KYIV BLOG: Whose reform is it anyway?

By bne IntelliNews August 31, 2010

James Marson in Kyiv -

It was to be the new government's flagship overhaul that would demonstrate to foreign and domestic investors that Ukraine was serious about reforming its limping economy overburdened by taxes and red tape. But the draft tax code has now become a political hot potato after the business community slammed the first version as oppressive and choking for small businesses, and the second as only a slight improvement.

Deputy Prime Minister Serhiy Tihipko, who was supposed to be in charge of the project, said in August that he had a separate, competing version to the latest draft, apparently produced by the Finance Ministry and State Tax Administration, before backing down and saying there was just one version. The president's top economic aide says he won't sign it until his 17 pages of changes are taken into account.

The impression is that lots of cooks have produced a pretty weak broth that provides no relief for small businesses struggling under the jackboot of officialdom. Voting on the document was put off over parliament's summer recess as the authorities again went back to the drawing board.

The refomer

The struggle over the draft tax code is part of a broader battle to be recognized as the "reformer" ahead of local elections in October.

Deputy PM Tihipko seems to be on a mission to demonstrate himself a tough economic liberal, blocked from effective work by the other members of the coalition. He is leader of the Strong Ukraine party, and was handed a role in government after scoring third place in the presidential election in January.

He gave a characteristic robust press conference earlier in August shortly after the International Monetary Fund (IMF) had made public the tough measures that Ukraine must take to receive $15bn in loans. "I am not afraid of taking the blame, I do not fear responsibility. I am afraid of failing as a politician and being unable to do my job. I fear becoming just a populist," said Ukraine's point man on IMF negotiations.

The controversial IMF-backed overhauls include a 50% rise in household gas prices every six months until they are equal to the import price and a gradual increase in women's retirement age over the next five years.

Populism has long been the only game in town among Ukrainian politicians, but Tihipko clearly believes he is on to something. The same anti-populist mantra brought him 13% - and third place - in the first round presidential vote. A recent poll by the Razumkov Centre shows that he has turned this score into a similar level of support for his party. Former PM and now opposition leader Yulia Tymoshenko, meanwhile, is haemorrhaging support, down from 25% to 14%. President Yanukovych's Party of Regions is also down to 28% from the 35% he received in the first round.

Others have also laid claim to the reformist hat. Economy Minister Vasyl Tsushko recently praised Yanukovych and Azarov as the country's true reformers, even comparing the latter, curiously, to Margaret Thatcher.

Their main reform document - put together by Iryna Akimova, deputy head of the presidential administration, and consulting firm McKinsey - is an impressive tome collecting all the problems and some potential solutions to fix the country's spluttering economy. But it contains no deadlines or priorities, nor does it delegate responsibility for implementation of the proposed overhauls.

No surprise, then, that after six months in power, we have seen no major reforms, save the gas price increase. The inertia of the new government is in part down to overkill: There are two different committees for economic reforms, alongside Tihipko, the deputy premier for economic reforms.

They have also been busy boosting their own power, ostensibly to put themselves in a position to carry out their programme. Yanukovych said on August 24 that a stronger presidency was needed to push through changes.

But the public, so far, has been decidedly unimpressed, as shown by the latest Razumkov polls. In May, 43% thought the country was going in the right direction, and 33% in the wrong one. Now only 26% agree with the country's path, with 50% against. That's a much quicker drop than over the same period following the Orange Revolution.

Personal approval ratings for Yanukovych and Prime Minister Mykola Azarov have also plunged as bombastic rhetoric has given way to a feeling of more of the same. As former Russian PM and ambassador to Ukraine Viktor Chernomyrdin once said: "We wanted the best, but it turned out as always."

Which begs the question: Is there any substance behind Tihipko's rhetoric?

Mixed legacy

His tenure as deputy premier in charge of economic reforms has hardly been a tale of successes, in particular the much maligned draft tax code. He can't evade all responsibility for the lack of serious reform, although he can quite plausibly that he is but one man in a hostile sea of conservatism.

That sea, however, is not all that unfamiliar. He was, after all, Yanukovych's campaign manager during the scandalous 2004 presidential election that led to the Orange Revolution, and some now accuse him of still being effectively part of the Regions team. Others suggest he is about to jump ship into opposition.

Whatever the case, the point is perhaps less that Tihipko is Ukraine's knight in shining armour who will push through much-needed overhauls in areas such as the economy and the state administration, and more that he has realised these are not necessarily a vote killer, and potentially a vote winner.

And his continued popularity indicates that he may have a crucial role in whether or not things turn out "as always."

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