Political reform eludes Ukraine's leaders

By bne IntelliNews January 15, 2007

Roman Olearchyk in Kyiv -

A week is certainly a long time in Ukrainian politics. Just two days after the increasingly marginalized President Viktor Yushchenko and his nemesis Prime Minister Viktor Yanukovych pledged to put their differences aside to work together to reform the constitution and free the country from its political paralysis, supporters of the PM garnered enough votes to thwart a presidential veto and passed legislation to sharply curb Yushchenko's powers.

Yanukovych's governing coalition mustered more than the two-thirds majority required to override a veto with the support Yulia Tymoshenko, a firebrand former PM who played a big role in mustering support for Yushchenko during the 2004 presidential elections, but has since fallen out with the president after he sacked her in 2005.

The new bill, which Yushchenko plans to challenge in the Constitutional Court even though he is bound by the constitution to sign it into law, would deprive him of the power to reject Parliament's choice of prime minister and to pick the defence and foreign ministers. It would also limit presidential decrees.

The legislation represents a remarkable comeback for Yanukovych, who was the humiliated loser in the 2004 "Orange Revolution," which ultimately led to Yushchenko's election to the presidency in 2005.

@@%% /pics/1/177_YanukovychPC2.jpg ::: Viktor Yanukovych ::: LEFT %%@@

Yushchenko agreed to nominate his archrival as PM last year in an attempt to end four months of political paralysis, after securing safeguards for his pro-Western agenda. A carefully worded document signed at the time reaffirmed the country's existing ambitions to join the EU, NATO and the WTO.

The deal was billed as a move that would bring stability to Ukraine's divided politics. But it has been unable to solve the messy constitutional arrangements agreed after the Orange Revolution, which envisioned many key presidential powers shifting to parliament - ostensibly to prevent a repeat of authoritarian rule, but which many suspect were intended solely to transfer power into the hands of influential tycoons with seats in parliament.

Bohdan Futey, a US judge who advised Ukraine when it developed its constitution in the mid-1990s, says that Ukraine has taken a "significant step backwards."

"The political reform and its aftermath have created a legal chaos and forced political confrontation," Futey says.

Which Viktor is in charge?

The lack of clear rules has marginalized Yushchenko and resulted in a de facto increase in the power of Yanukovych. Foreign diplomats say they are unsure which Viktor is in charge.

Since returning to power, Yanukovych has played a game of cat and mouse, systematically pledging to support Yushchenko's plans to join NATO, the EU and WTO, while simultaneously working to undermine them.

Yanukovych, for whom reviving relations with Russia were a priority, has methodically wrested authority away from Yushchenko. During his first months in power, he gradually squeezed members of Yushchenko's party out of his governing coalition. In recent months, Yanukovych's coalition has ejected Yushchenko's last allies in government from the interior and foreign ministries.

The disputes reached a farcical level when the Yushchenko-appointed foreign minister, Borys Tarasyuk, was physically barred from attending a Cabinet meeting after parliament sacked him in a controversial decision at the end of last year. Yushchenko, who claims the constitution gives him control over foreign policy, has refused to recognize parliament's ouster of Tarasyuk.

Yanukovych's government has also taken some steps backwards from market reforms, imposing restrictions on grain exports that have squeezed the profits out of multinational grain traders operating on Ukraine's market. The controversial restrictions were intended to beef up state grain reserves and to keep bread prices under control. But they also hurt domestic farmers, preventing them from receiving market prices for grain.

Stability is key to growth

While publicly expressing his disappointment with Yanukovych's government, Yushchenko has defended his decision to appoint the villain of the Orange Revolution as prime minister. He argued it was necessary to allow his foe a chance to change. He also recognized Yanukovych's strong voter support as a means of maintaining stability, itself key for sustaining impressive economic growth.

Ukraine's economy first surged in 2000 under the premiership of Yushchenko, posting a GDP growth rate of 5.9% and signalling an end to years of the hyperinflation that followed the break-up of the Soviet Union.

The economic growth rate grew steadily before peaking in 2004 at 12%. Growth rates reached a low of 2.6% last year just after Yushchenko was propelled into the presidency on a wave of popular support. But the economy has since picked up, finishing 2006 above 6%.

