A Post-Soviet Puzzle: The Case of After Independence

A Thesis

Presented to

The Faculty of the Departments of Economics and Political Science

The Colorado College

In Panial Fulfillment of the

Requirements lor the Degree

Bachelor of Arts

By

Yaroslav V. Hetman

May 200; 'I'll My Familj CONTENTS

Acknowledgements ...... 11

Introduction ...... 1

1. Transition Theory...... 3

2. Ukraine, Before and During Transition ...... 18

3. The Puzzle ...... 48

4. Ukraine's Economic Growth Between 2000 and 2004 ...... 50

5. The Yuschenko Slowdown ...... 59

Conclusion ...... 73

Sources Consulted ...... 76 ACKNOWIEDGIVlENTS

This paper represents nearly one year of research and has been one l)rthe best academic experiences I've had at Colorado Collegc. However. it would not have been possible without the help of many people.

First I would like to thank John Gould. my adviser and mentor over the past two years. Not only did he help me obtain the funding necessary to go to Ukraine and conduct much ofthe research for this paper. but I will forever be indebted to him for the patience and countless number of hours he provided me during the writing process.

Secondly I would like to thank Sergei Pokhilko. Vitaly Andriyshin and Vasyl

Prikordonniy for all their help during my research in Chaine. Without their guidance I could never have heen able to conduct all or lh~ inten'it'\\s that I needed.

I would also like to thank Vlolly Gross. l'or devoting many days to helping me edIt and proolread this paper. I could never have preserved my sanity without her good humor and sound advice.

Finally. I would like to thank my family fur helping me with finding accommodations in Ukraine and fi)l' supporting me in every way possible throughout the past year. Introduction

After the collapse of the and its Eastern Block satellites, many international institutions expected rapid growth in Ckraine, The country's enormous agricultural and industrial output, highly educated population, and strategic location between natural-resource rich and the rest of Europe almost guaranteed a much better quality of life for . In contrast, by 1999 the couutry's total economic output was at less than hal r its pre-independence level and millions of Ukrainians were struggling just to survive, Even more discouraging was the fact that political power became highly concentrated in the hands of Leonid Kuchma, a callous and self-serving executive wbo was unwilling to undertake tbe reforms needed to change the country's dire prcdicmncnt,

According to prominent political economy theories, under such leadership

Ukraine's economy should have continued to decline or at bcst to become stagnant. A corrupt and politically unopposed executive is likely to only continue transferring resources to family members and loyal supporters, thereby stining investment and other legitimate economic activities, Moreover, theory argues that the only way to reverse this trend is through a change of regime type and leadership, in which a more democratic and transparent government comes to power, In other words, before strong economic growth can take place the government must restore investor and business conlldence by severing illegitimate ties between corrupt ofticials and favored economic actors.

In Ukraine these predictions failed to emerge, Firs\, during the last few years of the Kuchmll regime Ckraine experienced unpreeedentcd economic growth. Second, and even more puzzling. the countr),' s economIC gn)\vth rapidl) Jissipated \\-hen a 11101\.' transparent and less corrupt government replaced the Kuehma regime by way of a democratic revolution.

Diagnosing Ukrainc's current economic predicament is not only important to the country itself but it is of key importance to other countries in the region and in the world, cspecially ones that might experience a similar transtormation li'om authoritarianism (i.e.

Belarus, Russia. and many Central Asian countries). Accordingly. this paper answers three questions. Firs\, what are the reasons bchind Ukraine's initial post-independence economic decline'? Second, why did Ukraine experience a rapid and unexpected economic expansion during the last few years of the authoritarian Kuchma regime') And finally, why did economic growth quickly taper off in the wake of the 2004 "Orange

Revolution?"

This paper asscl1s that first, Ukraine's initial economic decline can be directly linked country's social and political conditions upon independence. A lack of political competition and the absence of a strong national identity led to the accomplishment of few economic retorms and to destructive governmental corruption. Second. the economic growth under the Kuchma regime cannot be largely attributed to beneficial actions of the

Administration. Rather, the growth resulted from favorable external conditions and limited retorms enacted by relatively weak members ofKuchma's opposition. Finally, the economic slowdown after the was largely caused by an unfavorable change in external conditions, along with the elimination of falsi lied exports and other Iflkc growth spawned during the Kuchma era. The slowdown thereforc does nO! disprovc the prominent theory and is not largely attributable to the new gO\crnment or to lTIOrC democratic factors. Chapter 1: Transition Theory

In order to best understand why Ukraine did not nndergo a successful market transition alier independence, one must look at the predominant theory concerning the di fferent transition paths of the Eastern European states. Having suffered through decades of political repression and economic mismanagement, certain states like Poland. Hungary and the Czech Republic managed to develop liberal democracies and market economies much faster and more effectively than neighboring states like Ukraine. Belarus and

Moldova. who are still years behind and. in some cases, making no progress.

According to economic and political cxpel1s. there are three main reasons flJr the latter countries' not transitioning as successfully: a lack of initial political competition. the decision to undertake reforms slowly, and the onset of state capture. which exacerbated the previous two factors.

Political ('ompelitiol1

The predominant theory concerning the development of a liberal democracy In former communist countries revolves around whether or not an organized opposition to the pre-transition government exists. and whether or not it is strong enough to take power. I If this is not the case. then the former regime will win the first elections and stay in power. retaining the ability to "control the process oftransition ... 2 Specifically. while taking on the task of replacing the old order with democratic institutions. " ... old rulers

[also] attempt to block the entry of competing political and interest groups into the political arena.'" In this way the old rulers try to ensure their long-term, unchallenged,

\;1 lada :\nna Vachudova, I:~lgm"s:"""UDd!vi\t~..Q (Ncw York: Oxford t:niversity Press, 20(5), PP- ~ g, :2]. : ib d .. 19. ; It d .. 19

3 tenure in power. The successful t(lfInation of a liberal democracy and the institutions associated with it thus hinge on the prior existence of hcalthy political competition.

A good example of the need for initial political competition can be seen with

Poland, currently considered one of the most liberal market democracies of the former

Eastern Block countries. Solidarity, a powerful opposition group to the country's communist government, was first founded in I 980-nine years before the collapse of that regime. Although governmwtal reprisals forced it underground, the movement survived and Lech Waksa, its leader, was even awarded the Nobel Prize "for his efforts to gain legal recognition lor Solidarity and the right to civic selt~organization in communist

Poland"" Solidarity was consequently organized and powerful enough to take over when the cOlnmunist government an1idst economic crisis in 1989. was {()feed to open up elections in the wake of mass demonstrations.'

Moreover, the demise of the Polish communist regime encouraged the formation of other political groups, which prevented anyone group of people from obtaining unchecked political power. For instance, at one point President Walesa suggested that he be given special powers in order to carry out painful but necessary economic reforms.

However, this idea was democratically rejected by a faction in Walesa's own party, comprised of"politicalliberals [who) believed that economic reform should !lot be implemented in such a heavy-handed manner that it jeopardized the development of democratic institutions. "h ft is the existence of initial political competition that allowed for a liberal democracy to consolidate in Poland, even when the initial leaders of

Solidarity desired to turn to away ll'Oll1 it.

; !v1itchell A. Orenskin, ~,!JLu!Llh~~J~_£.~!, (Ann Arbor: University of Michig,U) Press . .20(1). ,J, \ Ibld .. 3. f, Ib!d .. 31-33. Poland's story also illustrates the biggest criticism of the theory that political competition and a liberal democracy are key to a country's successful transition, This criticism suggests that the very people and democratic institutions responsible for

bringing to power a reform-minded government will serve to depose it as soon as the initial hardships of economic re!(mn appear. The idea behind it is rdatively simple:

Economic reforms generate transitional costs in the short term beJ()J'c they produce their promiscd economic gains, The magnitude of these costs is believed to be positively correlated with the comprehensiveness (or radicalness) of the relorms adopted, IneHicient enterprises must be closed or restructured, state subsidies and local spending must be reduced, and domcstic prices must be raised to world levels-a program that in the short term is expected to generate unemployment, sharp declines in production, and falling living standards 7

The vast majority of the popUlation must thereJore become temporary "losers" in the reforn1 process. They are forced to rnake significant sacrifices in order to obtain a brighter future in the long run, And, since the government in a liberal democracy IS accountable to these losers, it should logically be reluctant to enact the type of comprehensive economic reforms needed to complete the transition to a market economyg Accordingly, not only should the fastest and most comprehensive reil)rmS place the biggest hardships on the majority of the population, but the only governments capable of carrying out such reforms must be ones that are adequately insulated from the losers, In other words they must not be liberal democracies,

In reality, quite the opposite is true. The biggest and most comprehensive reilmns were carried out in countries where the govcrnments werc least insulated lh1l11 the losers' backlash, Statistics show that "the advanced and intermediate reformers have an average

Joe! S. Hellman, "\Vinnt'rs Take At!: Politics oCPartia! Reform in Pustcommunisl Transitions," World Po/ifics S(}, nO.:2 (1998): 205. , Ibid" c03

5 of just over three and a half executive turnovers. while ... slow reformers average no more t1 1an one turnover over t h e same peno'd,,9 .

Returning to our example, Poland experienced several executive turnovers between 1990 and 1997. going through three presidents and seven prime ministers. While these frequent governmental changes prove that some backlash against reforms does exist, in tact, more moderate retorm parties have replaced several govemments in the advanced reform countries-·this has happened without a significant change in the course

ll of the rdorms. ) Surprisingly, "those political leaders with greatest security of tenure have tended to introduce pal1ial economic reforms or have delayed reic)fms altogether. even though they would appear to have the weakest threat of electoraL .. challenge to

Inore corI1prCI1cnSi\i1 • e rCIOr111S.r "II ',.,111cre t'ore. Iess msu. I atce1 govcrnlnents 0.01 not necessarily experience slower reforms.

In nKt. as argued by Mitchell Orenstein, frequent governmental change can actually be benelicial to countries, especially when governments are faced with tough reform choices. The reasoning behind this is quile simple; even the most informed and reform-minded government officials are bound to make mistakes. This prohability is even higher in the poslcommunist states, since many nevI' offlcials arc inexperienced and accuratc ini()J111ation on thc elkcts of various decisions is hard to nblain. 12 Moreover. as evidenced by a decade of transition, governments arc rarely willing to undo their own

.) JOt;! I-leHman and Danie! Kautl11

(; policy mistakes. i.1 This reluctance for governmental policy reform happens for several reasons,

First. because criticism otten comes Ii-om the opposition. the government might be reluctant to acknowledge early signs of its policies not working or causing harm. 14

Second. erroneous policies might hene/il certain groups of people in the governing coalition. who consequently prevent the policies from being altered, I, Third. governments may fear losing credibility with the electorate i I' they admit to making mistakes or instituting bad policies. And linally, governments might not want to abandon policies that are a part of their ideological beliefs, or to adopt policies that are better but lie outside of their ideological beliefsI6

Indeed, it is in the wake of losing power that political parties are 1110st likely 10 review their previous mistakes and to formulate better policies. A party that has been voted out of power has a good inccntive to rethink any erroneous ideologies, since it must now battle for votes with the ruling panyI7

Luigi Manzetti reinj(Jrces the need for governmental accountability by highlighting the importance of appropriate checks and balances. especially during periods of drastic economic change. In the absence of checks and balances, "corruption, crony capitalism. and political patronage are likely to thrive and create serious transaction costs thm will deeply undermine the economic results of market rel()rms and have dire

I' Ibid .. 137. i-\ Adam Przc"vorski (;1 aL. Sustainab1s;j)ernocr,<;;tJ;)', (Cambridge: Cambridge Univ..:rsity Press. 1(95), ~n, as cited by Orenstein, 137.

C Hellman. as cited b: Orenstein 137 Orenstein, 138, Orenstein, 138.

7 consequences for democracy."l8 As an example orthe consequences of a lack of governmental accountability, Manzetti presents the case of Argentina in the 1990s, where former president Carlos Menem consolidated power in his hands for the purpose of quickly instituting market reforms.

Upon coming to power in 1989, Menem coerced Congress into granting him emergency powers, which essentially allowed him to implement policies and relc)fms by decree. Mcnem's llrst action was to enlarge the Supreme Court 11'om five to nine members, thus packing it with supporters willing to uphold his subsequent decrees-such as the one that converting all savings accounts larger than $610 into long-term government bonds (effectively expropriating hundreds of mi Ilions of dollars from ordinary il,xgentines) and the one dismissing several prosecutors and high ranking ollicials without the mandated Senate approval. Menem then used his unchallenged powers to award overpriced governmental contracts to personal triends, as well as to dismantle regulatory agencies that raised concerns about discrepancies in his state enterprise privatizalions. According to a study done by PricewaterhouseCoopers,

Mencm's actions to deprived Argentina of about $18.7 billion in foreign investment. l"

The need for healthy political competition in transition countries can perhaps best be summed up by an old proverb: "absolute power corrupts absolutely." Few individuals can ever be trusted to both make all the right decisions and to effectively correct their own mistakes. In other words, a country is very unlikely to undergo a successful transition in the hands of an illiberal democracy or a dictatorial rcgimc.

lS Luigi \1anzl':1tL "Polltical !V'1anipulalions and :Y1Jrkd Reforms Failures,' Fforld Polirics S~, no. J (1003): 3"}{}. :9 ibid .. 334-344.

8 The SDeed, ofRejimns"..

According to Leszek Balcerowicz, the man responsible for instituting initial reforms in Poland, all economic reforms, even successful ones, will lead to a certain level of discontent among the public. Moreover, in a democratic society this discontent can only be avoided if the reforms are carried out very quickly. First, some people will inevitably experience a lower standard ofliving than they had in the past, even if in all likelihood their quality ortiJ(: would have further deteriorated without the re!'onns. It is only natural for people to compare their circumstances to those of the past instead of to those of a difTerent governing scenario. Second, some people will be more adept than others at taking advantage of the new il'eedoms offered to everyone, allowing them to obtain a rnuch better quality of life than tnany of their countryrnen. 'T'hose people that were not able to do so will inevitably succumb to cnvy~-based on beliefs that the first group gained their money as a result of preferential treatment by the government or

"'through activities whieh under [the old] system were branded as speculation. ",2u

Third, some groups will be dissatisfied because their relative social position will be decreased in comparison to past times. For former Soviet and Eastern Block countries this usually includes groups like miners and workers in the heavy industrial sector. While previously respected and highly valued, these vvorkers arc usually not as important or well-rewarded in the competitive market economy. And tinally, most people will lose the former job security guaranteed by the state, creating unemployment and thus making some groups very unhappy.--I

Leszek Bak~ro\'.icz. 2Ds;Li.i.ul§!ll Capil'lLi$JllJ'ransl()lJ11JJiDD--! (Budapest: C.:mral European University Press, 19(5),163. '; ibitL 263<:6-L

9 However. economic reforms also bring with them benefits. such as the elimination of shortages. long lines. and the availability of a greater variety of goods and services-·which provide politicians in power with the necessary political capital to continue their policies. Balcerowicz's conclusion is therefore that economic reforms can only be completed if they are done rapidly enough for their benelits to have enough of a countcracting dlect on their inevitable drawbacks. These drastic rdorms should also be instituted during a period that Balcerowicz labels as"extraordinary politics," which occurs in the wake of a major political change (such as a revolution). This endows the government with enough temporary political capital to carry out tough reforms. while the country is still in a state of euphoria22 Delaying such rei()rms or spreading them out owr a long period of tin1t' will lead to a stalled transition and even \vorse economic dlects.

