Ukraine: Shaky Ground For Foreign Investors

When Ukrainians elected Western-oriented reformer Viktor Yushchenko as President last December, hopes ran high for radical economic improvements. A former central banker with liberal views, Yushchenko, had promised to fight corruption and regulatory burdens on business and to promote greater openness to foreign investment. Yet one year after his victory, the breakthrough has yet to occur.

The Orange Revolution has certainly had its achievements. The media, formerly tightly controlled, can now report freely. Yushchenko can also point to economic gains, notably the October privatization of steel mill Kryvorizhstal, which fetched $4.8 billion when it was auctioned to Mittal Steel Co., the world's largest steelmaker. In October, Austria's Raiffeisen Bank paid $1 billion for Aval Bank, Ukraine's second-largest. ``Political risk has declined, and investors are much more confident,'' says Tomas Fiala, managing director of Kiev brokerage Dragon Capital.

Yet while Ukraine is looming larger on investors' radar screens, reforms have been slow and the country's economic performance has deteriorated. Gross domestic product likely grew by little more than 3% in 2005, far below the previous year's 12%. The cooling in part represents a fall in the price of steel and other metals, Ukraine's chief exports. But the economy also hasn't been helped by the policies of Yushchenko's first Prime Minister, Yulia Tymoshenko, dismissed in September after infighting within the Orange camp. She spooked business with interventionist measures such as promises to renationalize Ukrainian companies sold off under the previous regime. ``It was very much a [command] control economy,'' says Garry Levesley, Ukrainian director for U.S. power company AES Corp. ``The results from the business perspective were not good.''

In contrast, current Premier Yuri Yekhanurov has helped to restore confidence by saying he's against renationalization. The snag is that his government is little more than a caretaker until parliamentary elections in March, which will determine the next government's makeup. The stakes are high because of constitutional changes that come into force on Jan. 1. Under these rules, ministers, including the Prime Minister, will be appointed by the parliamentary majority rather than by the President.

Public disappointment

The change could spell more trouble for the President. The pro-Yushchenko bloc faces competition from not only Tymoshenko's party but also from the party led by Viktor Yanukovych, the defeated candidate in last year's presidential election. Public disappointment with the revolution has meant rebounding support for the opposition. A recent poll by the Ukrainian Sociological Service put Yushchenko's party in third place, with 12.2% support.

Any governing coalition will have to include two of the three major parties, forcing Yushchenko's supporters either to team up with Tymoshenko or form an unholy alliance with the Yanukovych camp. If Tymoshenko wins more votes, she's sure to make her support conditional on participation in the new government. Analysts believe she hopes to get back her old job as Premier, risking a return to interventionist policies. With the President's powers clipped, the revolution's supporters split, and an uncertain battle ahead, no one should take the Orange Revolution's progress for granted.

By Jason Bush in Kiev

Edited by Rose Brady

Before it's here, it's on the Bloomberg Terminal.