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29 August, 2011  ▪  Rostyslav Pavlenko,  Andrii Duda,  Serhiy Balan

Late Start

In its first years of independence, Ukrainian politics took the steps necessary for the creation of Ukraine as an independent country but never resolved the fundamental problems of its development

In theory and in practice, experts in post-Communist transformations believe that success is based on several key components:  

– a clear plan of reforms to unlock economic initiatives of the public and give people access to free market resources and mechanisms rather than reforms conducted for the sake of reforms. In order to make a market work, it needs to have legislative environment based on the specific situation in the country, taking into account its comparative advantages and disadvantages.

– the establishment of a power structure, which would allow efficient decision-making and the implementation of decisions, including those that will have a (short-term) negative impact. At the same time, the government should have remained responsible to voters, which meant the prevention of a dictatorship, and legitimate, which meant having the trust and support of the electorate.

– the existence within society of classes supporting reforms, would win from them and become allies in further transformations. These groups should have been numerous enough to provide necessary support in elections and to expand continuously, demonstrating the success of reforms, the ultimate goal of which was for society to gain from a new economic and political system.

– determination by the country of its distinctive place and role in the region and in the international arena. This entailed the matching of desired goals with available resources, a search for allies, focusing foreign policy and economy on reinforcing the country’s advantages and gaining resources to develop priority sectors within the country.  

Ukraineis often said to have ended up in a more difficult situation than its neighbours because it was forced to solve issues arising in the process of establishing a new state at the same time as it was conducting reforms. However, if there had been a vision of what these reforms should have been, this detail would have been a virtue rather than a vice. The establishment of a new state meant a higher level of freedom in choosing what it would be. As a result, the Ukrainian elite was faced with the opportunity to build a country, which could make the best of its advantages and minimize the effect of its inadequacies, taking measures to offset them. In practice, though, it turned out that those in power failed to use even one component of success effectively.

Romanticism, sabotage and opportunism

At first glance, there were plenty of programmes and visions. Back on 3 July 1991, the Verkhovna Rada of the Ukrainian SSR approved a government “Programme for Emergency Measures to Stabilize the Economy in Ukraine and Bring It Out of the Crisis.” It was based on earlier platforms and concepts. During 1991, parliament passed 35 laws, including ones on private property, rent, entrepreneurship, banks and banking, commercial entities and others, that were crucial to the life of the country and laid a legislative framework for the transition to a market economy.

Although fundamental to the economic life of a new country, these decisions had one major drawback. The reasoning behind them was to separate Ukraine from the Soviet economic system, a system that ran counter to the interests and needs of an independent Ukraine, rather than to undertake serious reforms. Worse, the initiators of these reforms, both within the government and in the opposition, were caught up in a kind of romanticism that seemed to be the spirit of the times, based on the hope that Ukraine’s rich natural resources would allow the country to switch to a modern market economy quickly and painlessly. The reality was that decision-makers at all levels knew next to nothing about how a modern economy operated. Moreover, the romantics were surrounded by many who had no interest in any changes, preferring to preserve their habitual lifestyles and the way things were run in the past. And sprinkled among them both were the usual shameless opportunists, for whom the new conditions represented an opportunity to gain unlimited wealth. Missing in all this were the people who were prepared develop serious programs and take responsibility for carrying them out, rather than explaining the reasons for failure.

Red directors

The specific structure of Ukraine’s economy determined the comparative power of one group within the establishment, specifically “the red directors”, which played a leading role in processes taking place in 1991-1994. “The production of the production means” reached 65% leaving only 35% for the production of consumer goods. In real prices, however, this proportion constituted 87 to 13 compared to 35 to 65 in Poland whose production structure was also considered to be distorted. The use of fixed assets was characterized by low-level technologies, high energy consumption and the wasteful use of resources during the production process. As a result, managers of Group A enterprises, more commonly known as the red directors and kolhoz heads, emerged as the leading players. One fact to note is that for the most part, making an enterprise more independent, particularly large ones, during the last years of the USSR, presented directors with the opportunity to make free with funds. Since the collapse of traditional relations within the USSR resulted in the problem of selling production, which could not be resolved at the expense of Western markets due to almost non-existent experience in foreign economic activities, and the poor quality or specific nature of the goods, many red directors resorted to selling off the assets of their enterprises to make a quick buck. In the meantime, they paid wages for their employees and covered other expenditures from the state budget since the enterprises remained state-owned.

