Friday, May 06, 2005

100 days

There have been a number of articles on the government of Yuschenko since he took office this past week commemorating, of a sort, the first one hundred days of the Yuschenko government. The Kyiv Post, for one, had an editorial lamenting that more had not been done since Yuschenko took power and that some of what had been done—raising pensions, for one-- was the type of thing Yanukovych did prior to the election. He was roundly criticized by the Yuschenko camp for it.

Here’s my take on it:

First of all, the actions of the government do not seem to be coordinated in any way. They seem to be ad hoc decisions made on certain things as they catch the attention of the respective minister for whatever reason. There seems to be no overall plan of attack on these issues.

The biggest example of this is the revaluation of the hryvna and the negotiations with the Russian oil companies to voluntarily roll back their price increases. These two don’t look like they would go together but the fact is that the Russian oil companies really didn’t decrease prices in real terms. What they got was a stronger hryvna in payment, a hryvna made stronger by the central bank’s revaluation. That means no real price decrease.

There has been an argument made by some that this was what was intended by Tymoshenko in the first place. The hryvna revaluation allowed her to get her price decrease without the Russian oil companies having to give in on anything. They got their value anyway and Tymoshenko got gasoline prices down to make consumers here happier. (Consumers are voters after all.) So it was a wash under this view and suggests some collusion between Tymoshenko and the Russian companies and Tymoshenko and the head of the central bank.

There is a lot that can be said for this view. The argument for the revaluation was that it would bring down inflation. But the inflation argument doesn’t wash. The head of one of the European banks here said that the hryvna would have to rise about 15% against the dollar to bring inflation this year to down under double digits. The rise here was only about 3%. So the revaluation won’t even begin to bring inflation under control. Since inflation will not decrease appreciably, then there must have been some other non-economic reason for it--so the argument goes.

And some of the public statements made by Tymoshenko that the hryvna is overvalued aren’t really an argument either. The hryvna doesn’t float; it is pegged to the dollar which means its value is set by the government for policy reasons. That means the hryvna might be undervalued or it might be overvalued but the government maintains it that way for policy reasons. If they were going to float the hryvna, then saying it was overvalued would be something of an argument. But they have no intention of floating it right now.

So there is some reason to think that there might have been collusion. I happen to think there wasn’t any. I think it was simply a coincidence and a lack of coordination among the higher levels of government. I think no one knows what anyone else is doing at the moment and none of it is a part of any overarching plan for the government. Many of the decisions appear to be made on the fly with no attention paid to their collateral consequences. And not much attention is paid to addressing what the opposition might make of it. Good intentions and clean hands do not make up for a case not being made in the public arena.

Where’s the Ukrainian Karl Rove?

A second problem is that the actions of the government are not transparent enough. This is true in a number of areas. The biggest political instance is the arrest of Kushnaryov, an associate of Akhmetov from the Donetsk area. His arrest touched off a number of protests claiming it is payback for having been a part of Yanukovych’s camp. There were a number of protests that took place over this. They have since petered out but the claim that it is retribution still hangs in the air.

The government of course denies it and has alleged certain crimes that he has been involved in and I bet they have the evidence. But the problem is that the case should have been made in public for his arrest. That might have been a difficult thing to do because of the possibility of flight. (The country of choice for people fleeing arrest is Russia, interestingly.) But it has to be done.

One of the things an American prosecutor has to do is to detail the criminal allegations against a defendant in either an information or an indictment by a grand jury depending on the jurisdiction. The result of this is that a case starts to be made for the arrest of the person charged before the fact and it is all matter of public record.

This is not done here as far as I can tell. There may be no procedure for it but there ought to be. The east is still not Yuschenko territory and they have enemies there and any number of other people there who do not trust Yuschenko and his government. If people on the opposition side keep getting arrested, that will not make them true believers. It ust confirms them in everything they ever suspected about Yuschenko and his government. To combat this, the government must come up with some kind of bill of particulars detailing the illegal conduct of the person arrested and the laws broken.

The government is also threatening to revoke the licenses of at least one television station—possibly two-- that was pro-Yanukovych. The government argues that the station was given certain frequencies by government officials that were not paid for. The station on the other hand is arguing political retribution, the tit for tat that is political business as usual around here. And this station has the airwaves to make their case with. The government on the other hand has not even begun to make their case as to why the license should be revoked. Again, a bill of particulars detailing what laws were violated and how needs to be drawn up.

The third problem is that the re-nationalization issue has not been resolved yet. The number of companies to be renationalized is anywhere from a dozen to three thousand. There is nothing out there a company or potential investor can look at to tell them if a particular company will be renationalized. It is all up in the air. There are calls by Yuschenko for a list of companies but there hasn’t been one to date. And Tymoshenko says she will press the Parliament for a law on the re-nationalization but it is hard to see what that will do other than provide some kind of color of law to operate under. There isn’t any for them to operate under now? If they are looking for legal authority to do it that suggests that maybe no law was broken in the first place. If that is true, then this legislation would be for nationalizing the companies—a naked grab. That kind of things will not make investors comfortable.

The fact is that this is a horrible state of affairs for potential investors. What will happen to the company they purchase or the stake they acquire in any company here in the Ukraine? Will it be subject to nationalization? No investor in his right mind is going to want to put money in any concern here under these circumstances even if the potential returns were quite high. If the company were renationalized, their stake could be locked up in disputes for a long time. And with the courts the way they are here right now, it is not a certainty that they can rely on what would be the law to reclaim their stake. The courts are getting better but they are not there yet.

The problem with the whole re-nationalization talk is that it shows the government still has the power to do it even if they may not be willing to use it. To say that they will only renationalize twelve and then stop means they have the power to go the whole way. The only thing lacking would be the reason to do it or the will to do it. Not a real stable state of affairs for investment.

This has to stop. The government needs to set out clear guidelines as to what companies it will focus on and if a company does not fall under those guidelines it should be left alone.

The ideal from some people’s points of view is to leave them all alone. I think that would exact too much of a political price from Yuschenko for him to do it. He made justice on these privatization deals a central part of his campaign. So I think he has to go after some of these companies to protect his flank. But they have to be the most serious cases. The rest must be left alone or it will thoroughly undermine the goodwill that has been created by the Orange Revolution. Many companies are now looking at the Ukraine that wouldn’t have thought anything about it before. They need to be assured that any investment they make will be secure.

There is an argument that re-nationalization is being left as an issue for the Parliamentary elections next year. If that is the case, it is irresponsible. Investment is needed here right now and those with investment money are not going to wait around for this problem to be solved next year. They will take there money to other countries not threatening to nationalize any companies. And there are a lot of those countries around. The problem is that the government may end up with a sizeable majority in Parliament but bring the house down around them to do it. And they will not be able to escape the charge that this is simply more of what has always happened here. It will have been more of what has always happened around here. And that would make the Russians right about the revolution.

The fourth problem is all the price controls and government intervention in the marketplace. This serves to prop up inefficient businesses. If they want to bring prices down they should liberalize the economy and decrease tariffs. The problem with this from their point of view is that that will spell the end for any number of Ukrainian businesses. But WTO entry will do the same thing. It is better to get them used to it now. If can be more gradual than a kind of shock therapy, but there must be more movement in that direction. But there seems to be not much at all.

All of this said though, the people still have confidence in Yuschenko and Tymoshenko. Their popularity has only increased recently. And maybe there is some sort of strategy in all of this. One can only hope.


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