[n fact. the countries that carried out the most comprehensive and fastest ref()tIl1S did not end up suffering the vvorst short-term economic consequences. Statistically, .. the advanced rciormers have the lowest overall output declines and most rapid recoveries,,23

The countries that suffered the greatest economic decline. as predicted hy Balcerowicz, turned out to be the intermediate, or partial ret(lfITIers.

The average ratio of real GDP in 1994 to tbe 1989 level in the advanced reform group was 83 percent. .. [in comparison to I an average ... decline to 65 percent for thc high intermediate rdormers. 57 percent lor the low intermediate reformers, and 72 percent for the slow relormers24

SILIte ('aplUre

While the majority of the populatilln in a eountr) undergoing economic rci()[ms are short term losers. there usually also appears a group of "winners" who henefit !Tom

, Ibid. 264-266. '; Hellman, '-Winners Take AIL" 208, > Martha de Melt), Ctv-der Denizcr. and /\lan GeJb. "f,'rom Plan to Market: Patterns of Transition,'" lVorid Batik Re,Vedt'L'!; Wurking PaiNt', no, 1564 (1996), as (:ited b;.- l-kllman, "\VinntfS Take A]L" 208.

iO the transition period. Among many others this includes the managers of state enterprises who are able resell subsidized natural resources (i.e. oil. lumber) at immense personal profits 011 the world market. and monopolies that are able to turn large proflts with the liberalization of prices and no immediate competitors25 The goal of these winners is not to reverse reforms but to stall the reform process in such a way as to continue benefiting hom it. They take advantage of the fact that it is simply impossible for transition governments to overnight liberalize all prices. remove all trade barriers to world markets. hreak up highly subsidized monopolies. and establish appropriate contract enforcement protections. As thl' reform process continues. though, the inconsistencies benefiting the winners are expected to disappear. to be replaced by a functioning market economy. 2(;

The only exception to this is if the ref(W1TIS are being undertaken at a very slow pace. This happens most frequently where old communist elites. unhampered by a robust opposition. control the post-communist transition.

These j(lrmer communist leaders have neither the ideological desire nor the incentive to quickly enact radical reforms. given that such reforms risk the creation of many losers who can potentially remove these otlicials tl'om power. Such governments almost always decide to undertake reforms at a slow pace, which not only extends the transition period but it creates ideal conditions for the winners of transitional periods to stall the rel(Jl'l11sthrough an insidious form of corruption formally known as state capture.

Stale capture. as defined by economists Joel Hellman and Daniel Kaulimllln. occurs when firms "shape the laws. policies. and regulations of the state to their own

·c I-kllman. "\Vinncrs Take AlL" :::! S. -, Ibid,,218-219.

] 1 advantage by providing illicit private gains to public ol1icials."n Instead of attempting to

influcnce the way laws arc en/iJrccd, firms and elites influence the way the laws arc created. thus maximizing their own welfare at the expense of the rest of the society. 28

These winners take advantage of the weak governmental structure and the

underdeveloped system of checks and balances inherent to transition countries.

Specifically.

In most transition economics. the mechanisms through which the state deliberates on the formation oflaws. rules and decrees arc still largely hidden t!'om puhlic view ... Draft laws arc seldom published jt)r discussion ... [and] the voting records of individual legislators are not available to the public. At the same time. the institutional tools that various constituencies can usc to gain access to the state's deliberations are very limited. Political parties are weak. Trade associations, interest groups, and collective organizations lack the resources and experience to influence policy2"

While this description can be applied to all transition periods, these conditions persist jor a mueh longer time in states that are slow or partial retormers. This provides winners with ample opportunity to capture the state. Rather than influencing the government through normal approaches like lobbying and the electoral process. these tirms and elites find it easier simply to bribe officials to represent their interests30

Moreover, a vast majority of illiberal democracies have taken the route of insider privatization, where privatization rights heavily favor those with connections to the government." Instead of state enterprises going to the highest bidder. they are handed over at a IhlCtion of their price to the person or group of people with the best political connections. This type of privatization has allowed former elites and governmem ot1lcials

Joc! HeHman and Di.mi(,j Kaufmann. "Confronting the Chaliengc\« !. " Ibid .. 2. -~'! Ibid .. 7 ···Ibid .. 7. , John (ioule!. "Uut ofthc' Blw.:? Democracy and Privatization in PosH:ommunisl Europe," Cotnpurufi't'E! [:ilriJpci/n PO!i!n'." L nu.3 C\ovembcL 20(3): 13.

11 to, through privatization, transform their "communist era positional resources into postcommunist era material resources.,,12 If during Soviet times the director of a large state enterprise was entitled by the state to a chauffeured Chaika limousine and a lavish dacha on the Black Sea, after the collapse of the Sovkt Union the same otTicial can. for a vcry advantageolls price. use her government contacts to become the legal owner of that enterprise-··cndowing her with enough income to on her own buy a new Mercedes limollsine and a vacation villa in the Cayman Islands.

Along the same train of thought. the benefits of state capture are immense for captor firms and the elites behind them. "ot only are they able to guarantee for themselves secure property rights and operating environments nearly devoid of conlpetition. but they have been proven to gro\", at a rate of 1110n:: than t\vo tin1es that of other tirms.31 However. this happens at a great price to the rest ofthc society. First, new firms and entrepreneurs must /()Cus on capturing the state instead of on traditional methods of competitionlikc better goods and improved production techniques.

According to Hellman and Kaulinann.

The capture economy rewards connections over competence and inlluence over innovation: it is fueled by private investments in politics that weaken the state and undermine the provision of basic public goods. At the same time ... capture systematically deters private investment in the economy ... and creates obstacles to the entry of small and medium· sized enterprises. undermining the key sources of q sustainable growth ..

Second, captor tlrms and elites usc their intluence to ensure a continuouslv km level of political competition. which serves to shield corrupt politicians !i'om the scrutiny

"Ibi ::. Joe I--kllman and Daniel Kaufmann, "Confroming the Chalh:ngL'."4-6, !bi ,,6. of rivals and voters.·l5 If political competition is weak or nonexistent, government ofTicials arc able to transfer ever more political and economic power to a select group of elites, who in turn reward the officials and help them stay in power:'''

The best way for elites and captor firms to stitlc political competition is by creating a high level of information asymmetry between the government and its citizens.

I f only the government and the elites know the actual results of reforms and various politicalieconomic decisions, then the rest of the population will not be able to properly evaluate the effect of these decisions on its wel!ilre. The elites can then continue benefiting at society's expense37 This type of information asymmetry is usually maintained through three methods.

First, political rivals ll1USt be elin1inated or kept in a very weak state, effectively preventing them ti'om defeating incumbent parties and officials. Several methods are eflective in achieving this. including "blocking the registration of rival political parties. diverting state funds from inconvenient interest groups. changing the electoral laws to the advantage of the ruling parties, [and] physically assaulting [rival politiciansj."]S In

Slovakia. the HZDS (Movement for a Democratic Slovakia) Party used ruthless tactics to consolidate power and to encroach on the influence of rival politicians after the J 994 elections. "It took complete control of all parliamentary committees (except environment) .. excluded all opposition parties from oversight bodics ... illegally stripped

"5 Vachudova. 14. Ibid" 15. Ibid .. 16. ibi.L 16-17.

I~ an I!lOS defector of his parliamentary mandate ... [andl passed dozens of la'As ... violating provisions ofthe constitution, such as the separation of powers. ,,39

Second. the elites need to maintain tight control over the media. Any independent media sources should be weakened or outright eliminated. State-run and elite-controlled media should be used to elevate public opinion of the regime. praising its economic and political decisions.j() The FSN Party in Romania, which took over ailer the demise of the communist regime and was comprised of many ofllcials from that regime, immediately brought under its control all stale-run television and many powerful newspapers. It even excluded all non-communist intellectuals from the Romanian Academy. While there still remained some independent newspapers, they had very limited opportunity to reach readers in areas uutside Bucharest.~l

Both the IIZDS in Slovakia and the FSN in Romania also used the state security apparatuses to reinf()J'ce their power and control the media. The Slovakian Secret

Information Service(SIS), filled with many officers of the former communist secret police "monitored and harassed opposition politicians, trade unionists, clerics, and journalists ... allegedly organizing the kidnapping of the Presidem's son in

1995 ... physically assaulting ajournalist [investigating the S lSI and [setting up I his newspaper to be heavily sued. ,,.'2 In Romania the FSN even used 10,000 armed miners to disperse protestors after the 1990 elections. Afterwards, "encouraged to embark on an anti-intellectual rampage, the miners moved to destroy the hcadqumiers of opposition

;q N1anrl1 Butora ,mJ lora ButL)fOVcL Serninar at the Ct'nter for European Studies. Harvard University, Apr!! IV. 199:\ as cited by Vaclwdohl- 47. "! Vachudova. 17. " Ibid .. 45. ':' Kieran \Villiarns, "Slovakia since 1993," in }iecuritv Intelligence Services in New DemoCrjigi~2",,~[hg ~.it:ch Rerw.Qij.;~.5J~tYA~jgUJl"L

15 newspapers and political parties. and to attack anyone they suspected of opposition to the

government ,.·r;.

Finally. if possible. the elite should lind a way to appeal to ethnic nationalism of

the citizens,

Ethnic nationalism undermines social cohesion and makes politics seem like a zero-sum competition for influence between two ethnically defined groups ... disguising the benefIts of partial economic reform enjoyed by the rulers at the expense of society" ,It also detlects the blame for economic hardships fl'om the government to the alleged rapaciousness of ethnic minorities at home. or of natJOl1a'I enemIes'b a roa d .44

In Slovakia. the HZDS "cycled through all of the available ethnic cncmies ... [the government I started with the Czechs. continued with the lIungarians and thc Roma

(Gypsies) and finished with opposition politicians. independent journalists and even

Western academics:,45 This was done through various means. including a lavv in 1995

4 forbidding the lise of any minority languages in of11cial governmental communication. ',

There arc several big differences between transition states that had started the process with a healthy level of political competition. and staks that had very little initial political competition-...causing the old regime to get reelected. First, the former dissidents did not prevent other political groups from entering the political arena. including the communist party. Democratic institutions were from the beginning founded in such a way as to establish a level playing lleid for all political groups and actors"" Second. the former dissidents supported ethnic tolerance and did not res<)rt to using ethnic tensions in order to push through their policies or to remain in power. Finally. perhaps the most

11 Vachudova, 45-46, ;-1 Ibid" ry ,. Ibid .. 3. ;( Ibid .. 6. IbitL ().

16 important dilTerence lies in the fact that "former dissidents helped electorates to understand and accept difficult economic reform as a part of the democratic revolution:,~8 The people in states where the opposition took over were successfully convinced that dcmocracy and capitalism were forces equally important to a successful transition~which allowed economic reforms to continue even when the Erst opposition governments were rep Iace' d ,,IY

ExpeClalions

Given the evidence from countries that underwent transition, one should expect to reasonably well predict the path of other countries either entering into or undergoing transition, The success and effectiveness of the transition should be based on factors such as \'.'hethel' or not political c0l11petition v,/us initially present and allowed to evolve, the speed at which the countries decided to implement them, and whether state capture was given the ability to evolve and negatively inlluence the previous two factors, Thus, countries like Ukraine, which for the first fifteen years of independence was classiJied as an illiberal democracy and a partial reformer, could be expected to be prone to economic crisis and to suiter ti'om stunted economic growth,

is !bi ..L 27. h Ibid" 27.

17 Chapter 2: Ukraine, Before and During Transition

Before 1991

During the I O,h and 11'h centuries Ukraine was the center of the Kievan Rus, at the time the most powerii.!l empire in Europe. However. aller being weakened by internal warfare and Mongol invasions. the country was first conquered by the Duchy of

Lithuania and then by the Polish Commonwealth. Even though the Polish and Lithuanian conquests brought with them many hardships. some of the worst times and higgest changes for Ukraine came after it was absorbed by the Russian Empire in the late 18'h century. ,0

In an attempt to eliminate powerful Ukrainian independence movements and to fully incorporate Ukraine into Russia, rvl0SCO\V resorted to S0111C of the most deplorable methods of subjugation. hrst a czarist decree in 1876 forbade the printing of any works in the .': However, when this decree proved to be largely unsuccessful and lJkraine had to again be re-conquered after a brief period of independence (1917-1920). the Soviet leadership introduced even more draconian measures. With the goal now of lorcefully reducing the number elf Ukrainians and repopulating the republic with other ethnic groups. the kadership engineered two artificial I~lmines (1921-1922 and 1932-33)~-etTectively killing over eight million peoples2 Starting in 1937. the Soviet regime also began the mass deportation and

'irj ClA \Vorld Factook online. accessed March 22. 2(j07, ':) Richard Pipes. "In the Burdcrland: The Struggle f()r Ukraine," Satiuna! Reviclf, 56, r/ij ]4 (December 2(04): np. ." - CIA World Factbouk on lin..::.

18 resettlement of Ukrainians into other parts of the USSR. in the end leading to entire

Ukrainian villages being repopulated by other ethnic groups. 55

The most lasting effect of these historical repressions has been the creation of divisions within the Ukrainian population. The biggest of these. a division between eastern and western Ukraine became highly apparent during World War II. While much of western Ukraine rose up against both the Soviet Union and Nazi Germany. fighting for

Ukrainian independence. most of eastern Ukraine supported the Red Army in its light against Germany. 54 The westem resistance lasted into the early 19505 and to this day represents some ofthe divisions between a more russitied eastern Ukraine and a more pro-independence western Ukraine. All "I' these divisions. though. \Vere put to the test when the Soviet Union canle to the brink of dissolution in 1991.

1991 was a year of unprecedented change for Ukraine. In a referendum on

December 1. 1991. 90.3 percent of the population voted in favor of breaking away from

Russia and the Soviet Union. This was quite a teat. considering that or the 52 million people living in the country. only 73 percent were ethnic Ukrainians (22 percent were in l~lct ethnic Russians).55 It seemed as though after centuries of domination by foreign powers. political divisions and internecine conflict. Ukrainians tinally decided to put their diflerences aside and to unite. in the hopes of reaching a bctter future together. I !owewr. the honeymoon did not last \ery long. It quickly became apparent that the unification of

q Dan) 10 I-Iava!cshka, "Rise Up, Ukraine:' .Hac!eanv, 117, no, 50 (December :wo-n: np, q !lya PrizeI. "Natiol1 w Building and Foreign Policy," in JJ~t-raine: the Search for a NatiiJna!.ldJi~ll1it\" ;::U5. Shan')l1 L Wokhik and Voiodymyr Zvig!yanich (Lanham: Rowman & Littletlcld Publishers, 2000), 12~!3. ~, Victor Ba::.iuk. --Ukraine: Toward a Viable -;"\3tiona1 Ethos," in Ckraine: thG~S_~~'!L~lL!i2Li!}:tm.igJ)ill W~lHjJ):_, eds.. Shnronl Wo!chik and Volodymyr Ivig!yanicl1 {Lanham: Rowman & Littlefield Publishcr~, 200(j), 31

19 the population was only skin-deep, with the absence of a national identity and a lack of healthy political competition preventing necessary reforms t1'om being carried out.

