A Key Ex-Soviet State Withers

ROCKY ROAD TO CAPITALISM

April has been a cruel month for Ukraine. In the space of four weeks, the ex-Soviet republic lost one of its largest foreign investors, the leading architect of its reforms, and the chance to put together a timely government budget.

Now the nation's hard-won good standing in Washington and the remaining foreign ventures in Ukraine are at risk. Ukraine is currently the No. 3 recipient of American aid, trailing only Israel and Egypt.

Ukraine's biggest loss would be the defeat of a tax-and-pensions reform package being pushed by President Leonid Kuchma. The bills, which would close tax loopholes, reduce tax rates, slash benefits, and mandate individual-retirement accounts, have met with fierce resistance in the nation's leftist-dominated parliament.

The parliament's failure to pass the legislation led to the resignation of Deputy Prime Minister Viktor Pynzenyk April 7. Before leaving, Mr. Pynzenyk, the mastermind of the legislative package, slammed the lack of commitment to reforms.

Motorola walks away

Mr. Kuchma's bureaucrats repeatedly have been accused by Western companies of sabotaging their Ukrainian ventures.

Push came to shove a month ago, when Motorola Corp. walked out on a joint venture to provide cellular phone service. Motorola blamed "the ever-changing terms of conditions" of the government license it sought. The New York Times later linked a local competitor of Motorola to one of Kuchma's aides.

Motorola's decision to pull the plug on its $500-million project sent shock waves through a country that has attracted just $1.4 billion in foreign capital in the five years since independence. It was also noted in Washington, where the business environment in Ukraine drew criticism during appropriation hearings on Capitol Hill earlier this month.

Richard Morningstar, President Clinton's ambassador-at-large to the former Soviet Union, told congressmen that aid to Ukraine will depend on the country adopting reforms demanded by foreign creditors and investors. "If steps are not taken, then we will have to review the program and look at how much money should go to Ukraine," Mr. Morningstar said at the hearings.

But he also stressed Ukraine's strategic importance to the United States, which views the young country as an important check on Russia.

Ukraine has led the resistance by ex-Soviet republics to military and economic reintegration with Russia. Ukraine has also developed close ties with NATO and may soon have a treaty with NATO even beyond the Partnership for Peace program.

Kuchma has been trying to salvage his government's reformist image. He launched a well-publicized anticorruption drive, set up a council with foreign businessmen, and promised to veto an attempt by parliament to revoke tax breaks for foreign joint ventures.

But faced with infighting between Pynzenyk and Prime Minister Pavlo Lazarenko, a former collective-farm manager not versed in free markets, Kuchma chose to let Pynzenyk go and keep Mr. Lazarenko.

Pynzenyk's job went to Serhiy Tyhypko, the chairman of PrivatBank. PrivatBank is Ukraine's largest private bank. It is said to finance a nebulous constellation of businesses closely associated with Kuchma..

Such links between Ukraine's business and political establishments are commonplace.

For frustrated foreign investors and Ukrainians still waiting for the government's limited reforms to bear fruit, those ties symbolize the inside dealing that constrains the nation's economy.

Government spending has become part of the tax-reform fight. The government insists this year's budget must be based in part on the new tax system it proposes. Parliament wants to preserve the status quo. An interim budget expired March 31, and no replacement is in sight.

Until a budget based on new taxes is approved, the International Monetary Fund will not approve a three-year, $3-billion loan needed to finance Ukraine's budget deficit.

If reforms fail, 'all is lost'

Failure to secure the loan would jeopardize the government's chief economic accomplishment, the taming of inflation from triple digits in 1994 to this year's 20 percent.

"If we come to June or July and there is no reform, as much as confidence went up, it all will be lost," Harvard economist and Eastern European reform maven Jeffrey Sachs said recently at a Kiev press conference. "Foreign capital would stop coming in and would start going out and that would worsen the situation."

Mr. Sachs drew a parallel between Ukraine and Bulgaria, another half-hearted reformer that substituted cosmetic change for real reform, leading to its economy's collapse earlier this year.

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