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Ukraine's Revolution Didn't Have to Fail

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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In Ukraine, it was a year that started with a bang and ended with a whimper. The "revolution of dignity," as many in Kiev still call it, upset the political balance in Europe but gave the nation new hope. Now, as is customary in Ukraine, that hope is being trampled by incompetent, greedy leaders. It is being upheld only by iffy Western financing -- and Ukrainians' anarchic, ferocious spirit.

On January 16, 2014, as Kiev boiled with a desire to break things and hundreds of thousands attended rallies in the city center, the old Ukrainian parliament passed a package of illiberal bills, copied from recent Russian ones, practically outlawing protest. Many legislators did not know what exactly they were voting for, yielding to pressure from President Viktor Yanukovych, who sought to put down the disturbances that began with his refusal to sign a long-awaited trade and association deal with the European Union. Instead, the blind vote set off the final, violent phase of the Euromaidan revolution.

Standoff in Ukraine

At 4.30 a.m. yesterday, a new, pro-European parliament passed a half-baked 2015 budget, based on unjustifiably high revenue projections and a spineless refusal to cut government spending from the level reached by the old, corrupt government. The all-night debate was marked by scenes of public drunkenness, and some legislators were not sure what exactly they were voting for -- they just followed President Petro Poroshenko's entreaties to pass something to keep the International Monetary Fund talking to the government.

In between these two parliamentary votes, there was enough tragedy to make this Ukraine's darkest year since World War II. In hindsight, the death and destruction appear to have been preventable, but events spiraled out of control.

In January and February, more than 100 people -- dubbed the "Heavenly Hundred" immediately after the events -- died in central Kiev. Many of them were innocent bystanders shot by snipers from rooftops. The deaths still have not been properly investigated, despite help from the U.S. Federal Bureau of Investigation, and it is impossible to say with any certainty who opened fire on the civilians. At his year-end press conference yesterday, Poroshenko said he was unhappy with the investigation's progress. 

The deaths, and the subsequent outpouring of grief and rage, convinced Yanukovych he would not be able to hold on to power by force. Even as the first citizens fell on the streets, his staffers began cleaning out the president's vast house in Mezhihirya near Kiev. On February 21, Yanukovych signed a deal with several opposition politicians, who themselves could not claim to fully represent the protesters: They just happened to be the only marginally legitimate negotiators around. Arseniy Yatsenyuk, the current prime minister, was one of the signatories, and Kiev's current mayor Vitali Klitschko was another. According to the terms, a new presidential election was to be held at the end of 2014. Several European diplomats, relieved a solution was in sight, initialed the deal. Only the Russian representative, present during the talks, refrained.

This was a critical fork in Ukraine's road. Yanukovych fantasized about alternative paths  in a recent interview with the Russian weekly AiF, painting a picture of a peaceful nation still in possession of all its territories. He was being disingenuous, however, because he bears primary responsibility for the collapse of the agreement: The night the deal was signed, a helicopter carrying the president took off from Mezhihirya. Yanukovych was never seen in Kiev again, surfacing instead in Russia to explain he had to flee because his life was threatened. It's impossible to establish whether such a threat existed, however, because he bolted, creating a power vacuum the opposition could not but fill.

In Moscow, President Vladimir Putin panicked, believing Yanukovych had been overthrown by Western agents as part of a plot to surround Russia with NATO military bases. He acted quickly to secure what he saw as Russia's vital interests in the region, sending unmarked troops to capture Crimea. Ukrainian troops did not put up a fight, apparently on strict orders from Kiev to prevent bloodshed by all means. The West, too, swallowed Russia's initial aggression: international sanctions imposed in the spring against Russian officials and Putin's friends were laughable. 

This was a second crucial fork. If Putin had stopped at Crimea, both Ukraine and Russia would have been in much better shape than they are now. As the Crimean drama unfolded, Kiev secured a $17 billion rescue package from the IMF. The loss of Crimea's paternalistic, pro-Russian voters made it possible for Ukraine's pro-European parties to gain a majority in parliament in any fair election. Russia, with its international position both strengthened by the conquest and undermined by increased Western mistrust, would be roughly where it had been before the Ukrainian revolution.