Ukraine quickly descended into many years of economic mismanagement and crippling corruption.

A lack ojPo/iricai ('ompelitiol1

As mentioned in the previous chapter, one of the most important factors in whether or not a country can be expected to undergo a successful transition is the presence of initial political competition, In the case of Ukraine, it is perhaps the most influential factor in that country's failed transition,

During Mikhail Gorbachev's glasnost and perestroika movements of the late

1980s. political change began spreading through several parts of Eastern Europe and the

Soviet Union, especially in the Baltic states, Poland and Czechoslovakia. Many political hardliners were forced to resign and harsh communist policies were softened.'6 Lkraine, though, experienced the opposite effect. Under the rule of the hardliner Volodymyr

Sherbitsky, "Ukraine became one of the most conservative and repressive republics ofthe

Soviet Union ... [with] the nomenklatura using the chaos in the center [caused by

Gorhachev's reforms] to consolidate its position.";? In other words, while by 1991 political competition was quickly /()rming and nourishing in neighboring repUblics, it was still in its inLull stages in Ukraine. In fact, if it wasn't lor two externall~lctors, political competition might have been even weaker in Ukraine.

First, in the miJ to late ]980s many Ukrainians begin to worry about the republic

"ending up as the 'rust bdt' "fthe I'SSR, with Ithe central gU\crnmcnt Ji\crting!rnost or

~b Prize!. ! 3. ;, ibii.L 13.

20 the new investlnent., ,to Siberia.'·)s \Vorkers in Ukraine's industrial and 111ining sector

became especially concerned about this. as the equipment and infrastructure around them

was quickly becoming outdated and no new investment was coming in. Second, many

Ukrainians were shocked by Moscow's reckless and nontransparent handling of the

Chernobyl nuclear disaster in 1986. \Videspread concerns eventually began spreading

about whether the Soviet leadership was treating Lkrainians as second-class citiz.cns.'0

These two factors provided a large portion of the political capital for the tllUnding

of Rukh. the first major political opposition party in Ukraine. With its support base

primarily in Western Ukraine. Rukh managed to gain several key seats in local

governments and even to send thousands of activists all over Ukraine to campaign Illr

60 independenc:.:: before the December 1991 rcfcn:ndulTI. I!t.)\i\cver, unlike its CUU11terparts,

such as Poland's long-standing Solidarity movement. Rukh only came into existence in

1989. In 1991 it was consequently still too weak to form itself into a movement strong enough to challenge the former regime. Moreover. Rukh eventually tractured into several

6 different factions. making it even less inlluential. '

It is this weakness in Rukh. along with the lack of other political competition that allowed the previous government to win the tirst elections and to sID)" in power~under the leadership of Leonid Kravchuk. the former head of Ukraine's communist-era

Parliament. The members of Rukb. and of the several other, much smaller opposition movements had llll alternative but to accept the previous regime's continued rule. 'rhe

" Ibid .. 13. " Ibid. 13. Janusz Bugajski, "Ethnic Relations and Regional Probcms in Independent Ukraine,'· in lLIg:i:lin~~Jbs $g.-'i!IflLLQIJd i\~ni9ngLhkmitv, cds. Sharon L Wolchik and Vo!odymyr Zviglyanich (Lanham: Rowman & Littlelield Publishers. 2()OO). 176. Ibid .. 176. opposition pmties were simply too weak to take over and thus had to come to terms with

"the possibility (which became a reality) that the old partocracy and bureaucracy would slovv the process of economic rei'orm .. ,62

The Ahsence ofa Nalional Idenlily

The second big obstacle facing post-independence Ukraine was the lack of a clear national identity/ethos. As defined by Victor Basiuk, a national ethos is

The sum of the principal characteristics of a nation on which a national consensus exists and whose acceptance by thc popUlation endows them with legitimacy. It includes the political structure approved by the people, the economic system. and cultural and linguistic elements. 6 .•

In other words, if Ukrainian citizens don't detine themselves as "Ukrainians." and don't fcellike they are one people, the country can never be expected to 1'orm cohesive policies and may potentially find itself in grave danger of losing its territorial integrity and overall stability. Probably the most notorious example of what can happen to a country that lacks a national ethos is that of Yugoslavia's violent disintegration in the early 1990s. Alier two wars and over ten years of intervention by the international community, ethnic tensions have still not been eliminated and even the name "Yugoslavia" has disappeared.

In Ukraine, even though 22 percent of the population is composed of ethnic

Russians, ethnic divisions arc not the biggest obstacle hlcing the f'ormation of the country's national ethos. Instead. it is the russiiication instilled in millions of I 'krainians by centuries of Russian inJ1ucnce und policies."+ Whether through harsh reprisals against t;krainian intellectuals or through rewarding more russitied 1 'krainians with sought-atler

Olel1 Havrylshyn, 'The Political Economy of Delayed Reform in Ukraine." in Ukraine: the Sear£lLl~1L£l­ Nationalldent!t~,:.., cds. Sharon L \Vokhik and Vo!odymyr Zvig!yanich (Lanham: Rmvman & I,ittlef1eld Publishers, 2000). 53. B3Siuk 3! -]2, ,,-, BibiJ .. 33 governmental and industrial positions. Moscow managed to stine much t:krainian nationalism. In fact. the russification of Ukraine was an intentional part of an overarching goal inknded to make all people living in the Soviet Union feel like they are one. ",lost movies. books. radio programs and educational institutions directly or indirectly promoted the use of the Russian language and the idea that being "Russian"' was the goal everyone should strive for.

One ean still kelthe effects of this russiJlcation in Ukraine. primarily through the prevalence of the Russian language. In fact. at the time of independence, some polls showed that roughly halfofthe population spoke Russian at home and that the vast majority of the population in did not use Ukrainian as their primary language. Even though on its o\vn cultural russification can't be considered a factor po\\'erfu! enough to determine political allegiance. it docs create a certain attraction \(l\\ards Russia within the people targeted by it. In Ukraine. russitieution has the potential to ""lead to a division and perhaps to conflict. between Ukrainian-speaking and Russian-speaking segments of

Why Independence?

Given that ncarly one third ofl'kraine's population was not even comprised of ethnic Ukrainians. and the prevalence of russitication, the obvious question that arises is why over 90 percent of the population voted for independence in 1991 ') As it turns out. three di tTerent groups dominated Ukrainian politics in 1991. with each group choosing independence f(JI' a di frerent reason.

rh.: first group \\as rq;rcscnlcd hy the Ill'\\ OPp~)sjti~)n mo\ L'ment Rukh. and \\as primarily comprised of western t:krainians. This group and its sympathizers \vamed Ukraine to become independent and to undergo reforms similar to those occurring Poland and in several other Eastern European countries. Most western Ukrainians desired for

Ukraine to distance itself from Russia and to move in a Western-oriented direction66

The second segment of the population supporting independence consisted of miners and industrial workers in the eastern Donbas region. This group voted for independence as a way to preserve their jobs and future livelihood, given the fact that the central planners in Moscow were funneling new investment to Siberia and away hom the aging industries and deep mines in Ukraine67 The finaL and much smaller pro- independence group consisted of the old elitcs and respected ot1icials, "who feared that

Moscow would lose control of [its I reforms ... and considered independencc as a possible

In other words. unlike the united and committed revolutions against communist rule that occurred in neighboring states like Czechoslovakia and Poland .. Ukraine's move away from the USSR was both more conscrvalive and loosely united. In fact, while still head of the Ukrainian Parliament, Leonid Kravchuk, later to become the country's lirst president, actually supported the 1991 coup in Moscow, led by hardliners opposed to

Gorbachev's reforms. It was "only after it became clcar that the attempted coup in

Moscow had collapsed did Kravchuk and the party elite embrace independence.,,69

Kravchuk and the rest of thc Soviet government in Ukraine were never forced to the negotiating table by a strong-willed opposition, with the 1110ve towards independence firmly under the elites' control.

"{' PrizeL 14. Ibid .. J~. '" Ibid .. 14. '" Ibid .. j-+. The Kravchuk Era (1991-19941

Leonid Kravchuk. after facing the previously described weak political opposition. was predictably elected as the lirst president of Ukraine. As president. Kravchuk had to accomplish three tasks. First. he had to establish Ukraine as a separate entity from Russia in the eyes of the international community. Second he had to find a way to keep together the loosely connected political coalition that had voted for independence. Otherwise, internal bickering could lead to a political stalemate and potentially even to the country's dissolution. Third. in order to keep the popUlation happy and to shore up international support. Kravchuk had to ensure that Ukraine lived up to the enormous post­ independence economic predictions made by both by the international community and

Ukrainians then1selves,

Kravchuk performed the first task almost flawlessly. Fueled by the fear that

Ukraine's relations with Russia would be consideredjust another Russian internal matter, as happened to Chechnya several years later, Kravchuk quickly moved to distance

Ukraine II'om Russia. First. Kyiv moved itselfout of the same time zone as Moscow. creating a brief period of chaos in the still-joint railroad and air transport system. Second,

Kravehuk established a large Ukrainian Army and Navy. in addition to annexing the

Soviet nuclear arsenal remaining on Ukrainian soil. In contrast tel its previous times elf independence (the most recent between 1917-1920). Kravchuk ensured that Ukraine would not be a militarily anemic state that could easily be subjugated. Finally. while other former Sovkt republics allowed Russia to keep all ex-Soviet property abroad in cxchan"e Ill]" inheriting the Sovkt l.·nion's debt. Umline demanded that both the debt and the property be proportionally divided among the republics~with Ukraine inheriting

18 percent 0 f'I cae 1 ...'I'

These moves. along with Ukraine's insistence on independent participation in various imernational arms reduction negotiations. allowed the coumry to sufficiently distance itself from Russia and to gain wide recognition as an independent entity in the eyes of the rest of the world. In fact . .i ust in thc llrst year of independence, over one hundred countries had established ot1ieial diplomatic relations with Kyiv71

The second task j~lcing Kravchuk, that of keeping the population united. rested primarily on his ability to lilrm a national ethos. According to Victor Basiuk, there are three things that need to be accomplished in order lor a national ethos to be created in

Ukraine. First, strict laws must be established to sal'tguurd rninurities frufll discrimination and to of1icially recognize the right of people to speak a language other than Ukrainian.

Second. the governmel1l must form a constitution "with clearly delined lines of authority on a lunctional and regional basis in such a way as ensure tbe acceptance of the state's legitimacy.'·)2 Third, the government must institute economic reforms that would improve the lives of the population. 73 This would mitigate ethnic tensions by making everyone better olT economically.

Although in the end Kravchuk did not succeed in forming a strung national ethos or in keeping the population united. he did manage to make some progress in this direction. Even before the 1991 vote for independence. several key laws were passed thm were meant to reassure minorities and non-Ukrainian speakers that the country would

Ibid. 16. Ibid .. 16. - Bas!uk 34. Ibid" 34,

26 protect their rights and not turn against them in the wake of independence, In fact. in

1992 the Kravchuk government enacted the Law 011 National Minorities, which

Based on the work of the United Nations in human and minorities rights, is one of the most enlightened laws on this subject in the world, Along with prior acts and follow up laws", [it1 provided a foundation for the significant expansion of cultural. educationaL religious, and other activities of various minorities in 1\..) 'k' nnnc. 7"

These laws, though, signified the high point of Kravchuk' s successes, His

attempts at forming a constitution became deeply bogged down in parliament. and the

country ended up "governed by ad hoc laws of the parliament and/or presidential decrees,

not always consistent between and among themselves, not necessarily implemented, and

onen ineffective,"?<

By far the primary reason for Kn:rvThuk's inability to foster a unilY bdvveen the

main political groups lies in his failure to meet the great economic expectations j()J'

Ukraine, The rationale behind these expectations was indeed very simple, Based on the

pre-independence level of industrial and agricultural production of Ukraine, alter

breaking away li'om the Soviet Union the country should easily have become Europe's

breadbasket and the recipient ofmueh income hom the sale of its other exports, An erroneous 1990 Deutsche Bank report further rein lorced this belief The report. an evaluation of the fllture market capacity of Ukraine's economy, ranked it as tirst among all the Soviet republics,'" Reports such as this one were most influential to the movement j()r independence in the heavily industrialized and russified eastern Ukraine, where the people agreed to independence largely because it promised an improvement in their

"Ibid., 33. Ibid., 34. f, "The Soviet Lnion at the Crossroads: FaCiS and hgures on the Suvict Republics," (Frankfurt: Deutsche Bank AG, Ecullornics DepanrnenL (990). 1 L as CHell by Ivig:lyanich. 239 economic situation. \Vhcn it soon became apparent that independence had the opposite

economic effect. eastern Ukrainians quickly blamed Kravchuk and the new government.

In fact. after independence Ukraine's economic situation began quickly declining.

Injust the tirst three years its Gross Domestic Product (GDP) shrank by 22.9 while

inllation rose to as high as 4,734 percent in 1993. In the period between 1991-93.

domestic output decreased by 39.4 percent. This was by contrast "more than thc decline

in the United States output during the Great Depression (which never exceeded 25

percent) and the Soviet Union during World War [J (30 percent).,,78

However, how much of this decline was Kravchuk' s fault versus how much was

the result of Soviet economic structures and dependencies is still a debatable maller. The

1990 Deusche Bank report, which many used to justifY Kravchuk's inCOlnpetence, turned

out to be "based on calculations ... that did not take into account Ukraine's complete

dependence on Russia for energy supplies and the fact that 70 percent of Ukrainian

industrial output was taken to other Iformer Soviet J republics ... f()r iinal assembly." N

Russia actually did playa large part in Ukraine's economic woes. Lntil

November of 1992, Ukraine was able to issue ruble-backed credits in order (0 subsidize

its industry and to buy Russian energy at below world prices, so In 1992, however. Russia

expelled Ukraine from the ruble zone and raised its energy prices to world Ievels. XI

'vlorcovcr. Russia forced t'kraine to purchase more expensive oil tl'om Iran ailer refusing

"Tmnsition Report, 2005: Business in rransition:' (London: European Bank for Deconstruction and Development, 20(5): 48, 50. -.') Volodymyr Zviglyanich. "State and Natiun: Economic Strategit!s for Ukraint.:." in ll!rrillne: tht:; ..~~lrch f9X fLllilDS21lg1Idemit\.t eel:., Sharon I" \\:'olchik and Volodymyr ZvigJyanich (Lanham: Rowman & Littlefield Publishers, 20(0), 243. ~'J Leonid Kucllma, speech at thl.: Center fi:w Strategic ;md International Studies. Washington. DC )\ovt'l11ber 23, ! 994. as cited by ZvigJyanich. 239 \U PrizeL 18. '" BasiuL )4

28 to provide Ukraine with more than 6-8 millioll metric tons of oil per year, despite the fact that at the time the country needed at least 40 millioll metric tons per year. Russia also refused to accept the Coupon (a temporary Ukrainian currency alier the ruble) as a means of payment tc)r its energyS2 By the end of 1993, "hypcrinJlation (50 percent per month) had been reached .. [andJ runaway inflation combined with the lack of a viable reform package [servedJ to keep Ukraine li'om receiving billions of dollars of potential assistance

!i'om the IMF and the World Bank.""

