Ukraine political crisis puts economy at risk
06 April 2007
Published in The Wall Street Journal
Major Investments Delayed As Power Struggle in Kiev Brings Renewed Instability The political crisis triggered by the Ukrainian president's decision this week to dissolve Parliament is already freezing some major investment decisions and threatens to undermine an economic recovery that began last year.
The risk to the economy goes to the heart of the disappointment with President Viktor Yushchenko, a pro- Western leader who swept to power amid a popular revolt two years ago. Since then, he has been buffeted by political power struggles that contributed to a collapse in economic growth in 2005.
Major Investments Delayed As Power Struggle in Kiev Brings Renewed Instability The political crisis triggered by the Ukrainian president's decision this week to dissolve Parliament is already freezing some major investment decisions and threatens to undermine an economic recovery that began last year.
The risk to the economy goes to the heart of the disappointment with President Viktor Yushchenko, a pro- Western leader who swept to power amid a popular revolt two years ago. Since then, he has been buffeted by political power struggles that contributed to a collapse in economic growth in 2005.
The renewed instability in Ukraine has drawn
appeals for calm and compromise from the European
Union and the U.S., as well as Russia. A nation of
about 48 million that borders Russia and four EU
countries, Ukraine is critical to regional
stability and trade in energy. Some 80% of Russia's
natural-gas exports to the EU cross
Ukraine.
Ratings agency Standard & Poor's cut Ukraine's outlook to negative from stable yesterday, citing uncertainty created by the crisis and warning that it was difficult to see a good outcome for the economy.
Other economists are less bearish. But since Monday, when Mr. Yushchenko ordered Parliament to disband and prepare for new elections, several major deals have been put on ice, according to Transport Minister Mykola Rudkovsky, who is part of the governing coalition that is refusing to obey Mr. Yushchenko's order to dissolve parliament. Mr. Rudkovsky said delays include signature of a $300 million credit by Barclays Capital for Ukraine's rail company to buy passenger cars, negotiations that were due to start this week with French construction companies to rebuild major highways and a $189 million contract involving Hutchinson Whampoa Ltd. to build a port container terminal.
A spokesman for Barclays Capital declined to comment. Hutchinson Whampoa couldn't be reached for comment.
"It's only since March that investors have been willing to talk seriously with me about making investments without government guarantees," Mr. Rudkovsky said. He said growth, running at 9% in the first quarter, would fall to 7% or less this month. Ukraine's economy grew 7% last year.
"The main reason for Yushchenko's popularity in 2004 was that people remembered what he had done as prime minister," said Andriy Bychenko, a director at the Razumkov Center for Economic & Political Studies in Kiev.
"His was the first government under which Ukraine's economy grew since it became an independent country" in 1991.
This time, Mr. Yushchenko's record has been much less impressive. His popularity has crumbled, and the less Western-oriented candidate he defeated in 2004, Viktor Yanukovich, has returned as prime minister and has assumed many of the president's powers. Mr. Yanukovich has made few of the economic changes investors want, yet greater certainty under his rule has revived investment.
Both sides claim the recent crisis is about protecting the constitution, but most analysts believe it is simply the culmination of a long-running zero-sum political struggle for power, which has seen Mr. Yushchenko gradually stripped of authority. In recent weeks, 11 legislators have defected to Mr. Yanukovich's camp from parties supporting the president. That has brought Mr. Yanukovich's governing coalition closer to the 300 votes he needs in parliament to amend the constitution and write the president out of power. "Yushchenko cannot afford to back down or to lose," said Taras Kuzio, a Ukraine analyst and associate professor at George Washington University, speaking in Kiev. "If he does, it will complete the reversal of the Orange Revolution."
While few analysts predict bloodshed, the uncertainty has some economists worried. Mr. Yushchenko has called fresh elections for May 27, but Parliament has refused to dissolve and has demanded that the Constitutional Court rule first on whether Mr. Yushchenko's decree was legal. The court itself is deeply divided and has failed to rule on a series of related disputes. On Wednesday, the court's president tried to resign.
