Business Appears Calm Over Tymoshenko As PM

KIEV, Ukraine -- Following the signing of a coalition agreement between the three parliamentary Orange factions on June 22, Yulia Tymoshenko, the femme fatale of Ukrainian politics, looks set to regain her old job as prime minister.

Femme fatale Yulia Tymoshenko

Although reviews are mixed on Tymoshenko’s first stint as premier in 2005, there seems to be a general consensus among observers that her return won’t mean more instability for the country’s economy.

Tymoshenko, a close ally of President Viktor Yushchenko during the 2004 Orange Revolution that brought him to power, was sacked by Yushchenko in September 2005 over what he called “serious problems” with her management of the economy.

In particular, Tymoshenko was blamed at home and abroad in the summer of 2005 for sharp rises in the prices Ukrainians paid for gasoline, sugar and meat. The fiery female politician was also widely accused of scaring off much sought foreign investors with threats to repossess facilities privatized in questionable state tenders.

And more recently, some have questioned her staunch opposition to a controversial gas deal signed in January by the current government and Russian gas giant Gazprom, which doubled the price Ukraine pays for its gas imports. The fear is that cancellation of the deal could spark an energy war with Moscow.

Now as Tymoshenko’s BYuT faction, together with the pro-presidential Our Ukraine and the Socialists, which together make up the new Orange coalition, drag out talks over who will get what position in the next government and how they will be appointed – a process which in itself has done nothing to improve Ukraine’s economic outlook – business and political players don’t appear to be frightened by a second Tymoshenko premiership.

Jorge Intriago, a partner at PricewaterhouseCoopers, one of the big four international accounting and audit firms, believes Tymoshenko has grown as a politician since 2005.

“I think she is more experienced this time around. She is very intelligent. I’m sure she has learned from her previous mistakes and how to handle the same office better,” he said.

According to Intriago, the investment climate will depend on the government’s ability to speed up the pace of reforms while maintaining benefits for business already in place – for example the privileged economic zones that Tymoshenko abolished to root out tax avoidance schemes by local businessmen.

But like many, Intriago was concerned by Tymoshenko’s 2005 statements, which seemed to leave the door open for the state to confiscate industrial facilities privatized under former President Leonid Kuchma.

Although Tymoshenko’s statement’s were in line with promises made by her Orange allies during the 2004 revolution, and she called for investigations rather than direct confiscations, the fear of the business community was that Ukraine’s legal system was incapable or unwilling to handle such matters with due fairness and transparency.

“If the government would have explained clearly which criteria were followed to establish the list of enterprises to be re-privatized, the procedure of re-privatization, and the compensation to existing owners, we would have had something to debate,” said Intriago.

Serhiy Teryokhin, former minister of economy in Tymoshenko’s government and currently a member of her BYuT faction in parliament, dismisses suggestions that Tymoshenko’s short-lived policies might have hurt the Ukrainian economy.

“Any revolution creates additional risks for investment, especially political risks. That’s why the investment decline in 2005 couldn’t be avoided and Tymoshenko has nothing to do with that,” he said.

“Frankly speaking, in the first quarter of 2006, there was four times more foreign investment in the economy in comparison to the same quarter of 2005,” he added.

Regarding possible repossession of former state property, Teryokhin said, “Tymoshenko never talked about re-privatization but about re-appraisals.”

According to the former minister of economy, the idea was to find out the real value of enterprises that had been sold under less than transparent circumstances and then offer the current owner the option of paying the difference.

Regarding Tymoshenko’s attempts to control rising inflation on things like meat, sugar and gasoline by using administrative caps, Teryokhin said these goods are monopolies and their prices aren’t established by the market anyway.

“The government has a right to establish prices in monopolies, which are not markets anymore,” according to Teryokhin.

PricewaterhouseCooper’s Intriago played down the significance of Tymoshenko’s 2005 price caps, too.

“The price controls weren’t a general policy. I believe they were exceptions, and I think business people have the same perception,” he said.

