[Ohio UZO News] Ukraine: Economist; NYT; EDM

[Deychak, Orest]

The Economist

www.economist.com

April 23 

The Viktor and Yulia show, continued 

 

The squabbling "orange revolution" leaders are failing to push through the longer-term reforms that the economy needs.

 

A COUNTRY in default, engulfed by social protests and political chaos, crumbling to bits. This has been the West's nightmare image of Ukraine. It was the first country to ask the IMF for a bail-out, its currency was in free fall, its economy is contracting at an annual rate of 9%. Yet the main activity in Kiev today seems to be putting up summer terraces outside cafés, not tents for demonstrators. In front of the main government building, a dozen bored protesters call on Yulia Tymoshenko, the prime minister, to come out "to the people". Even in the industrial east, where output has fallen by as much as a third, the mood is subdued.

 

One reason is that trust in the government is so low and the experience of crisis so extensive that Ukrainians see little point in taking to the streets. At a time of hardship, working on a vegetable patch is preferable. A protest called by Viktor Yanukovich, leader of the opposition Party of the Regions, attracted relatively few people. There is no money to pay demonstrators. Stirring up his eastern heartland could annoy Mr Yanukovich's business backers, who have been cutting jobs and wages.

 

Another reason for relative calm is that after several years of growth many Ukrainians have enough savings to get by for a few months. Some unemployment has been avoided by involuntary holidays and pay cuts. And though the main exporting industry, steel, is struggling, farming (which employs a quarter of the workforce) is doing well. Petro Poroshenko, a businessman, suggests that food production could become an engine of growth.

 

"Either the country is more resilient or the adjustment started earlier than we thought," says Ceyla Pazarbasioglu, head of the IMF mission visiting Kiev. After a 40% devaluation, the hryvnia has stabilised. The trade balance went briefly into surplus for the first time in years. The rate of economic decline has slowed. "There is a feeling that we have touched the bottom," Viktor Yushchenko, Ukraine's president, says in an interview. On April 17th the IMF mission said it would recommend the release of the second tranche of Ukraine's $16.4 billion loan.

 

The banks have undergone a stress test and the biggest will be recapitalised. For all the political cacophony, the government has pushed through the fiscal measures required by the IMF, including increased duties on alcohol and tobacco and higher gas tariffs for rich households. In the short term, Ukraine needs to cut its budget deficit. In the longer term its big problem is the structure of public spending rather than low tax revenues, argues Pablo Saavedra, an economist at the World Bank. Its unreformed social system and its red tape, both inherited from Soviet days, are crushing burdens. Ukraine devotes a third of GDP to social spending. Less than 2% of GDP goes to infrastructure investment. It takes 47 permits to open a business and three years to close it. All Ukrainian politicians, including Ms Tymoshenko, Mr Yanukovich and Mr Yushchenko, admit to corruption and lack of structural reforms in Ukraine-and blame each other. "We have been engaged with elections rather than with reforms," says Anatoly Kinakh, who has served in several governments.

 

Now Ukraine is in the middle of a new election cycle. Mr Yushchenko's presidential term expires in January and the campaign is under way. Political turmoil is nothing new in Ukraine, but when commodity prices were high and foreign credit cheap it had little impact on the economy. No longer. Ukraine nearly botched its agreement with the IMF partly because some members of Mr Yushchenko's Our Ukraine block refused to vote for fiscal cuts. Mr Yushchenko says that "half of my own block has been bought by Ms Tymoshenko, while the other half cannot support her economic methods". He blames Ms Tymoshenko for sacrificing the ideology of the 2004 orange revolution to political expediency and populism. She says that he has sold out to vested interests.

 

Mr Yushchenko certainly has ideology and vision. He talks of building a nation-state and taking Ukraine into NATO and the European Union. "Six times in the 20th century we have declared our independence and five times we have lost it." Yet on vision, rhetorically at least, there is little difference between Ukrainian politicians. Ms Tymoshenko talks eloquently of European integration and the need to consolidate a country historically divided between east and west. "First of all we need to build Europe in Ukraine, because a country can only enter the EU if it has the same blood group, otherwise it will get rejected as an alien body," she says in an interview. Even Mr Yanukovich, once backed by Moscow, now subscribes to the notion of European integration.