The Kuchma Era ( 1994-2(04)

Leonid Kuchma, the former executive director of the largest missile factory in the

Soviet Union, tirst entered the political scene in October of 1992 when Kravhuk

. 1 f.... t J' n . 11.1" ii4 J T ' , appointco 111111 to tllC post 01 rnrne IV 111lstcr. lO\Vevef. a power struggle between

Kuchma and Krmchuk eventually led Kuchma to resign in September of 1993 and to run against Kravchuk in the 1994 presidential elections. After consequently beating

Kravchuk with 52 percent of the vote, Kllchma became the second president of independent Ukraine. g,

Unlike Kravchllk, who at least initially enjoyed a multi-regional support base,

Kuehma looked primarily toward eastern Ukraine, where he was also lhnn, for his political support. The 1994 elections signilicd a turn away from Kravchuk's \,estern- oriented policies, with Kuchma advocating a return to closer relations with Russia and the

iC Z\iglyanich, 242. B'lSiuk. 34-35_ \-1 "Countrv Profl!t': l.-krain.;," I!T~J:~~~mDJ11isl1ntsWgcnce_JLl1iJ 199{2::22 (\ie,'v York: 1996): 6. ~~ fbHL 6.·

29 promise of a consequent improvement in the economy that the population in eastern l )'k rame. soug IH. 86

After coming to power, K uchma did in fact move closer to economic and military tics with Russia, signing a hilateral free-trade agreement and agreeing to the joint training of military ofliccrs with Russia. J lowevcr, Kuchma did not establish the kind of ties with

Moscow and the other former Soviet states that many believed he would. He chose to preserve Ukraine's sovereignty. Specifically, he never joined a customs union with the

CIS states and did not sign the Tashkent Treaty, which would have created a common military. H7

Moreover, even though Kuehma was able to swbilizc the economic chaos that enveloped Ukraine during the first rev; years of indcpendel1c(.', bringing inflation do\vl1 to a much more acceptable level (377 percent in 1995 and 15.9 percent in 1997),gg his legacy is instead based on the nlct that he "figured out how to usc democratic means to achieve authoritarian ends,·gy In other words, Kuchma created a political machine that allowed him to consolidate power in his hands and to usc it to reward supporters and li·icnds. while still preserving many democratic institutions that on paper resembled a liberal democracy.

From the very beginning of his tenure, Kuchma sought to strengthen the executive branch and to maintain that power through means such as a stricl control over the media and selective enforcement by go\crnmental agencies. \Vhat distinguishes Kuchma li'om

~(, Roman Solchanyk. Jhe PO~1:5D-,js;JJ~CillJS_irii-21LJ:v1arylanJ: Ro\\ man and l,it1!dll'!d Publislh.'rs, :ZOO 1), 70-71. ~- Prize!' 22-23, J'" ··Transition Report 2005: 48. 50 i'/i Paul IYAnil'rL "Leonid Kuchma and the Personalization of the Lkrainian Presidency_ Prohiums ;;jP(}SI- Cumm!fl7is!i7, 5(l no_ 5. (September Octobt:c 2(03): 59, many other authoritarian rulers is the fact that most of these methods wcre legal and not overt. preserving a semblance of governmental legitimacy, StilL especially in the later years of its tenure, the Kuchma regime did occasionally commit heinous illegal acts, including murder, physical intimidation and fraud,

Conso/idalion ofPowcr in the E-ccclIlivc Branch

Kuchma began his quest for power almost immediately after becoming president.

Just three months atter the elections (in October of 1994) Kuehma submitted to parliament a draft law allowing him the ability to veto any decisions by local governments and city councils (ifhe deemed any actions by those bodies contradicted the

Ukrainian constitution or other laws), 90 To approve the 1996 constitution, which "gave

, q' . j'" I ' , 'h ' , "'lI '( " .. ' UKraine one t) tne nlO~l puwer f'UI , pn:Sl( ' el1CleS In l e WOrIO, 1 UCnITIa tnreatened members ofpariiament that if they did not comply with his wishes he would pass the constitution through a pubic referendum, even though thae \\asn't a legal basis I(l!' such an action at the lime, According to Paul D'Anieri:

Since Kuchma was popular and the parliament was not, it was widely expected that he would win such a referendum and then be ahle to disband the parliament., ,Faced with this choice, the parliament chose compromise (and selt~ preservation) instead of a battle it would surely lose, Thus, by threatening something illegaL Kuchma was able to get full legal approval, [and] hence legitimacy for something that the parliament would never have approved within normal channelsn

The new constitution now allowed the president to appoint and dismiss the Prime

Minister at wilL without the consent of parliament along with the authority to appoint all

'!-i Bugajski .. 169.

)! IYAnicri, "L.:onid !

(i.e. the ministers of defense, finances, and foreign affairs)93

However. unlike the legislatures in fully authoritarian regimes, the Ukrainian

Parliament never became subjugated to Kuchma, relusing to pass many of his desired policies and in 2000-200 I successfully rejecting his em)rts to further strengthen the presidency.')4 In other words, despite the great amount of power Kuehma amassed in the executive, the parliamem still possessed the ability to hamper many of his desires.

Therefore, not only did Kuchma have to worry about maintaining control over the presidency, but parliamentary elections remained very impoI1ant to him.

Control over the lv!edia

Unlike !TIany other authoritarian leaders, Kuchn1U realized the in1111cnse benefits of attaining and maintaining power through elections that project at least a semblance of tilirness. Not only docs such a government enjoy greater legitimacy abroad but it can also garner greater support on the domestic front95 Consequently, the most legitimate way of convincing people to keep a government in power is through control of the media, the primary source of inl()fl11ation telr most people. In this way nO! only can a gowrnment make itself and its candidates look good, but it can also tarnish opponents' reputations or even to prevent the public l1'om being introduced to them. With regard to the media organizations in Ukraine. the government lIsed several tactics to accomplish these goals.

Tirnm Be/chell and ROSlyS!a\ Pavknko, --The Presidcmial Eledion and Constitutional Refixl1l," in Presidential Ekction and Orange Revolution Implications for Ukraine's Transition, cds. lris Kempe and Helmut Kurth (Lkraine: Friedrich-Ebert Stitlung Pubications, 2005), 57-58. <'. Lucan A. \\'a:. "Kuchma's Failed Autht)fitarianism:' Journdl (4 DemOcT(fcy, 16, no . .2 (lOOS): 3. 'i< Paul f)' Anieri "'I 'he Last Hurrah: The 2004 Ukrainian Presidential Elections and the Limits of Machine First, the government. either directly or through its loyal supporters strived to own all major media sources. In Ukraine. where 75 percent of the population gets its news

thlll1 television. there arc six main TV stations. The governmel1l owned one of these stations (liT-I) directly. while the other Jive were in the hands of some of Kuchma's

biggest allies. Specillcally. Novyy Kanal. STB. and IClV. are owned by Kuchma's son- in-law. Victor Pinchuk·who also owns Ukraine's largest daily newspaper, Fakly I

Komel1larii. Leading members of the pro-presidential SDPU(o) party control the other

96 two, Inter and Studio I ;'1 By 2004. the opposition did control OIlC channel. Channel 5.

However, it only accollnted lC)r a mere Jive percent of the news market.'"

This dominance in the media ensured ovenvhdming support for Kuchma in the

1999 presidential elections. along \Vilh support of favlJrablc poiiticians during the 2002 parliamentary elections and the 2004 presidential elections. For example, "two nights before the first round of the [20041 presidential election, [TVI viewers could choose between live coverage of the 'Za Yanuko)'ic/1a' (for Yanukovich [Kuchma's selected successor]) pop music concert ... and a 'news' program consisting of a glowing biography of Y anukovich. ,·9S

Second, the Kuchma Administration. especially starting in 2002, issued

"temnyki" to most media organizations. Tcmnyki are

Roughly 8- J 0 page daily bulletins sent. .. to major nev\ s outlets, indicating which stories were to receive prominent coverage that day. and what slant V\l1S to be given to them ... The temnyki gave very precise instructions about news coverage. leaving little room ttll' imerpl'etation. Editors were clearly under pressure to

"'i\egotiating the News: Inf(mllal Censorship ofUkrain!al1 Televisioll, 'Human Righi Walch (2003b), as cited by [Y Allieri :2005 Way. ~. ,,~ IY Anieri "The La~I Hurrah." :Zj:. conlorm. kst they should be subject to [vioknt intimidationj ... or simply Iires bl 9 their owners. who bl this time were almost all controlled by Kuchma c)

·fhird. the government used selective enforcement and bureaucratic roadblocks to control or shut down opposition and neutral media sources. From the selective enforcemcnt of building11 ire codes and the tax law to blocking distribution channels of opposition newspapers, the Kuchma Administration made it very difficult for the opposition to inI<)f]11 the public. According to Georgiy Zhebak. in charge of distribution lor Shlax Peremogu. an opposition newspaper based out of Kyiv:

In the times of President Kuchma, there were always misunderstandings with the 'DP Presa: the monopolist state organization in charge of distributing [our] newspaper. and with the governmental customs, since Shlax Peremogu sends its newspapers to Ukrainians in more than twenty-five countries around the world. There were constant problems with the paperwork or with something else [and] yve Viere persistently being refused the right to distribute our ne\\"spaper. .. V-ie would [alsoj get calls from the people running ne\\spaper kiosks ... stating that they wcre being threatened if they continued to sell [our) newspaper. 'UO

One opposition newspaper in Kyiv was even shut down because "the dimensions of its

,,101 premIses. were mcorrect, I y state d'111 t1eI Iease. '

Fourth, when all other tactics of deterrence failed. the Kuchma Administration resorted to violent intimidation and even to the murder of opposition journalists. Perhaps the most notorious example of this tactic was the 2000 disappearance and murder of

Heorhiy Gongadze, a prominent independentjollrnalisL Not long after Gongadze's body was found. secret tapes surfaced (later conlirmed by US experts to be authentic). 102 directly implicating Kuchm

eN Ibid.< 236. Georgiy Zhebak, ,'JlIux PCrt!Ili(J}!,lf ClI\pujicr, intervk\\ by author. KylV. Ukraine June. 2006. ;,1, D' Anieri. "Leonid Kuchrna," 61 . . ibid" 59. murder. IOJ "The president was clearly heard complaining in foul language about

(JC)J1ga' dze ancj orcI' enng I'liS Sli bor d' mates to coI somet l'ling a bout I'11m. ,,1()4

Patronage

Patronage in this context can be defined as "the ability of an actor to lise control

of jobs or government entitlements to control votes. ,,10' In Ukraine the government has

significant intlucnce over pensioners, military personnel. as well as workers in

universities, hospitals. and state enterprises. It can therefore threaten these people into

voting "the right way" during elections, in exchange for keeping their jobs or preventing

their quality of life from dekriorating. For example, "in the 2002 parliamentary elections,

precincts with hospitals. army bases, and prisons provided some of the highest returns jClr

Kuchrna. The phen0l11CnOn v;as so \videspread that the pro-Kuchn1a bloc Za Ycdinuu

Ukrainy (,For a United Ukraine") was given the nickname Za YedU (,For Food,)."IO(,

Mon:ov~r. not only did the Kuchmu government coerce large groups of voters

into voting according to its wishes. but it also took steps to ensure that these voters ended

LIp voting the way they promised. "" The most prevalent way of dCling this is thrLlugh the

use of absentee ballots. which can be filled out anywhere and then mailed in or delivered

to the electoral commission. Workers that the government has control over can simply be

forced to order absentee ballots and show them to their supervisors prior to turning them

in. The supervisors can also bc charged with collecting and delivering the ballots

",~ Nadia Duik. "Sovcreignty ,md Uncertainty In Ckraine." JOlfrflui (4 Dcmocla(r. !2. no. 4,(October, 2001) 63 li>~ D'A!1ieri. "L:onid Klichma,"50 ;,~ D'Anit."fi "The Last Hurrah," 238, '"'' [) Anieri, "Leonid KucimHL" 62 ,'''' I),Anicri rile Laslliurrah." J8. then1selves, 108 Another, even lTIore certain way of ensuring c0111pliance is through

"·carousel voting.' in which one worker for the [government] gets a ballot at the polling place, and smuggles it out rather than depositing it. Then the ballot can be 'correctly' filled out and given to a Ilew voter. The voter. .. smuggles that ballot in, deposits it, and brings the new blank ballot [OUtj."IU9 Even if there isn't a guarantee of one's vote being known, it only takes a reasonably good probability of that for most people avoid the risk an(j to vote m. t I1e way demane :i e d'. II""

Economic Rewards

The governmcnt in Ukraine enjoys a signilicant control over the economy and the welfare of businesses. Likc many other f()[]ner-Soviet states Ukraine did not privatize quickly, thus providing Kuchlna vvith continuing o\vncrship of large state enterprises like the energy sector and the arms indllstry. These enterprises can either be used directly, as a source of funds necessary to finance political activities and to "buy loyalty," or privatized in such a way that allies of the government can reap great rewards at the expense of the

' . I II rest 0 t socIety.

State enterprises were one of the biggest sources of funding for Kuchma, helping him \0 raise enormous amounts of money for his campaigns. If hlCt. his nominee for the

2004 presidential elections, Victor Yanukovich, managed to raise over six hundred million dollars l()!' his campaign--roughly three hundred million of which came from businesses and state enterprises within Chaine. This is comparable to "spending by

Ibid.238, Ibid" 238. Ibid .. 238. , 1Y Anit:ri. "LL'lJniJ Kw:hma,P 62.

36 George Busb's 2004 campaign ... in a country with 50 times the GNP of Ukraine.,·,12

During the Kucbma era a state enterprise director knew he had to meet certain guidelines

lregarding tbe economic performance oftbe enterprise], but he also knew that at some point someone was going to come from the President' s Administration, saying that X amount () f· money was neeej eeI to support t he eampmgn.·. ..Ill .

Privatizmions in Ukraine were the second way the Kuchma regime was able to raise money and gain powerful supporters. Anyone who was in favor with the government, or v;bo was being recruited as an ally, was given the ability to be a part of these lucrative deals. A notorious example is the privatization of the Kryvorizbstal steel mill. which by itself is responsible for about 20 percent of thc country's entire steel output. In 2004 it \vas sold tz)r $800 i11illion dollars to a group or Ukrainian investurs led by prominent oligarch and Kuchma's son-in-law Victor Pincbuk. amid allegations that bids li'om foreign investors were many times higher. 114 In June of 2005 (in tbe aftermatb oftbe ouster of the Kuchma regime), tbe Commercial Court of Appeals in Kyiv ruled that the sale was illegal and the company was returned to the state, 115 to be resold just [(JUr months later to a ()feign firm for $4.8 billion dollars. I 16

Selective En/brcemel1t

Much like opposition newspapers and other sources of media. any businesses or inlluential indiv'iduals refusing to ally with Kuchma were subject to selective enforcement on the part of powert'lll government agencics. While cllnducting research in

Ukraine. I bad the opportunity to speale tll a member of the police j,)rce in Kyiv. who had

"~D'Anleri. "The Last Hurrah,":246.

