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UkraineBusiness insight

The Good, The Bad And The Unusual

profound reforms in many areas this time round. Order, the ‘team of professionals’ to run the country, Russian as a second state language, cancellation of independent school tests, good relations with Russia.

One of the first things the Viktor Yanukovych

detention of the German expert Niko Lange (who had criticised the government) in Boryspil airport in June 2010. He was released without charges after ten hours and allowed to enter the country. But the accusations of clampdowns on freedom of speech, visa problems for foreign ‘troublemakers’ and disappeared journalists are, once again, in the headlines in Ukraine. The government denies any such accusations blaming it on opposition provocation.

In August several senior officials

of the former government were arrested, mainly those involved with Naftogaz’s expropriation of US $5 billion worth of gas from the intermediary RosUkrEnergo’s storage during the gas crisis of 2009. A former acting head of the Ministry of Defence was arrested in connection with a privatisation deal. The government insists that

these are simply necessary steps in the fight against corruption.

Corruption is only one of

the problems facing this new government. They have promised to implement IMF structural reforms in exchange for the loan which will require some unpopular decisions; raising of the gas tariffs for the population in line with IMF requirements has damaged popular support for the government. Basic crops like potatoes were ruined by drought; bread prices are still holding, but sugar, necessary for home preserves, doubled in price. And the 31st of October local and municipal elections are fast approaching.

As Prime Minister, Viktor

Yanukovych was not an avid reformer, unlike his predecessor Viktor Yushchenko. But he had promised immediate and

new president accomplished was taking NATO membership out of Ukraine’s official foreign policy agenda. Ironically, it was Yanukovych himself, as ex- President Kuchma’s Prime Minister, who declared NATO membership as Ukraine’s strategic goal in the first place. The removal of NATO from the agenda did not particularly disturb the West, which lost enthusiasm for Ukraine’s membership after the brief Russia-Georgia war in 2008. But it does seem to have noticeably pleased the Kremlin.

Nobody doubted that

Yanukovych would improve relations with Russia as he promised: they had been at such a low during the Yushchenko years that only Georgia had been more distrusted by the Kremlin. But the scale and speed of this rapprochement surprised many, even some ruling party sympathisers.

The promise of ‘strong power’

was also delivered with astonishing speed. A coalition was swiftly formed in the parliament in a way which many called anti- constitutional, by incorporating individual MPs from opposition factions. The Party of Regions also invited the Communists into the coalition, who might prove to be difficult bedfellows when it comes to the land reform (the Communists are opposed to private ownership of arable land).

Some of Yanukovych’s

campaign promises, such as bringing US $50 billion of investment to Ukraine by 2014, making Ukraine the best investment opportunity in the Eastern Europe and reaching European social security standards in his first term in office, hardly anybody expects to come true. But there was a Yanukovych promise which a lot of voters took to heart: the tax reform, specifically the promise of a tax holiday for small businesses.

“I see a lot of people here in

Kharkiv, businessmen and regular voters, who are very mad at the government”, says an online comment on Yanukovych. “People expected tax breaks, and instead we are hearing all about Azarov’s plan to introduce new, confusing taxes.”

So far, it is not clear if any new

taxes are actually in the pipeline. Yanukovych’s Prime Minister

Mykola Azarov, famous for his hard administrative style and his bad Ukrainian, has had a lot to do in his first six months pass the 2010 budget in April of this year,’ secure the IMF loans without which the country faced an unsustainable balance of payments situation; consider joint ventures with Russia in many areas, including gas and aviation, while trying not to surrender the national interests to the much stronger potential partner. And he has had to initiate the much-needed tax reform.

But his proposals for the

new Tax Code satisfied almost nobody, not even his boss. The new powers for the taxman and the presumption of guilt of the taxpayer scared some investors.

October/November 2010 UkraineBusiness insight 5

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