 

In truth, none of Ukraine's politicians has risen to the promise of the orange revolution. Ms Tymoshenko's actions sometimes smack of populism. When inflation rose last year, she imposed temporary controls on grain exports, for example. She has done little to promote long-term reforms. But it was thanks to her intervention both that the IMF loan was unblocked and that a breakthrough was made in the gas-price stalemate with Russia in January. In contrast, Mr Yushchenko's influence has been mostly disruptive despite his avowed liberalism. He has vetoed many government plans, including privatisations.

 

The problem goes deeper than animosity between two old allies. It is rooted in a flawed change to the constitution in 2004 that reduced the power of the president but stopped short of turning Ukraine into a parliamentary republic, fudging the responsibilities of president and prime minister. "Whoever wins the presidential election will next day run into the same problems," says Ms Tymoshenko.

 

Inevitably, all three main leaders insist they will run for president, including Mr Yushchenko, despite a poll rating in low single digits. But Ms Tymoshenko's popularity has also suffered recently. Even Mr Yanukovich, who now leads in the polls, has seen his popularity dented. Many Ukrainians feel that none of the three familiar faces is capable of taking the country forward. Tired of the mudslinging, 20% would either vote against all candidates or simply not turn out.

 

To hedge their bets many businessmen are now betting on other candidates, including Arseniy Yatseniuk, a 34-year-old who has already served as foreign minister, economics minister and central-bank governor. Mr Yatseniuk's rating has doubled in a few months and he is now catching up with Ms Tymoshenko. Her preferred option would be to change the constitution before the election and choose the next (symbolic) president in parliament. But she does not mind if Ukraine reverts to full presidential rule. "It does not matter to me what the head of the executive power is called: a prime minister, a chancellor, a president or a hetman."

 

A bigger question is what kind of Ukraine will emerge from the crisis. And that will be determined not by elections, but by the willingness of political leaders to push through structural reforms. 

 

The New York Times

www.nyt.com

Gazprom Seeks a Gas Pipeline to Bypass Ukraine 

By JAMES KANTER 

24 April 2009

 

BRUSSELS -- Gazprom <javascript:void(0);>  began a campaign in Brussels on Thursday to push for a gas pipeline that would bypass Ukraine to supply customers in Europe.

The project, which is called South Stream, would run under the Black Sea and link Russia directly to Bulgaria. The project also is hitting a roadblock at the European Union's border with Bulgaria.

Prime Minister Vladimir V. Putin of Russia canceled his appearance on Friday at an energy summit meeting in Sofia, because of slow progress over negotiations concerning a vital part of the route for the pipeline, according to news reports. The negotiations are important for Russia because Bulgaria could force Gazprom <javascript:void(0);>  to build a costly new network to transport the gas rather than allow it to use Bulgaria's existing facilities.

As part of the effort to push the project along, Gazprom <javascript:void(0);>  representatives said they had held talks with the European Commission, the executive arm of the European Union, on giving the project a form of priority status, which would make it eligible for aid for feasibility studies and special loans.

South Stream ''is an important project at the European level,'' Sergei Kuprianov, the spokesman for Gazprom <javascript:void(0);> , said in an interview.

Many European leaders view Russia as an unreliable trading partner that has used gas supplies as a way to bully countries like Ukraine to stay within its sphere of influence.

A dispute in January between Russia and Ukraine that severely interrupted gas supplies to Europe was the second crisis of its kind in three years. Bulgarians were hardest hit, with many left to shiver in severe winter cold.

Mr. Kuprianov said he met Thursday with Andris Kesteris, cabinet head for the European Union energy chief, Andris Piebalgs, to discuss making South Stream a priority project. He said Gazprom <javascript:void(0);>  officials would seek to make a presentation to the European Parliament to promote South Stream later in the year.

Ferran Tarradellas, a spokesman for Mr. Piebalgs, said Gazprom <javascript:void(0);>  would need to prove that South Stream represented ''added value'' for Europe to become a priority project. 

Eurasia Daily Monitor

IMF to Resume Assisting Ukraine

April 24, 2009

The IMF's mission visited Ukraine April 8-17 and was satisfied with the results of its talks with the government. It will recommend that the IMF board resumes financial assistance to Ukraine in May. This means that Ukraine must avoid a critical depletion of its foreign exchange reserves (forex) and consequently a sovereign default -which has been feared by many observers. In order to qualify for IMF financing, Ukraine agreed to implement several unpopular economic measures. Also, seven banks will now be bailed out by the government.