The managerial elite felt completely confident in the Verkhovna Rada. MPs included 97 red directors and 35 kolhoz directors. They skillfully used populism and nostalgia for past times when “the state provided everything” to get the support of dozens of their colleagues in the Verkhovna Rada from other segments of the party and soviet leadership and even representatives of Narodna Rada, the People’s Council that was in the opposition. The latter was unable to shape its own vision of economic issues and often followed someone else’s ideas.  

A strategic mistake: the non-dissolution of parliament

The continuation of this situation, comprised of a lack of strategy and the domination of short-sighted and selfish interests over national ones, was mainly a result of the postponement of the issue of a pre-term parliamentary election. In virtually all East and Central European countries, the first democratic elections, won by reformers, marked a transition from the soviet to the post-soviet period, allowing the accomplishment of a series of tasks:

– revive the elite. Indeed, as democratization and independence gained momentum, talented and patriotic professionals who had proved their ability to reach a goal, had the opportunity to get into parliament;

– increase the legitimacy of the government and clearly show the public which political forces undertook reforms and who should be held liable for the outcome, which increases the motivation for politicians; and

–ensure the sustainable support of reform-oriented moves in the Verkhovna Rada, while preserving the parliamentary filter against  the introduction of purely lobbied interests, often abused by the uncontrolled executive branch.

The situation with each of the three above items left much to be desired in Ukraine. Prominent representatives of the then opposition would later recall that they wanted to support Ukraine in the first months of its independence, so they did not directly ask for things that could shake the boat. This was one of the major drawbacks of the then opposition, inherited by the political forces that grew from it: the inability to separate strategy, national interest and the existence of the state from the details of the development and specific political decisions that do not question the existence of the state, yet are called on to search for the best ways of its development.  

Therefore, succumbing to cooperation with the government and dropping early elections or the availability of opposition from the agenda, in the eyes of the public, the democrats – meaning the opposition to the Communist Party of Ukraine – turned out to be no better than those in power. Ultimately, both the government and the opposition experienced complete public disappointment in 1993 when the decision to hold early elections was finally passed. The contextual leftist majority that resulted from these circumstances managed to choose a socialist speaker, while the structure of the parliament turned out to be too fragmented to support the uniform direction of reforms. President Leonid Kuchma, elected in 1994 on the same surge of disenchantment, used the situation to his own benefit turning the unstable Verkhovna Rada into a convenient sparring partner which could conveniently be blamed for the lack of change for the better. Moreover, many foreign observers remembered Russia where the conflict between the president and parliament ended in armed clashes. The MPs elected thereafter proved incapable of supporting liberal reforms. Explicitly or implicitly referring to this example, Kuchma was able to expand his powers.

Society is ready for an integral policy   

During the first years of independence, Ukrainians were giving conflicting signals. According to surveys by the Sociological Institute at the Academy of Sciences of Ukraine, 22.1% of those polled in 1994 supported the socialistic style of development for the country, while 12.7% opted for the capitalistic way. 23.7% “supported both as long as they did not cause conflicts among themselves” which meant that they were ready to accept any scenario. 20% did not support anyone and 19.3% were unable to determine their own positions. Interestingly, this ratio has remained the same to the present time.

This proves that a reasonable plan of reforms and their proper implementation could have found a lot of supporters. They could later have turned into the nucleus of the middle class which is the platform for the stability and development of a state in Europe.

