Ukraine's Big Step Backward

KIEV, Ukraine -- The conviction and sentencing of Yulia Tymoshenko for "exceeding her powers" while Prime Minister tells the world little it didn't already know about Ukraine.

Yulia Tymoshenko

If seven years in jail and personal liability of $185 million is the price for signing a gas deal without cabinet approval, even though its defining feature was to reduce corruption in a vital part of the economy, then one should probably continue to err on the high side when discounting for political risks.

The government may claim the trial was fair, but when even Russia's Vladimir Putin expresses bewilderment, then one is entitled to raise an eyebrow.

The verdict will certainly not make it easier for the International Monetary Fund to disburse the next tranche of aid under the country's $16 billion adjustment program in November.

Even though strengthening the rule of law isn't explicitly part of the IMF's required adjustments, the failure to demonstrate progress in this area will surely cast doubt over Ukraine's ability to implement reforms that are, such as bolstering the independence of the National Bank and improving the quality of public administration.

It will also make it harder for the European Union to justify building closer ties, forcing President Viktor Yanukovych to be more reliant on his relationship with Mr. Putin's Russia.

As the latter's agenda is known to feature bringing Ukraine into the customs union that he hopes will re-establish Russia's economic primacy among the former Soviet Union, one of the longer-term consequences of Tuesday's verdict may be easier penetration of the Ukrainian market by Russian companies and banks, rather than European or Turkish ones.

Thanks in part to adjustments made under the IMF's tutelage, Ukraine is entering the new, acute phase of the global financial crisis in a far stronger position than it was in 2008.

The structural budget deficit has narrowed to around 1.6% of gross domestic product from 3.8% in 2007, while the current-account deficit has narrowed to around 3.9% from over 7%.

But this is still a weak starting point for a country that has to fight desperately hard for capital, in an international environment characterized by extreme risk aversion in the wake of the European sovereign-debt crisis.

For years, investors have waited for real reforms to unlock Ukraine's potential in agriculture, financial services and consumer goods.

Tuesday's verdict shows that remains a distant prospect.

Source: The Wall Street Journal

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