Viktor Skarshevsky, an advisor at the Economy Ministry, said the fact Ukraine's economy has grown despite recurrent political crises, three tense election campaigns and six changes in government shows the economy is playing according to the tune of demand for its principal exports, namely steel, chemicals and grain, as well as rising domestic consumption, rather than internal politics.

"In general, if prices for major Ukrainian exports rise – namely world steel prices – Ukraine's export-oriented economy should grow sharply," says Skarshevsky, adding that rising domestic consumption has played a larger role in driving growth recently.

Foreign investment has also been on the rise. Andrew Mac, a partner in Kyiv's Magister & Partners law firm, said the political uncertainty has not discouraged investors from entering the market.

"There has been a flurry of investment activity across all sectors of the economy. Foreign direct investments into virtually all sectors of Ukraine's economy. European banks, insurance companies and real estate developers, private equity firms have made significant investments and are contemplating further investments ever since the Orange Revolution" Mac says.

The Tymoshenko factor

Karasiov said that efforts to keep the odd tandem of Yushchenko and Yanukovych together are intended to prevent the rise of the populist Yulia Tymoshenko, who has her eye on the presidential vote scheduled for 2009.

Public support for Tymoshenko, who mustered just over 20% of the vote in the March 2006 parliamentary polls, has gradually risen. By contrast, recent polls show that public support for Yushchenko has sunk below 7%, while Yanukovych's star has waned in light of high inflation and painful tariff hikes on public utilities.

Tymoshenko's camp is calling for repeat parliamentary elections, wedging Yushchenko and Yanukovych deeper into an uncomfortable partnership. Yanukovych's Regions party would likely repeat its strong showing in another election in the near future, but repeat coalition talks that follow would not guarantee Yanukovych the prime minister's seat. Meanwhile, Yushchenko's Our Ukraine party is not rushing towards new elections because of sinking public support.

If Yushchenko were to go head-to-head against Yanukovych by teaming up again with Tymoshenko, he could face strong pressure for new presidential elections from the governing coalition of Yanukovych. The prospect of a presidential vote could also be tempting for Tymoshenko.

"For Yushchenko, this uneasy partnership with Yanukovych is a chance to buy time, offering hope that he can boost his ratings again ahead of a repeat presidential bid," Karasiov says.

But the awkward partnership designed as a counterbalance to Tymoshenko has the two Viktors locked in a fight that neither side has enough momentum to win, Karasiov adds.

The result is no new elections, but no clear reform or foreign policy either.

"It prevents fast moves in any direction, be it westward towards the Euro-Atlantic community or eastern integration. At the moment, Ukraine is not flowing in one or the other direction; it is drifting upon the waves of geopolitical currents with roots in Russia, the United States and the European Union," Karasiov says.

The Russian connection

Many Western diplomats are confronting the reality that Yushchenko's victory in the Orange revolution didn't offer enough momentum to earn him an undisputed mandate for his speedy EU integration drive. And the loss of many key presidential powers to Parliament left him incapable of dealing with the corruption inherited from the regime of his authoritarian predecessor.

The Orange Revolution also gave the false impression that Ukraine was on the verge of breaking free from Russia's influence completely. More than two years later, the country is even more economically dependent on Kremlin-controlled energy companies for oil and gas imports.

Tymoshenko has established a reputation for fighting corruption, dubbing energy trading intermediaries such as the Swiss-registered RosUkrEnergo, as corrupt intermediaries and risks to the country's national security. Viewed by many as arm of Russia's Gazprom, the company monopolizes the supply of gas to Ukraine.

Yulia Tymoshenko

Tymoshenko has claimed her aggressive attempts to fight corruption in the energy sector triggered Yushchenko to fire her. She has not, however, toned down her call to squeeze intermediaries, such as RosUkrEnergo, from the multi-billion business of supplying gas to Ukraine. She has dubbed these companies as tools of the Russians and a risk to national security.

Since her firing, RosUkrEnergo, owned by Russia's Gazprom and two Ukrainian businessmen, has strengthened its grip over the Ukrainian market, taking part in a joint venture with Ukraine's state energy company, Naftogaz. The joint venture nearly monopolizes gas supplies to Ukraine's industry, opening the door for Gazprom to gain an interest on Ukraine's vast domestic gas market.

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