Tuesday, May 24, 2005

Ukraine: there's a struggle going on 

From the beginning of his administration, I worried for President Yuschenko when he chose Yulia Tymoshenko as prime minister. I wasn't worried because she had little experience or even her dicey past working with ex PM Pavel Lazarenko. What worried me was that she had a clear idea what she wanted to do and that she had not clearly worked out details with Yushchenko. According to an article last week by the well-connected economist Anders Aslund, it appears they are working at cross-purposes and dissipating the fruits of the Orange Revolution.

[T]he new Ukrainian government of Prime Minister Yulia Tymoshenko, another revolutionary hero, has surprisingly opted for an economic policy that appears to be socialist and populist in nature. The results have been immediate: Last year Ukraine enjoyed economic growth of 12 percent; in the first four months of this year, the growth rate plunged to 5 percent, while inflation has surged to 15 percent. How could things turn so sour so fast?

The biggest blow to the economy has been the new government's foggy plans for re-privatization. During the election campaign, Yushchenko advocated the renationalization of Ukraine's biggest steel mill, Kryvorizhstal, to be followed by a new privatization deal. The goal was to undo the sale of the mill to Ukraine's two biggest oligarchs in a sweetheart deal last year. The new government quickly acted to recover Kryvorizhstal, but the owners have taken the case to the European Court of Justice, where the proceedings are expected to be prolonged.

For months top Ukrainian officials have discussed publicly how many flawed privatization deals should be reversed -- the possibilities range from 29 to 3,000 -- and how this would be done. The government is trying to recover many enterprises through the courts, and it has drafted a broad law that could undo much of Ukraine's privatization. The dispute can be settled only by the fractious parliament, which will need months to come to a decision -- if, indeed, it ever decides anything.

Meanwhile, the property rights of thousands of enterprises are in limbo. In Kiev, rumors abound that oligarchs connected to the old regime are trying to sell their enterprises to Russian business executives and are preparing to escape the country. Naturally, executives are cutting off investment, and economic growth is screeching to a halt.
Populists try to dump wads of cash on the population, and Tymoshenko's popularity is rising rapidly after disposable income in real terms was up more than 23% in the first quarter largely through huge social transfers. (Data from State Stastistical Committee.) But inflation is being fueled by rapid money growth as the deficit has widened to 3.4% of GDP from rough balance in 2004. If I remember right, the number tends to widen more in late summer, so the government is starting from behind.

Other problems are emerging after Tymoshenko chose to freeze gasoline prices, leading to spot shortages. (You really should read Scott Clark on the shortages.) Jed Sunden writes in the Kyiv Post:

The effects are already being felt. Ukrainians have been lining up for gas outside filling stations that � logically enough � are refusing to sell gasoline at the low prices the law demands. In Kyiv, it�s difficult to find gasoline at all. The government�s socialism has taken us right back to the scarcity days of the Brezhnev era. And observers could only hang their heads in despair when Fuel and Energy Minister Ivan Plachkov announced on May 13 that the Cabinet of Ministers would devise a special formula for calculating prices of petroleum products. A working group consisting of both government officials and representatives of Ukraine�s petroleum refineries was charged with coming up with this formula before the end of June.

Before the end of June? Not only is this an example of flagrant, Soviet-style interference in the economy, it also suggests that the authorities are in the price-fixing game for the long haul. But in a country that calls itself a market economy, there should be no government formula setting prices in the first place. Let supply and demand and market forces rule.

It seems rather grim to some, but Dan McMinn is actually optimistic that Yushchenko is keeping control of the situation. Yet Yushchenko can't go too boldly against Tymoshenko unless she would be weakened for the parliamentary elections in March, and after that the handover of powers from the presidency to parliament.

Interesting side note: Despite all this, FDI is increasing in Ukraine, but according to some reports its coming from top Ukrainian oligarchs selling out to Russians trying to get away from Putin ($479 million.) Western European companies are abandoning plants they already had started as tax amnesties are reneged. One wonders what will be left when the dust settles from the battle certain to continue through parliamentary elections.