Huge street protests over a sweeping rehaul of Ukraine's tax system have provided a harsh reality check for President Viktor Yanukovych's government as it pursues reforms to satisfy its powerful international lenders.
Yanukovych vetoed the proposed tax code and ordered a new draft to be produced by Dec. 2 after up to 10,000 small entrepreneurs — Ukraine’s emerging middle class — vented their anger in the biggest protests against him since he came to power in February.
Reforming the ex-Soviet republic’s inefficent tax system is a requirement of the International Monetary Fund, a key financial prop, and delays in passing a new tax code could endanger disbursement of IMF credit.
But protesters say the proposed reform, which would force tens of thousands of small business owners to file tax returns, would destroy their livelihood. They say it favours the wealthy industrialists who bankrolled Yanukovych’s election campaign.
The IMF and other international creditors will now be watching to see whether the tide of popular opinion tempts the Yanukovych government to backslide on this and other reforms such as raising the pension age.
Under the deal with the Fund, Ukraine will receive credit of $15 billion over two and a half years, which could spur renewed investor interest.
The IMF has promised to decide on a second tranche of the loan by the end of this year, and says Ukraine is keeping broadly in line with targets set.
The program is key to the government’s efforts to revive its economy, which is dominated by steel exports, after a 15 percent contraction in 2009.
Despite popular anger now, Yanukovych has tightened his grip on power through local elections which have left his Regions Party in powerful positions across the country.
Though popular opinion has moved against him over tax reform and other austerity measures such as a 50 percent rise in domestic gas prices, he appears to have bought valuable time by avoiding an early parliamentary election next year.
What to watch:
— Will Yanukovych lift his veto on a new version of the code after Dec. 2 or will there be more delays in its implementation?
— Will there be a knock-on effect delaying submission of the 2011 budget and threatening disbursement of the new tranche of IMF credit worth $1.6 billion ?
— Any signs by the Yanukovych leadership of reneging or backsliding on other reforms such as raising the pension age.
— Indications Yanukovych may reshuffle Prime Minister Mykola Azarov’s government to appease public anger.
GAS AND RUSSIA
In January 2009 a gas pricing row between Moscow and Kyiv resulted in a stoppage of Russian gas flows to European households for about two weeks, tarnishing Russia’s image.
Ties with Ukraine’s powerful neighbour have greatly improved with Yanukovych’s arrival in power. But the high cost of imports of natural gas from Russia remains a drag on the economy.
Prime Minister Azarov says the base price for Russian gas is still way too high despite an April agreement under which it was granted a 30 percent discount.
At the same time, it is resisting a counter-proposal from Moscow for a merger between Russia’s gas giant Gazprom with Ukraine’s state energy firm Naftogaz.
A visit to Kyiv by Russian Prime Minister Vladimir Putin on Oct. 27 failed to produce a new gas supply deal, leaving the threat of a new year gas war hanging in the air.
What to watch:
— Signs of strain in Ukraine meeting gas payments.
— Renewed pressure by Moscow over the merger idea.
FOREIGN INVESTMENT
Though Ukraine needs foreign investment, the strange case of steelmaker ArcelorMittal and its Kryvy Rih mill in central Ukraine raised eyebrows among potential investors.
The state prosecutor launched a court action against the company, which bought the mill for $4.8 billion in 2005, over alleged violations of contractual commitments, raising fears this could herald a roll-back of privatisations carried out under Yanukovych’s predecessor, Viktor Yushchenko.
The state prosecutor abruptly dropped the case after pressure from France’s Nicolas Sarkozy.
Investors will be now be monitoring progress of Ukraine’s next biggest sell-off, that of fixed-line monopoly Ukrtelecom in December.
What to watch:
— How transparent the Ukrtelecom public auction will be on Dec. 28. Will it go to an outside investor or a local oligarch ?
INCREASING POWERS, TIES WITH THE WEST
Yanukovych’s steady accumulation of power is alarming his opponents who see old-style authoritarianism growing.
Western governments seem unperturbed by Yanukovych dropping NATO membership as a foreign policy objective.
But the European Union and the United States, under pressure from media and human rights groups, have urged him to honour his pledges to defend democracy and a free press.
They have also criticised the way local elections were held.
Though Yanukovych says European integration remains a priority for foreign policy, little headway has been made in negotiations on a free trade zone between Ukraine and the bloc.
What to watch:
— Any signs of growing authoritarianism in Yanukovych’s style of rule. Are media freedoms under pressure?
— How far will Yanukovich go in overtures to the European Union to balance his policy ?
