The Breadbasket Becomes The Basket Case

KIEV, Ukraine -- Ukraine's president was once considered a hero. But his country has spiraled into chaos and despair.
On an icy November night in 2004, Viktor Yushchenko and Yulia Tymoshenko stood in front of orange-clad crowds in Kiev's Independence Square and promised their supporters a brave new world.He spoke of a new Ukraine allied to the European Union, not Moscow, free of Russian-style vote-rigging and crony capitalism, with a free press, free elections and transparent markets."My heart breaks when it sees how the government is robbing this country of its riches," Yushchenko said to the half million people who had braved the freezing rain to protest the corrupt old regime. "Europe has shown us what can be achieved with solidarity, tolerance and mutual understanding." The new Ukraine, he added, would be "respected by both East and West."Five years later, the promises of the Orange Revolution are ringing very hollow. Democracy is certainly flourishing—but instead of bringing stability and prosperity, the Orange revolutionaries and their Western values seem to have brought nothing but chaos and disaster.The years since Yushchenko's historic speech have been marked by unstable political coalitions and incessant wrangling between Yushchenko (now president) and Tymoshenko (now prime minister). Yushchenko's 2.7 percent approval rating likely makes him the world's most unpopular leader. Ukraine and its leaders are distrusted by their would-be European allies, and their big neighbor to the east continues to view it with the patronizing eye of empire.Meantime, the promised free market has battered Ukraine half to death. Since 2000 it has averaged 7 percent annual growth, but its economy is expected to shrink by up to 20 percent in 2009, according to Standard & Poor's, making Ukraine the developed world's worst recession victim. Some analysts fear the country's fragile banking system could fail altogether, demolishing savings and making recovery even more difficult.On one level, the fall of Ukraine has nothing to do with the failings of the government. More than 40 percent of the economy depends on aluminum and steel exports, a legacy of Soviet-era central planning. With the global recession, both demand and price for metals has dropped by 50 percent, decimating Ukraine's exports.But bad leadership has made things much, much worse. Paulius Kuchinas, a regional analyst for the Oxford Business Group, says Ukraine got the "worst sort of democracy," one that has been hijacked by populism and business interests. Indeed, all of the top political leaders have unsavory ties to Ukraine's oligarchs, and it often seems that the leaders are more concerned with leveling accusations of corruption against one another than in solving the country's problems. "It's all tactics and no strategy," says Kuchinas. "Everyone is looking for short-term gain."Voters perceive Yushchenko to be the worst of the bunch, judging from his popularity ratings, and even many of his staunchest allies have become disillusioned. Sergei Teriokhin, a former minister of the economy and an old personal friend of the president's, recalls how they used to talk for hours about how to reform and democratize Ukraine, but instead of following through, Yushchenko fell out with Tymoshenko in 2005 and dismissed her government.Many now believe he is spending his time protecting his cronies' business interests rather than managing the country. "None of our old dreams have come true," Teriokhin says.Emblematic of the mismanagement has been Yushchenko's handling of the nation's natural-gas imports, which account for 70 percent of Ukraine's energy needs. Ukraine's state gas utility, Naftogaz, sells to consumers at below-market prices, with the state picking up the difference—a massive drain on the state budget. With debts of more than $3.5 billion and an expected loss this year of another $3.5 billion, Naftogaz only barely scraped together enough money last month to pay its main supplier, the state-controlled Russian energy company Gazprom.Scrapping subsidies and forcing Ukrainian consumers (including oligarch-owned businesses) to pay full price for the gas would allow Ukraine to balance its budget, but both Yushchenko and Tymoshenko have so far balked at such an electorally unpopular move.Worse still, Yushchenko has refused to allow payments between Ukraine's gas monopoly and Gazprom to be made directly, allowing them to go through shadowy middlemen like RosUkrEnergo, a company partially owned by longtime Yushchenko-backer Dmitry Firtash. "Yushchenko was the father of the RosUkrEnergo scheme, but he lied to everybody and lost himself in lies," says Mikhail