NEWS ANALYSIS: Ukraine changes prime minister, again (07/13/97)

NEWS ANALYSIS

Ukraine changes prime minister, again

by Taras Kuzio

A July 2 presidential decree released Pavlo Lazarenko from the post of Prime Minister of Ukraine after only one year in office. He is the sixth prime minister to have led the Ukrainian government since it became an independent state in January 1992 - roughly one new prime minister each year. None of them, including outgoing Mr. Lazarenko, were radical reformers. During the same period of time there were 11 first vice prime ministers and 28 vice prime ministers.

This rapid turnover in personnel has damaged Ukraine's economic transition in two areas. First, through a lack of consistency on the part of government and state policy in the socio-economic fields. Secondly, it has served to damage Ukraine's credibility vis-à-vis international financial institutions and potential foreign investors. That credibility was already severely damaged by the Verkhovna Rada's cancellation of tax benefits for joint ventures, removed from the company profit tax law, which went into effect on July 1.

The entire saga of Mr. Lazarenko's dismissal reflected a scenario reminiscent of the Soviet era. On June 19, the same day that an International Monetary Fund delegation arrived in Kyiv to discuss a new loan for Ukraine and only a few days after the prime minister returned from a tour of Canada in search of business contracts, President Leonid Kuchma issued a decree appointing First Vice Prime Minister Vasyl Durdynets as acting prime minister "for the duration of Prime Minister Lazarenko's illness." This was curious because only the day before Mr. Lazarenko had seemed perfectly healthy meeting striking coal miners in Kyiv.

The claim that Mr. Lazarenko was too ill to perform his duties enabled President Kuchma to avoid demanding his immediate resignation which would have led to the resignation, of the entire Cabinet of Ministers. Although Mr. Lazarenko was diagnosed with vein varicosity and chronic thrombophlebitis, his condition was never described as serious. The manner in which Mr. Kuchma tackled the PM's dismissal reflected his fear of openly sacking Mr. Lazarenko and thereby causing a rupture with a powerful regional clan tied to the energy sector whose support the president may need during the elections. Hence the decree releasing the PM was only issued after a meeting last Saturday failed to patch up their differences and Mr. Lazarenko himself then petitioned for his own resignation.

Mr. Lazarenko will not disappear from the political scene: he remains a national deputy in the Verkhovna Rada and chairman of the Dnipropetrovsk Oblast Council.

Between June 19 and July 1 Messrs. Kuchma and Lazarenko attempted to reach a "gentleman's agreement" whereby Mr. Lazarenko would remain as prime minister, provided he showed greater loyalty to the president. Mr. Kuchma was quite prepared to keep Mr. Lazarenko as prime minister, despite widespread criticism of him both at home and abroad, but only on condition of his absolute loyalty. Throughout most of this period President Kuchma continued to both criticize Prime Minister Lazarenko for past mistakes as well as deny that there were any grounds for a change of government. After being unable to reach a "non-aggression treaty," as the Kyiv newspaper Zerkalo Nedeli put it, the presidential decree merely talked of Mr. Lazarenko's health as the reason for his resignation.

Now there are two major questions: Who are the likely candidates for prime minister? Will they introduce anything radical in the socio-economic field? Any new prime minister, coming in on the eve of parliamentary and presidential elections, must have three qualities: loyalty to the president, acceptability to the Parliament and loyalty to the Kuchma policy since 1995 of a "state-regulated transition to a social-market economy." These conditions will be difficult to fulfill because most Ukrainian prime ministers since 1992, Mr. Kuchma included, had also used their posts as presidential campaign headquarters. It is difficult to find any candidate with the support of over 220 members of Parliament.

Serhii Holovatyi, the young, energetic and reformist minister of justice, has been touted as a candidate. But he, like Boris Nemtsov in Russia, is still too radical for most national deputies.

Acting Prime Minister Durdynets, head of the State Committee on Corruption and Organized Crime, could be another logical candidate, although he is considered to be rather weak.