"The negative outlook reflects the growing risks that Ukraine could slide into a full-blown constitutional crisis, paralyzing policy making and undermining economic growth prospects," said S&P in a credit note.
Mr. Yushchenko added to those concerns in a interview with foreign journalists Wednesday by recalling former Russian President Boris Yeltsin's use of the military to storm Parliament to end a similar power struggle in Moscow in 1993.
It is hard to see how elections would improve the climate for investment. Our Ukraine, Mr Yuschenko's party, polled just 8.4% in a survey of more than 11,000 people the Razumkov Center conducted in the first two weeks of March. The most likely outcome of any election would be another government headed by Mr. Yanukovich, making further struggles likely.
Ratings agency Standard & Poor's cut Ukraine's outlook to negative from stable yesterday, citing uncertainty created by the crisis and warning that it was difficult to see a good outcome for the economy.
Other economists are less bearish. But since Monday, when Mr. Yushchenko ordered Parliament to disband and prepare for new elections, several major deals have been put on ice, according to Transport Minister Mykola Rudkovsky, who is part of the governing coalition that is refusing to obey Mr. Yushchenko's order to dissolve parliament. Mr. Rudkovsky said delays include signature of a $300 million credit by Barclays Capital for Ukraine's rail company to buy passenger cars, negotiations that were due to start this week with French construction companies to rebuild major highways and a $189 million contract involving Hutchinson Whampoa Ltd. to build a port container terminal.
A spokesman for Barclays Capital declined to comment. Hutchinson Whampoa couldn't be reached for comment.
"It's only since March that investors have been willing to talk seriously with me about making investments without government guarantees," Mr. Rudkovsky said. He said growth, running at 9% in the first quarter, would fall to 7% or less this month. Ukraine's economy grew 7% last year.
"The main reason for Yushchenko's popularity in 2004 was that people remembered what he had done as prime minister," said Andriy Bychenko, a director at the Razumkov Center for Economic & Political Studies in Kiev.
"His was the first government under which Ukraine's economy grew since it became an independent country" in 1991.
This time, Mr. Yushchenko's record has been much less impressive. His popularity has crumbled, and the less Western-oriented candidate he defeated in 2004, Viktor Yanukovich, has returned as prime minister and has assumed many of the president's powers. Mr. Yanukovich has made few of the economic changes investors want, yet greater certainty under his rule has revived investment.
Both sides claim the recent crisis is about protecting the constitution, but most analysts believe it is simply the culmination of a long-running zero-sum political struggle for power, which has seen Mr. Yushchenko gradually stripped of authority. In recent weeks, 11 legislators have defected to Mr. Yanukovich's camp from parties supporting the president. That has brought Mr. Yanukovich's governing coalition closer to the 300 votes he needs in parliament to amend the constitution and write the president out of power. "Yushchenko cannot afford to back down or to lose," said Taras Kuzio, a Ukraine analyst and associate professor at George Washington University, speaking in Kiev. "If he does, it will complete the reversal of the Orange Revolution."
While few analysts predict bloodshed, the uncertainty has some economists worried. Mr. Yushchenko has called fresh elections for May 27, but Parliament has refused to dissolve and has demanded that the Constitutional Court rule first on whether Mr. Yushchenko's decree was legal. The court itself is deeply divided and has failed to rule on a series of related disputes. On Wednesday, the court's president tried to resign.
"The negative outlook reflects the growing risks that Ukraine could slide into a full-blown constitutional crisis, paralyzing policy making and undermining economic growth prospects," said S&P in a credit note.
Mr. Yushchenko added to those concerns in a interview with foreign journalists Wednesday by recalling former Russian President Boris Yeltsin's use of the military to storm Parliament to end a similar power struggle in Moscow in 1993.
It is hard to see how elections would improve the climate for investment. Our Ukraine, Mr Yuschenko's party, polled just 8.4% in a survey of more than 11,000 people the Razumkov Center conducted in the first two weeks of March. The most likely outcome of any election would be another government headed by Mr. Yanukovich, making further struggles likely.