"The End of the Orange Revolution"

This government has been an unmitigated disaster of socialist populism

This has been a miserable year for the Ukrainian economy. Last year, Ukraine enjoyed an economic growth of no less than 12.1 percent, but that had declined to 3.7 percent during the first seven months of 2005. Moreover, output has declined by almost every month and so has industrial production that fell by 2.4 percent in July over July last year.

Construction and investment are falling ever more. A huge trade surplus last year has been eliminated in the last months. Clearly, Ukraine is on the way toward 2-3 percent growth this year. Only the budget balance is positive, as the Ministry of Finance has pursued a conservative fiscal policy.

This economic deterioration has been caused domestic economic policy. The dominant concern [FIRST] has been a wide-ranging discussion about re-privatization. Prime Minister Yulia Tymoshenko once talked about the revision of 3,000 privatizations. Another problem [SECOND] has been a sharply increased tax burden of 5-6 percent of GDP needed to finance very large increases in social transfers and public wages.

A THIRD issue has been far-reaching government intervention in the economy, such as attempts to regulate the prices of petrol, meat and grain and to reinforce state monopolies. A doubling of railway tariffs for metal freight has also harmed the economy. The government has been run like a
profit-maximizing state holding company oblivious of effects on the private sector.

Meanwhile, this government [FOURTH] has not undertaken any of the many promised and badly-needed liberal reforms. The only positive step has been the late adoption of half the WTO-related legislation that was necessary for Ukraine's accession to the WTO this year. So far, no significant
deregulation has occurred in spit of much talk about it. No tax cuts have occurred.

No financial legislation has been adopted, although Ukraine does not even have a law on joint stock companies.

In short, this government has been an unmitigated disaster of socialist populism. On top of everything, it has maintained a revolutionary discourse of vehement public attacks against individual businessmen and politicians, including members of the government. Eight months of this mess was too much.

It was therefore a great relief when President Viktor Yushchenko reasserted his authority to put an end to this public mismanagement. Sensibly, Yushchenko also let several big businessmen, who helped finance and manage his campaign, go, as their aspirations to make money on their
positions have been another worry.

This government change marks the end of the Orange Revolution. Yulia Tymoshenko and her loyalists have now marched out of the government, and Tymoshenko has declared that her political bloc will stay independent of Yushchenko's. The question today is where various politicians and
businessmen will go.

One old oligarch, Alexander Volkov, and the probably second largest oligarchic group, Privat Group in Dnepropetrovsk, are with Tymoshenko since a long time. More than twenty businessmen in the parliament have recently joined her party faction.

Sensationally, Kuchma's former chief of staff, Viktor Medvedchuk, and his Social Democratic Party are suddenly favoring Tymoshenko, with Ukraine's first President Leonid Kravchuk strongly supporting Tymoshenko. Curiously, the real agitators of the Orange Revolution and some of the more disreputable oligarchs appear to be coming together in Tymoshenko's bloc.

Meanwhile, others are joining Yushchenko. Anatoly Kinakh and his liberal industrialist faction are already with him. Speaker Volodymyr Lytvyn appears to turn to Yushchenko as well. Embattled oligarch Viktor Pinchuk and his Labor Ukraine faction support Yushchenko. The assumption is that the new government will contain about ten former Kuchma ministers of good reputation, who can the support of four-five centrist party factions in parliament for Yushchenko.

The big businessmen who have stood behind Yushchenko all along, notably Petro Poroshenko, David Zhvania and Yevgeny Chervonenko, are staying loyal to him, even if they are leaving their government portfolios. Former President Leonid Kuchma has expressed his support for Yushchenko.

Thus, Yushchenko's old liberal, Western and moderate nationalist supporters are likely to stay with him, while the centrist oligarchic factions will probably join him. Oddly, the Socialist Party wants to stay in government and thus support Yushchenko, although they have been much closer to
Tymoshenko.

Ironically, the biggest outstanding question is where the Donetsk party, the Regions, including former presidential candidate Viktor Yanukovich and Ukraine's leading oligarch, Rinat Akhmetov, will go. Akhmetov has long seemed to want to make peace with Yushchenko, while Yanukovich sounds
as if he is leaning toward Tymoshenko.

A swift split of Ukrainian politics is taking place among the leader of the Orange Revolution, and the two opposing leaders are Yushchenko and Tymoshenko, even if they do not attack one another in public as yet. Both are mobilizing substantial forces, which contain big businessmen.

In the ideal case, a US-type Republican Party could be formed around Yushchenko and a somewhat populist Democratic Party around Tymoshenko, while at least the small Socialist Party and the even smaller Communist Party would stay independent. The nightmare would be a party fragmentation
as occurred in Poland in 1990-91.

The litmus test will come very soon, with the formation of the government of Yuri Yekhanurov and the parliamentary vote on his candidacy. The assumption is that he and Yushchenko will do what it takes to get a majority for the new government, and they already seem to have secured enough votes.

In this hot political situation, it is difficult to imagine a more suitable prime minister than Yuri Yekhanurov. As Chairman of the State Property Fund from 1994 to 1997, he carried out mass privatization in Ukraine, and very successfully so, leaving him in high repute. As first deputy to Prime Minister Yushchenko in 2000-2001, he made sure that the government worked well.

From 2002, he has been one of the leaders of Our Ukraine in parliament, and as committee chairman he has shepherded substantial economic legislation through parliament. In spite of many years in politics, he has virtually no enemies. Yekhanurov should be able both to hold the Yushchenko loyalists together and make the government start working, although parliamentary
elections are scheduled for March 2006.

Yekhanurov has his work cut out for him. In a short period, he needs to accomplish many things. FIRST, of all, he is strongly committed to put an end to mindless re-privatization campaign. Probably, the steel mill Krivoryzhstal but nothing else will be re-privatized. SECOND, a long
prepared draft omnibus law abolishing some 3,600 regulations is ready to be sent to parliament.

THIRD, the remaining WTO legislation is already in parliament, and Ukraine needs to have it promulgated not later than October, if it is to have any chance to enter the WTO this year.

FOURTH, the very populist budget for next year of the former government, containing little but more social transfers and public wages, has to be redone quickly. In particular, that high spending must be cut, and social taxes should be unified and reduced.

Finally [FIFTH] , Yekhanurov might be able to push through some financial legislation long prepared and lying waiting in the parliament. The economic agenda can at long last become relevant for Ukraine's economic development, and the growth could soon resume.