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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

A Year Doomed to Change

19 January, 1999 - 00:00

By Oleksiy PLOTNYKOV 
The last year was remarkable in all respects. It is completely obvious
that the presidential election year is determined by all the previous activity
of the current Ukrainian leadership and by the fact that the economic sphere
is bound to become feverishly strained in the course of the presidential
campaign.

LAST YEAR'S RESULTS

Last year can be characterized by rather obvious events in contemporary
Ukraine's policy and economy.

Above all, in 1998 the only positive achievement of the present government,
national monetary stability, was lost. Traditionally, this stability was
maintained by a rigid monetary policy. The outbreak of financial crisis
in August resulted in the devaluation of the hryvnia, and the President's
subsequent statements de facto calling for abandoning restrictive
monetary policy and tearing down the currency corridor could only aggravate
the situation.

Also, the past year did not justify forecasts about economic stabilization
and growth. On the official level many predicted GDP growth by year's end.
These prognoses were constantly revised and eventually proved wrong.

The mounting economic crisis was unpredictable for the political and
economic leadership of Ukraine. Previously statements were made to the
effect that the Asian financial crisis and that in Russia would not affect
Ukraine. Nothing was said about domestic causes.

The external factor remains painfully pressing: both the general concept
of Ukraine's role and place, and its relations international financial
institutions, in which big hopes were constantly placed. In fact, the Cabinet's
performance is so heavily dependent on the IMF Memorandum as to verge on
risking Ukraine's national security, and in some cases even crossing this
line.

Social tensions remain and gain momentum, primarily due to reductions
in budget social spending and growing arrears on pensions and other social
payments. Using official statements, the key to solving social problems
is a monetary emission and the privatization of Ukrtelekom, although in
both cases the outcome is anyone's guess.

Ukraine's political and economic leadership's ideas for overcoming the
crisis remain vague in keeping with local tradition. The President's messages
to Verkhovna Rada in May and November contradict one another and offer
no constructive approach. His latest public appearances boil down to constant
demands for more and can by no means be considered a lever that will get
the country out of the crisis, and the same is true of his almost paranoiac
statements about a bad Parliament. Most likely there are no mechanisms
on high to lead the country out of crisis. Moreover, the latest cadre "achievements"
of the Presidential Administration's economists are simply terrifying.

There was perhaps one positive aspect to the past year. Basic macroeconomic
parameters did not avalanche, especially compared to what the crisis did
to Russia. At the same time, it is necessary to take into account the fact
that Russia had farther to fall. With all the general similarity of the
transformations in the former Soviet republics, owing to objective as well
as subjective conditions, Russia remained in the lead. In addition, the
almost spiteful official tone of commentaries on the Russian financial
crisis does not testify to the high intellectual level of their authors.

UKRAINE ASSESSED FROM WITHOUT

The ratings of Ukraine by the foreign analysts do not offer anything
new. Traditionally, its image is smeared by corruption out of control,
the predominance of organized crime in all social spheres, absence of real
economic reform, instability of the legal framework, political situation,
and a multitude of other factors. Thus, in mid-1998 the Swiss World
Economic Forum published a report on worldwide competitiveness. Among
other things, the document refers to Ukraine as a country where: (a) bribe-giving
and taking are a daily standard procedure, (b) citizens evade taxes, (c)
organized crime stands in the way of business, and (d) the police cannot
guarantee personal safety.

According to the EBRD Transition Report, Ukraine was placed 15th
in 1998, in aggregate transformation parameters among the 17 Central and
Eastern European countries under study. Below Ukraine were only those of
Bosnia and Belarus.

Ukraine's place in international economic relations can be judged proceeding
from the world economic integration ratings carried by the New Year issue
of the Central European Economic Review. Of 27 postsocialist and
post-Soviet countries of Europe Ukraine takes 23rd place, superior only
of Uzbekistan, Turkmenistan, Belarus, and Tadjikistan.

In terms of statistics for 1999, the Austrian Erste Bank Research
predicts Ukraine's GDP decline of 4.0% and an unpredictable inflation rate.
This decline will be second worst after Russia (-6.0%), with -2.0% in Romania
and none in the other postsocialist countries. The Central European
Economic Review predicts 3.2% GDP decline and 34.8% inflation in Ukraine
in 1999. Among the 27 countries under study regress is expected only from
Russia (-4.6%), Belarus (-2.1%), and Moldova (-0.4%).

These statistics originate from the said organizations and have nothing
to do with the quasi-propaganda forecasts of official Ukrainian structures.
Incidentally, in 1997 the Deutscher Bank Research, annual supplement
to The Economist, and the prestigious economic prognosticator, Consensus
Forecasts, predicted for next year 1.0-1.5% growth in Ukraine, largely
under the influence of official Ukrainian sources.

As for of economic and social development forecasts, this year cannot
be analyzed using the traditional tools. Apart from Ukraine's economic
specificities ruling out worldwide schemes and criteria, one has to reckon
with the specific impact of the presidential campaign.

Two facts are apparent: first, the current political leadership has
no vehicles to stabilize the situation and keep the economy in a relatively
normal condition before the elections; secondly, there is no money to finance
social programs. Thus, the alleged "natural manner" of canvassing, saying
that "life will get better through the dedicated effort of the beloved
leader of the nation," sounds very dubious.

Speaking of possible political scenarios and their impact on the economic
situation in general, it seems worthwhile to single out three:

First, a "soft" cancellation of presidential elections. In this case
the economic sphere could continue as it is for a time, although mounting
social tensions, budget troubles, consequences of the debt pyramid, and
a great many other national peculiarities would loosen the foundations
of the current administration. Other countries will hasten to fold up economic
and political relations with Ukraine and its international isolation will
become an established fact. Considering the present government's inability
to carry out any reforms, it will be doomed.

Second, it is also possible that the authorities will be strengthened
after canceling the elections and establishing a semi-military regime.
Likewise, it is theoretically possible to return to a rigid command system
under the slogans of "preserving the gains of independence" or of fighting
something else. In this case the economy will have to adopt something akin
to rationing, extinguishing the first weak glimmering light of a market
economy. But this scenario is hardly likely to be played out as it will
be immediately and overwhelmingly condemned by the international community;
in addition, those wielding power in the advanced shadow sector will never
allow the current administration to tighten the screws that much.

Third is yet another scenario which seems most likely, whereby the present
political and economic leadership will do its utmost to suck this country
dry before the elections. Of course, the money-printing machines will be
working at full steam and all debts will be paid off, wages and salaries
raised, and other steps taken, acting on the principle apres mois le
deluge. Several months before the elections Ukraine will live contrary
not only to the fundamentals of the economic theory, but also common sense.
No one will pay any attention to what international financial institutions
say, or to domestic and foreign opinion. All this will be followed by soaring
inflation and recession. A sad scenario that will not bring the results
expected by today's wielders of power. Instead, it will have devastating
consequences for Ukraine's future. Considering that this country has no
reserves left for such experimentation, the new President will receive
a miserable economic legacy which will best illustrate his predecessor's
performance.

The existing socioeconomic situation makes it clear that in ten months
Ukraine will have a new Chief Executive. This year is simply doomed to
change, as the electorate at large - from pensioners to housewives to political
figures to businessmen. Such changes are sure to be positively received
within and without Ukraine.

 

 

 

 

 

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