Stranglehold

KIEV, Ukraine -- The European Union's top official in Ukraine this week dropped diplomatic doublespeak and nuance and said what he and a lot of others really think about what's wrong with the nation.

A woman begs on a street in downtown Kiev. Nearly 18 years after the collapse of the Soviet Union, Ukraine’s economy and government are still controlled by a small number of billionaire industrialists, while many of its citizens live in misery.

The European Union’s top official in Ukraine this week dropped diplomatic doublespeak and nuance and said what he and a lot of others really think about what’s wrong with the nation.

“Corruption, red tape, administrative obstacles of every kind – these are only things that serve the interests of those who today control the economy because they do not want competition. They are allergic to competition,” Jose Manuel Pinto Teixeira of Portugal told journalists on Nov. 30. “The vast majority of Ukrainians cannot have employment, cannot have decent salaries, do not have a decent social system, because the country today is in many aspects like 20 years ago.”

Teixeira’s comments came ahead of the Ukraine-European Union summit in Kyiv on Dec. 4 and against a backdrop of the nation’s long-stalled efforts to achieve European integration and shed its Soviet past. The remarks, which the ambassador elaborated on in a Dec. 2 interview with the Kyiv Post, also came ahead of the Jan. 17 presidential election, a race in which a candidate who will usher in major reforms is hard to identify.

In an interview, Teixeira wouldn’t name names when asked to be specific about who he thinks is stifling Ukraine’s economy and democratic progress. But he also said he doesn’t think it is much of a mystery about who is creating the bottlenecks.

A list of top suspects might start with Ukraine’s richest businessmen, or the so-called oligarchs, who today have commanding influence in politics and who control much of the country’s economy. They made spectacular fortunes from the opaque privatizations of government-owned assets after the nation gained independence in 1991.

They have long reaped billion-dollar profits out of Ukraine, and are accused by some of stalling changes – such as progressive yet simplified taxes, effective law enforcement and less bureaucracy – that could make Ukraine’s economy fairer and more competitive.

While a couple of them – Rinat Akhmetov and Victor Pinchuk – have spokespeople who pump out scads of press releases, Ukraine’s richest pair would not comment to the Kyiv Post this week about Teixeira’s comments or whether they thought he was talking about them. Kostyantin Zhevago refused comment. Gennadiy Bogolyubov and Igor Kolomoisky could not be reached before the newspaper went to press on Dec. 3.

But an endorsement of Teixeira’s assessment came from Andrei Lobatch of the Foundation for Effective Governance, a policy center funded by Akhmetov. “I agree with him in a general way. There are a lot of things that need to be done. There is obviously a great need to have a consolidated view on reform priorities.”

Oleksandr Sushko, an analyst with the Institute for European Atlantic Cooperation, said some Ukrainian industries are hindering progress towards a free-trade agreement with the European Union because their owners fear competition and loss of profits. “One must approach this carefully,” Sushko said. “It’s impossible to ignore domestic businesses because their short-term interests don’t always coincide with the long-term interests of government.”

In his Dec. 2 interview with the Kyiv Post, Teixeira said his views are common knowledge. While the nation has made progress, the ambassador said Ukraine still lacks a “consolidated political view” and is hobbled by an unclear constitution, a poor legal system, “widespread corruption and conflicts within the country’s institutions of power.” He also called the nation’s haphazard path “unsustainable.”

Teixeira also said on Nov. 30 that “very little has been done” in the last 18 years. “Politicians should tune into the reality more. Much more could have been done. There is a long way to go and the nation’s [citizens are] demanding progress.”

The recent economic crisis and current recession have exposed how undiversified Ukraine’s economy remains, dependent upon exports of steel, raw materials and thereby extremely vulnerable to global price shocks.

The Soviet-era industries of steel, chemicals and coal mining dominate the economic landscape. These heavy industries are located in the country’s industrial east and south and are owned by a handful of business groups, including those controlled by Akhmetov, Pinchuk, Kolomoisky and Serhiy Taruta.

While Ukraine’s business tycoons have started to invest into modernizing these highly inefficient behemoths, their efforts are seen as small compared to the large fortunes earned to date in the sectors . Together, with others, Ukraine’s oligarchs wield immense influence in government and, along with their industries, are able to command big favors.

