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Vol 2, No 43
11 December 2000
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Ukraine in 2000Bitter-sweet Symphony
The year in review for Ukraine
Sarah Whitmore

2000 has been witness to lots of change in Ukraine, but there is much ambiguity as to its direction. In the economic sphere, there are grounds for cautious optimism, as the year saw strong growth of real GDP and industrial production for the first time since independence.

The year began with the appointment of the most pro-reform, pro-Western government to date, which has managed to eradicate pension arrears and accelerate privatisation. However, the government faced big problems, not least in the energy sector and has been unable to rely on consistent support from either President Kuchma or Ukraine's first-ever parliamentary majority.

The President prioritised constitutional augmentation of his powers vis-à-vis Parliament, while the conduct of this process aroused concern from international bodies, such as the Council of Europe. At the same time, relations with Russia were tense. As the year drew to a close, an enormous scandal attempting to implicate the President of complicity in murder demonstrated that instability and unpredictability remain defining features in Ukraine.

The economy: turning the corner at last?

Macro-economic indicators for the year permit a degree of increased confidence that Ukraine's economy could finally be heading in the right direction. Post-independence Ukraine has seen real GDP and industrial and agricultural output fall year after year, coupled with substantial budget deficits, negative balances of trade, growing external debt and rising unemployment. If 1999 showed a slowing of some of these negative trends, this year real GDP is predicted to grow by 3 to 3.2 %.

In the first eight months of 2000, industrial production increased by 10.6 %, the budget was on course to balance, there was a slight fall in official unemployment, a (tiny) trade surplus and the government had managed to reduce the external debt burden (albeit at the expense of lower foreign currency reserves).

According to European Bank for Reconstruction and Development (EBRD) figures for Central Europe and the Former Soviet Union, Ukrainian economic growth is part of a regional trend, which has been promoted by the strong world economy, high demands for exports and the aftermath of the Russian rouble depreciation (Financial Times, 15 November 2000). However, Yushchenko's government can certainly take some of the credit, although the positive macro-economic indicators belie a more ambiguous economic picture.

The government maintained relatively tight fiscal control and significantly reduced the proportion of barter payments in the economy. Major administrative and tax reforms are being undertaken and privatisation of large-scale assets has accelerated. Nevertheless, government targets are still seen as too optimistic by Western analysts and support for privatisation in the parliamentary majority tends to be conditional.

Despite impressive growth figures and the greater reform commitment of the government, there were few indications that these improvements were tangible for most of the population. Although the government paid off pension arrears and promised to raise them, less progress was made with wage arrears and social indicators remained poor. The International Labour Organisation reported in April that the average salary in real terms was a mere USD 25 and real unemployment was around 30%.

Things are likely to remain difficult for some time, but this year there are signs of progress and reform commitment that have long been absent. To a significant extent, the survival of Yushchenko's government will be key to building on these trends. This remains far from certain, especially as attempts to reform the energy sector have met with powerful opposition.

Ukraine's achilles heel

Support for the government by the parliamentary majority has remained conditional, at least in part due to the government's energy policy. The area remains the most problematic for the government and the economy. Ukraine is heavily dependent on Russia for energy and has accrued huge debts—an ongoing source of tension between the two countries.

The domestic energy market is largely controlled by so-called "oligarchs," who funded President Kuchma's re-election campaign and unofficially run the parliamentary majority. The government's attempts to reform the ailing sector are under the charge of the controversial Deputy Prime Minister Yulia Tymoshenko. Her policies have significantly increased the proportion of cash payments for energy, while she sought to reduce dependence on Russian gas by negotiating with Turkmenistan and also hopes to attract Western investment in the forthcoming privatisation of several regional energy distributors.

The EBRD cautiously praised her attempts, but powerful groups in the parliamentary majority consistently called for her dismissal, and the President has not disguised his preference for her ouster. But he has refrained from sacking her.

The energy question also dominated relations with Ukraine's northern neighbour. Russian President Vladimir Putin has demonstrated a tougher stance than his predecessor towards Ukraine's energy debts and theft of gas. Ongoing negotiations throughout the year floated various schemes, whereby Russian gas companies could lease or own stakes in Ukrainian pipelines to clear the debt, but disagreement on the size of the debt was one of several sticking points.

Moreover, a twenty-year deal for Russia to supply the European Union (EU) with gas in October allowed Russia to increase the pressure on Ukraine by announcing plans to build a pipeline that would by-pass Ukraine. This would deprive Ukraine of valuable transit fees for gas passing through its territory and has increased Russian leverage in the ongoing negotiations.

If the EU handed Russia a stick to beat Ukraine with, at the same time it offered a carrot to guarantee the accomplishment of one of its aims: the closure of Chornobyl. Although the government announced the closure date of 15 December earlier in the year, uncertainty over whether the promised Western financial assistance would be forthcoming provoked backtracking statements from politicians, such as the parliamentary speaker. In October, the EU pledged USD 56 million to help cover the costs of purchasing supplementary energy until the completion of two new nuclear power stations which depend on the EBRD's pledge of loans.

The IMF saga

In terms of foreign debt, the government avoided default by restructuring USD 2.6 billion worth of international loans in March. In fact, the risk of default and the suspension of International Monetary Fund (IMF) and World Bank lending were influential factors in the appointment of Viktor Yushchenko as prime minister, who was seen as the West's preferred candidate. Despite regular words of encouragement for the government's reform efforts, the IMF continued to withhold the money and evinced a tough line towards Ukraine throughout the year.