Foreign policy: illusory and obvious threats

In the international arena, the attempts of the Ukrainian government to find its place in the region and the world faced at least three major barriers. Firstly, Ukraine fell victim to Western stereotypes, skillfully fuelled by Russian officials. The West saw Ukraine as an “unstable country with the third biggest nuclear potential in the world”. Meanwhile, tactical nuclear weapons were removed to the Russian Federation in 1992 without any negotiations, while strategic weapons which Ukraine could neither afford to maintain nor use, became one of the major sticking points in attempts to establish contacts with the world. Negotiations resulted in the 1994 Budapest Memorandum, whereby nuclear states guaranteed security to Ukraine. Among other things, they promised to refrain from using any economic leverage (!). Still, Ukraine never made use of the options granted by the document, neither during the Tuzla conflict nor during the gas wars.

Secondly, Moscow played an ambivalent role. On the one hand, it was less aggressive and tough towards its neighbours under Yeltsin, in comparison to the years after 1999. Yet, Ukraine was dependant on energy supplies and the Ukrainian elite was unable to solve this issue. This resulted in powerful leverage for Russia. The Ukrainian Week is publishing a special report on energy and the way it affects the region.

Thirdly, Ukraine’s Western neighbours made a definitive choice to join NATO and the EU. In the early 1990s, neither the government nor the opposition in Ukraine included European integration in the political agenda. It was not referred to as a series of decisions to be made. Therefore, in many issues concerning European integration, Ukraine finds itself at the level its Western neighbours underwent back in 1993.

Shockwithouttherapy

This set of circumstances determined the helplessness of Ukraine’s movement in the early years of independence. Many researchers consider it to have been unfair to drag Ukraine into the shock therapy along with Russia, which cancelled price regulation in early 1992. This was a complete shock for the Russian economy, as well as the related economies of former union republics.

Instead, this fact is proof that the Ukrainian political establishment had zero understanding of economic processes and decisiveness in implementing a policy of its own. Even after the price shock, it took the government and the central bank until November 1992 to introduce the non-cash circulation of the kupono-karbovanets, the first Ukrainian currency after the collapse of the USSR! Until then, the cash for settlements with the Russian Federation or CIS countries was literally transported in sacks. This indecisiveness was a result of both the individual features of the post-soviet elite as well as combined and institutional factors.

Red directors played a major role in this. They resisted bold moves preferring to not tilt the balance at their enterprises. The early 1990s saw large-scale and resonant strikes. Red directors just began to win over strike initiators with promises to pay and raise salaries. The burst of hyperinflation in 1993 was partly caused by the printing of money as a means to solve the issue of salary payment quickly and painlessly, thus flooding the economy with unsecured funds.

The muddled constitutional model, in turn, prevented the government from establishing clear responsibility for the implementation of the economic policy. The president appointed and dismissed the prime-minister, as well as the power and economic blocs of the Cabinet of Ministers with parliament’s consent. So the governments looked more like teams comprised of different classes, rather than teams of likeminded people.

There was an attempt to mend the situation in 1992, with the appointment of Leonid Kuchma, a member of the red directorate, as prime-minister and authorizing him to pass decrees, that were the power of the law, without the approval of the Verkhovna Rada. On the one hand, this led to the elimination of many loopholes. Some of the documents from that time were still effective in the 2000s. On the other hand, the lack of control entrenched lobbyist interests into the documents, such as the decree on trusts or the resolution on the introduction of a fixed currency rate.  

In fact, Kuchma himself often claimed that the government lacked a systemic approach. His “What are we building, tell me!” is probably the best slogan of the time, even better than Kravchuk’s saying: “we have what we have.”

But there was no one there to give a hint. The opposition was either carried away by symbolic issues or practicing its silver tongue. Even its representatives, such as Viktor Pynzenyk or Volodymyr Lanovyi, who were government members, preferred to leave the government and criticize its failures, rather than seek to put pure theory into practice.

Hence, it is possible to conclude the following: the necessary moves were made in 1991-1994 to create, preserve and establish Ukraine as an independent state. There was no longer a threat to its existence. By contrast, most fundamental constitutional, economic, social and other systemic reforms were postponed “for the future” where the same old people got down to solving the problems. It’s true, that their roles were changed somewhat, but not the result.


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