Tough Love For Ukraine

In a grocery store in central Kiev, shoppers are in a state of shock. After controls were lifted in late October, the prices of such staples as cheese and sausage have soared. Ira Maksymovska, the store's cashier, sits by crates of bottled milk whose price has doubled in just one week. "All morning people came in, shook their heads, and walked out again," she says. "Bitter medicine is hard to swallow when you've been suffering like we have."

Just three months after winning office, Ukraine President Leonid D. Kuchma is acting tough. No more go-slow approach to economic reform for Ukraine. That avenue, tried for the past three years, has led to 35% production drops, hyperinflation, and 30% unemployment. Now, with international backing, Kuchma is pushing an ambitious program that includes many of the austerity and privatization moves already taken by Russia and Poland. While it's causing near-term pain, it might be what Ukraine needs to turn around its basket-case economy.

SLASHING SUBSIDIES. Kuchma is thinking big. He plans a massive sell-off drive for 1995 that could, in one year, transfer 8,000 medium and large state enterprises, plus thousands of smaller ones, into private hands. He wants to lower taxes to spur trade and investment and encourage exports by cutting red tape. He also aims to slash subsidies to agriculture and industry and reduce the budget deficit from 20% to 12% of gross national product by yearend.

To cut 100% monthly inflation, boost production, and reduce capital flight, Kuchma has unified the exchange rate for the country's anemic temporary currency, the karbovanetz. Previously, traders were required to sell half of their hard-currency holdings to the state at an extremely unfavorable fixed rate. Now, they can sell at nearly the market rate.

His recovery program won't work without heavy amounts of foreign aid. For starters, the International Monetary Fund has granted Ukraine $700 million and promises more, including $1.5 billion next year if Kuchma sticks to the reform path. The loans would prop up Ukraine's sagging hard-currency reserves. The World Bank also is considering a $400 million loan to help Ukraine import critical goods.

But that's not nearly enough. Besides $371 million already received from the IMF, Kuchma hopes to draw in more of the $4 billion over two years that was promised at the Group of Seven meeting in Naples last June. With foreign debt pushing $7 billion and growing by $600 million each quarter, Ukrainian officials claim they need as much as $1 billion to last to the end of the year and $5.5 billion to pull through next year. Part of the cash could help pay its huge overdue energy bill, including a gas bill of $1.2 billion to Russia. Kuchma is also scheduled to visit Washington on Nov. 22 to drum up more support.

Kuchma's privatization drive could be as bold as Russia's and even faster moving. Each Ukrainian citizen will receive a voucher, worth about $15 initially, to buy shares of state enterprises. One example of a city ahead of the game is the heavily industrialized Luhansk, where 70% of the smaller businesses owned by the city have already been sold off.

PIZZA BLUES. The intent is to fuel private industry, but Luhansk business owners complain of high taxes, high interest rates, and state controls limiting the use of their property. "Every day is a battle to survive," says Ekaterina Pavliuk, co-owner of the Doka Pizza restaurant. After getting started in business, Pavliuk found the interest rate on her loan doubled, to 300%, and the city suddenly decided that her building was historic, blocking her plans to buy it.

The biggest threat to Kuchma's program is the Communist Party-dominated Parliament, which until now has thwarted all major reform efforts. Recently, however, even the Communists have had to admit that something must be done. In mid-October, they voted a grudging acceptance of the Kuchma plan. But opponents are certain to start taking potshots soon. Already, Parliamentary Speaker Oleksander Moroz has serious doubts about such things as free pricing and land privatization, even though his Socialist Party generally supports Kuchma's program. Labor unions, too, are threatening walkouts over price increases.

The foreign business community is waiting to see how much staying power Kuchma has. "Here is a chance for reforms to really start," says Vladimir Anikeev, PepsiCo Inc.'s vice-president for Ukraine. If they do, Kuchma's medicine might finally brighten both business prospects and the outlook for 50 million Ukrainians.

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