Relations were particularly tense in the spring, when the Financial Times published allegations of loan misuse by the National Bank of Ukraine in 1997, when it was headed by Yushchenko. The subsequent investigation uncovered no evidence of misuse but found that the bank had overstated its foreign currency reserves to get loan tranches it might not have received otherwise. The Prime Minister explained that the unintentional overstatement was a result of the changeover from Soviet to Western accountancy methods.

The scandal damaged both Ukraine's reputation before its foreign creditors and, particularly, the previously untarnished image of the Prime Minister. At home, the episode served to reinforce popular distrust of international financial institutions and media. Nevertheless, by November the IMF was looking more favourably towards the government, conditionally promising to renew lending even before the end of the year. As the 2001 budget takes these loans into account, this was good news for Yushchenko.

It is possible that the IMF's game of hardball this year helped Yushchenko hold on to his post. If the cynics are to be believed, the President intended to remove the Prime Minister as soon as he had negotiated the lending resumption, which was initially expected in the spring. However, as time passed, it became clear that the government's survival was intimately entwined with that of the parliamentary majority that the President needs to increase his formal powers.

Quickstep in political quicksand

An unstable but curiously enduring marriage of convenience between the President, the government and the parliamentary majority has been perhaps the political innovation of the year. This unholy ménage-a-trios evolved out of Kuchma's determination to change the Constitution in his favour (see A Difficult Season from 25 September 2000 for more on this) and bring into line the Parliament he blamed for blocking reforms.

To this end, he engineered a referendum of dubious legality to endow his plans with popular legitimacy and, as a result, prompted threats of suspension from the Council of Europe. In its turn, the threat of the referendum and possible dismissal of Parliament provoked an unprecedented parliamentary crisis that resulted in the ousting of its leftist leadership and the formation of Ukraine's first-ever parliamentary majority.

That the constituent factions (parliamentary caucuses) of the majority were not natural bedfellows was clear. Their disunity, with centrist factions opportunistically voting with the left, had allowed the leftist minority to dominate Parliament since the 1998 elections. Inbuilt tensions in the new centre-right majority led many commentators to question its durability.

It was a heterogeneous mix of pro-presidential and pro-government factions, whose interests were often mutually exclusive. Put most simply, there are those who support Western-style reforms and those who have vested interests to protect.

Pro-presidential factions and centrists, including the aforementioned "energy oligarchs," organised and supported the referendum but remained aggrieved over government personnel, because the majority did not influence the formation of Yushchenko's government. Getting rid of Deputy Prime Minister Tymoshenko was one such priority.

Tymoshenko, though, has her own faction of 35 deputies, who form part of the pro-government component of the majority along with the national-democratic factions supporting reforms and are lukewarm about the referendum and its implementation. During the year, it became evident that Tymoshenko's dismissal would sound the death-knell for the majority, while her continued presence in the government constantly threatened its integrity.

The President's prioritisation of changing the Constitution made the survival of the majority indispensable. As only 251 of approximately 270 majority deputies voted for the amendment bill in July, another 49 would require "persuading" in order to gather the 300 votes necessary for the final reading before the end of the parliamentary session early next year.

Factions in Parliament have notoriously fluid membership, but the recent months of "recruiting" have exaggerated this liquidity. Leftist and non-aligned deputies have been attracted to the majority—with prominent majoritarians openly admitting that large sums of money have been changing hands; for example, former President Kravchuk (Den', 21 September 2000).

Recently, the President appeared to be attempting to compromise slightly with deputies when he introduced two draft laws to Parliament that would clarify and supplement the constitutional changes. One of the bills, if enacted, would qualify, but not remove deputies' immunity from arrest. It remains to be seen if the minor concessions offered in the form of ordinary laws will be sufficient to persuade 300 deputies to vote for a reduction in their own constitutional powers.

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Despite enormous efforts this session, the majority still only numbers an estimated 280 to 285 deputies. However, if Parliament fails to implement the referendum, the President would seek ways to dissolve the legislature and hold early elections. Taking this step would involve stepping into to legal no-man's land and would again generate tension with international bodies, such as the Council of Europe.

Concern from international bodies was not limited to constitutional change in 2000. Anxiety about freedom of speech and the media, which was awakened during the 1999 presidential election campaign, grew during the year and found its apotheosis in the disappearance and probable subsequent murder of opposition journalist Heorgiy Gongadze.

Last week's revelation by respected parliamentarian and leader of Socialist Party Oleksandr Moroz that he had tapes of the President and top officials organising the disappearance shocked the international community and Ukrainians alike. Only Ukrainians tended to be more cynical about the scandal's implications. One Kyiv resident said that "even if it were true, we would never know."

Sweet and bitter

On one hand, 2000 could be seen to have been a continuation of some familiar themes: economic hardship for the population; the President imposing his will on Parliament by means of a referendum; constitutional crisis; political and financial scandal; restrictions on freedom of speech.

On the other hand, the turn of the century could be remembered as a turning point for Ukraine: the year Chornobyl closed; the year in which the economy finally started to grow and reforms got some momentum; the year in which the first real pro-reform government was able to survive and, thanks to the existence of the first parliamentary majority, stood a chance of enacting a coherent programme.

What you see depends on where you look. 2000 will be assessed in light of what happens subsequently. And, at the moment, uncertainty is the only certainty.

Sarah Whitmore, 11 December 2000

photo by author

Moving on:


EIU Country Reports, 2000 Ukrainian Economic Trends, UEPLAC, July 2000


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