More trouble ahead

This piece originally appeared in the International Herald Tribune

What is up with Ukraine? As if the January gas dispute with Russia was not bad enough, the country is lurching from one crisis to another. Political infighting is endless. The Russian ambassador, former Prime Minister Viktor Chernomyrdin, provoked a diplomatic storm by saying Ukraine's leaders were "at each other like dogs."

Prime Minister Yulia Tymoshenko and President Viktor Yushchenko have accused each other of treason - in the president's case, ordering the diplomatic service to spread the calumny abroad. There is talk of emergency rule, of new elections, of impeachment and criminal cases planned against either side.

Meanwhile, the economy is a mess. The annualized rate for the decline of industrial output in January was a staggering 34.1 percent. With the collapse in world steel prices, the country's steel production is down 46 percent - and steel used to make up 40 percent of Ukrainian exports. Overall GDP may fall by as much as 12 percent in 2009. The currency has slumped by over 40 percent against the dollar; the stock market is down over 80 percent. The finance minister resigned in January; an emergency IMF loan of $16.4 billion agreed to in October is now in danger.

Parliament has twice censured Volodymyr Stelmakh, the chairman of the National Bank, for both incompetence and alleged corruption, but is unable to remove him so long as the president extends his protection.

There are mutterings of default. Ukraine's foreign exchange reserves are down from $38.1 billion to $28.8 billion: Government and government-secured debt is manageable, but the corporate sector is thought to owe over $40 billion. Unlike Russia, where the oligarchs have fought over handouts, Ukraine does not have the funds for too many bailouts. Several major corporate bankruptcies are likely this year, especially in the steel sector.

So is there a way out of this mess? Few are sanguine. Germany's foreign minister, Frank-Walter Steinmeier, has publicly expressed his exasperation at the "complete deadlock" in Ukraine, saying "we haven't got an answer to everything." A recent report by the former U.S. ambassador, Steven Pifer, for the Council on Foreign Relations asserts that the "best case" scenario for 2009 "is that Ukraine muddles through without serious crisis."

The simple truth is that Ukrainian politics is a brutal contact sport. Sometimes Ukrainian politicians need to fight - and fight hard. And much of their ceaseless struggle is constructive. As part of the deal to end the gas crisis, Tymoshenko froze out the controversial company RosUkrEnergo, which has earned mammoth profits for its unclear role in aiding gas transit. But this was only the first bout. Tymoshenko is now locked in a bitter battle with the company's main Ukrainian owner, Dmytro Firtash.

Tymoshenko agreed that RosUkrEnergo's debt to Gazprom would be paid by its rival Naftohaz Ukrainy, with advance transit payments from Gazprom. So in effect RosUkrEnergo now owes Naftohaz money. The customs and security services have been dragged into a fight over who owns 11 billion cubic meters of gas in storage that Natfohaz has claimed from RosUkrEnergo. The disputed gas is worth $1.7 billion.

Firtash, who supports both the president and the opposition Party of Regions, allegedly responded by demanding a parliamentary vote of no-confidence against the government, which fell 22 votes short. As a result, the Party of Regions, which is traditionally financed by steel barons, is split, and Tymoshenko is constitutionally safe from further censure until next autumn. She has also alleged that Firtash, along with other disillusioned businessmen, is sponsoring Ukraine's fastest-rising politician, the former parliamentary speaker Arseniy Yatsenyuk, and his new organization "Front for Change."

Yatsenyuk will only reach the minimum age to stand for president - 35 - in May. But one recent poll showed him closing fast on 11.8 percent, compared to 24.2 percent for the Party of Regions leader, Viktor Yanukovych, and 15.3 percent for Tymoshenko. Yushchenko scored 3 percent.

The shake-out among the Ukrainian oligarchs is a reason to hope that the years of deadlock since the Orange Revolution may be finally broken. Previous crises have led to bursts of reform. A "big bang" of simultaneous presidential and parliamentary elections, plus a referendum on constitutional reform, could reboot the political system. Or reformers could rely on Tymoshenko overcoming her past predilection for populism. But she will have to fight hard to get back in front in the polls. Ukraine can expect more trouble to come.

Andrew Wilson is senior policy fellow at the European Council on Foreign Relations.

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