Business bails out of Ukraine

April 16, 1997|By Elizabeth Pond

BONN -- Ukraine's top economic reformer, Viktor Pynzenyk, resigned this month after the Kiev parliament rejected yet again both tax revision and the 1997 budget. And Motorola, Marathon Oil, and the sugar giant Tate & Lyle have all recently left Ukraine because of the vast corruption they encountered there.

It's bad news for the U.S. and even worse news for Ukraine. A strategic American protege is falling backward -- and the International Monetary Fund will not release the $3 billion it pledged Kiev for budget support if deficits were kept reasonable.

lTC The U.S. has bet on President Leonid Kuchma, elected in 1994, to liberalize the economy and get it growing again. Washington gave him close to $1 billion, making Ukraine the largest recipient of U.S. assistance after Israel and Egypt. It also got the World Bank and International Monetary Fund to give generous support.

Mr. Kuchma did start belated reforms, and he turned out to be a better politician than might have been expected of the former director of the Soviet Union's largest missile factory. He cajoled a resistant parliament into ratifying Ukraine's surrender of all nuclear weapons. He got a new constitution passed. He got the parliament to condone economic stabilization and privatization. His governments supported the central bank in getting the 10,000 percent hyperinflation of 1993 down to the current 40 percent.

He also brought his eastern Slav country to approve NATO enlargement and even to say that Ukraine, too, would like to join in another decade or so.

It was muddle-through, but it worked, for a while. And when parliament refused to pass a non- inflationary 1997 budget last fall, President Kuchma vowed he would get it passed this spring, along with tax and structural reforms. Mr. Pynzenyk, as deputy premier in charge of the economy, was his point man.

As an economist with no political base, however, Mr. Pynzenyk ** was no match for the anti-reform parliament, or for the tough prime minster, Pavlo Lazarenko, a former collective-farm bureaucrat and reputed new millionaire. Mr. Lazarenko formally supports reforms, but Western businessmen and diplomats say he has acted behind the scenes to block both land reform and the opening of the economy to more competitiveness and transparency.

Mr. Pynzenyk's replacement is Sergei Tigipko, a nouveau-riche commercial banker with no experience in government, but with close ties to Mr. Lazarenko and the United Energy Systems conglomerate that Mr. Lazarenko built last year to corner an estimated 90 percent of Ukraine's gas market and an eighth of the country's GDP. The widespread expectation in Kiev is that the energy conglomerate's huge wealth will enable it to snap up the country's best industrial properties, which are due to be privatized this year.

Both men and President Kuchma come from Dnepropetrovsk, the home of the most powerful Communist Party machine in Soviet times and of UES now. The latest skirmish suggests that today's Dnepropetrovsk ''clan'' answers more to the formally subordinate prime minister than to the president. Mr. Lazarenko is expected to run against Mr. Kuchma in the 1999 presidential election, and may beat him to the Dnepropetrovsk money that supported Mr. Kuchma's campaign in 1994.

Opaque circumstances

Major Western firms are cutting their losses. Motorola, which had invested heavily on a contract for mobile phones, gave up after the rules (and fees) for frequencies kept shifting and Ukrainian competitors were awarded frequencies under opaque circumstances. Tate & Lyle pulled out after it was suddenly barred from importing sugar cane and exporting its refined sugar -- apparently to favor domestic sugar-beet growers, who cannot even produce this quality of sugar.

JKX Oil and Gas, a British firm that says it could produce 20 percent of Ukraine's gas needs from its Poltava fields -- and thus help free Kiev from its huge and growing debts for Russian and Turkmen imported gas -- is also considering leaving after officials barred it from feeding into the domestic pipeline. Other companies that aimed to help Ukraine boost the exports of its famed grain had contracts for cereal deliveries broken as the state appropriated the harvests instead (paying less than half the world price).

Between them, these Western companies had been planning to invest more than $1 billion in Ukraine -- almost as much as the country has been able to attract in its five years of existence.

Muddle-through, it seems, is turning into sleepwalking.

Elizabeth Pond, an independent journalist, is writing a book about Ukraine.

Pub Date: 4/16/97

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