10/12/2003 | Englishman

President Leonid Kuchma’s efforts to maintain political influence -- or at least avoid criminal prosecution -- after the presidential election will keep political tensions high until the vote, which is scheduled for October 2004. Mr Kuchma has abandoned attempts to strengthen the presidency and delay the election until 2006 (when the next general election will be held). Indeed, he has reversed course, backing the introduction of a parliamentary system and a weaker, possibly indirectly elected, presidency.

Mr Kuchma’s new stance is ostensibly in line with the long-standing position of his most vocal parliamentary opponents. But his diametrically opposed proposals for constitutional reform merely suggest that he has so far failed to identify a suitably loyal candidate to groom as his chosen successor. No representative of the pro-presidential camp has been able to compete in terms of popularity with Viktor Yushchenko, a reform-minded opposition leader and former prime minister who has consistently enjoyed the support of 20-25% of the population over the past two years.

Assuming that the election proceeds as planned, the most likely pro-presidential candidate at this point is Viktor Yanukovych, the prime minister, who has strengthened his position in recent months. However, his support in opinion polls remains well under 10%, and his prospects depend on Mr Kuchma’s shifting assessment of how best to balance competing interests within his own camp.

Mr Yushchenko seems set to remain the most popular candidate in the run-up to the election. However, the presidential succession remains wide open, given the political system’s lack of transparency and accountability, and the Kuchma administration’s disregard for free and fair elections. Although resort to massive electoral fraud appears unlikely, some degree of political pressure and falsification is probable if the pro-presidential camp is unable to reach an accommodation with Mr Yushchenko.

Repeated bouts of political turmoil over the past year have taken a heavy toll on Ukraine’s reform progress, marked by Mr Kuchma’s increasing obstructionism. In August he vetoed a raft of economic laws, including an amendment that would have lowered the value-added tax (VAT) rate from 20% to 17% from the start of 2004. Mr Kuchma objected to the VAT amendment on the grounds that it would have cost the budget some HRN5bn ($950m) by removing double export taxation, and that it would scrap various tax incentives.

Never mind that both the IMF and the World Bank have repeatedly called for eliminating the tax incentives in order to increase transparency and eliminate loopholes. The abolition of the incentives -- a rich source of patronage for Mr Kuchma’s cronies -- was also intended to compensate losses caused by the decrease in VAT.

Similarly, a bill on export-import licensing, which would have implemented World Trade Organisation recommendations, also fell victim to Mr Kuchma’s red pen, as did a telecommunications law establishing a regulatory agency for the telecoms market, which was needed to proceed with the privatisation of the fixed-line monopoly Ukrtelecom. Another law that would have called for legislators to discuss draft bills with business representatives was shot down as well.

Fitful future

Those reforms that have taken place will probably not be reversed. The left wing in parliament is weak, and the reformist Our Ukraine faction -- by far the largest parliamentary group -- will continue on occasion to co-operate with pro-presidential groups.

Nevertheless, progress on other legislative priorities will be fitful, particularly given the high risk of further infighting in the run-up to the 2004 presidential election. These distractions are almost certain to bring delays in crucial policy areas, particularly restructuring and privatisation in important sectors such as coal, energy and telecommunications.

Indeed, Mr Kuchma’s veto of the telecoms regulatory law seems particularly capricious. He proclaimed in April that one of the main tasks of the government this year would be to complete preparations for privatisation of the state’s 50%-plus-one-share stake in Ukrtelecom, calling for greater market liberalisation and stronger regulatory capacity in order to attract foreign investors.

Moreover, in May Mr Kuchma all but vetoed the privatisation of Oshchadbank and Ukreximbank anytime soon. Mr Kuchma’s announcement came in response to earlier remarks by Serhiy Tyhypko, governor of the National Bank of Ukraine (the central bank), that controlling stakes in the two banks would be offered on equal terms for local and foreign private investors, following the presidential elections in 2004.

As a result, inflows of foreign direct investment (FDI) are likely to remain far below potential. But not all foreign players are content merely to await Mr Kuchma’s departure. Volkswagen (VW; Germany) has started talks to acquire a minority stake in car manufacturer Eurocar, which began assembling cars for Volkswagen in March 2002, including the Fabia, Octavia and Superb models of Skoda Auto (Czech Republic), VW’s 100%-owned subsidiary. Eurocar says that it will produce 8,100 cars in 2003 rising to 15,000 cars in 2004, issuing eurobonds to raise cash and boost capacity.

At the same time, even as he was preparing to sink key economic legislation, Mr Kuchma signed amendments to the land code in August allowing foreigners to buy land in partnership with Ukrainians. The changes are aimed at attracting more FDI and modernising agriculture. But the big money probably won’t come until investors are freed from Mr Kuchma’s frequent and tendentious policy reversals.

Facts and forecasts
2001a 2002a 2003b 2004b
Real GDP growth (%) 9.2 4.8 5.5 5.5
Consumer prices (%)c 12.0 0.8 6.0 9.0
Exports ($ bn) 17.1 18. 21.9 24.0
Imports ($ bn) 16.9 18 21.2 23.6
Current-account balance
(% of GDP) 3.7 7.7 5.3 3.4
Exchange rate (HRN:$1)c 5.37 5.33 5.34 5.45
a Actual. b Forecasts. c Annual average.

Source: Economist Intelligence Unit.