Ukraine's Orange Revolution

Adrian Karatnycky

From Foreign Affairs, March/April 2005

Summary:  The electoral triumph of opposition leader Viktor Yushchenko and the victory of the Ukrainian people over their country's corrupt leadership represent a new landmark in the postcommunist history of eastern Europe, a seismic shift Westward in the geopolitics of the region. But what will come next for the new president--and the rest of the former Soviet Union?

Adrian Karatnycky is Counselor and Senior Scholar at Freedom House.

Corruption accelerated after Kuchma's election as president in 1994. The former director of the Soviet Union's largest missile factory, Kuchma brought with him ambitious and greedy politicians from his home base, the eastern city of Dnipropetrovsk. The greediest of the crew was Pavlo Lazarenko, who, in June 2004, was convicted in U.S. District Court of fraud, conspiracy to launder money, money laundering, and transportation of stolen property. Lazarenko, currently free on $86 million bail, was accused of having stolen from the state and extorted from businesses hundreds of millions of dollars between 1995 and 1997, when he served for 12 months as first deputy prime minister and for 7 months as prime minister. When the scale of Lazarenko's corruption became known, some Ukrainian leaders were outraged. But Kuchma could not have been surprised. In 2000, his former bodyguard leaked hundreds of hours of transcripts of the president's private conversations. On the tapes, Kuchma is heard dispensing favors, paying massive kickbacks, and conspiring to suppress his opponents--making it clear that the president sat at the head of a vast criminal system.

Several factors facilitated Ukraine's massive corruption. High inflation meant that until the mid-1990s, many cross-border financial transactions were conducted using a barter system, which was easily falsified to understate the amount of goods traded; resources that were exported to Russia ostensibly for energy often brought huge kickbacks instead. Wide-ranging privatization also enabled government insiders and cronies to buy state enterprises at bargain-basement prices. Steel mills, today worth several billion dollars, were bought for a few million. Regional energy companies fell prey to the same forces. The tax inspectorate was another weakness in the system, as the government manipulated it to gain financial and political advantages: competitors could be harassed or forced out of business by inspections and fines, and oligarchs could easily evade paying taxes.

In general, the oligarchs were able to operate their businesses without fear of independent oversight. Under Ukraine's constitution, local government officials are not elected but appointed by the president, who allowed oligarchic groups to create local enclaves headed by their allies. In the Zakarpattya (Transcarpathia) region, local and central government officials enabled one oligarchic consortium to amass vast fortunes from the lumber industry by stripping the forests of their trees. Now, parts of this once richly forested mountain region have been dangerously depleted, compounding the problems caused by deforestation in the Soviet era.

Over time, several Ukrainian oligarchic clans became dominant in the young nation. Medvedchuk, who became presidential chief of staff in December 2002, represented the Kiev clan, which controlled regional energy and timber companies and invested in broadcast media. The Dnipropetrovsk clan, which invested in the energy pipeline industries, included Viktor Pinchuk, now Kuchma's son-in-law. A powerful group from the eastern coal-mining Donbass region included metallurgy baron Rinat Akhmetov, the postcommunist world's second-wealthiest man, with a net worth of $3.5 billion.

Each interest group established its own political party in parliament. The Kiev clan ran the Social Democratic Party of Ukraine (United). The Donetsk oligarchs created the Party of Regions, the ranks of which included a local governor who later became prime minister: Yanukovich. The Dnipropetrovsk group created and backed the Labor Party. And the influence did not stop there. The oligarchs owned or controlled their own national broadcast media and local and national newspapers. Each was capable of massively funding political campaigns in the emerging pseudodemocratic system.

In the late 1990s, the oligarchic clans largely remained under the control of Ukraine's powerful president. But in 2000-2001, Kuchma's power began to weaken as the wealth of the robber barons grew significantly and Kuchma's personal corruption and criminality started coming to light. Eventually, Kuchma even faced a vigorous opposition campaign to impeach him for his role in an abduction that ended with the murder of the investigative journalist Heorhiy Gongadze. But the campaign stalled as the president and his backers blocked efforts to institute the legal procedure needed to formally make the charges.

CHANGES

It was this turbulent period that saw the metamorphosis of Yushchenko from colorless central banker into charismatic opposition leader. In December 1999, pressure from Western donor countries seeking deeper economic reforms resulted in his appointment as prime minister. As chairman of the National Bank of Ukraine in the 1990s, Yushchenko had tamed rampant inflation and introduced responsible fiscal controls. In taking the reins of the government, he was determined to impose fiscal discipline and rigorously collect tax revenues and privatization receipts. To achieve these goals, Yushchenko needed to crack down on Ukraine's crony capitalism. He formed an alliance with one of the system's own--Yulia Tymoshenko, a former energy mogul who had run afoul of the Kuchma regime. With Tymoshenko's help, Yushchenko managed in just a year to recoup more than $1 billion in revenues that had been siphoned off by energy oligarchs.

Yushchenko's new approach helped propel Ukraine's economic turnaround. In 2000, his first year as prime minister, the economy grew by nearly 6 percent. In 2001, the country's annual growth rate rose to 9.2 percent. Without busting the budget, Yushchenko used recovered energy revenues to solve Ukraine's most urgent social problems: wage arrears to teachers, health care workers, and other state employees, and overdue pension payments to retirees. His public image as an honest, effective leader was secured.