'i.1 Jiln Davis, Chief Editor. interview by £tuthOLJ

• C, Transition Report 2005, 194. :\rkier. 51. risen lip to a high rank during the Kuchma Administration. According to this person, "the police in Ukraine know only two commands: 'Fas' and '1"00' [common commands that are taught to guard dogs, meaning "attack" and "Icave alone I." This was coniirmed by

Yevhen Marchuk, tonner head of the Ukrainian Security Sen ice (SBl'): "if [your business] is loyal to the authorities, they will ignore or overlook anything. If you are disloyal, you or your husiness will be quashed immediately.··ll?

The tax police acted in a very similar fashion. In fact. one distinguishing feature about Ukraine. especially during the Kuchma era. is its notoriollsly complex tax laws and regulations. Thcir purpose is to make "it is ncarly impossible for a iirm to be in total compliance with every regulation at all times. By creating a system in which everyone is guilty of sOlncthing, all the power lies in the hands of those \vho decide who and what to prosecUle ... IIN Therefc)re. whether through economic carrots or through sticks of selective enforcement. the government had immense inJluencc at its disposaL leaving almost no one outside its reach.

The effects of this inl1uence became 1110st apparent in the wake of the 2002 parliamentary elections. Even though the pro-presidential "For a United Ukraine" (FUU) party only gained twelve percent orthe vote, despite having the overwhelming support of the media and a significant financial advantage over the other parties. the party ended up

o o eoercine enou!.(h'- independent candidates into allvin.- 10 with it to eoain a 39 percent maJ·oritv., ~

This allowed I,)r Volodymyr Lytvyn, a ft)fmer head of the Presidential Administration. to

"The System ufDcmocratic Civilian Cumru! 0\'('( Lj\\'~Lnjlm:enk'nt Bodi6: Its LrfeCli\i.,~n\.":is ana Shortcominus.'" .\uliorlo! ((nd ,52 (April 200.4): 21. >IS cih,·d b~ "Va), ..+. liP 0' Anierr --Lconid Kuchnw." 6].

38 be elected as the speaker of parlian1ent by a one-vute margin. ll() I\1any of these

independent candidates were "businessmen, who thought that it would serve their own

best interest to join the prcsidemial faction once in parliament.. , with rumors

[confirmingj that some [Members of Parliament] had been paid up to US$300J)()() If)r

their votes", ,,120

The Kuchma regime utilized a vcry similar approach vvith regard to inlluencing judges, Given that judges in Ukraine have a relatively nominal pay, and that the government owns some of the best apartments in Kyiv, Kuchma would rewarded favored judges with desired apartments and threaten to withdraw them if the case of any dlSP' Ieasmguture 'f' (j" eCls1Ons, 121

('rea/il'll Volt: Thu/i Lind Fraud

In addition to controlling the media, raising vast sums of money and coercing politicians to join pro-presidential parties after being elected, the Kuchma Administration also used creative tactics meant to confuse voters into voting differently than they intended. According to Nadia Dink and Myroslava Gongadze, 'candidate cloning' was an especially l~lvoritc tactic of the Kllchma regime, Specifically, this is

the practice of confusing potential electors by arranging for candidates with the same name to run in his or her district Thus the prominent prodemocratic politician Taras Stetskiv found that the ballot for his constituency contained several other candidates who shared his surname, Taras ChornoviL son of the late Rukh leader Vyacheslav ChornoviL was surprised to discover that his half-brother Andriy, who had never before used the Chornovillast name".was listed high on th" slate of a new party bearing the name Rllkh, National Movcment of t;kraine, a case of 'party doning' to go along \vith candidate cloning. There \vas 'bloc cloning' as welL. ,One coalition with no connection whatsoever to

':'j Nadia Dtuk and MYToslava Gongadze. "post-r::!ection Blues 111 Ukraine." Juurnal ufDcmo ... -r£lLY 13, no. -+ (October 2002): 159 ,>; Ibi(L 163-! 64. , IYAni\:r:. ··L('oniJ KuehnEL-' 62. IYuschenko. the leader of the biggest opposition bloc] was nonetheless registered 'in the name of Victor Yuschenko: l22

Direct haud was also not excluded by Kuchma and his allies. Specifically. the administration entered additional candidates into elections. who had no chance of winning and serwd only to help the government influence the composition of local election commissions (which are in charge of preventing electoral fraud). Because these additional candidates had the right to appoint members in the electoral commissions. they could effectively dilute the opposition's commission members. The Kuchma-controlled

Central Election Commission could then distributed these posts unevenly. ensuring that districts where the government was planning to commit Iraud were statTed by commission members from candidates (either directly or indirectly in support of the administration IV

Elimination oj"Opposition Figures

In order to maintain pClIser and thereby to ensure that Kuchma's favoritism remained in place. it is strongly suspected that the government even resorted to murdering important opposition figures. Within days of the 2002 parliamentary elections.

"a young and therefore healthy Our Ukraine Ithe largest opposition party1 MP died suddenly after the rapid onset of a mysterious illness. On the same day came the suspicious death by 'heart t~lilure'~-:iLlst two days bet(we he was due to testify at the

Supreme Court--··"f the confessed killer of lhor Aleksandrov. a journalist who had been beaten to death:' 2~ HoweveL these incidents were far from isolated,

Diuk ilnd (iofl1lddzc, "Post-Elecliun Blut:s:' 16 j. , . D'Anit:Ti, "The- Last Hurrah," 239. Diu"- and (iong:w..lA'. "Post-Lkctio!l 131ut.'').'' !b5.

40 In addition to the previously mentioned murder of Heorhiy ()ongadzc. the popular

independent journalist whose execution Kuchma ordered. the government is slrongly

suspected of being involved in the tragic death of Vyaehislav ChornoviL An outspoken

leader of the Peoplc's Movcment of Ukraine. Chornovil was expected to be a strong

opponent to Kuchma in the 1999 presidential elections. On March 25 or that year.

Chornovil was killed in an auto accident. which an otIicial investigation by the Ministry

of Internal At1airs ruled to bc an accidcnt. However. seven years later. attcr the removal

of the Kuchma government Yuri Lutsenko, the head of the Ministry ofinternal Atfairs,

stated that based on the information he saw, he "considers that Chornovil [to be the 1

victim of murder rather than the road accidenL,,125

In facL VyacheShn" ChornGvil isn't the uIlly pruminent opposition politician

involved in a suspicious auto accidem. Yulia TymoshcnhL a \cry outspoken Member of

Parliament and Ukraine's tirst Prime Minister atter the Orange Revolution, was seriously

injured in an auto accident two months before the 2002 parliamentary elections. It is

speculated that she would not have survived the collision had she not been riding in a

specially armored Mercedes car. 126

Even Victor Yuschenko. the internationally renowned opposition candidate and eventual winner of the 2004 presidential elections l~lced two serious attempts on his life.

First. in September of 2004. Y uschcnko was almost fatally poisoned with dioxin, leaving him permanently disligurcd. l.ater that year. in a secretly recorded tape bet\\een a

Ukrainian inlcmmmt and an orticer of the Russian FSB, it was revealed that the

L='--Vyaches]av Chor!l(niL" \V!kipeda uniin,,-,,- ,--';1,\\ \\iki \ accessed Fcbruar) 10,2007, np. "Tymoshenko Injured in Car Accident" JUItlCSlOl1'fl F,)undatiol1 Jlunifur S. no, 24. (February 2002j'

41 assassination wus planned and carried out by the Russian and Ukrainian security serVIces., 127

The second attempt on Yuschenko's life was thwarted just hours before it was due to take place. On the night before the second round of eic<:tions, a group of security agents from the State Defense Service responded to a burglar alarm at near one of

Yuschenko's campaign oftkes. While investigating the alarm the agents noticed two men sitting in a parked car with Russian license plates. Upon closer inspection it was revealed that the two men had f~llsilied Ukrainian and Russian passports, along with three kilograms of plastic explosives. The subsequent investigation showed that both men were

Russian FSB operatives, who illegally crossed the Ukrainian boarder with the explosives and vvere due to [(:(dvt $50.000 1~)f killing Y uschenko. A. further search of the safe house the two were living in revealed guns, bomb-making instructions and

., . 11M coml1lU11lcatIOns ClJUlpll1cnt. -

The Oran~e Revolution and the Rise of Victor Yuschcnko (2005-Present)

Besides the 1991 referendum on independence, the 2()04 presidential election signified one of the most important turning points in Ukraine's history. It pitted Victor

Yanukovich, a pro-Kuehma candidate who enjoyed overvvhelming support in the pro-

Russian eastern part of the country, against Victor Yuschenko, the primary opposition candidate who was mainly supported by the pro- independence western Ukraine. At stake was essentially the future of the country, since a Yanukovich victory was seen as a continuation of more of the samc and a Yuschenko victory promiscd critical reforms and a drastic change in guverl1lnental bt.'havior.

Taras Kuzio. "Russi~ll1 Polic; 10\\ards Lkraine during Uectio!ls." iNIIIOCr'''!CdiSnd. 13. no. ~ {FalL 2005) 498 . .'r Ibid .. 498. Russian Aid and Influence

Besides following the same practices used in the 1999 presidential election, such as ensuring tight control of the media, intimidating of the opposition, and raising money from corrupt governmental allies, Yanukovich and Kuchma also turned to Russia for assistance and advice, In addition to providing Yanukovich's election campaign with an estimated $30() million, nearly halfofthe unprecedented amount raised, Russian president also sent to Gleb Pavlovsky to Kyiv, the head of Putin's own political machine, The idea was to win the presidential election by utilizing the same tricks and tactics used to net {'min's spectacular March 2004 victory, IN

One of Yanukovich and Putin' s biggest successes in this regard was thcir use of governmental control of the n1cdia and other resourceS to l11agnify already existing regional diflerence in Ukraine, It was not sulTicient to try and convince enough voters that Yanukovich ,vas a better candidate: the goal instead was for people in eastern and central Ukraine to believe that Yuschenko was a Russophobe and an ultra nationalist A

Yuschenko ,ielOry needed to represent the beginning of governmental discrimination against all non-western Ukrainians, IJI) Even though in the end these tactics proved insufficient in making Yanukovich victorious, they did inHume many regional differences and led to over 90 percent of the population in eastern and western l~kraine voting for their rcspecti ve candidates (Y anukovich in the east and Yuschcnko in the west), L't

The Re/eclion uta (~(Jnvicl and Yuscizenko 's Big ('ompromisc

The Kuchma government made a bold move by selecting Victor Yanukovich as its presidential candidate, Lnlike Putirl, whose charisma leads man) to sa) that he would

129 D" Anieri --The Last I Iurrah," 243, 246. ,p Kuzio, "Russian Policy towards Lkrd!Ile,"495, "": fYAnicri ··Tht: Last Hurrah," 242. have won the presidcmial elections even if they were completclj fair. Yanukovich was a terrible candidate. Not only was it widely known that he had two criminal convictions in the 19705, but he was far from eloquent in h is speeches and many times used crude prison slang. 132 Yanukovich also developed a reputation for being very stubborn and even for resorting to violence when he did not get his way. For instance, when Minister of

Transportation Georgiy Kirpa fililed to prevent opposition demonstrators from reaching

Kyiv during the early stages of the Orange Revolution, Yanukovich punched out two of

Kirpa's tedh and sent him to the hospital. lJ3 It was feared tbat Yanukovich would subjugate Ukraine to even more direct rule by oligarchs and criminals. eliminating any of the democracy Kuchma allowed to exist. In the end. too many l;krainians could not justify voting for such a candidate. in lhe words of one voter.

It wasn't that tbe people were so mucb in favor of Yuscbcnko but rather tbat they were so against Yanukovich. Things might have turned out difTerently if the regime put up a different candidate, a more neutral person. some young lawyer or professional. Instead they put up a total idiot. This was a very grave mistake. Perhaps I would not have even voted lor Yuschenko if it was someone else. 134

After three rounds of voting, mass protests against documented abuses on bebal r oftbe government. 135 and a ruling by the Ukrainian Supreme Court invalidating an initial

Yanukovich victory. Victor Yuschenko was finally elected as the president of Ukraine.

'This victory. though. came at a substantial price to Yuscbenko.

In order to ensure that the same fraudulent practices seen in the fJfst round of elections were not repeat<:d. a llew bill on elections was proposed in parliament (bill

Ibid .. 240. Way. II. q Valentin lagari{1. Director of the L:gal Department. ~cw [::uropc Private Equity, interview by author, Kviv, Lkraillt.'. June, 2006. p~ 400 /0 of districts reported inaccuracies in voter lists and experts have estimated that 2,8 million voles \-VtTC distorted by lit!sitlcations (Beichel! and Pavlenko. 63).

44 6372-d). This bilL among other measures. called for regional electoral commissions to be

"composed of equal numbers of both candidates' representatives." 136 However. in order to obtain enough support in the parliament and to ensure that Kuchma did not veto the bilL a compromise was reached regarding its passage. Consequently. in exchange for transparent and legitimate elections, it was agreed that two additional bills would be passed. The tirst bill 4180. was an amendment to the Constitution that transferred most presidential powers to parliament. The second bill, 3207-1 gave more powers and budgetary control to local and regional governments. 137

Furthermore. both bills were set to go into dfect starting Jan. 1,2006, even though a new p

COinprOlnisc dfcctivcly prevented Yuschenko frOlYI inheriting rnany of Kuchn1a's presidential powers. many people in Ukraine and in the rest (lfthe world still had great expectations for Yuschenko's ability to unleash the country's forecasted economic potential and to bring the economy up to speed with more prosperous neighbors like

Poland.

