Kiev's economic performance on trial

KIEV, Ukraine — For the leaders of Ukraine's Orange Revolution, who inherited a $6 billion budget hole and an impoverished population impatient to see corruption eradicated, getting a handle on the economy was never going to be simple.

The popular mood isn't encouraging for proponents of reform.

Alexander Ivanov, a 43-year-old electrician, says salaries have failed to keep pace with rising prices for daily items. "Workers now buy their sausage for 30 hryvna ($6) and wages haven't gone up," he said. "I don't think people in politics pay any attention to the ordinary people."

Still, investors are bullish. Construction cranes dot Kiev's skyline and BMWs speed down its elegant boulevards, while a mix of languages can be heard in restaurants packed with foreign executives who are rushing to cut deals in a huge market largely free of competition.

"The government doesn't get involved in the day-to-day affairs of ordinary businessmen," said Alex Frishberg, a veteran Kiev-based lawyer, adding that politicians were too busy with "constant infighting."

"What you have in Kiev is the purest form of capitalism," he said.

The economy has taken plenty of hits. Erratic policies under firebrand former Prime Minister Yulia Tymoshenko in the early months of the Orange government _ compounded by a 30 percent decline in late 2004 in international prices for steel, Ukraine's key export _ squashed economic growth from 12.1% in 2004 to just 2.6% in 2005.

President Viktor Yushchenko's opponents have hammered a January gas deal with Russia, which saw the price of gas imports nearly double to $95 per 1,000 cubic meters, as potentially lethal for Ukraine's gas-intensive and inefficient industries.

The agreement came after Moscow demanded Kiev pay nearly five times more for its gas and temporarily halted supplies, also causing interruptions in European deliveries. Observers called Moscow's stance punishment for Yushchenko's pledges to bring Ukraine closer to Europe and out of Russia's orbit.

And corruption remains entrenched. If a clique of oligarchs wielded power under former President Leonid Kuchma, analysts and businessmen say the Orange Revolution has simply expanded the pool of tycoons with ties to power.

On the other hand, foreign direct investment came in at a record $7.9 billion (euro6.6 billion) in 2005 _ nearly as much as had entered the country since its independence in 1991. That jump came almost solely through the reprivatization of the Kryvorizhstal steel plant, which Mittal Steel Co., bought last fall for a jaw-dropping $4.8 billion.

The auction was a huge vote of business confidence for Yushchenko, who had promised during his campaign to smash the nepotistic excesses of the old regime. The plant, which accounts for 20 percent of Ukraine's metals output, had been sold to Kuchma's billionaire son-in-law in 2004 for a fifth of what Mittal paid.

Then came a series of acquisitions of Ukraine's top banks. Within the last six months, Austria's Raiffaisen bought a controlling stake in Aval Bank for over $1 billion, France's BNP Paribas snapped up 51 percent of Ukrsibbank for about $500 million and Italy's Banca Intesa acquired more than 85 percent of Ukrsotsbank for just over $1 billion.

Further support came from the European Union _ which Yushchenko has pledged to join _ when it granted Ukraine market economy status, began talks on easier visa rules and agreed to sign a free trade deal after Kiev joins the World Trade Organization. Last week, Ukraine and the United States agreed on a deal on Ukraine's accession to the WTO.

That has gone a long way to calm the nerves of local and foreign investors after the roller-coaster stewardship of Tymoshenko, who was fired and replaced in September by Yuriy Yekhanurov, who is seen as more business-friendly.

As part of an anti-corruption drive under Tymoshenko, foreign investors were left smarting after the sudden termination of the tax havens provided by free economic zones. Her bombshell pledge to review some 3,000 questionable privatizations shook faith in property rights and contributed to a dramatic drop in domestic investment, while her decision to cap gasoline prices ahead of the spring sowing season prompted production cuts at Ukraine's Russian-controlled refineries _ sending prices soaring.

But there were successes. The anti-corruption campaign saw tax revenues rise by about 70 percent _ plastering over the 32 billion hryvna ($6.4 billion) budget deficit opened by the populist spending policies of former Prime Minister Viktor Yanukovych before the presidential election.

Still, many Ukrainians have been disillusioned with Yushchenko's promises of prosperity through closer ties to the EU, and analysts predict a strong showing by Yanukovych's pro-Moscow Party of the Regions bloc.

There are high expectations of a parliamentary majority formed between Yushchenko and his rival Yanukovych, who is bankrolled by powerful business magnate Rinat Akhmetov, a former Kryvorizhstal shareholder who today is worth $1.7 billion according to Forbes magazine. Considered the real force behind Yanukovych, Akhmetov is running for parliament and is rumored to have his eye on the prime minister's office.

While some analysts have said that union could pull Ukraine further back into Russia's orbit, others see Akhmetov as a realist whose metals businesses stand to benefit from the removal of antidumping restrictions, which WTO membership would eventually lead to. Some suggest he would also be averse to Russian companies encroaching on his business activities, which could be a consequence of Kiev's membership in a planned "common economic space" between Russia, Ukraine, Belarus and Kazakhstan.

Kamen Zahariev, country director for the European bank for Reconstruction and Development, noted that Ukraine has had 11 prime ministers in the past 15 years and said that above all, political stability would be key to Ukraine's economic progress.