Ukraine Faces Real Change, at Last

Ukrainian President Viktor Yushchenko last week dismissed the government of Prime Minister Yulia Tymoshenko amid infighting and accusations of corruption.

A crucial ally of Yushchenko during last year's street protests that helped him to defeat a pro-Moscow rival and win power in a presidential election, Tymoschenko's (photo) departure appears to have triggered relief in business circles in Ukraine largely because of her restrictive economic policies and populist social measures.

Tymoschenko's firing may restore Yushchenko's image as "investor-friendly." But he doesn't have much time, because Ukrainian parliamentary elections are scheduled for next March.

Improving investment climate crucial

The new cabinet led by Yury Yekhanurov, a regional governor and a pragmatic economist, will thus only be a temporary one, according to Ricardo Giucci, a financial expert who's part of the German consultancy group that advises the Ukrainian government.

"This government ... has no big political ambitions and thus has a possibilility to take the right economic decisions," Giucci said, adding that the government faced two big challenges: "On the one hand, it has to restore macroeconomic stability, and, on the other, improve the investment climate."

Several large foreign companies looked eagerly towards Ukraine following the "Orange Revolution" last year that saw the pro-EU and pro-European Yushchenko replace the pro-Moscow Leonid Kuchma.

From a business point of view, Ukraine is indeed an interesting and large market. Its economic attraction is enhanced by its proximity to the European Union, well-qualified workers and low wages.

No investment boom

Michael Kraud, head of the Ukrainian branch of Odw-Elektrik, a German producer of electronic systems which has been operating in the country for the past two years, said he had hoped for better conditions for foreign investors when Yushchenko came to power.

"There was so much euphoria in the beginning. One had hoped that everything would become simpler and that investing would be smoother," Kraud said. "That didn't prove to be the case."

The result has been that the much-hoped for investment boom hasn't taken place.

Ricardo Giucci said that one of the reasons was the government's reprivatization campaign. Tymoshenko had sent jitters through companies and investors by saying that she wanted to roll back dodgy privatizations of companies carried out during the Kuchma era without stating any clear criteria.

Giucci said the new government needed to do all it could to win back the trust of Ukrainian and foreign investors. Towards that end, the long-running and damaging discussion on the nationalization or reprivatization of large companies should stop immediately, Giucci added.

"There has to be a clean cut. The state has to unambiguously say that the discussion is over."

Populism is damaging

The government is also up against stubborn inflation and sharply reduced economic growth.

Giucci pointed out that in the last year, state pensions and minimum wages for employees in the state sector had been increased several times for political reasons -- indicating the continuation of a populist line followed by Tymoschenko's government, for which her predecessor's cabinet had been sharply criticized by financial experts.

Giucci too warned of the damaging consequences of populist policies.

"We believe that a further increase in pensions beyond the inflation rate would endanger not just the financial situation but also the stability of the country."

Inflation has indeed caused nervousness among foreign producers in Ukraine, who have long cited low wages as one of the country's attractive features.

ODW-Elektrik, for instance, pays its Ukrainian wrokers 80 euros ($98) a month -- just about a third of what a worker in neighboring EU country Poland earns.

But, at the end of the day, low wages are precisely the reason why ODW-Elektrik still employs 140 local workers in Ukraine -- despite the difficulties. It even plans to expand its workforce by 50 next year.

Ukraine has to stick to reform path

But Ukrainian politics would have to continue on the reform path, said Michael Traud of ODW-Elektrik.

"Laws are made very fast here -- almost overnight. The next day you'll read about it in the papers if you get one. They're mostly out of print. And then in three or four days you'll find out that there's some new legal clause that then repeals the law," Traud said.

"You have to be very, very careful in Ukraine."