Ukraine's reforms have been sporadic so far, with dire effects on the economy. Now the country is broke, so reform has to happen.
"Ukraine faces a choice ," says Yvgeny Tchervonenko, one of Ukraine's new breed of entrepreneurs, as he sits at a cafe table sipping one of his company's fruit juices. "Either it lives on aid injections and works with unclear laws and a semblance of democracy; or it develops itself and becomes competitive."
Some would argue that Ukraine has already chosen. With an economy that has slumped 55% since 1991, workers that haven't been paid for months, and a strategic geographic position, it's the world's third largest recipient of US aid. Mind-numbing taxes and regulations have pushed up to half of its economy into the shadows, and there's been just a dribble of foreign investment. Elections may be free, but the media is less so.
And compared with most of its neighbours, Ukraine has been snail-like in its development. It is at least five years behind Central Europe in terms of reform, and two to three years behind Russia. Prime ministers have come and gone, an- nouncing comprehensive reforms that somehow always failed to happen. One Western diplomat fears that, in its eagerness to support Ukraine's fledgling independence, the West has risked creating a "dependency culture" that won't face up to the pain of more reform.
But for all the gloom in Kiev, there is a slim chance of change this year, not least because Ukraine is broke. In the past few months, President Leonid Kuchma has sent out a series of decrees, which start to tackle some of the problems Western lenders have been moaning about for years, like the budget deficit and red tape for businesses. Even better, a new privatisaffon plan has been announced, which suggests that Ukraine could finally get some foreign investment into its biggest firms. And this time, Ukraine may just be desperate enough for cash to bow to multilateral pressure and push through reforms.
The wildcard is that this is an election year. And with impoverished pensioners the only certain voters, March's parlia- mentary elections are likely to result in an even more Communist-dominated parliament than the present one (see box page 1). But thanks to new electoral laws aimed at consolidating political parties, it may at least be a bit less quarrelsome. And all parties, even those still proudly labelled Communist, promise reform (albeit sometimes in terms that make Western advisers wince). They have to: most of Ukraine's 50 million people, sick of the effects of slow reform, want more speed.
So political self-interest, combined with the commercial self-interest of the numerous businessmen standing for election, plus some sharp kicks from Western lenders, just might push parliament into reform. President Kuchma, on the other hand, has less clear-cut incentives, though he claims to be committed to reform. Parliament will be out of action until May, which will clear his way, but presidential elections are due in October 1999, which may tempt him back into populism. That gives Ukraine just a small window of opportunity between now and the start of presidential campaigns.
However small the window, it has to use it. Ask a businessmen like Yvgeny Utkin, head of local computer company Kvazar Micro, if the elections will change anything, and he answers simply: "l need to believe they will." For Mr Utkin, and many other like him, the agenda is clear. Ukraine must get business - and the economy - moving.
The good news is that it may already be happening. Surveys of electridty usage (and of the number of new cars and travel agencies) suggest that, taking the shadow economy into account, Ukraine is no longer heading for the bottom. It may actually be heading north. Even the offlcial figures suggest that 1.5% growth is possible this year and, with a bit of effort, could hit 2% next year. "We're at the turning point," claims presidential adviser Anatoly Huylchinsky triumphantly.
The bad news is that, at that rate, it will take nearly half a century for Ukraine to get back to pre-independence wealth levels. If it's to happen any faster, then Ukrainian industry needs to be in a fit state to take advantage of anyupturn in its own huge market, and possibly (given the re- cent truce in the Russian-Ukrainian trade war) in that of its larger neighbour. And that means injecting two things - money and good management.
So far, Ukraine's sporadic pdvatisation programme hasn't done enough. Mass privatisation, first launched in 1992 and then again in 1995, has proceeded mainly through vouchers. That may have got around half the economy, including most small- and medium-sized companies, out of state hands, but it has done little to give companies more capital or better management. For the large companies, most of which are still largely in state hands, that need is even more awte. Ukraine's overall fixed investment is still slumping even faster than its productivity.
Hence the announcement, late last year, of a new dfive for large-scale cash privatisation. Stakes in some 933 companies are being put up for sale this year in what politidans call a Hungarian-style selloff. The plan is far from perfect. For a start, most of the stakes are minority ones - not so attractive in a country where shareholder protection is slight and commercial management rare. Secondly, Ukraine is not above setting conditions for foreign investors, and then changing them at the last minute - a tactic that last year scared off America's Motorola telecoms giant. And thirdly, sales are supposed to take a mat- ter of weeks, in a country where any investor is going to be taking on huge risks that need time to quantify.
