Ukraine – consensus in conflict by Roland Nash, Chief Strategist, Renaissance Capital

February 21, 2006

OPINION: Ukraine – consensus in conflict
Contributed by Roland Nash, Chief Strategist, Renaissance Capital

MOSCOW, Feb 21 (Prime-Tass) — A couple of weeks ago at our conference in Kiev, I talked politics with my cab driver. We agreed that the outlook was bleak. March elections looked likely to produce an unstable coalition government led by one of a range of equally unsavoury potential Prime Ministers.

But, I suggested, unlike Russia, at least Ukraine had democracy. The people had earned the right to choose through their courage and determination during the Orange Revolution. The taxi driver nodded his agreement. I said that no matter what the short-term issues, in the longer term, democracy was a much more secure political foundation than the authoritarianism towards which Russia was tending. The driver said that he was no fan of Putin. Perhaps partly in the hope of a lower cab fare, I said that being British I could assure him that Ukrainians stood a good chance of eventually becoming part of the EU. My driver said that Ukraine was, and always would be, a European country. We drove in silence for a while. ‘But’, he said, ‘what Ukraine needs right now is a candidate like Stalin who can come in and shoot all the thieving bastards in government’. He then charged me the exorbitant price of Hr25.

Ukraine is in the early phases of democracy. The country’s near term political success will depend on whether the current instability is the consequence of democratic teething problems, or is fundamental enough to undermine the concept of consensus government altogether, as happened in Russia after the nineties. Given the underperformance of Ukrainian equity over the last six months, the type of regime that emerges post March 26 elections will also determine whether there is a sharp period of catch-up, or whether Ukraine will slide along in the doldrums.

If a coalition government emerges post elections that must struggle to build compromise through the infighting of various lobbying groups, then that is simply democracy at work. It might look ugly, but as long as each power group feels that they have the potential to influence government, then politics is essentially internalized and will tend over time towards stability. If, however, the differences between factions prove so great that no coalition is able to compromise enough to govern effectively, then the result could be the sort of anarchy that forces interest groups to look for solutions outside of the existing constitutional framework. Given the precedent of the Orange Revolution, the temptation exists to try the experiment again – a risky strategy at any time, but particularly when Russia is feeling more assertive over the near abroad.

Unfortunately, Ukraine has a number of elements that do not bode well for successful coalition government. There are at least three axes around which differences are irreconcilable enough to challenge stable government. First, there is the split between West and East. Historically, culturally, economically, even linguistically, Ukraine splits down the middle through Kiev between the Russian speaking East and the Ukrainian speaking West. In polls on everything from support for Ukraine’s European aspirations to attitude towards democracy, the best predictor of preference is the geographical location of the poll.

Second, is the relationship with Russia. Viktor Yanukovich, leader of the Party of the Regions faction, one of the three main contenders in the March 26 elections, is openly standing on a platform of support for Ukraine’s future with Russia. Of the leaders of the other two main factions, Yulia Tymoschenko has an arrest warrant out for her in Russia, and the other, President Yushchenko, has frequently suggested that the Russians have tried to poison him. While foreign policy is an electoral issue in many countries, it is rare for the gap to stretch from mentor and sponsor to jail and assassination.

Third, there is the difference between those on the inside of Ukrainian power and those on the outside. Until the Orange Revolution, most of Ukrainian politics and business was dominated by a small clique who shared power and split the economics. Controlling both politics and business, insiders were virtually impregnable to anybody outside wishing to exercise influence through the existing power structure. The popular frustration following the electoral manipulation in late 2004 was what catalysed the Revolution. While that episode broke the monopoly on power, it has not ended the enmity. Much of the politics of the last year has been about the old power clique clinging on to their assets and the new attempting to wrestle them free. The elections may redraw the battle lines, but they are unlikely to end the fight.

So are the factional differences simply too great to permit the formation of a stable government? Is Ukraine doomed to unstable government until a single party is able to dictate stability from the top, much as the Kremlin has decided is necessary for Russia? This time last year, in the afterglow of the Orange Revolution, I was highly enthusiastic about Ukraine’s prospects – in fact, so enthusiastic I bought a rather expensive apartment in Kiev, unfortunately after a Revolution inspired 30% jump in prices. Now, one difficult year wiser, I am certainly more sanguine, but still remain reasonably confident that Ukraine will prove successful. While there may be issues over which universal agreement is all but impossible, on many of the most fundamental questions, there is broad agreement.

All of the three main factions believe that economic growth is crucial, and that private business is the best way to generate it. There is also broad agreement on the need for private property and a stable legal regime in which to operate. Similarly, the lessons of the nineties have made classical macroeconomic stability conventional wisdom across the political spectrum. To be sure, there are many disagreements on rather important details – including how much state subsidy is needed to encourage private business and from when exactly property should be considered private. But the examples of Eastern Europe and Russia have illustrated the power of economic growth and the role that private business has to play in generating it. A government based on open conflict may well take considerably longer to reach agreement on those important details, but equally there is a lot less scope for either the wrong decision being reached or for a decision taken on behalf of one particular inside group. Much has been made of the disappointing corruption scandals that have emerged within Ukraine’s Orange government. But, on the other hand, at least they emerged and did damage. In a number of other regimes bordering Ukraine, corruption stays submerged and encourages ever more ambitious projects.

Moreover, consensus government, for all its many faults, does at least provide a voice for each of the interest groups. Ukraine would have its irreconcilable issues whatever the form of government. If one party dominated government then it might be able to dictate stability for a while, but other factions would be left with no choice but to attempt to bring down government and establish their own period in power. Hardly a recipe for long-term stability. Indeed, given the entrenched factionalism in Ukrainian politics, the sort of coalition government likely to emerge after the March elections is perhaps the only form that has the chance to achieve some kind of longer-term balance.

At this stage, the most likely outcome of the elections appears to be a coalition government formed between Viktor Yuschenko’s Our Ukraine and Viktor Yanukovich’s Party of the Regions. This time last year, a partnership between the heads of the two parties that fought the Orange Revolution would have been unthinkable. But the exigencies of government have forced the two sides towards cooperation. If a government is indeed formed between them, it will doubtless prove highly conflictual and may well break down. But what the Orange Revolution and its aftermath has shown is that neither side is able to govern for long alone, and that some sort of cooperation is necessary if the longer-term goal of a more stable, wealthy, powerful Ukraine is to be achieved. And that cooperation, is what a consensual, democratic government, for all its faults, is best able to achieve.

The remarkable global appetite for risk, the strength of Russian equity so far this year and the number of Ukraine dedicated funds that have emerged in recent months may well mean that Ukrainian equity will look attractive in the aftermath of the upcoming elections. My taxi driver and I may have been united in our bleak outlook for Ukrainian politics, but we were also equally united in our hope for a stable business environment in which to increase our incomes. He had been one of those dedicated drum bashers the previous year who had kept up a 24/7 racket outside government. His desire to murder the resulting personnel was not your ideal democratic response, but it does illustrate the level of frustration with the stand-off that has frozen government for the last 12 months ahead of the March elections – possibly exacerbated by several weeks standing in the snow banging a drum. While the coalition that will likely emerge will not exhibit the unchallenged cohesion of Putin’s Kremlin, it could well prove to be better than both the current incumbents and the pre-revolutionary monopoly.

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21.02.2006 14:15