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Ukraine's President Viktor Yanukovych Opts for Robber Capitalism



Today, the Ukrainian Cabinet of Ministers unanimously decided "to stop the process of preparation for the signing of the Association Agreement" between Ukraine and the European Union. This decree came as a complete surprise. All previous indications were that Ukraine was planning to sign this important agreement in Vilnius on November 28.

With this action, Ukraine has missed a great opportunity to integrate with Europe and modernize its state. The Association Agreement is not permanently dead, but presumably a change in Ukrainian leadership will be necessary to revive it.

Today and tomorrow, the Ukrainian parliament had been scheduled to adopt the last three laws out of a score required by the European Union to qualify for signature. It did enact the law on the electoral system, but it has not adopted the law on the prosecutor's office and on permission for former Prime Minister Yulia Tymoshenko to leave prison and go abroad for needed surgery, which the European Union had indicated was a prerequisite for Ukraine's association. Now the parliamentary session has been called off.

The official aim of the government decree is to restore the lost trade volumes with Russia and other former Soviet republics. Prime Minister Mykola Azarov signed this decree just after he had returned from St. Petersburg, where the prime ministers from the former Soviet republics met. Azarov had a bilateral meeting with Russian Prime Minister Dmitry Medvedev. They discussed mutual cooperation on "access to pipeline transportation, free trade in services and the gradual restriction of export taxes."

Ukraine appears to have received a specific promise from Russia to ease  the many trade restrictions that have brought down Ukraine's exports to Russia by about one-third this year. The promise would presumably also guarantee Ukraine cheaper natural gas from Russia. Since August, Russia has effectively imposed sanctions on Ukraine in an escalating economic war to discourage it from turning west. Now it appears that Russia's sanctions have had a substantial and desired effect. Yet, Ukraine has so far stopped short of talking about acceding to Russia's protectionist Customs Union with Belarus and Kazakhstan, a step that would probably be too costly for the nation.

Ukraine's fundamental problem is poor economic policy. For the last three years, President Yanukovych has persistently refused to try to improve the ever worsening economic situation. The country has an overvalued pegged exchange rate, which has led to a large current account deficit. It also suffers from falling currency reserves, extreme currency regulations, and very high interest rates, which kill investment. The total budget deficit is about 6 percent of GDP, and Ukraine has hardly any access to international financial markets. GDP is likely to fall by 1.5 percent this year, while industrial production has so far decreased by 5.2 percent. Ukraine is running out of financial options.

Yet, the very purpose of the current economic policy appears to be to transfer financial resources and companies to what is known as the Yanukovych family, a group of young businessmen, who are quickly buying up both private and public companies at rock-bottom prices. They are the only permitted buyers in key industries. The worse the economic situation is, the cheaper these companies are for the young robber capitalists.

In order to continue this process, Yanukovych needs two things—full political power and control over the judiciary. Thus, after having defeated Tymoshenko with a narrow margin in the presidential elections in February 2010, he had her sentenced to prison for seven years for abuse of power in a farcical kangaroo court. He has just signed into law an amendment on residence definition in the tax code that would deprive the most popular opposition leader, Vitaly Klichko, of the necessary residence requirement. Naturally, other leaders can also be taken out if necessary because of the obedient court system.

In the Soviet legal system, the prosecutor was superior to the judge. Yanukovych has accepted  laws to reform the courts and the other parts of the law enforcement, but the old law on the prosecutor remains on the books. My suspicion is that it will not be adopted in a decent form, and then the president can maintain his control over the whole system of law enforcement.

The simple truth is that European legal norms would not permit Yanukovych to maintain these controls. The EU representatives are no fools. It is all too obvious what kind of regime Yanukovych is pursuing. Therefore, the European Union had to insist on political freedom of opposition leaders and a decent law on prosecution. My suspicion had been that Yanukovych had hoped to force the EU to refuse to sign so he could blame both the European Union and Tymoshenko for the failure of the agreement.

This is a sad day for Ukraine and Europe. The only silver lining is that Yanukovych has made clear who the culprits are. It might turn out to be a Pyrrhic victory for President Putin: He has encumbered his stagnant economy with large additional liabilities, and Ukraine stays outside of his beloved Customs Union. For Yanukovych, it is a big loss. He has shown that his poor economic policy has made him excessively dependent on Putin and that he and nobody else has blocked Ukraine's European integration, which a large majority of the Ukrainian people supports.

Anders Åslund is a senior fellow and author of the book How Ukraine Became a Market Economy and Democracy.

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