Putin, however, decided to push on, sending military advisers, weapons and funds to pro-Russian separatists in eastern Ukraine. He must have been counting on broader support throughout the region, which would have split Ukraine roughly in half and given him a land corridor to Crimea. As it was, Russia was only popular enough to sustain a rebellion in the Luhansk and Donetsk regions. 

All this was just unfolding when Ukraine elected Poroshenko president in May. After the landslide victory, he, too, overplayed his hand, betting on a military victory over the separatists. Those dreams ended in September, after Putin sent Russian troops to the conflict zone. They beat back the Ukrainian military and volunteer battalions, forcing an uneasy truce that is still in effect, though clashes have continued, claiming hundreds of lives.

While about 4,700 people on both sides were being killed in the east, the government in Kiev used the war as an excuse to delay reforms or any real effort to root out corruption, the main reason why Ukraine had risen up against Yanukovych. Only in October were some anti-corruption bills finally passed, and that only because the IMF required it. Now, the IMF and the Council of Europe are calling for changes to the laws, which Ukraine will have to make next year. 

While international economists called for drastic deregulation -- the most natural way to keep corruption down -- and for a 10 percent GDP cut to government expenditure, politicians in Kiev took their sweet time forming a governing coalition and writing up an action plan. Undermined by war, continuing mismanagement, and delays in international funding, the economy kept slipping. Ukraine now has international reserves that cover about a month of imports, the worst-performing currency in the world and, National Bank governor Natalia Gontareva said today, a "non-functioning" banking system. According to European Commission President Jean-Claude Juncker, the country needs $15 billion on top of the aid already promised by the IMF.

This is the country that just passed a budget that increases government spending, mainly on defense. Military expenditures will now cost more than 5 percent of GDP, as if Ukraine still hopes for a military victory over Russia -- though Poroshenko said at the annual press conference he considered a military solution impossible. The spending plan also envisages unrealistic growth in tax collection, particularly in income tax and import duties. The government is betting it can get businesses to stop paying employees under the counter by gradually reducing payroll taxes, but the country's tech industry lobby has calculated that it still won't be worth paying salaries legally. On increased import levies, Ukraine still faces talks with the World Trade Organization, whose rules the increase contravenes. 

The budget maintains the pre-revolutionary levels of social spending, including energy subsidies, which international financial organizations have long called on Ukraine to reduce. Ukrainian politicians still lack the courage to do anything that might undermine their standing with voters, even though more than half of Ukrainians now say they no longer want to take part in street protests. In fact, the Ulkrainian elite is not willing to give up anything at all. As the budget was being debated, the daughter of former prime minister Yulia Tymoshenko, now a member of the ruling coalition in parliament, held a Great Gatsby-style wedding reception at Kiev's olympic arena. 

The IMF mission that will start work in Kiev on January 8 will probably demand changes to the budget, and the progress of Ukrainian reforms will depend on how firm the fund representatives will be. If Ukraine's Western sponsors make a political decision to keep the money flowing regardless of the government's true intentions, Ukraine will start sinking into the old quagmire of wastefulness, incompetence and corruption in which it has spent most of its 22 years of independence. Then, Putin won't need military force to subjugate it again by stealthy intrigue.

Ukraine's biggest missed opportunity this year was probably the post-revolutionary government's failure to give up more of its powers and set the economy free. An economic liberalization would not have spared lives, but it would have nurtured the hopes that moved Ukrainians to die on the barricades a little less than a year ago. As things stand, the hope is not dead yet. For Ukraine to right itself, forceful external management from the IMF and the EU is a must. It would also help if Putin decided to move from aggression to damage control.

As for the Ukrainian people, they have so far done all they could, paying an enormous price for the dwindling chance their country still has at the end of this terrible year. If politicians fail them again, they still have the powerful support networks and volunteer movement born of the Maidan. They will survive and rebuild -- eventually.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Cameron Abadi at cabadi2@bloomberg.net