THE CINDERELLA HAS NOT TURNED INTO A PRINCESS

Ukraine struggles while Russia prospers
By Andrew Hurst
ANALYSIS
MOSCOW, Aug 16, 2005 (Reuters) - Eight months after an "Orange Revolution"
installed a new reform-minded government in Ukraine, some investors
believe the country is floundering while neighbouring Russia is making hay.
The bloodless revolution which helped sweep the pro-western Viktor
Yushchenko to victory in presidential elections last December was a
stunning reversal for the Kremlin, which pulled out all the stops to
back his opponent Viktor Yanukovich. Yushchenko's government, with its promise to modernise Ukraine and lead it into the European Union, fired the imagination of foreign investors,
upset by the Kremlin-inspired destruction of Russia's private oil company
YUKOS. But perceptions have changed fast. And reforms may have been put on
hold pending a parliamentary election next March on which virtually all the
country's political forces are focused. "Six months ago, everyone thought the Orange Revolution would be a disaster for Russia," said Tim Ash, Managing Director for Emerging Markets at Bear Stearns in London. "Russia has moved on and the Ukrainians seem to have messed things up," he added. Portfolio investors, who bought up Ukraine securities in the aftermath
of the revolution, have taken fright after months of government infighting
and what they see as policy paralysis, made worse by a corrupt and unresponsive civil service. "The Cinderella has not turned into a princess," said Katia Malofeeva, an analyst at Renaissance capital, a Moscow investment bank. "It was a case of excessive expectations." A muddled review of controversial privatisations made under Yushchenko's predecessor, Leonid Kuchma, and divisions in the government over how to conduct exchange rate policy have added to the sense of disarray. "The new government is divided and does not have a coherent plan," said Vlad Sobell, senior economist at the Daiwa Institute of Research in London. Meanwhile in Russia, where memories of the YUKOS affair have started to fade, equity markets are enjoying a resurgence and a string of big
Russian companies have floated shares on the London stock exchange.

SCRAPPY POLITICS

But appearances may prove deceptive.

Ukraine is simply learning to engage in the scrappy politics of a
proper democracy where cabinet rivalries are highlighted by a boisterous press
and politicians are not scared to speak their mind, say some analysts.
"The political situation is very competitive in Ukraine. There is no
single centre of power which dominates the whole of political life and this is
much healthier," Malofeeva said. That is a stark contrast with Russia where President Vladimir Putin has presided over a centralisation of power in the hands of the Kremlin and growing state control over broadcast media, a development which some find alarming. "Ukraine's situation is more volatile and harder to predict than Russia," said Malofeeva. Ukraine's policy drift may be more apparent than real as key politicians, led by Yushchenko and his ambitious Prime Minister Yulia Tymoshenko, position themselves ahead of the March 2006 election. "The government which emerges next March will determine Ukraine's future," said a fund manager based in Kiev who asked not to be identified. "The entire public administration needs to be reformed and the real reforms
will not start until April. This government is not stupid. They know that to go ahead with a root-and-branch reform of the civil service now would have a very high political cost and could lead to defeat in the election," he added.
And a slump in gross domestic product growth, which fell to 3.7 percent
between January and July from 13.5 percent in the first seven months of
2004, has more to do with falling prices of steel, Ukraine's main
industrial export, than any mishandling of government policy, say
economists.