a-half-year lending package from the IMF that was provisionally agreed earlier in July. The government had already cut the budget deficit from 5.3% to 4.99% to satisfy the Washington-based lender, as well as passing legislation to strengthen the independence of the central bank, which has been hit by allegations of corruption. The reform to gas prices is viewed by analysts as ticking the last box for approval of the loan by the IMF's board at the end of July.

The combination of the reforms and the IMF cash should help to stabilize Ukraine's economy, which plunged an eye-watering 15% last year. "There is no alternative," said Prime Minister Mykola Azarov at a government meeting. "In talks with the IMF, the government stood up for its vision of a path out of the crisis and measures of social protection for the population. But the creditor always has a stronger position than a weakened country that needs support."

In other words, the IMF has Ukraine on a short leash and is pushing for overhauls ignored during the good times of the mid-2000s.

Through the meat slicer

Analysts expect the IMF loan tranches to be "salami sliced" - in other words, to be handed out in small instalments dependent on concrete reforms. This will be easier to do than last year, when Ukraine's economy was close to the edge of the cliff and the government managed to squeeze billions out of the IMF while pushing through few of the reforms agreed on, including the gas price rise.

But analysts still say credit must be given to the current government for grasping the nettle, particularly ahead of local elections in October. Olena Bilan, an analyst at Dragon Capital in Kyiv, says the decision was a "pleasant surprise," given the likely hit to the ruling Party of Regions' approval ratings. "This may indicate Yanukovych's administration feels confident enough in terms of its grip on power, which bodes well for further reform progress," she says.

Tightening the grip on power has been the main political agenda of Yanukovych and his team since his inauguration in February. After using a constitutionally questionable method to form a parliamentary majority in March, he and his allies are making a concerted push to secure more power for the president. The focus is on annulling changes to the constitution made in the heat of the Orange Revolution in 2004, which weakened the president's authority. A law to call a referendum on the issue was defeated in early July, indicating unease about the plan not only among the opposition, but also some in the ruling coalition. Now some lawmakers have asked the Constitutional Court to examine the constitutionality of the 2004 changes.

Critics say reverting to a presidential system would turn Yanukovych into a "Kuchma Mark-2" - a second coming of Yanukovych's authoritarian political patron, former president Leonid Kuchma. But others argue a solution is needed to the current unclear distribution of authority that contributed to the political deadlock under the Orange leaders-turned-enemies of ex-president Viktor Yushchenko and ex-PM Yulia Tymoshenko, which paralyzed policymaking. "The inherent conflict of the current constitution paralyzes power," says Peter Vanhecke, CEO of Renaissance Capital Ukraine. "The alternative [to consolidated power] of chaos carries bigger risks."

Serhiy Lyovochkin, Yanukovych's chief of staff, says strengthening the presidency would enable Yanukovych to pursue unpopular, but necessary reforms. "[Political and economic] reforms could happen more effectively and faster if he [the president] had more authority," he suggests.

However, the sway that Yanukovych and his allies have over all branches of power - from the security service to the judiciary - already gives them enormous scope for action. The question is how they use it.

Opponents and civil rights activists have accused the administration of trying to muzzle dissent and noted a worrying rise in media censorship. Two allies of opposition leader Tymoshenko were detained as part of a battle over 11bn cubic metres of gas acquired by Naftogaz on her watch in 2009 from gas middleman RosUkrEnergo - part-owned by Dmytro Firtash, widely seen as one of Yanukovych's main backers.

It's unclear how far the ruling coalition is prepared to go on the overhauls. Will it cancel subsidies on energy and transportation costs that favour Yanukovych's big industrial backers? The much-trumpeted proposed new tax code was also heavily criticized by the business community as favouring big business - Yanukovych's main supporters - and not enough for small business, which is overwhelmed by taxes. PricewaterhouseCoopers said the code's message was "the taxpayer is always wrong and guilty." But the government agreed to hear the business community's views, and put off the second reading of the code until parliament's summer recess ends in September. "I'm prepared to give them the benefit of the doubt at the moment," says Renaissance Capital's Vanhecke.

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