Ukraine: What’s Happened To Economic Reform?

KIEV, Ukraine -- Western business people in Ukraine are watching president Viktor Yanukovich closely. Three months ago, when he won power in the presidential election, many were happy enough to see him elected.

Viktor Yanukovych

They brushed aside concerns that Yanukovich would break with the pro-west policies of his predecessor Viktor Yushchenko and take Kiev back into Russia’s orbit. They hoped that, whatever his foreign policy preferences, he would focus on reviving and reforming the recession-hit economy.

Now they are disturbed to see that for Yanukovich geopolitics has come first. He has rushed into Russia’s embrace with deals over cheap energy and a Black Sea naval base - but not much progress on reform.

As one western business leader says, “Recent events have triggered a wakeup call, forcing the business community and western diplomats in Ukraine to take a closer look at the reform situation and to reassess the geopolitical landscape. The gap seems to be widening between what is being said, and what is being done.”

For the moment, this executive is not ready to put his head above the parapet and put his name to his comments. But , like others, he is anxious. Yanukovich can deliver fast when he wants. Last month’s he agreed with Moscow a controversial ‘gas for fleet’ deal under which Ukraine will receive cheap gas in return for granting Russia a long lease on the Sevastopol naval base.

The prime commercial beneficiaries will be the president’s billionaire backers and their energy-hungry steel mills. But watching from the sidelines - still patiently for now - are the western investors.

Keeping them happy will require hard work to fix everything from notoriously corrupt courts, a heavy and complicated tax system, as well as mountains of red tape that have kept billions of investment at bay. Controlling nearly all branches of government, Yanukovich’s team will have no excuses if they follow past governments by failing to deliver.

And without investment, Ukraine will struggle to crawl out of a deep recession, which saw GDP contract 15 per cent last year. A key tests will be the forthcoming talks on a new International Monetary Fund programme totalling perhaps $20bn, to replace the $16.4bn plan suspended last year. the sooner it is agreed, the more confident foreign business people will be.

But, disturbingly, Mr Yanukovich’s team seems reluctant to to accept the IMF’s painful conditions. Sticking with the populism of predecessors, his government says it will not increase natural gas prices on households to market levels - a key IMF demand.

“This time, there will be no excuses,” says Anna Derevyanko, Executive Director of the European Business Association, a Kiev-based business advocacy. “They have all the opportunities to implement reform, where as previous governments - who shared power with opponents - could always say they were sabotaged.”

Yanukovich must show he can act as quickly on economic reform as on geopolitics.

Source: Financial Times