Teryokhin also dismisses concerns about possible spoiled trade relations with Russia, on which Ukraine is heavily dependent for gas and oil imports.

“Ukraine is as dependant on Russian gas as much as Russia is dependant on Ukraine’s gas transportation system, which runs 80 percent of it to Europe,” he said.

Thus, according to the ByUT deputy, future talks between the Ukrainian government and Russian company Gazprom should be on a parity basis, rather than a dictation of terms from Moscow.

“There will be no crisis following a gas agreement review,” he assured.

Oleksandr Paskhaver, director of the Center for Economic Development and an advisor to President Viktor Yushchenko, agrees.

“Tymoshenko understands the senselessness of a war with Russia, so she will start a long-term political game to improve the gas deal step by step,” he said.

Like Teryokhin and Intriago, Paskhaver is also not worried about the economic ramifications of a Tymoshenko government, but not because of his unwavering faith in her.

“First of all, the atmosphere is no longer revolutionary, and radical actions aren’t supported anymore. Second, the coalition agreement includes enough institutional checks and balances, which won’t allow unpredictable emotional decisions,” he said.

But like other supporters of President Yushchenko, Paskhaver is critical of Tymoshenko’s policy in 2005; for example, her calls for so-called re-appraisals.

“If somebody takes away your property, for example, an apartment, re-assesses it and suggests that you to buy it for a new price or lose it, you will call this process re-privatization, not just a re-appraisal,” he said.

“Tymoshenko will try to continue re-privatization as a political process, but, again, the coalition checks and balances will be a technical check,” he added.

According to Tomas Fiala, managing director of the investment and brokerage house Dragon Capital, a state review of past shady privations isn’t bad for investment in itself, but “it looked like she wanted to punish her opponents.”

“In 2005, Tymoshenko was oriented toward the parliamentary elections of 2006. She made a lot of populist decisions, like increasing salaries and pensions and setting up price controls,” he said, adding that, “this time she will be pragmatic. There is some time before the next elections.”

Fiala pointed out, however, that the decrease in economic growth noted in 2005 “wasn’t just Tymoshenko’s fault.”

According to Concorde Capital, another Kyiv-based investment firm, in 2005 real GDP fell from 6.5 percent to -2.7 percent by the end of the year.

In January 2006, Ukraine started with real GDP of 0.9 percent, which continued to increase up to 4 percent in June and is expected to reach 8.5 percent in August this year.

Fiala said this economic upturn can be attributed to Tymoshenko’s policy, the effects of which were subject to a delay of several months.

Concorde reported that during the first three quarters of 2005 the amount of direct foreign direct investment received by Ukraine was on the decline until the state’s re-privatization of the steel plant Kryvorizhstal. The sale earned the state a record-breaking $4.8 billion.

Through court proceedings in 2005, the Tymoshenko government managed to nationalize the 93 percent share in Kryvorizhstal that was sold in 2004 to companies controlled by tycoons Rinat Akhmetov and Viktor Pinchuk. The latter is former President Leonid Kuchma’s son-in-law.

Companies controlled by Pinchuk and Akhmetov acquired the mill for $800 million after bids nearly double in size were disqualified due to controversial sale conditions.

As for what lies ahead for Ukraine’s economy, Tymoshenko is likely to play a key but not necessarily decisive role.

Talks with Gazprom will be in the forefront when parliament finally picks a government and both get down to work.

“Now there are two main concerns for investors,” said Fiala, “the first is when the parliament and government will actually start to work, and the second is how much the price Ukraine pays for its gas will change.”

“Negotiations will be very tough. Russia doesn’t have any intention of changing the agreement, while Tymoshenko does …certainly there could be a crisis,” said Fiala.

In addition to Russian gas moguls, Tymoshenko also faces hostility from her new coalition partners, the president’s Our Ukraine party.

“There are two possible options, either Tymoshenko will adhere to the coalition obligations and will stay for years, or she will break the coalition restrictions and be fired soon,” said presidential advisor Paskhaver.

Source: Kyiv Post

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