Divergent Views of a Looming Economic Iceberg
Free Republic Home/ 24th May, 2005
http://www.freerepublic.com/focus/f-news/1409616/posts
Ukrainian President Victor Yushchenko responded to the country's growing energy
crisis May 19 by canceling import tariffs on petroleum products and promising
that the government -- which he says is responsible for the crisis -- will
allow oil prices to be controlled by free-market factors.
Yushchenko's reaction and proposed solution to Kiev's energy crisis clashes
sharply with those of Prime Minister Yulia Timoshenko, who believes Russian oil
companies purposely created the energy crisis.
Yushchenko's and Timoshenko's reactions to the energy crisis -- and the crisis
itself -- are symptomatic of two larger problems facing Ukraine: an internal
power struggle between the country's two most prominent and powerful
politicians and the lack of internal economic reforms. The former problem has
only compounded the latter and could result in Kiev's severely hurting its
domestic economy as well as international image.
Timoshenko set up Ukraine's petroleum sector for its current crisis when, just
after taking office, she chose state administration of the economy as opposed
to free-market management. At her direction, the government arbitrarily imposed
a ceiling on fuel prices of no more than 13 percent above a baseline
established by the government. Second, she imposed import tariffs on petroleum
products.
In theory, the tariff was meant to help increase the amount of revenue
available for Ukraine's national budget. Instead it increased the overall
production costs for Russian and other oil companies who export to Ukraine.
These higher costs, along with Ukraine's habit of delaying payments, have
prompted oil companies -- namely TNK-BP, LUKoil and Tatneft � to decrease their
portion of output exported to Ukraine.
Ukraine's need to beef up its budget and its inability to make timely payments
are symptomatic of larger economic problems, which worsened after Yushchenko
took office. In the aftermath of the "Orange Revolution," the government has
undertaken no economic reforms. Instead, Yushchenko has revamped government at
all levels by firing those considered loyal to the old regime and appointing
those loyal to the new. Along with firing political opponents, some of whom
were indeed useless, the new govern- ment fired thousands of highly skilled
professionals.
Altogether, more than 18,000 officials were dismissed, Yushchenko said in
April. Those experienced professionals have been largely replaced with
unskilled individuals who seem more actively engaged in regulating market
activity while having no desire -- or idea how -- to reform the Ukrainian
economy. Instead, the government is attacking opposition parties and big
business.
Because attention has been diverted from the nation's true economic problems,
Ukraine's economy is faring rather poorly and suffers from high levels of
inefficiency. Even before the current energy crisis, food and basic-goods
prices skyrocketed 100 percent compared to prices before the revolution.
Ironically, the very thing the new government says it is actively fighting --
corruption -- seems to be increasing rather than decreasing.
This is due to the phenomenon that haunts almost all countries in transition:
Newly appointed bureaucrats on average tend to be greedier than their
predecessors. After years in power, veteran bureaucrats already have enriched
themselves, while new ones start putting their hands on whatever is within
reach. Given the chronic instability in transitional countries -- Ukraine being
no exception -- many officials consider their positions to be tentative and are
in a race with the clock to maximize their profits.
Currently, since it is not so easy to steal government money because of the
ongoing anti-corruption drive, many officials opt to steal from the mostly
impoverished population.
One telling example: Sources in Ukraine have said new Interior Minister Yuri
Lutsenko issued an intra-agency directive requiring every individual in the
country who wants to get a driver's license to obtain a certificate from a
regional panel of psychiatrists certifying that he or she is not mentally ill.
How do Ukrainian psychiatrists determine this? Sources say they interview the
candidate and ask questions such as, "What is the product of 389 multiplied by
527?" If the candidate cannot answer instantly, he or she is not certified
sane. The only way around it is for the candidate to fork over $300 in cash to
bribe the panel.