Small Business-Driven Revolulion

The Orange Revolution succeeded not only because of a seemingly indefatigable determination on behalf of millions of Ukrainian protestors, but also because these protestors had the necessary financial and material support to physically maintain the protests. Within days of the rigged lirst rOllnd of elections. pro-Yuschenko demonstrators arriving in Kyiv were with military-like organization. One could receive a hot meal several times p<:r day. usc a referral system to lind hllllsing tel!' th" night. and there was

.... Ibid. 63. Ibel.. 68-69. even a location reserved It,W charging mobile phones, From tents in which hundreds of

thousands of protestors spent nights in Kyiv's Independence Square to food, warm

clothing, portable heaters and cven toiletries, the revolution demanded many resources,

Most oCthese rcsources·--despitc the filet that millions of Ukrainians donated thcir own

food, clothing and living space-came li'om small and mcdium-sized Ukrainian

businesses,

Unlike their large and well-connected counterparts, small and medium-sized

companies saw the Orange Revoilltion as their chance to fmally throw off the yoke of the

Kuchma regime and thrive. Bolstered by the beneficial reforms Yuschenko undertook

during his short tenure as Prime Minister between 1999 and 2001 (discussed in detail

later in this paper), these enterprises began devoting resources necessary to ensure that

the revolution was a success, Many small and medium-sized businesses even completely

stopped work in order to support the revolution. Vakntin Zagaria, the Legal Director of a

large private equity firm spent entire days in Kyiv's Independence Square, declining

oflcrs for work, According to Zagaria:

When people would call me about doing work lelr them, I would simply apologiz-c explain that I was on the Maidan [the Ukrainian word Jell' "square," retcrring to the Independence Square] and couldn't do any work untillthe revolutionj was done, The Orange Revolution was a tremendous opportunity je)r Ukraine to make a gigantic leap towards a better Itllure, All of us on the Maidan, from businessmen to pensioners were braving the cold so that our kids and Juture "enerations could ha ve a better life,., 1:;9" <.<

Many other Ukrainian busincssmen reiterated these same lcclings and turned away from the !clflncr regimc and its rules, hen relatively well olTbusinessmen sllch as

Yuri Chuikov, the CEO of Alternet Communications and lc)Uncler of one of the largest mobile phone networks in l 'kraine, devoted their lime and resources to keep the Orange

,,'-} lagaria, np, Revolution al ivc, As a gesture of support Mr. Chuikov joined thousands of Ukrainians in spending cold winter nights of 2004 on Kyiv's Independence Square~~~defying the unjust regime and its promises of great future wealth in exchange for his support, 140

:,L Yuriy BUftso\:lL'h Chuiko\, Ci-:ncrdl fV1anageL A!t(,n1d Tekcon:!11unicm!ons, in!l:nic\\ by author- K:i\_ Lkrain(', June. ::::006.

47 Chapter 3: The Puzzle

According to political economy theories of postcommunist change, one would expect economic growth to be hampered in a transitioning country in which political power is organized in the hands of a strong executive. The only exception to this rule is if by chance the executive is actually committed to reforms and to the respective country completing a successful transition to a market economy. Examples of prosperous countries that transitioncd under reform-minded dictators are Singapore under Lee Kuan

Yew and Chile under Augusto PinocheL However, these are very rare instances and in most cases even executives that initially intended to use their powers to undertake tough reforms get sidetracked and begin making decisions f()r their own benefit.

1,('onid Kuchmu. aile!" taking poyver in ]994, did take sonlC steps to stabiliD;:

Ukraine's economic situation and to bring to the country a keling of greater overall stability. However, as described in the preceding section, he also used his initial popularity to consolidate grcat amounts of power in his hands and consequently to construct a powerful political machine-which allowed him to retain power and reward his allies through actions like rigged privatizations and selective enforcement. Given the economic problems that arose with powerful executives like Carlos Menem in Argemina,

Robert Mugabc in Zimbabwe and Saparmurat Niyazov in Turkmenistan, one could therefore reasonably expect Ukraine under Kucbma to continue iilitering economically, with relatively fcw clites prospcring at an immense societal cost.

Conversc:l J . despite increasing corruption. cron) ism and political repression, the economic situation in l'kraine aClUally improved during the last several years of

Kuchma's rule. In lilct. starling at a (J percent growth in 1'199. l:kraine's Gross Domestic

48 Product (GDP) grcw by 6 percent in 2000, 9 percent in 2001, 5 percent in 2002, 9 percent in 2003, and an explosive 12 percent in 2004,!4!

Moreover, when Kuchma was democratically overthrown by Victor Yuschenko, a leader committed to cleaning up corruption and creating an even playing field for investors and businessmen, GDP growth in lOOS decreased by four times, to 3 percent.!'!·

Even in 2006 GDP growth was only 6'/O,!4' What are the causes for sllch an increase in economic growth during Kuchma's rule, and, why did this growth largely dissipate when a more transparent and reform-minded government took over'!

':-\\ \:Vorld Bank World Development Indicators onlin(\ ',,',,',' del old',dc'liltdl accessed Fi.'bruar~ 2-L :2007,

!bid .. np. ,,, CI!\ \Vorld hlCthook online Chapter 4: Ukraine's Economic Growth Between 2000 and 2004

Ukraine's vibrant growth during the last few years of the Kuchma government is

primarily due to live reasons: Yuschenko's reforms in 1999, t~lVorable external

conditions, privatization revenues, fictitious growth, and questionable foreign investment.

Yuschenko '.I 1999 Re/imns

In December of J 999, under pressure li'om Western donors, Kuchma appointed

Victor Yuschenko as Ukraine's Prime Minister. The former chairman ofthc National

Bank during the J 990s, Yuschenko was internationally known and respected li)[ being a

reform-minded politician and for introducing fiscal policies that mitigated the country's

hyperinflation, lH Additionally, it is widely speculated that Ukraine's oligarchs influenced

Kuchn1a's selection ofYuschenko. These tycoons wanted to restore Ukraine's

creditworthiness, after seeing the losses of the Russian oligarchs in the wake of Russia's

1998 financial crisis. 14j Yuschenko's appointment was thereiiJre Kuchma' s attempt at both pacifying the oligarchs and restoring trust with the international community,

Living up to his name, Yuschenko almost immediately moved to clean up the most egregious forms of corruption and cronyism. Yuschenko's first action \vas to abolish 270 laws that provided various businesses with large subsidies and other

l4 privileges. He also cfTectivelv eliminated the barter system t> and the double accounting practices that allowed many oligarchs to siphon off billions of dollars Ii-om the country.

These reforms quickly Icu to much unhappiness and resistance on the part of many

Adrian Karat!1)CK). ·'Ckrain.:'s Orange Revo!urion:' Fordgn /yjiiirs. 8·:L no,2, (March:;\pril2005): np. ,-;~ Anders Aslund. "The Economic Policy- ofUkrail1c After the Orange Rl'Vo!ution." Eurasian ("'O£i'ii{)!/j and fcof}otnic's, -1-6. nO.5. {::W(5): 3~8. h Due to high inllation in thc 1990$. man) goods v,ere exported to countries like Russia through a barter system. AccorJingt). it \\a5 (:asy for businessmen and state enterprise directors to HllsifY the true value of the goods. in return for iarge kickb;;l_cb. (Karalnycky. np).

50 powerful oligarchs and corrupt officials. who originally supported Yuschenko's appointment. Nevertheless Yuschenko managed to turn a 1.5 percent (ofODP) budged deficit in 1999 into a 0.6 percent surplus in 2000. as well as to decrease foreign debt from

$9.3 to $8.0 billion. 117 His biggest rei(ml1s. though, were in the notoriously corrupt coal mining industry.

Once a thriving, healthy industry, producing 260 Mcgatons(Mt) of coal per year during Soviet times, by ]999 Ukraine's coal mining industry was producing a paltry 80

Mtlyear. This production decline was furthermore accompanied by terrible working conditions and outdated equipment; each ton of coal produced cost on average 3-5 dead and 30 wounded miners. Most of these problems stemmed directly lhJll1 mass privatizations in the coal industry, \-vith !1t'\\" owners caring solely about profit and unwilling to renovate dilapidated mines or to purchase new equipment. Many mining compnnies and coul-powered utilities also refused to pay the government their dues und taxes. i4S Prior to Yuschenko there was simply no one in the government willing to risk forcing Kuchma-friendly oligarchs to follow laws that threatened their linancial gains.

Yuschenko. on the other hand. was not afraid to challenge these oligarchs. Even though he was in office for a mere eighteen months. Yuschenko not only managed to increase overall coal production. surpassing the planned goal for 2000 by .3Mt and increasing winter fuel reserves by 30 percent, but the number of companies refusing to pay their dues to the government decreased Ihlnl 30 percent to 16 percent. III addition. several more d'licicnt enterprises (which utilized coal wastes) vvcre started in the

Julian Evans. "The Theh oftht I'ruth:" \('11 SEaresman 130. no. 4562 C\uycmber. 20Ui): 3. i-'K!. Egorov. H'{uschenku's C.ibinet and Rdonns in the Ukrainian Coal Mining Sector.' :Hining /c'clll1\)/(I1') , ! !2. no. J (ApriL 2003): 34-35,

51 Donbass region.'4'! In lac I. Yuschenko's overall improved collection of tax revenues and reforms that eliminated gigantic loopholes netted the Ukrainian budget over $1 billion in just the lirst year, setting the stage for Ukraine's rapid economic growth over the next several :years. I so

Yuschenko's reforms eventually made him extremely unpopular with many oligarchs and Kuchm

cars 153

Beyond helping to Ii'ee Ukraine's economy of some of the most horrific corruption and illegal practices, Yuschenko' s brief stint in ortice also revealed the extent to which oligarchs and wealthy allies of the government captured the state during its transition. In fact, by April of200l, four of the Jive m,\jor factions in the parliament had direct links to oligarchs, who cared about little more than lining their pockets and stalling any reforms that threatened their way of life or sources of income.""

Fovomhle /::Ylerno/ ('ol1diliorls

,j<, Ibid" 33. 36-37. :5,; Karatnvckv, '-C:krarnc"s Orange Revulution. np. :~,\ Egoro~" "Yuschenko's Cab!!~t.'· 38. Karalnycky, "Ckndnc' s Orang;,; Revolution. np, "'c :\k'\ i-lHp<..mit:v. Pmkssor of Business. Wisconsin 2006 -<; Duik. 6(-6~. The growth in the last few years ofthc Kuchma regime was heavily export driven, especially with regard to steel production and food processing. Specifically, during 2004 the explosive GDP growth was accompanied by a 42 percent increase in exports. 155

World prices for Ukraine's primary exports like steel were very high during those years, which signiticantly increased the monetary value of the exports. I 56 In fact, many analysts in the steel market commented that the "world's gone mad:' after steel prices increased by 66 percent injust the jlrst few months of2004. Fueled mostly by China's large increase in demand for steel, the increased prices helped Ukraine's economy record unprecedented growth. I ""

Privatizalion Revenues

Bet\veen ! 999 and 2004. governmental revenues from privatization were un a constant increase. Even though many o I' these privatizations were nontransparent and skewed in favor of Kuchma's powerful supporters, who were able to acquire them at a fraction of their worth, J58 the government still served to gain billions of dollars from them. SpeciJically, revenues started out at2.9 percent ofGDP in 1999, were 6 percent of

1 GDP in 2002 and a staggering 9.5 percent of GDP in 2004. 5Y In tact, in 2004 privatization revenues surpassed the country's total pension payments, which totakd 9 percent 0 j' tI 1C G'I)I) . I",)

file Influence ofFiCliliolis Growlh

:".z As!und, 328-]29, ,~(, Igor Shpak, Advisor f(w Gov~rn!11l."nta! Finance. International Monetary Fund. Ukrairll\ interview b: author, Kviv. Ukraine, June. 2006. ,- - Barbara Hav:enbau~h. "Steel Prices Soar 66{~"o in a World \r1arket 'Gone Mad,' (//'»1 Tuc/czr. 02--'24/2004, i'ii> The notorio~ls disc~unr purchase of Kryvorizhswl b:y Kuchrna's son in law, Vicwr Pinchuk, is a perfect cxampk Oflhis, ;~() fransition Report 2005, 206, As!und,345.

53 As previously 111entioned. H large part of the econoDlic gfl)\yth during the Jast fe\\ years of the Kuchma regime was fueled by growth in exports. In lact, exports comprised at least 55 percent of the total GOP between 1999 and 2004, steadily increasing during each of those years and breaking the 60 percent mark in 2000 and 2004. To provide a comparison. these high figures arc lIve times as large as the influence of exports on the

GDP ofthc United States and roughly t\Nice as large as those of Germany, France. the

United Kingdom and even natural resource-rich Russia.!6! While attractive world prices for Ukrainian exports like steel were a major contributing factor to this growth. there is evidence that a large portion of this export was fictitious.

According to Igor Shpak. th<: International Monetary Fund Acl\isor for

Governn1ental Finances In Ukraine. beginning in 2001 Ukraine faced a chronic probieln. that of fictitious exports being reported in order to collect a refund of the Value Added

Tax.!62 Billions ofllryvnas were paid Oltt for nonexistent exports every year. Not only did such practices put a strain on the governmental budget. but they heavily contributed to the rapid GDP growth between 2000 and 2004. creating the illusion that Ukraine's economy was growmg. at a I11UC I1 J'aster pace tI" lan It was 111 reaI' tty. !63

The scope of this problem is highlighted by Volodymyr Martenyuk, ajournalist fi)!' the prominent Ukrainian opposition newspaper Shlax PerelJ1ogu:

I have a fi'iend who Iduring the Kuehma times J used to create fake exports in order to collect the VAL He would load up a barge \\ith grain and ccrCl110niOllSi1 make it look like it is leaving the pOrI. with customs agents affixing all the correct stamps signifying that a certain amount of Ukrainian grain has been exported. The barge would then !Urn around and return to a di flerent dock in the same port. This

"" World Bank WDI online hl The Value /\ddcd Tax (VAT), or "PDV" in Ukrainian, is a tax on the value added to a good bej-()fi..' il is resold for a higher amount ofnl0ney, In order to encourage exports, the Ukrainian government refunded the VAT w the person or entity that exported a good. Shpak.

54 happened about two times a month to the same barge. My fl'iend's firm would then turn to the government and collect the tax money' owed to it' -----in this way making money 1I'om the air. The government certainly knew about such practices and would often refuse to make these payments. many times to peopk who were genuinely involved in exporting goods. Iinwever. this friend had some connections in the government and, for a fee of 20-30 percent. they would help him collect the moncy--in the millions of dollars. 1M

A similar practice was occurring with Ukraine'S imports. In order to avoid paying the full amount in import tariffs and customs duties, many businessmen and companies would bribe oHicials into undervaluing the goods they imported into Ukraine. 165

Vyacheslav Rushchyshyn. the owncr and j(lUnder of the Ukrainian clothing firm Trottola. provides a good example of how allics of the Kuchma regime undervalued imports to avoid customs duties. Rushchyshyn's "competitors--those 'with conncctions in Kyiv'---- received shiplnents of Chinese-nladc suits virtually duty-free by dcciaring their value to be a ludicrous 17 cents apiece."lu, In the end. Elke and ovenalued exports. combined v,ith undervalued imports, heavily skewed ollkial statistics and intlated C'kraine's economic growth.

It will never be known for certain just how much ofUkraine's exports and imports during the last few years of Kuchma's tenure were legitimate, and correctly recorded in the GOP grovvth. Howcver. one can be certain that the amount of fictitious growth was in the billions of dollars. According to ofticial statistics cited hy Anna

Skovoronska-Lychinska. Poland's Trade and Economics representative in Ukraine. a very big difference existed between the amount of goods Poland recorded as exported to t:kraine and the amount of imports l 'kraine recorded as having come Irom Poland. For

in·; Vo!odymyr iv1arkr1) uk, \ournalisL .\I.JX 2006 Chuikov.

