by Anders Aslund, Peterson Institute for International Economics
Op-ed in Action Ukraine Report (AUR) #879
October 15, 2007
© Action Ukraine Report
Two weeks after the elections on September 30, 2007 and after one week of intensive talks here in Kiev, it is a good time to take stock. Elections are always major events, which change more than people anticipate.
After three lively years of minimal reforms, it has become all too evident that the constitutional order must be settled after the Orange Revolution. The renewed gas dispute has revealed serious shortcomings and calls for early and decisive action.
A Successful and Fortuitous Election
The parliamentary elections on September 30, 2007 cemented Ukraine’s democracy. They were arguably freer and fairer than any other Ukrainian election. Participation remained high at 64 percent.
As in all Central-East European countries, the dominant topic of the election was corruption. As corruption always is blamed on the incumbent government, virtually all Central-East European governments have lost elections, and the most effective critic of corruption has won, in this case Yuliya Tymoshenko.
Because of such an election outcome, something is usually done to reduce corruption. Ukraine fits the democratic mold, and the electoral weight of critique of corruption should not be underestimated also in the future.
It should lead to the fruitful instability that is most characteristic of the successful Baltic countries, where an average government lasts one year.
The voting pattern has changed substantially, from region to class. All parties lost relatively in their strongholds and gained votes in enemy land.
The Regions lost most votes in Donetsk, Kharkiv, and Luhansk but won throughout Western and Central Ukraine. Our Ukraine lost in West Ukraine (Ivano-Frankivsk, Lviv and Rovno) but acquired new votes in Kharkiv and Chernigiv.
Yuliya Tymoshenko’s Bloc (BYuT) gained nearly everywhere but most in West Ukraine (from Our Ukraine) and also substantially in the East (from the Regions). As a result, all parties have become more national. Ukraine’s previously so strong regional division has become more of an urban-rural and class divide.
Most strikingly, Our Ukraine has become a rural party, which does not correspond to its liberal image. The Regions has somewhat surprisingly become the urban middle-class party.
BYuT is the populist party of the lower middle class. The parties’ regional concentration remains strong, but the new class pattern has been superimposed.
These huge voter streams which are hidden under stable overall numbers for the Regions and Our Ukraine are likely to lead to future big electoral changes and will probably entice the winners to opt for early elections.
The economic programs of the three leading parties were extremely similar. They can all be described as democratic European center-right.
They all want deregulation, more privatization, stable macroeconomic policy, lower taxes, accession to the World Trade Organization (WTO), and membership of the European Union.
It is rare that any country has such a broad consensus about economic reform as Ukraine has today. Gone is the populism of the Orange Revolution represented by radical demands for higher social transfers, taxes and reprivatization. BYuT has made the biggest change, symbolized by its switch from attempted entry to the Socialist International to full membership of the European People’s Party.
In 2005, the Socialist International had two friendly parties in the Rada. Now it has none. The communists absorbed Vitrenko’s extreme socialist progressive party and even so they did not gain votes, showing how marginalized the communists and socialists are.
The one worrisome conflict is a possible reprivatization of Dniproenergo, which Rinat Akhmetov acquired cheaply from the state just before the election.
Such a reprivatization could be time-consuming and a major diversion from more important policies. Only Our Ukraine insists on early membership action plan for NATO, which is clearly unrealistic for Ukraine’s domestic politics.
Given that the three big parties are so close to one another in policies expressed, it does not appear essential which parties actually form a government.
What is important is that they agree on both a coalition government and the functioning of the parliament so that Ukraine at long last can adopt a vast amount of legislation out of the hundreds of draft laws that have collected dust in the Rada for the last three years.
Given that the Regions just have had the chance and that BYuT won the elections, a BYuT–Our Ukraine coalition would appear natural. The latest negotiations point in that direction with Tymoshenko as prime minister.
The current idea is that BYuT would take the whole economic bloc with Viktor Pynzenyk as the leading economic politician, while Our Ukraine would be in charge of security and culture. Tymoshenko’s ambition is to have her candidacy put to a vote immediately after the new parliament has been convened around November 1, 2007, and she assures that she will get more votes than anybody expects, suggesting that some other transactions might be going on.
Grand coalitions should always be avoided. They are only good for safeguarding corruption, which is not what Ukraine needs.
The Regions want reassurances of their influence as opposition. Tymoshenko generously offered a deputy prime ministership and a deputy minister in each ministry. That is the wrong way. It would lead to unbearable corridor intrigues without transparency.
An alterative proposal is to give the opposition half the committee chairmanships in parliament, first deputy speaker, and control over the potentially powerful Auditing Chamber. It is vital that the Regions do not boycott the new parliament, but it is not likely to happen.
Given the minimal difference in policies, the most important thing is that Ukraine gets a government that can start working. Ukrainians are tired of politicians not doing anything for them.
If the politicians do not deliver legislation and reforms now, their democratic legitimacy might run out. People are tired of petty personal intrigues.
Urgent Need for Elementary Constitutional Order
The all-dominant need is to achieve some constitutional order. The intellectual Alexander Paskhaver argues convincingly in the weekly Zerkalo nedeli that under Kuchma Ukraine had an informal order in which Kuchma acted as the last arbiter. This order collapsed with the Orange Revolution, and the standoff between special forces on May 24, 2007, showed the absence of any constitutional order, whether informal or formal.
