Ukrainians went to the polls yesterday amid deepening worries about the future shape of the former Soviet republic's economy.
The sense of euphoria generated by the Orange Revolution in late 2004 -- led by the pro-Western President Viktor Yushchenko -- has long since faded, with a pickup in inflation, a near-stagnant economy and the looming threat of higher energy prices.
"There has been a modest trimming of positions," said Charles Robertson, emerging markets analyst with ING Bank in London, as international investors weigh up the possible coalition scenarios following yesterday's parliamentary elections.
After racing ahead by more than 12 percent in 2004, economic forecasters are expecting economic growth in the country to come in at between 2 percent and 3 percent this year, roughly the same as last year.
"The problem is to regain a stable growth rate," said Igor Burakovsky, director of the Kiev-based independent Institute for Economic Research and Policy and Consulting.
Ukrainian industrialists already are (loudly) griping that it won't be easy, since in the wake of a price battle earlier this year between Ukraine and Russia gas monopoly Gazprom, the cost of gas imported into Ukraine jumped from US$60 per thousand cubic meters to US$95.
For the moment, Kiev has forced the publicly owned gas company, Naftogaz, to absorb the higher gas costs rather than passing them on to consumers and public heating companies.
Private industry has, however, already taken the full effect of the hikes, and for the first time since independence, Ukrainian smokestack industry is worrying it may not be able to produce steel and chemicals at internationally competitive prices.
"If we don't get cheap energy, not all our goods can compete," said Serhy Mikheev, an Odessa-based steel trader. "And our economy needs exports to survive."
With another gas price shock widely predicted later this year, analysts are concerned that the economy could grind to a halt.
"There is such a danger," Burakovsky said.
Indeed, analysts believe that another increase in gas prices could lead to growth slumping by five percent. Meanwhile, inflation is expected to remain stuck above 10 percent this year.
At the same time, however, a sharp pickup in wages and a fall in interest rates have helped to underpin both a consumer and borrowing boom in the country. Retail sales are expected to bound ahead by more than 10 percent this year, after growing at over 11 percent last year.
Still, few of the Ukrainian electorate that took to the streets during the Orange Revolution are living better 15 months later.
As the election campaign comes down to the wire, the government's opponents are hamming one theme repeatedly: The Orange government has not lived up to its promise of improved prosperity through forging closer links to the EU.
The future of Ukraine's economy, analysts said, depends on Ukrainian President Viktor Yushchenko's ability to forge alliances with, and between, factions in the new parliament.
One option would be to lay aside differences with former prime minister and one-time Orange Revolution stalwart Julia Timoshenko to build a government.
A coalition between Timoshenko and Yushchenko's own center-right Our Ukraine Party would likely continue free market reforms.
But a cause for concern for foreign investors, and in contrast with Yushchenko, Timoshenko has made it clear that if she becomes the next prime minister, her first order of business will be the review of thousands of privatizations from the 1990s.
Another alternative would be a coalition between Our Ukraine and pro-Moscow Viktor Yanukovych, the loser in the 2004 presidential race.
Yanukovych's Regions Ukraine Party, according to polls, could take up to 30 percent of the next parliament's seats, and its pro-big business constituents would likely stand behind continued government assistance to heavy industry, the past engine of Ukrainian growth.
But Yushchenko's view of economics is far from eye-to-eye with Yanukovych's.
A former National Bank head, Yushchenko in a Thursday evening television speech made clear he wants the next parliament to continue reforms.
This includes faster and more transparent privatizations, flat and moderate corporate taxes, and a strong national currency to reduce the cost of Russian fuel imports and to promote domestic manufacturing.
Yanukovych's priorities are simpler, boiled down to their essentials focusing on giving smokestack industry all the government help it can get; among other things a super-cheap hryvna so Ukrainian steel will remain inexpensive.
Exactly how a Yushchenko-Yanukovych government might conduct more fair and open privatizations is therefore an open question. Ukraine Telecom, the Odessa port, parts of the nation's energy generation business, as well as two state banks, are still up for grabs.
Another top issue on Yushchenko's agenda is steering the nation towards WTO membership without causing additional friction with Moscow.
An even more difficult problem facing the next government is how to implement reforms -- all of which cost money -- without gutting the nation's already impoverished welfare system, thereby risking social unrest.
"The color of the new coalition will determine the speed of privatization," Burakovsky said. "Foreign investors are in a wait-and-see position."
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