55 instance. in l003 Poland officially recorded the value of its exports to Ckraine to be $1.5 billion dollars. Ukraine, on the other band. recorded the imports it received Ii'om Poland as $708 million. ;6' In other words. the undervaluing of Polish imports alone amounted to at least $800 million. Moreover, in 2003 Poland was only Ukraine's tourth largest trade partn<:r.

f)ues{ionahle Foreif.{fllnveSlmenl

Foreign investment between 1999 and 2004. another !i\ctor affecting tbe GDP. has also come under scrutiny. A large portion of this investment is believed to be the repatriation of money that was shadily obtained and funneled out of the country by oligarchs and corrupt government otlicials in the 1990s····instead of legitimate investment that represents grov.th. /\t the time the 11103t popular way of taking large SUDlS of fnOne) out of tbe country was tbrougb semi-legal transactions involving Joreign banks. Tbe corrupt oflicials and oligarchs would create iront Jirms, through which to transfer funds into foreign banking systems. For example. take a factory in which two different Jirms operate. One Jirm makes bol1s and delivers them across the bctory flol)!' to the other firm.

However. the firm that makes these bolts ollicially sells them to a company in Cyprus at a certain price. T'he Jirm that uses these bolts then otlieially buys them fi'Oln the Cypriote firm for a mueh higher price. llsing money provided by a fourth party (i.e. an oligarch or a government offIcial). The difference between the two prices for the bolts, or the money that needs to be taken out of Ukraine. remains in the Cyprus and it is legally difficult to

· Jllg prove any \-\Tong'd OlI1g.

·'Thl:.' Disparity Betwe~n Ukraine and Poland's Export Statistics Amounts tu $800 Million in 2003," The Ckraillian Independent VeH"s .-fgen(]' !LSJA.V). Mar. I L 2004, online: : np. \1artenyuk.

56 This money began returning to Ukraine for three reasons: I) those responsible for

stealing it became Ji"ightened by the successful prosecution of fonner Prime Minister

Pavlo Lazarenko in the United States, 2) the Kuchma government was putting significant

pressure on them to return the money, and 3) the new millennium seemed to usher in an

era of political power being lirmly in Kuchma's hands-thus allowing his allies to bring

back the money and use it for a comfortable, worry-free lifestyle.

Pavlo Lazarenko, widely considered to be the greediest of Kuchma's political

allies, was convicted in 2004 in US District Court of thlUd. money laundering. and the

transportation of stolen property. Currently out of jail aner posting an $86 million bail. he

is accused of stealing hundreds of millions of dollars li'om the state and from Ukrainian

businesses betvveen 1995 and 1997'""""-first as Deputy Prime !\1inister and then as Prime

Minister. 169 It was commonly thought that Lazarenko's move to the US and subsequent cash purchase of a luxurious $6.7 million dollar mansion in California would only end in a minor scandal and a comfortable lifestyle for the former onIciaL 170 However. when

Lazarenko was convicted of serious crimes. many former ofticials and oligarchs started repatriating large sums of money it back into Ukraine in the form of investments. This in turn served to boost the orticial GDP growth. despite much of this investment never ending up in projects or businesses aimed at long-term growth.

The second inl1uential f2lCtor was the international war on terror. Because large bank accounts vvith questionable origins were now being more closely scrutinized worldwide. it became a much riskier game Jor Ukrainian oligarchs and lcmner government ol1icials to ensure the safety of their accounts. In addition to the risks

Karamyd.;.), np. Paui Qui!ln-Judgt: and 'y'uri larakhovich. "in;j Slate l)f Deciine," TilJh~ Lliropc. ]59, no. ]3 c:\pril 0 I. ~O()2): np.

57 increasing fium external hlctorS. Kuchma also began putting pressure on money to be returned to Ukrainel71~it was of no lise to him in foreign bank accounts or assets. which provided the regime with no income.

Finally. perhaps the most important factor inl1uencing the repatriation of questionahly obtained money was Ukraine·s favorable political situation during

Kuchma·s last few years. Kuchma and his allies vvcre firmly in control of the government and had sufficient inf1ucnce over the media and civil society~providing a good environment for oligarchs and former government ot1icials to use their money tor an opulent and legitimate Ii festyle. Kuchma's unquestionable control in Ukraine became solidified in the wake of two events. First Kuchma easily won the 1999 presidential elections. Second, in 2002 Kuchnla gained control or the parlianlcnt by putting pH:ssun: on independent candidates. even though his party ollkially obtained a meager twelve percent of the total votc. Powerful opposition candidates like Vyachesluv Chornovil and outspoken journalists like Georgiy Gongadze were simply assassinated as soon as

Kuchma decmed them to be threats to the carefully maintained politieal machine.

Moreover. what could bring the government down if even internationally verified recordings OCKllchma ordering Gongadzc·s cxecution had barely any repercussions tllr the regin1c?

Growlh thai Was Long ())'erdue

By 1999. eight years altcr independence, Ukraine·s economy was at a record km point. Total economic Ourpllt had t~llkn to only 40 percent llf what it was in 199 L and the

Jack of reforms letl the country susceptible to extern"l shocL. C Per capita CiDP dropped

.vli1rtenyuk. , ~ C!A \\-'orld FactbllOK un line

58 to less than hal f of the 1991 level (irom $8,624 \0 $4,044),173 and capital Hight from

Ukraine was estimated at $3 billion per year. 174 Just about everyone, outside of the wcll- connected oligarchs and governmental allies, was worse ofT than during Soviet limes.

The argument here is that it would not take much growth to post figures such "s a six or even twelve percent GDP growth· -when output has fallen to such a low level compared to a country's former economic strength. A few key reforms by someone like

Yusehenko would likely be enough to stem the tide of the most egregious theft and to unleash some of the country's economic potential by creating a more equal playing tield and de-linking some prosperity Irom governmental connections.

Chapter 5: The Yuschcnko Slowdown

One of the biggest surprises of the 2004 Orange Revolution \vas its negative economic effect. Within one year growth dropped fi'om an explosive 12 percent to a relatively unimpressive 3 percent, reaching only 6 percent by the end on006. This is a complete contradiction of the predominant political economic theory regarding a corrupt and selj~serving regime being replaced by a more transparent one. Consequently, understanding the causes behind the slowdown is important to better understanding the effects of future democratic revolutions.

initial Uncertainty

One can always expect a revolution to lead to a short-term period of uncertaintv.

When people in the government change, one can't be certain what dTcets this will have on the rules of the game (i.e. the way laws will be enftwced, how various permits are granted, how one deals with the government. etc). Consequently, many business owners

\\,'ortJ Bank. \Vorld Dt2"vclopmt'1l1 Indicator) Online !~1 r;'l

50 and investors will view revolutionary changes with caution and will wait to see what the new political environment looks like before making any significant decisions, If the rules ofthe game do not change, or if they improve f(lr the better, then previous economic growth will become reestahlished or even greatly expand, Thus this period of uncertainty is expected to only temporarily afTect post-revolutionary growth,

Uncertainty is dClinitely one of the causes of Ukraine's post-Orange Revolution economic woes, One of Victor Yuschenko' s /irst initiatives upon coming to power was to replace most of the top governmental officials left over li'om the Kuchma regime,

According to ollicial sources, in 2005 a total of about 18,000 civil servants in the public administration were dismissed, m In the words of Anatole Klepatsky, a local businessman and the CEO of Golden Gate ~Acrgers and /\cquisitions, '''this led to a big chaos. \viih a three to !

former schoolteachers, with little or no necessary experience, 177

Cn/ill'Orahle EXlerna/ Economic ('one/ilion.)

Much like the way world steel prices alTectcd Ukraine's GDP increase during

2004, a significant decrease in sted prices also affected the subsequent GDP decline in

2005, Specitlcally, world steel prices dropped hy nearly 20 percent in just thc first six

'~" Transitions Report 2005. 204. Anatole K!epatsky. ChkfExecutivC' OfikcL Goidt:n Gatt:' \'1crgers and Acquisitions, intcrvievv by authoL Kyiv. Ukraine. June. 2006. Kh::pmSK}.

60 months of 2005, 178 which helped lkpress the l11onctar> level oft 'kraine 's exports and consequently the GDP growth for that year.

A Reduction in Fake Growth

The governmental customs administration was, and in the eyes of many still is, one of the biggest drivers oft1:tke growth in Ukraine, Whether used to collect illegitimate

VAT refunds or to import/export certain disallowed goods, the customs administration is one of the most corrupt sectors of the Ukrainian government.

During Kuchma's times, there was an unonicial "price" for everything, It is common knowledge that nearly every customs agent was expected to pay a certain amount of money to be promoted or even to gct a job at some border checkpoints, These payments ranged in the lens of thousands of dollars for top ranking pusitiuns. rVlorcov(,L every customs agent was responsible for a cC11ain quota each day, with proJit sharing distributed in an organized way, For example, at one border crossing between Ukraine and Poland, it is rumored that the ofTicial in charge paid nearly $200,000 for his position,

He was able to earn it all back within three months through his share in the bribes collected,

The prevalence of corruption at the border became very apparent to me during my own travels between Ukraine, Germany and Rllssia in 2003, On a bus trip from Germany to the Ukrainian city of LviI', the drivers announced that in order to avoid having our bags inspected, each person was to "donate" live Furos, The total was then cullectively given to the Ukrainian customs agents, t:pon reaching the horder, none of the bags on the bus were even ul1l()aded and all of us simply had to present our passports, As retribution

Pi) Jennifer Sudick, "Stet:l Prices on the Decline Since January; Drop \Von't Affect Costs," ,)!_iOkesman RevieH- onlinl..':, 0630200', np. for refusing to pay the bribe, two passengers (myself included) were forced to show three different f,)I'l1ls of identification, alier the customs agent refi.tsed to recognize our passport pictures and threatened to deny us entry into Chaine. In the end, the Ukrainian government never discovered whether some of the passengers were transporting contraband or even a nuclear missile.

Several days later, while on a train at a border crossing between Russia and

Ukraine, [ witnessed another curious incident. Even though I was one of only two passengers in that particular car, every luggage compartment was filled to the brim with bags and packages of all different sizes. When the customs agents entered my compartment, they closely inspected my luggage and completely ignored the other bags, ascertaining only that they belonged to the conductors. Before reaching Iv1oscow early the next morning, the two conductors askcd me to step out of my compartment as they began opening scverallocked shdves and pulling out packages which took both men to litl. For the next two hours I was given the opportunity to watch the men, both soaked with sweat fI'om heavy lining, open locked compartments and shelves al! over the ear, lining out heavy packages and stacking them near one of the entrances.

Furthermore, I managed to find out that the price to transport at least three of the packages was $200 per package. Whik passing through the Ukrainian city ofTernopil the previous morning. I saw the conductors accepting three packages li'om two other men. The instructions muttered by the owners of the bags were '"$300 now. and $300 when this arrives in Moscow." The money then exchanged hands.

"'one of these practices were wdl disguised. and I highly doubt that border crossings like mine \Vefe an anomaly. In j~ld. must nfthc illegaJ (u:)toms rruclkc~ w::n:

62 down to a science. People were even aware of the currency for each bribe. For instance. the driver orthe \'an on my rcturn trip li'om Ukraine to Germany knew that in order to go in Iront of the tirst line of cars at the border crossing he had to give 20 Hryvna (about $4),

$10 (in dollars) to get ahead of a second line and another $5 to get a better spot later on.

All of this happened without anyone ever saying a word. The customs agents might as well have been toll collectors. By this time I was also used to the fact that I would not even have to take my bags out of the car tor the customs agents. provided thatthc) received their usual dues.

After hecoming president. Victor Yuschenko, along with the new Prime Minister and his ally . set mIl to fight corruption and these customs practices. In

2005 alone. ] ,350 goven1111cnt officials were prosecuted f()[ violating Ukrainian !;;l\-VS.

Those prosecuted came lrom all sectors of the government. including regional, district and local levels. Charges ranged II'om a Ministry of Defense official (who attempted to solicit a $600.000 bribe jj'Oll1 contractors), to the President of the Ukrainian $tate Reserve

(who cost the slate $7 million dollars after illegally selling reserve luel) and to the

Ukrainian Chief Prosecutor (who tried to seize 1.700 hectares of state property). 17<1

Regarding the highly corrupt cllstoms administration. after replacing several top otlicials the new government set up special "cllstoms raids." These raids consisted of teams of agents that undertook practices such as setting up surprise roadblocks several kilomders away Ji'OITI customs checkpoints in order to closely inspect cars and trucks with respect to what was written in thcir declarations. The effects were immediate. at least in the short-term. Fearing these raids and the possibility of being prosecuted.

;-,) ··Ukraine," United Kingdom Hnmc Office Country of Origin Report online: W\\ (Jun(\ 20(6): 8. customs agents began refusing to take bribes or to allow the most heinous practices to continue. ISO Many believe that the net elTeet has simply been an increase in bribe amounts and the acceptance of bribes by the agents responsible for enforcing the new raids. However. it is a fact that many illegal customs practices have been eliminated. lSI

Yuschenko's rele1fl11s undoubtedly made it more difticult to undervalue imports or to obtain the necessary documents for nonexistent exports at the border. They also made it harder to collect fake VAT payments from the government. since many of the officials formerly responsible for helping to push through fake claims have either been replaced or are no longer willing to take on the increased risk ofprosceution. IS2 A general consensus seems to exist that the new government is much more serious about lighting corruption.

According to Transparency International's Corruption Perceptions Indl~x (('PI), even though it is still tar below Western European standards, corruption in Ukraine has been steadily declining since 2004~~alier increasing lor several years beforehand. In fact. on a scale of 1-10 (with 10 indicating least corrupt) the (PI showed Ukraine tirst sliding from a score of 2.4 in 2002 to a score of 2.2 in 2004. After the 2004 Orange Revolution. however. Ukraine's (PI score jumped to 2.6 in 2005 and 2.8 in 2006. 183

Moreover.. the new budget law approved in March of 2005 also greatly reduced the type of activities eligible je)!- a VAT refund and in one sweep eliminated the preferential tax treatment of Special Eonomic lunes (SJl/s) in {·krainc. iX-I Originallv intended to encourage !(wcign firms to set up tux-Ii'ee enterprises and thus to boost the

I:': Shpak. , . Shpak. Martenyuk. Corruption Perceptions Inuex, Transpan:nc) Im('rnationai onlin~: \\ \'v\\ .(r'ln>paccnc: J.QDJ: access('d March 0 i. 2007, nr. Transitions Rcpnrl ~UO:;. :::0-+

64 local economies of certain geographic areas, on the day of their closing these SEZs amounted to roughly 10 percent of Ukraine's territory, I 'nlike in China, where SEZs were physically isolated and surrounded by fences (in order to control the duty-free goods and equipment brought into the zones)-many Ukrainian SEZs were not isolated and were poorly controlled, This led to many raw materials, such as meal, being imported duty-free and then sold in Ukraine at an unfair competitive advantage-instead of being transformed into finished goods and exported, This practice caused onIcial import levels to be recorded as much lower. along with much of the SEZ investment to be ineffective at generating real growth, In reality, while some SEZs were legitimate international efforts, their primary eJTect was distorted competition in the internal market and artiJicially low imports IX; This in turn led tn al'1i1icially higher (JDP growth.