Four other potential candidates are Oleh Diomin, chairman of the Kharkiv Oblast State Administration; Vadym Hetman, head of the Interbank Currency Exchange (and a close ally of Viktor Yushchenko, chairman of the National Bank of Ukraine); Volodymyr Horbulin, secretary of the National Security and Defense Council; and Ivan Pliushch, former chairman of Parliament (1990-1994).

Of these potential candidates, Messrs. Diomin and Pliushch are both members of the pro-presidential National Democratic Party. The Verkhovna Rada would be unlikely to approve of Messrs. Holovayi and Hetman, because of their support for radical reform, or Mr. Horbulin, whose appointment would signal that the government had come under the control of the powerful Security Council. Messrs. Messrs. Durdynets, Diomin or Pliushch would all be acceptable to the Parliament.

President Kuchma - who, according to the Constitution, has to appoint a new Prime Minister within 60 days - promised to present a new prime minister within the next 10 days.

Why had Mr. Kuchma waited so long to dismiss Mr. Lazarenko? The National Democratic Party and pro-reform parliamentary factions had openly called for the prime minister's dismissal, as did the Federation of Trade Unions, whose leader is allied with Socialist Party Chairman and Verkhovna Rada Chairman Oleksandr Moroz. Since early June most visitors to the presidential administration had demanded Mr. Lazarenko's removal. The growing wage arrears had brought coal miners and communists out into the streets of Kyiv to protest government policies. A majority of the members of the Council of the Regions also had voted for the PM's dismissal. There were also five compelling factors that finally led to Mr. Lazarenko's resignation.

First, the growing perception both at home and abroad of Ukraine's poor record on combating corruption and of a government tainted by corrupt practices. The Ukrainian media had been full of reports of government members involved in privatizing dachas, ensuring very preferential loans and holding foreign accounts.
Second, the IMF had threatened to cancel a crucial $2.9 billion loan to Ukraine because of the lack of a 1997 budget, remaining export restrictions, a long list of small-and medium-sized firms exempted from privatization, the failure to adopt tax laws and reform of pensions. President Kuchma had promised to ensure that these would be fulfilled by July.
Third, Mr. Lazarenko was not perceived as a committed reformer which, coupled with accusations that he himself was corrupt made it difficult for reformers to support his government.
Fourth, Mr. Lazarenko's arrogance and unwillingness to work and cooperate with the Verkhovna Rada had hindered the adoption of the 1997 budget. It cannot be any coincidence that this budget, which had been introduced initially as a draft in late 1996 and then was again introduced as a new draft on the day the IMF delegation arrived in Kyiv and Mr. Lazarenko became "ill," was finally adopted only eight days later. The budget, with a projected deficit of 5.7 percent of the GDP, was welcomed by the IMF, but the IMF insisted on passage of the tax laws before the loan was released.
Finally, Mr. Kuchma was reluctant to dismiss Mr. Lazarenko because of the approaching elections and the possible usefulness of his clan. President Kuchma is preparing a decree postponing the parliamentary elections until 1999 - the same year that the presidential elections are to be held. Mr. Kuchma is still the most popular politician in Ukraine with a 26 percent approval rating, with other likely candidates polling only 2 to 6 percent. Mr. Kuchma was reluctant to release the PM also because of close business ties in the energy sector which have national security ramifications.

There are others factors at work also. Yevhen Marchuk, whom Mr. Lazarenko replaced as prime minister, is likely to be President Kuchma's main opponent in the 1999 presidential elections. There are strong rumors in Kyiv that he has financial backing from Gazprom, which helped him establish a leading Kyiv newspaper Den (Day) that was at the forefront of the anti-Lazarenko campaign in the media. Energy companies allied with Mr. Lazarenko had diverted gas distribution in Ukraine towards companies closely tied to him (such as United Energy Systems) and away from Gazprom.

Mr. Kuchma, whose presidential candidacy in 1994 was backed by Russia, may now be concerned that history will repeat itself and Moscow will back Mr. Marchuk, his main rival, in 1999.

Taras Kuzio is a research fellow at the Center for Russian and East European Studies at the University of Birmingham and editor of Ukraine Business Review.

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