Still, Western lenders are pleased to see even an imperfect scheme go ahead. Similar plans have been announced in the past, then stalled as politicians squabbled over "strategic" companies, orwhether Russians were going to buy up the country. The result: Ukraine raised less than a third of its planned $500 million in privatisation revenues last year.
In the event, desperation could do the trick. With the govemment in urgent need of money to plug the budget deficit, sell- offs are supposed to raise over Hrv2 billion ($l bn) this year, about half Ukraine's total stock of foreign investment. Given last year's fiasco, it was an ambitious target, but Ukraine already looks close to reaching it. As BCE went to press, South Korea's Daewoo was set to sign a controversial $1.3 billion joint venture deal with Ukraine's biggest car-maker Avtozaz. A week earlier, Anglo-Dutch energy giant Shell signed a protocol that may lead to a $1.5 billion investment in Ukraine's crudal pipeline from Russia, which supplies a third of Europe's gas.
And with plum sectors like energy, chemicals, airlines and telecoms on offer, the chances of attracting more investors are highish. David Snelbecker of Kiev's Harvard Institute for Intenational Development, a US-funded think-tank, reckons that at least 200 of the companies are worth buying into. Even these, though, have their problems. In the cash-strapped power sector, for example, barter accounts for over 80% of revenues, and prices have yet to be liberalised. Domestic telecoms monopoly Ukrtelekom needs a scary $10 billion in investment.
But at least - unusually for Ukraine - there's been some attempt to prepare these companies for privatisation. The power sector has been split into competing chunks, separating generation and distribution. Ukrtelekom is being consolidated, taking in its 35 quasi-autonomous regional units. Ukraine's hopes that a minority stake in Ukrtelekom could be worth $ 2.5 billion are optimistic, but it should be sellable. And the State Property Fund claims it has already sold 20% stakes in several regional power companies, to unnamed American investors.
The bigger problems, though, are in heavy industry, where restructuring has been rudimentary at best. Take the steel sector, one of the few that is actually growing. Efficiency is a joke - some 89% of the country's blast fumaces need replacing - but so are costs, which are a fifth below Russia's. And that means plants may be sellable. The govemment wants to sell a 54% stake in Ukraine's fourth largest plant, Zaporizhstal, which has healthy sales to China, Russia and Turkey.
But talk to the likes of Donetsk, a medium-sized, largely private plant that has attracted $50 million in investment from the Hong-Kong-based RussianMetals group, and some worrying indications emerge. One is that Donetsk didn't spin off its social obligations - hospitals, schools, house of culture - until last year. Asked if this was a tad slow, the steelmaker points out that the industry minister commended Donetsk for being at the forefront of Ukrainian refomm. Another question mark is that Donetsk, still 20% state-owned, acknowledges that it has little political leeway to cut jobs.
The situation at Donetsk, now set for thorough restructuring and upgrade, shows why the commerdal management and investment that cash sales will bang is vital. But it also demonstrates the govemment's continuing reluctance to loosen its grip on industry, which is why it's of- fedng so many minodty stakes. The extent to which that grip is holding back growth can be seen only too clearly in the existing private sector.
Take new business start-ups, which as in Poland should be providing an engine for growth. Ukraine has only a third more small businesses than tiny Georgia, which has a population a tenth the size. That's largely because start-up companies in Ukraine have to collect some 26 different certificates, often bribing a tribe of officials, in order to get going. Even successful pioneers like Mr Tchervonenko, who set up his Orlan drinks company in 1992, claim a business start-up would now be next to impossible.
Deregulation, as recently proposed by a presidential decree, should help speed things up a bit. The president's new business council hopes to cut red tape, make it easier to open a bank account and introduce a lower flat tax for small businesses. Customs and licensing procedures are also set to be simplified.
Comprehensive tax reform could help even more. To lure the shadow economy into the light, taxes need to be lowered and spread wider, while government spending has to be cut. Some work has already started, with profit tax and VAT laws drafted. Imperfect they may be, as busi- nessmen's grumbles about yet more taxes suggest. But at least they're better than the old revenue-based tax system that charged unprofitable companies much the same as profitable ones. A hefty payroll tax, meanwhile, is gradually edging its way down.
It's a start - but only a start. To get all the paraphemalia to support growing businesses, like functioning banks and cap- ital markets, Ukraine has got its work cut out. But reform now has to happen, if only because Ukraine needs the money. "I've got sick of the word 'potential' in Ukraine, " says a Westem diplomat. "It's about time it became reality."