Pogrebinsky, a political analyst who has worked for a Yushchenko rival.With so many signs of dysfunction at the top, it's unsurprising that Europe now has a jaundiced view of Ukraine. Kiev has a long track record of broken financial promises, making Brussels wary of more bailouts—all the more so because the EU has its own wrecked economies to deal with.Ukraine's reputation as a gas-transit country is also rock bottom after spats between Naftogaz and Gazprom led to gas cutoffs that left Eastern European consumers freezing. Membership in the EU—a long shot in the best of times—now looks more unlikely than ever, and Germany and France, long skeptical about Kiev's NATO application, have hardened their stance.But the risks of abandoning Ukraine are great. The further collapse of Ukraine's currency—it has already fallen by half against the dollar since October—and the failure of its banking system would be disastrous for small and medium-size business, exactly the kind of enterprises the country needs to shift away from metals.Rising unemployment is likely to lead to social unrest and a wave of emigration that would destabilize the shaky economies of Ukraine's EU neighbors. It would also aid Russia, which has been trying to use the crisis to regain influence in Ukraine. Last week, Russia's Finance Ministry made positive noises about a $5 billion loan requested by Tymoshenko this year, raising concerns that Europe could be opening a door to Russian influence across the region."Allowing an enthusiastically pro-EU, pro-NATO state to fail for want of a few billion presents "a different sort of moral hazard," says one senior Western diplomat in Moscow. "The bottom line is, you have to stand by your friends … or you don't make any more friends."So far, others are getting the message. Despite the misgivings of some of Europe's biggest countries over bailing out neighbors, the EU is likely to add some money to a $16.4 billion IMF loan if a deal is struck.The European Bank for Reconstruction and Development has said it will also invest €1 billion this year. "The stability of Ukraine is of crucial importance for the future of all Europe," says EBRD president Thomas Mirow. "We must not allow it to become a no-man's land."Ukrainians appear committed to ensuring that such a thing never happens. Polls show a deep and increasing commitment to Europe, not Moscow, and it is clear that Ukrainians prefer real democracy, however rough-and-tumble, to the more superficially stable example of authoritarian capitalism next door.In fact, "everything that Russia has done over the last five years has pushed Ukraine further toward NATO and Europe," says Kremlin-connected political analyst Stanislav Belkovsky. For instance, there are no longer pro-Russian members in Ukraine's Parliament, and even Viktor Yanukovych, the Kremlin-backed candidate in the 2004 elections, no longer takes a pro-Moscow line.Moreover, despite the precipitous economic decline, protests in Kiev have been largely small and sporadic—certainly nothing on the scale of the waves of pent-up discontent that shook the country in 2004.Even the near-failure of banks like Rodovid Bank and Nadra Bank—which have frozen deposits, confiscated ATM cards and swallowed transfers—haven't yet produced major popular anger.Kiev's muted reaction to the protests has made Ukraine look more like strike-plagued France than neighboring Russia, where attempts at protest over recent months have been broken up by riot police, with the secret police filming the demonstrations.But as the election this fall approaches, it's unlikely the calm will last. The IMF's stringent budget-deficit demands will mean painful cuts in public spending—above all, on gas subsidies. The Central Bank will soon run short of reserves to prop up the currency, making a further fall likely and angering the thousands of Ukrainians who took out foreign-currency loans aggressively marketed by Western banks.The result is further disenchantment with Yushchenko and the factional politics that followed the Orange Revolution. Already, 80 percent of Ukrainians say they favor a "strong leader," and the front runner in the election, Tymoshenko, looks set to take that role.Like her countrymen, she has not turned her back on the democratic values of the Orange Revolution. But she has dropped the now-toxic brand, no longer calling herself an Orange politician, describing herself instead as "white-hearted" to emphasize her anti-corruption platform.How she will cope with the coming waves of anger remains to be seen. But the belt-tightening that will follow can only make Ukraine stronger—and maybe one day deliver the stability and prosperity the Orange revolutionaries promised.