All of these actions servl'd to signilicantl) diminish nlk<: growth, "ven though they never completely eliminated it. After Yuschenko came to power and instituted his anti-corruption and other rel()rms, Ukraine's ollicially recorded exports quickly dropped, 186 Specitically, while export growth was officially recorded as a robust 14 percent in 2004 (with 10 percent in 2003 and 9 percent in 2002), it was only 3 percent in

2005, Furthermore, as a percentage of GDP, exports decreased by a full 10 percent

(dropping hom nearly 64 percent in 2004 to 54 percent in 2005), At the same time, imports grew by 14 percent in 2005.' 87 After just the tirst six months of 200S, Ukraine's track surplus was cut in half.'~s

!\~ Shpak. 'Sic Note it is almosl impossible to correct!) prediCt h()\\ much uI'lhe JcC;:ClS(' in c:\porh \,,;1:' spt:cificaHi due to the dt'creasc ill fllke gro\vth and illegitimate customs praCtices. Other factors influencing the decrease arc the decrease in \\odd slee! priCeS and export bans on behaifofRussia both of\\'hich are discussc:d in this paper. '" World Bank, WDl online. :b,l! Transition Report 2005. 20:'.

65 A Decrease in lIIegilimate Foreign investment

Unlike the Kuchma government, which provided oligarchs and former ofTicials with a good climate for repatriating questionably obtained funds, the Yuschenko government instilled the opposite effect. No longer was the political situation firmly ll1 control ofKuchma's l(ll'Iner allies, which created great uncertainly amongslthose desiring to transfer suspicious funds back into Ukraine. This change in governmental attitude toward Kuchma' S allies became ll10st apparent with the Yuschenko government's resale of the Kryvorizstal steel company, which in 2004 was sold to Kuchma's son-in-law tor a ti'action of its value. I xC) This rc-privatization was one of many actions by Yuschenko which contributed to uncertainty in questionable foreign investment.

The reaction of the o\vners of questionable overseas assets 'vas instantaneous.

While the amount of Foreign Direct Investment (FDI) from the US, Western Europe and

Russia grew at the beginning of 2005, it drastically plummeted trom Cyprus and the

Virgin Islands-which are notoriously known for harboring questionably acquired funds ti'cnn Ukraine. In fact, after growing by 13.8 percent in the lirst quarteL 15.7 percent in the second, 7.3 percent in the third and 8.9 percent in the t()urth quarter of2004, FDI

Irom Cyprus and the Virgin Islands grew by only 0.7 percent in the first quarter of2005.

And, even though FDI fi-om Cyprus and the Virgin Islands did recover by the third quarter of 2005, average growth was still slightly more than half of what it was during the tlrs! three quarters of 2004 (7.9 percent verslls 12.3 percent, rcspcctively).'9u This dccl inc in FD! certainly contributed to the overall decline in Ukraine's GDP growth.

Russian Pressure

:;;'i Meier. 5]. ;"" A Ic.\andcr Mot>! "A Ll)()k at lht' '\lumbers: 1s foreign Dirc<.:i !nvt;::,tm.:nt intu Lkrainc Pluml11dingT' flie Ckruinian IF While at a 1993 G7 meeting in Tokyo. former Russian president Boris Yeltsin. referring to Ukraine. stated: .. they know that alii have to do is cut ofTthe gas and they'll come to Moscow on their knees ... :"1 Not long after the 2004 Ukrainian presidential elections, in which Victor Yuschenko defeated Russia's favored candidate, Russian

President Vladimir Putin followed Yeltsin's recipe by threatening Ukraine's energy supplies

In June 01'2005. the Russian state energy company, Gazprom, demanded that

Ukraine pay $160 per 1,000 cubic meters of natural gas--up Irom $50 that l 'kraine had been paying for the past several years. 102 Alier the Ukrainian government responded with several counterofkrs and offered to negotiate, Russia "resorted to a Don Corleone-like tactic lifted straight fr0l11 The Go{(/caher ... [and] increased the proposed 2006 price to between $220 and $230." 1'13 When Ukraine balked at the fourfold increase, Gazprom. on

January 1. 2006, simply cut otT Ukraine's gas altogether. In the end, Ckraine managed to agree to a price of $95, after many other European countries put Russia under immense pressure. What helped Ukraine is the fact that 90 percent of Russian gas sold to the rest of

I Europe has to go through Ukrainian pipeiines. '!4 When Russia could not supply those customers without supplying Ukraine lIrst. it had to soften its stance. The same eannot be said I()r Georgia. which Russia put in the same predicament alter that coumry's Rose

Revolution.

It is no coincidence that Putin first and foremost began pressuring the new

Ukrainian government through energy blackmail. [t is well known that Ukraine currently

'< Solchan;, k. 71. ,"} Nikolai Sokov, "The Lkrainian Clas Crisis Revisitc-d," Currl'nt J/is{()

67 depends on external sources for 85 percent of its energy needs, especially for natural gas

In t~lCt it is estimated that this price increase will cost thc Ukrainian economy $22 billion 195 and could have cost as much as $4.4 billion if the rest of Europe did not stand up for Ukraine when Gazprom made its demands. Moreover, neither Putin nor Yeltsin accidentally stumbled on such an effective method of influence. It was intentionally created during Soviet times. Dating back to Ukraine's industrialization and especially after the 19605, Soviet planners switched Ukrainian industry from using coaL which was and still is abundant in Ukraine, to oil and natural gas-which was transported to Ukraine tTom· R USSJa. . I11 t h'IS way llj". ,rame s economlC. d ependR' ence on USSIa was guarantee d . 19(,

Russia's second move came in January 01'2006, when RosSelihozNadzor. the

Russian government's f~)od safety administration, issued a ban on the ilnport of all animal products from Ukraine. I')] Including meat, eggs. Jish, cheese, mille butter and tinned food, the ban was based on qdubious Russian claims that the Ukrainian industries in question did not meet Russian veterinary standards. This ban effectively ceded the

Ukrainian animal industries of their biggest export market causing over $5 million in losses injust the tirst week and a projected $49 million at the end of the flrst month. In fact during 2004 over 50 percent of Ukraine's cheese was exported to Russia, which bonght over $400 million worth of Ukrainian dairy products alone. '98 While some milk and dairy lilctories have now been allowed to resume their exports to Russia, it took three

CIA World Fuctb(lok online,

!';() Ra\vi AbdelaL "Interpreting Interdependence: N

Russia

Russian Air Force< in accordance with the 1993 joint agreemenL also placed an order f()r 211U 164 of the aircrati However. on April 7, 2006, Russia suddenly announced its complete withdrawal hom the project and the cancellation of its entire aircraft order2111

Valued at $50-55 million each. the cancellation of aircraft alone was a major setback lor

Antonov< the Ukrainian aircrali manufacturer. By pulling out of the project, Russia has in effect deprived the Ukrainian eCOn0111Y of several billion donal'S v/orth of research and development investment as well as thousands of jobs.

These three big moves by Russia are only the most notorious examples of

Russia's continuing attempts to depress the Ukrainian economy in the wake of the

Orange Revolution. Russia has also put into effect quotas or restrictions on other

Ukrainian goods< such as large diameter metal pipes, white sugar, tobacco, and various 2112 alcohol products. All of these actions negatively affect Ukraine'e GDP growth and are beyond the control of the Yuschenko government.

YUl1u/covich"s Saho/axe

Shpak. John FrickneL "'Russia Resunh:s Funding for the :\n~70 Joint Millwry Transport A_ircraft Effort," Apia!iun t-Ft't!k July :2!, 2004: 25. "Russia to Pullout of .'\n-70 Production. ' I?lIsSltffi _\t'H \' dud Jnjilriilalj(!l1_-lgency ,m!ine, np. Svetlana Glinkina and L;. dia Ko-;ikova. "Dcvdopl11t:ll1 of ('O!1lmun Econumic Space of Russii-L l 'kraine. Belarus and Kazakhstan in the CUnl:CXI ofU _. nf)I"J -\J.',- !.-\ugusL 20(6): 20

69 Victor Yanukovich can be blamed for at least two big actions that adversely alTected Ukraine's economy and overall GDP growth, First while still the Prime Minister during Kuchma's reign, Yanukovieh drastically increased peusions, placing a gigantic burden on the new government Second, aftcr again becoming Prime Minister in the summer 01'2006, Yanukovieh instituted Ilawed grain export quotas that led to significantly smallcr export revenues and posed a risk of decreased future foreign investment,

On September 1, 2004, the Yanukovich government passed a law that doubled pcnsions,203 From the onset this law improved the lives of millions or people, since some pensions prior to this date were actually below the otlicial minimum living standards,

IloweveL in one day the law ruined the reformed pension system and put an unbearable strain on the governmental budget2iJ4 In 1act, the governmental cost of pensions was increased from an already high level of9 percent of the GDP in 2004 to 16 percent orthe

GDP in 2005-which is the highest level in the world! Moreover, the pension increase was broad and ill planned, For instance, 55-year old women are now entitled to full pension benefits but can simultaneously choose to continue working and earning a full wage, About 500.000 !tmner government orticials. who already had relatively high pensions, are now receiving the equivalent of$2,900 per momh. even though the average

2 monthly wage in Ukraine was $111 in 2004 !J5

After assuming the post of Prime Minister again, in the wake of a drawn out battle in the parliament, one of Vietor Yanukovich's Iirst actions was perhaps one of the most puzzling and economically damaging since Kuchma's times, Claiming that it was

]<, As!und. 345. 2>1 Shpak. >J_' <-\siumL 3.t5.

70 necessary for Ukraine's food security, in October 01'2006 (he Yanukovich government passed into law a grain export quota of 1,603 million metric tons (MMT), revising it to

2,873MM'r in November. However. official statistics seem to dismiss any justification

1'01' the quota, Not only is Ukraine's grain crop l'or the 2006107 year estimated to be

35M\nwhich is well above the ten year average and signilicantly higher than the

2003/04 erop--but total domestic use is only expected to be 24.4MMT""which would allow for signilicantly more export than Yanukovich's t'orecast of9,5MMT. Moreover, the lack ofjustification for the quota becomes more apparent when looking at the specific grains involved, For instance, barley, which is primarily used for feedstock and therefore has no impact on food security, was also included in the quota, despite the fact that the

2006/07 barley harvest representl~d a ten year high,206

The effects of this quota were staggering, First. rel1ceting current world prices,

Ukrainian wheat producers stand to lose at least $375 million in export revenues.

Additionally, i r world prices for other grains follow a similar pattern, the total revenue loss for grain producers would be $875 million. Second, this quota creates a ripe environment far corruption, Because the new quota creates a ditTerence between world and domestic grain prices, those producers with governmental connections could inl1uence officials to obtain the limited number of export rights. Third, the quota could lead to l jkrainian grain being traded on the \\orld market at a discount in the future, since f()reign investors would ll¢mand a risk premium in order tll compensate t(Jr the increased risk of delivery, given the uncertainly surrounding lliturc Ukrainian laViS, Finally, this quota threatens future l,)reign investment into Ukraine's agricultural sector. With total

>(, Stephan V. Crarnon and :v-1artin RaiSer, '"The Quotas on (jrain Exports in Ukraine: lneflectivt. Inefficient, and ~o!1-1ranSparenL<' Institutt: fix Economic Research and Policy Consulting in Ukraine, the World Bank. {Nu\('mo;:( :::7. 20061: ~-·t

71 foreign direct investment into Ukrainian agriculture reaching $294 million as of April

2006, this mow by Yanukovich risks alienating future investors and prompting current

investors to give up on modernizing Ukraine's agriculture-related infrastructure.'U!

At the time this paper was written. it was still too early to evaluate the complete

damage done by Yanukovich's grain export quota. However, in January 01'2007, reports

out of Ukraine began revealing that up to 10,000 tons of Ukrainian grain was being

thrown into the Black Sea every day. It is estimated that by that time over 270,000 tons of

grain had spoiled alier being loaded into grain elevators in the summer of 2006. and

subsequently prevented fi\,m being exported by the grain quota. Farmers estimate that

Ukraine has 6 million tons of excess grain. which could be exported for the equivalent of

Perhaps the best description of Y anukovich' s most reccnt economic sabotage has

becn provided by Ukrainian Agrarian Conkderalion Chairman Leonid Ko;:achenko: .. It is

a paradoxical situation that this country has never seen before. Every night 5.000-10.000

(ons of grain is thrown into the Black Sea. feeding fish. At the same time, we are looking

for funds for the agricultural seclOr.',209 This grain quota demonstrates the unwillingness

of the Yanukovich to support Yuschenko' s reforms. and highlights Yanukovich' s desire

to undermine the President.

ibid., 5-7. >'ii Jan Maks;miuk. "Ukrainian Grain Reportedl) Rots L$:('caus.: ~)f [:\port ()uotils," Rudw FF~-'~ Europe'Radio Lihlll'(L II. Ill).]7, Pan II (January 29.2007j: np. 2<1<) MaksyrniuK. np. Conclnsion

For the first nine years of independence, Ukraine did not deviate Irom the predominant theories of post-communist political economy; communist era politicians managed to retain power. undertaking only partial reforms that allowed a group of oligarchs to capture the state (at great economic cost). However. starting in :l.OOO Ukraine began contradicting the forecasts of theorists like Joel I leIlman and Milada Vachudova.

First. instead of continuing to decline. the economy began to "flourish" during Kuchma's last years. Second. when the Kuchma regime was overthrown by the transparent and reform-minded Yuschenko government, GDP growth decreased by two-thirds and the economy experienced its worst year since I 999-instead of expanding at an even faster rate. as theory would indicate.

This paper contends lirst that Ukraine's economic growth between :l.OOO and 2004 was largely due to favorable exogenous factors (such as high steel prices and low energy expenditures). as well as to reforms undertaken during Victor Yusehenko's brief stint as a

Prime Minister. Not only did the Kuchma government bear little responsibility for the growth. but it also allowed for fake exports and questionable foreign investment to create artiJicially high growth levels.

Second. this paper eomends that the economic decline after Yusehenko' s takeover was largely due to factors out of the new president's control. Specifically. this includes a drop in world steel prices. Russia·s deliberate actions to depress the Ukrainian economy. and sabotage b} both Kuchma and Yanukovich. Much of the ··slowdown" was also due to the elimination of fake growth. through tighter customs controls and the Yuschenko government's anti-corruption measures. Victor Yusehcnko cannot howevcL be completely absolved of any Quilt for ~ ~ v

Ukraine's troubles after the Orange Revolution, His inability to create a good working relationship with Parliament has led to almost-continuous stalemates and several governmental crises. Consequently, tCw of the key reforms desired hy small businesses were enacted (i.e. major tax reforms, laws regarding the sale and ownership of land, a decrease in governmental hureaucracy). Moreover. aner months of parliamentary bickering, Victor Yanukovieh, Yuschenko's archrival, succeeded in becoming Prime

Minister. This has led to the j(mnation of great tension belwccn the president and

Parliament, and has given Yunukovich the ability to sabotage Yuschcnko and his reforms, with actions such as the imposition of the harmfLli grain export quota.

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