Many victims of this scheme suspect Lutsenko implemented it because of his
background in psychology and association with fellow practitioners, who are now
enriching themselves. In any case, the scheme is just one of many new,
"creative" ways to separate the Ukrainian people from their money. And a $300
bribe for a driver's license has quite an impact in Ukraine, where most people
try to get by on $100 or less a month.
Exacerbating the corruption, of course, is the current energy crisis, which
Yushchenko blames on the Ukrainian government while Timoshenko continues to
insist that oil companies are at fault. These conflicting views reveal the
second critical problem facing Ukraine -- a power struggle between the
president and the prime minister.
As Stratfor has warned, Timoshenko's radical views (not exactly in keeping with
free-market capitalism) as well as boundless ambition and questionable past are
bringing trouble to Ukraine. Her personal ambitions of consolidating Ukraine's
power into a presidency she assumes, gaining personal wealth in the process,
have dictated and will continue to dictate her approach to national and
international politics.
Many Ukrainian and Russian officials are suspicious about the latest tariff,
given that Timoshenko has been under investigation by Russian and Ukrainian law
enforcement for laundering $400 million during her stint as deputy prime
minister. She allegedly bribed five Russian generals in a scheme involving food
products that were never delivered to the Russian army (the generals admitted
that she bribed them and were subsequently sentenced for their crimes).
Though Ukraine's Interpol representative said May 20 that Timoshenko's file has
recently been erased from Interpol's criminal database, Interpol sources in
Russia say U.S. and European agencies are still investigating her seemingly
shadowy deals. Perhaps it is no surprise that Timoshenko has yet to travel to
any Western countries. Timoshenko has been using her office's political
influence to help achieve her long-term goal of winning the Ukrainian
presidency after the fall 2006 elections. Her campaigns against corruption,
opposition parties, big business and now Russian oil companies seem to all be
part of her efforts to gain popular support and create an important and
powerful image for herself.
Throughout the energy crisis, Yushchenko has consistently blamed the Ukrainian
government and has not once even alluded to the possibility that Russians or
the oil companies could be at fault. Sources close to him confirm that,
although he values close ties with Washington, Yushchenko has abstained from
implicating Russia even subtly. This suggests he believes that Timoshenko's
initiating and implementing the tariff and wrestling with the energy firms are
the underlying causes of the energy crisis.
Yushchenko probably knows that the livelihood of Ukraine's domestic economy
depends on internal reforms, that the energy crisis severely threatens the
country's government and economy and that accepting Timoshenko's political
posturing would essentially be a concession in the continuing power struggle --
and he cannot afford to take such a position.
Though it appears that Yushchenko's canceling non-market restrictions imposed
by Timoshenko could help resolve the energy crisis, Kiev should not let itself
be lulled into a false sense of security. The energy crisis is only part of a
larger economic problem that is further complicated by the power struggle.
These problems seem to be so well ingrained in Ukraine's political and economic
way of life that one can safely expect continued turbulence in the country for
the foreseeable future.
Unless Yushchenko wants to commit political suicide and fall under Timoshenko's
thumb, the rivalry inside the government will not end any time soon. "Unruly
Yulia," as some inside the new government call her, has no intention of backing
off from her crusade for ultimate power in Ukraine. The rivalry will continue
to divert the government's time and resources away from instituting fundamental
reforms in Ukraine's economy and government -- reforms that are necessary for
Ukraine to survive economically and geopolitically.
The delayed reforms already have shed a negative light on Ukraine. Many Western
supporters of the "Orange Revolution" expected Kiev to adopt Western ideas
across the political board -- that is, to include free-market reforms with
shifts in foreign policy. The lack of these reforms now haunts Kiev as it faces
growing calls from the European Union and NATO to make internal changes before
it even thinks about membership in either organization
This news was monitored by the ArtUkraine Monitoring Service for The Action
Ukraine Report. STATFOR (Strategic Forecasting), Predictive, Insightful, Global
Intelligence, Austin, Texas, Friday, May 20, 2005
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