Ukraine was one of the first countries to apply for IMF assistance when the global financial crisis erupted last fall. The IMF approved a $16.4 billion stand-by arrangement for Ukraine in November, and its first $4.5 billion tranche came the same month. The second tranche was expected on February 15, but it did not arrive since the IMF and Prime Minister Yulia Tymoshenko failed to agree on the ways to finance the budget deficit and support banks.

Ukraine could not afford a long dispute with the IMF. The National Bank of Ukraine's (NBU) forex reserve shrank from $31.5 billion in January to $25 billion in March as it sold dollars in order to support the national currency, which had lost almost 40 percent of its value since last August. In order for the IMF mission to return, Tymoshenko agreed to give more independence to the NBU and to finance the 3 percent budget deficit by non-inflationary means such as loans. Also, ahead of the IMF's mission returning to Kyiv, parliament agreed to increase the excise tax on alcohol and tobacco (Ukrainska Pravda, March 31).

The IMF mission focused its concern on three areas: the cash-strapped Naftohaz Ukrainy national oil and gas company, the unreformed pension system, and financial sector restructuring aimed at restoring public trust in the banking system. Tymoshenko suffered a major setback early on April 14, when parliament refused to include on its agenda the crucial bills on Naftogaz and pension reform, which prompted Yushchenko and Tymoshenko to accuse each other of torpedoing the talks with the IMF for political reasons. In reality, this showed the political weakness of both, with Tymoshenko unable to muster a majority in parliament and Yushchenko having no effective control even of his small caucus (Channel 5, April 14).

Tymoshenko finally decided to circumvent parliament, on the same day adopting the measures required by the IMF to cover the state budget deficit at an emergency meeting of her government. Although there were doubts about the legality of the move, it was supported by Yushchenko. The measures included allowing private individuals to buy government bonds, increasing the price of gas by 2 percent for selected industries and by 5 to10 percent for high-income households (also increasing their electricity tariffs), partially waiving Naftohaz's tax debt, allowing government bodies to sell additional services and increasing the pension tax for small businesses (ProUA, April 14).

On April 15, the government and the NBU announced that seven banks would be bailed out in line with agreements reached with the IMF. It was decided that the state would take 75 percent, plus one share stakes in these banks in exchange for saving them; receiving an equivalent of $2.6 billion out of the $5.7 billion earmarked for the recapitalization of banks in the state budget. This means that more banks might be bailed out at a later date. Out of more than 180 banks in Ukraine, 26 larger ones fit the government's criteria for the bailout, but the owners of only seven of them accepted the government conditions, said Tymoshenko. After the recapitalization, due to start within the next three to four weeks, the banks will be sold at auctions, she added (Interfax-Ukraine, April 17).

The banks to be bailed out are: Nadra, Finansy i Kredit, Ukrgazbank, Rodovid, Ukrprombank, Kyiv and Imexbank. Only one of them, Nadra, is among the country's top ten financial institutions. Finansy i Kredit risks being dropped from the group as its owner, metals tycoon and Tymoshenko's political ally Kostyantyn Zhevaho, is reluctant to lose control over it (Zerkalo Nedeli, April 21).

The IMF mission said it was satisfied with the measures taken by the Ukrainian government. It observed stabilization within Ukraine's economy and believes it avoided more significant damage caused by the financial crisis. The IMF mission said its board might increase the second tranche of the stand-by loan to $2.8 billion from $1.84 billion -due to arrive by mid-May. The mission completed its work, but it will soon assess the possibility of disbursing the third tranche, expected to equal $2.8 billion (www.imf.org, April 17).

Ukraine previously expected to receive a $3.75 billion third tranche in May. Tymoshenko asked the IMF to disburse the second and third tranches at once (Interfax-Ukraine, April 9). It now appears that they will arrive simultaneously, owing to the delay in the second tranche. Despite that delay, a 30 percent year-on-year industrial output decrease in the first quarter, and the incessant political squabbles, Ukraine's economy has proven to be more robust than many expected. Yushchenko and Tymoshenko saw signs of an approaching recovery in the March statistics (UNIAN, April 15; Interfax-Ukraine, April 16). The IMF apparently shares their cautious optimism.

--Pavel Korduban

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