The government recently extended a freeze on gas, electricity and railway tariffs in effect since November 2008. The sweetheart deals will now last through the end of 2010 for steel and iron ore producers. According to a Millennium Capital analyst, the rate freeze “is negative for electricity manufacturers and railway companies as well as other companies who might gain from raising the tariffs. But metallurgy is the main source of hard currency inflow into the country and the interests of all others take the back seat now.”

More than half of the nation’s 50 wealthiest Ukrainians either made money in or are currently involved in the Soviet-era industries of steel, iron ore and coal mining, chemical production, machine building and automotives. Their estimated combined wealth in July was $16.6 billion, according to Dragon Capital, or 15 percent of the country’s 2009 forecasted nominal gross domestic product. The July estimated combined market capitalization of Ukraine’s metallurgical and mining companies is $13 billion, according to Dragon Capital.

Yaroslav Misyats, head of the Party of Small and Medium Size Businesses, said the government is more to blame than the business elite. “The oligarchs exist as long as the nomenclature allows and encourages it,” Misyats said. “The Ukrainian government is built on theft, controls theft, and proliferates it. That is what does not allow Ukraine to move forward.”

But others think that Ukraine’s business elite exerts more influence over politicians than vice versa. And many of the nation’s business elites also have powerful posts in government, holding seats in parliament or other positions. So if they had a genuine interest in changing the status quo, many think they could have done so by now.

“Undoubtedly, in Ukraine there are forces that perceive free trade and the reforms pursued by the Tymoshenko-government as a threat to monopolies and corrupt ways of doing business,” said Hryhoriy Nemyria, vice prime minister in Prime Minister Yulia Tymoshenko's Cabinet. “But, we won’t be deflected from establishing a free trade regime [with the EU] which provides an equal playing field.”

Whoever is to blame, the consequence is clear for average Ukrainians.

“Many Ukrainians are living in poverty, are underemployed, underpaid; they have poor health care and social support systems because the country hasn’t enacted any real reform. It lacks the political will to democratize Ukraine,” said Yevhen Bystrytsky, head of the Renaissance Foundation.

Ukraine has consistently scored poorly in various international evaluations. This year, Transparency International said the level of corruption, already alarmingly high, has worsened to 146 out of 180 countries surveyed. Ukraine also sunk in the Global Competitiveness Report, dropping from 72 to 82 out of 133 countries ranked.

In terms of quality of life, Ukraine was placed with Indonesia, Turkmenistan and Azerbaijan, according to the latest United Nations Development Program report. Direct foreign investment has been paltry in Ukraine since independence, especially compared to neighboring nations such as Poland.

Anna Derevyanko, executive director of the European Business Association, said that investment “should be fast, easy and transparent.” But it is not. “It seems like our political leaders don’t have a strategic view on Ukraine’s development,” Derevyanko added.

Jorge Zukoski, president of the American Chamber of Commerce in Ukraine, echoed the sentiment: “The reticence of the political elite to embark on the path of true reforms that roots out corruption, strengthens the rule of law, fosters transparency and creates a level and clear playing field for all market players has not yet been a priority in the 18 years since independence. The frustration that the EU leadership feels is understandable as they and others have continually extended a hand of friendship to the leaders of Ukraine.”

Since 1992, the EU has given Ukraine more than 1 billion euro in aid and is currently the largest donor of technical assistance, providing on average of nearly 200 million euro annually. The upshot is that Ukraine-EU “action plans” are misnomers – action has been lacking.

So it was hard to argue with Borys Tarasyuk, head of parliament's committee on European integration, when he said on Dec. 1 that it is “too optimistic to speak of signing the association agreement” between Ukraine and the European Union at the Dec. 4 summit.

The agreement, meant to move integration forward, also isn’t foreseen anytime soon by Ukrainian Deputy Foreign Minister Kostyantin Yeliseyev. He said on Dec. 2: “There is political readiness on the European side to take the earliest opportunity to sign an association agreement with Ukraine, which would involve a free trade zone, but certain conditions are to be created for this – Ukraine must do its homework, as it were.”

Source: Kyiv Post

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