NewsLink V9, N2, Winter 2005

Beyond the Orange Revolution:
Letter from Kiev

It is not often in the annals of history that peaceful revolutions evoke peaceful transitions. But in December in Kiev, Ukraine in the midst of electoral turmoil, the atmosphere did not fit the definition of a wide-ranging revolution. The waves of orange, the choice color of reformers in the streets, became etched in memory.

Where three years earlier protestors clashed with police, the Orange Revolution remained benevolent in the aftermath of a corrupt election won by Moscow-backed Victor Yanukovich.

The once unpopular police guarding the presidential compound, convinced that their fellow countrymen meant no harm, soon allowed their shields to be draped in orange flowers and ribbons. Journalists also became a part of the revolution by revolting against government control and strict censorship on the part of both the government and the owners of private media. December 2004 was a thrilling time to be in this renowned city and I, as a Ukrainian native, consider myself privileged to have been there to experience it.

Now that the most dramatic days of the Orange Revolution in Ukraine are over, new President Viktor Yuschenko, who represents "Our Ukraine," the largest faction in the Ukrainian parliament, having found himself the ultimate victor of a free and fair election, today faces a more challenging task Ð meeting the expectations of the people who fought hard to change their country.

Thus far those expectations are high. Most of the forces driving the Orange Revolution gravitated around political issues such as corruption, but now Yuschenko must address economic issues. To be sure, the people revolted against a corrupt system where bribes remain rampant and where favored families and clans control factories and plants. Failed privatization schemes also drove the people to revolt.

The first actions of the newly elected president prove that he does not intend to play cat and mouse with either Ukraine's partners, or with the people. By declaring he would like Ukraine to join the European Union, Yuschenko is sending a message to Russian President Vladimir Putin that the Russian republic is not a priority.
When it comes to finding Ukraine's place in the world, Yuschenko is looking to the West. Specifically he is pursuing political and economic integration into the European Union. He expects Ukraine to be a member nation within the next decade. Yuschenko strongly maintains that by looking westward rather than to the north, he will be able to increase UkraineÕs living standards and dramatically improve economic conditions in the country, all while gaining access to one of the largest marketplaces in the world.

"I have a clear plan of transformations in our country for the next five years and a team that can carry it out,"President Yuschenko said boldly in December. "I will not speak about its details now; I will only say that it is based on the realization of our strategic foreign policy goal which is membership in the European Union."

At the World Economic Forum in Davos, Switzerland, Yuschenko once again called for integration into the EU. But officials downplayed talk of membership insisting that Ukraine for the time being would be best observed as part of the EU's "neighborhood policy."

Significant improvement in economic conditions is what people expect from the new president. In his program, titled "Ten steps towards people,"Yuschenko promises to create 5 million jobs over 5 years (A huge task since the entire population of Ukraine is 48 million). He also plans to increase investment tenfold, reduce tax rates, increase budget revenues, prioritize social programs, increase benefits and pensions, eliminate wage arrears, fight corruption, reduce government apparatus, reduce the underground economy, improve public safety and national defense. Yuschenko also wants Ukraine to join the World Trade Organization. These are serious ambitions.

Ukraine is rich in natural resources that might make it attractive to investors. The country's major sources of income Ð base metals, metals processing and petroleum — comprise 50% of exports. These high value exports have been driving the respectable economic growth in the country. Last year's real GDP grew at a twelve percent rate. Moreover the nation is a fertile source for high technology. Ukraine benefits from an educated labor force. As it grows, UkraineÕs industrial base will need to encourage trade with EU and the U.S. so that it can upgrade its infrastructure. However, roadblocks remain. President Bush's protectionist steel measures hurt trade and growing pressures to protect textile jobs in the U.S. have also stunted growth. Transportation logistics also limit opportunities. Moving exports is expensive which gives the EU an advantage over the U.S. in any future trade pacts. Massachusetts' trade with Ukraine amounts to approximately $3 million per year mostly computers and electronics according to the U.S. International Trade Association.

