More trouble ahead

Endless political infighting and the economy in the doldrums - as if the gas dispute weren't bad enough, Ukraine is lurching from one crisis to another

Senior Policy Fellow


This piece originally appeared in the International Herald Tribune

What is up with Ukraine?
As if the January gas dispute with Russia was not bad enough, the
country is lurching from one crisis to another. Political infighting is
endless. The Russian ambassador, former Prime Minister Viktor Chernomyrdin,
provoked a diplomatic storm by saying Ukraine’s leaders were “at
each other like dogs.”

Prime Minister Yulia Tymoshenko and President Viktor Yushchenko have accused
each other of treason – in the president’s case, ordering the diplomatic
service to spread the calumny abroad. There is talk of emergency rule, of new
elections, of impeachment and criminal cases planned against either side.

Meanwhile, the economy is a mess. The annualized rate for the decline of
industrial output in January was a staggering 34.1 percent. With the collapse
in world steel prices, the country’s steel production is down 46 percent – and
steel used to make up 40 percent of Ukrainian exports. Overall GDP may fall by
as much as 12 percent in 2009. The currency has slumped by over 40 percent
against the dollar; the stock market is down over 80 percent. The finance
minister resigned in January; an emergency IMF loan of $16.4 billion agreed to
in October is now in danger.

Parliament has twice censured Volodymyr Stelmakh, the chairman of the
National Bank, for both incompetence and alleged corruption, but is unable to
remove him so long as the president extends his protection.

There are mutterings of default. Ukraine’s foreign exchange reserves
are down from $38.1 billion to $28.8 billion: Government and government-secured
debt is manageable, but the corporate sector is thought to owe over $40
billion. Unlike Russia,
where the oligarchs have fought over handouts, Ukraine does not have the funds for
too many bailouts. Several major corporate bankruptcies are likely this year,
especially in the steel sector.

So is there a way out of this mess? Few are sanguine. Germany’s foreign minister, Frank-Walter
Steinmeier, has publicly expressed his exasperation at the “complete
deadlock” in Ukraine,
saying “we haven’t got an answer to everything.” A recent report by
the former U.S. ambassador,
Steven Pifer, for the Council on Foreign Relations asserts that the “best
case” scenario for 2009 “is that Ukraine muddles through without
serious crisis.”

The simple truth is that Ukrainian politics is a brutal contact sport.
Sometimes Ukrainian politicians need to fight – and fight hard. And much of
their ceaseless struggle is constructive. As part of the deal to end the gas
crisis, Tymoshenko froze out the controversial company RosUkrEnergo, which has
earned mammoth profits for its unclear role in aiding gas transit. But this was
only the first bout. Tymoshenko is now locked in a bitter battle with the
company’s main Ukrainian owner, Dmytro Firtash.

Tymoshenko agreed that RosUkrEnergo’s debt to Gazprom would be paid by its
rival Naftohaz Ukrainy, with advance transit payments from Gazprom. So in
effect RosUkrEnergo now owes Naftohaz money. The customs and security services
have been dragged into a fight over who owns 11 billion cubic meters of gas in
storage that Natfohaz has claimed from RosUkrEnergo. The disputed gas is worth
$1.7 billion.

Firtash, who supports both the president and the opposition Party of
Regions, allegedly responded by demanding a parliamentary vote of no-confidence
against the government, which fell 22 votes short. As a result, the Party of
Regions, which is traditionally financed by steel barons, is split, and
Tymoshenko is constitutionally safe from further censure until next autumn. She
has also alleged that Firtash, along with other disillusioned businessmen, is
sponsoring Ukraine’s
fastest-rising politician, the former parliamentary speaker Arseniy Yatsenyuk,
and his new organization “Front for Change.”

Yatsenyuk will only reach the minimum age to stand for president – 35 – in
May. But one recent poll showed him closing fast on 11.8 percent, compared to
24.2 percent for the Party of Regions leader, Viktor Yanukovych, and 15.3
percent for Tymoshenko. Yushchenko scored 3 percent.

The shake-out among the Ukrainian oligarchs is a reason to hope that the
years of deadlock since the Orange Revolution may be finally broken. Previous
crises have led to bursts of reform. A “big bang” of simultaneous
presidential and parliamentary elections, plus a referendum on constitutional
reform, could reboot the political system. Or reformers could rely on
Tymoshenko overcoming her past predilection for populism. But she will have to
fight hard to get back in front in the polls. Ukraine can expect more trouble to
come.

Andrew Wilson is
senior policy fellow at the European Council on
Foreign Relations.

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The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of its individual authors.

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