The constitution of June 1996 leaves most things to be determined by laws, which have not been adopted, and the constitutional compromise of December 2004 barely hangs together. Therefore, all the fundamental constitutional issues need to be settled.
An acknowledged source of advice is the European Venice Commission.
For an outsider with some insight into the experiences of postcommunist transition, it is pretty obvious what changes that are needed. First, Ukraine must make a clear distinction between executive, legislative, and judicial powers, most of which has been done.
Second, Ukraine needs a parliamentary system. All East-Central European countries have adopted or moved to parliamentary systems. In the Commonwealth of Independent States (CIS), the most democratic countries—Ukraine, Kyrgyzstan, Moldova, and Armenia—have recently been moving in that direction. They offer more transparency and accountability than a presidential system.
In particular in the former Soviet Union, the presidential administration inevitably recreates the Central Committee of the Communist Party and the gubernatorial administrations the regional party committees. Nontransparency and telephone rule without accountability persists.
Third, Ukraine has already adopted a proportional election system with a hurdle for representation that works quite well. A remaining concern is that big businessmen buy safe seats. An easy technique to ease that practice is to abolish the fixed order of the candidates on the party lists. Voters may select any candidate on the list by marking him or her. Germany and Finland have excellent systems combining proportional election with the individual choice of a specific candidate.
Fourth, elementary order must be established in the judicial system. It must be evident which court has jurisdiction and the hierarchy between different courts, etc. On the one hand, judges must have a fair amount of freedom. On the other, it must be possible to sack evidently corrupt judges.
Fifth, Ukraine maintains communist overcentralization. Substantial state powers need to be decentralized to regions and municipalities. Regional and local executives should be elected in democratic order. Ukraine must not try to establish the old communist or Putin “strong vertical” which is causing such damage to Russia.
The regions and municipalities should be given their own taxes and expenditures to handle independently of the capital, minimizing the transfer of incomes up and down the administrative pyramid.
Presumably, these constitutional reforms are needed before Ukraine can start cleansing itself seriously from excessive regulation and the ensuing corruption.
A large number of reforms are long needed, and they cannot be held back much longer without serious harm to Ukraine’s economic and social development.
The Gas Dispute Reveals Serious Shortcomings
Gazprom’s announcement on October 2, 2007, that Ukraine owed it $1.3 billion for deliveries of natural gas was pretty obnoxious. The essence of this claim was that RosUkrEnergo (half owned by Gazprom and half by Gazprom’s best friend in Ukraine) had not been paid by Ukr-gazenergo (half owned by RosUkrEnergo and half by Naftohaz Ukrainy, which is controlled by the Minister of Energy Yuri Boiko, who is Gapzrom’s best friend in Ukraine).
Gazprom could as well have made a public announcement that it failed to manage its subsidiaries. It is unclear what relation the Ukrainian state had to its shortcoming, as President Yushchenko pointed out.
The situation became clearer after Boiko and Yanukovych went to Moscow to “settle the gas conflict.” Apparently, they gave away nearly all the Ukrainian gas in the huge gas storage located in Ukraine. In all likelihood, they did so at the low nominal price. If that is the case, the Ukrainian caretaker government has given away its last reserves for the winter to Gazprom and its subsidiaries for a song.
For the coming gas negotiations, Ukraine has no gas reserves to fall back upon, while Gazprom can deliver its 32 billion cubic meters stored in Ukraine to Europe, making sure that only Ukraine suffers from any disruption of gas supplies this time.
On the financial market, there are strong rumors that Gazprom has bought up vast amounts of Naftohaz Ukrainy bonds with the intention to bankrupt this state-owned and notoriously mismanaged company.
The conclusions of this story are evident. First, the current managers of the Ukrainian gas sector are thoroughly discredited. A clean sweep is needed, and all decisions they have made after the elections should be declared invalid because they exceed the powers of a caretaker government.
Second, by failing to collect payments and doing so without transparency, RosUkrEnergo has disqualified itself as a gas trader and should be taken out of business.
The election of about 10 people connected with this company on the Regions’ list is sufficient to say that this Gazprom-controlled entity plays an unacceptable role in Ukraine’s politics. Third, Ukraine’s gas policy can be reformed in many ways, but the prevalence of huge rents caused by price wedges is unacceptable. This must be a major objective of the new government. As before, gas is the most important source of grand corruption in Ukraine. Short-term gas bargains must not overshadow this fact.
This gas dispute can prove productive for Ukraine, and it offers a new government a unique opportunity to prove itself.
The strength of Ukraine’s negotiation position should not be underestimated even if it has been undermined. After all, Russia cannot export much gas to Europe for the next several years without Ukraine’s consent.
Reprinted with permission from the Action Ukraine Report (AUR).
Morgan Williams, Publisher, firstname.lastname@example.org
Peterson Perspective: Ukraine's Turmoil Without End? December 3, 2013
Op-ed: Ukraine: The Basket Case November 26, 2013
Policy Brief 13-22: Ukraine's Choice: European Association Agreement or Eurasian Union? September 2013
Policy Brief 11-9: Lessons from the East European Financial Crisis, 2008-10 June 2011
Book: How Latvia Came through the Financial Crisis May 2011
Book: The Last Shall Be the First: The East European Financial Crisis October 2010
Paper: Proposals for Ukraine: 2010—Time For Reforms February 2010
Book: The Russia Balance Sheet April 2009
Book: How Ukraine Became a Market Economy and Democracy March 2009
Working Paper 06-5: The Eurasian Growth Paradox June 2006