One of the biggest problems is the nation's tax system. Tax evasion is rampant. Incomes are underreported, despite a nominal flat tax rate of 13%. Much of the nation's income is "off the books." Official statistics cite that average annual household income in Ukraine is $1,608, a highly unrealistic measure. It's clear that Yuschenko, hardly a market liberal, will have to restore trust in the institutions needed to nurture economic growth.

A wide spectrum of changes makes his task challenging even without additional obstacles. But there are three major forces that will make it even harder to achieve his goals: the domestic opposition, Russia and the European Union.

Domestic opposition: Parliamentary elections in Ukraine are scheduled for the spring of 2006. Very soon the same forces that contested presidential elections in the end of 2004 will find themselves bogged down in a tough fight for a majority in the Ukrainian parliament. This battle becomes ever more important with the compromise constitutional changes that will see Ukraine transform into a parliamentary-presidential republic. The role of the parliament and the prime minister will increase (the government will be appointed by the parliament, not by the president) and the president will become weak without sufficient support in the parliament.

A majority in the parliament is also crucial for passage of the necessary laws that will lay the foundation for the reforms.
Russia: Ukraine does not want to lose and will not lose its ties with Russia. Despite noticeable cooling in the communication of political elites, Russia and Ukraine will remain strategic partners in the foreseeable future because of strong cultural, historical and economic links. Despite the media emphasis on ethnic differences, the Ukrainians, who have relatives and friends in Russia, do not dislike their neighbors to the north. Yuschenko's recent trip to Moscow, his first port of call, underscores this relationship. For all the talk about extending trade, Russia remains a major trading partner. About 41% of Ukraine's imports come from Russia with 18% of the country's exports go to Russia.

Thus far, the new leadership has been successful in distancing itself from Moscow's influence and there are signs that Ukraine will be a much tougher negotiator in the future. It is not clear, however, whether Ukraine will achieve significant revision of the preliminary Common Economic Space (CES) a regional agreement between Russia, Ukraine, Belarus and Kazakhstan, but Yuschenko has already stated that Ukraine wants to give the agreement another look. Russia, on the other hand, has no interest in losing its grip on Ukraine and will use all it has in store to ensure that Ukraine's road to the EU is not a cakewalk.

EU: Finally, EU's own rules, regulations and especially interests are another hurdle on Yuschenko's path to prosperity. It is hard to expect that EU leading countries would be happy to allow easy access to their markets. Among others, aircraft and steel industries are at the center of attention. European Commission has already stated that Ukraine's desire to join the EU may be premature.

Although Fitch has upgraded sovereign credit rating of Ukraine and investment companies are already starting to feel increased interest in Ukraine's assets, this interest can abate with time when investors take enough time to estimate real value of these assets, the risks and their gains compared to other emerging markets. To some extent the euphoria that dominated on the streets of Kiev in the end of 2004 has been transferred to foreign investors who often buy without sufficient knowledge.

Without a doubt, Yuschenko wants to improve the lives of many in his country. And, there is no question about his determination to lead Ukraine into the EU with its market of millions. But that progress may be slow in part because of the EU appears to be in no rush to help Ukraine realize her aspirations. It also depends greatly on two other players; both oppositional. Russia and the factions favoring strong ties to the largest remnant of the Soviet Union, may place even more obstacles before Yuschenko.

Now that the new and young government is in place, the eyes of the participants and the spectators of the revolution are on the new regime. The experience of the early 90's, when high hopes were pinned on Ukraine's independence, makes most people cautious. Though, you can see more smiling faces on the streets of Kiev today than just a few months ago. From my perspective, the main lesson of the December events is that the people have finally understood that no one has the right to ignore their right of choice. If this government does not meet their expectations, the people will not allow themsevles to be fooled any more.

Vadym Slobodyanyuk is a 2001 graduate of the Masters of Science in International Economics program at Suffolk University. He is co-author with Jonathan Haughton of BHI's State Competitiveness Report 2001. A consultant to BHI, Slobodyanyuk writes from the Darnytskyy district of Kiev, Ukraine.