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Democracy Watch, 2011 - Issue 3

02-17-2011 04:51 PM CET | Politics, Law & Society

Press release from: People First Foundation

The Ukrainian government and oligarchy seek to improve investment attractiveness and their reputation in the West, failing to appreciate the extent to which they are blemished by the national lack of democratic principles, freedoms and transparency.

The future of big business directly depends on the development of democracy

Under President Yanukovych the interests of big business remain Ukraine’s primary concern. This may explain why Cyprus was neglected from the recent Cabinet of Ministers list of offshore taxation clampdowns; Cyprus is a primary route for capital outflow from Ukraine. Party of the Regions and the current government continue to repay their debt to the oligarchs who pushed them through the 2010 elections. To some the gas seized by the previous Prime Minister is being returned. Others receive export monopolies or an opportunity to privatise grossly undervalued strategic state assets. The most attractive way to settle scores now is to involve the services of the “blind” justice. Not far behind is Russian capital which receives preferential treatment and access to the Ukrainian asset market.

With strengthening of his authority and the broadening of his powers, it is projected that the President will want to substantially decrease his obligations to the oligarchy. What is the future of Ukrainian big business? The conflict between Ukrainian and Russian oligarchs is already visible through contradictory privatisation decisions, an example being "Luganskteplovoz" or “Ukrtelecom”. Initiatives to insulate Ukraine from the penetration of Russian capital will only increase in number and potency, adding further tension to the relationship between Yanukovych and the Putin - Medvedev tandem. The Ukrainian authorities’ struggle against the Kremlins appetite may prove to be inhibited as the Oligarchy attempts to increase their power over the President, ensuring protection of their influence.

Ukrainian foreign policy is likely to remain Europe-oriented as the route through Cyprus ultimately settles in European financial establishments. Ukrainian oligarchs should consider the protection of such interests worth the cost of lessening pressure on democratic freedoms in Ukraine.

People First Comment:
The problem for the oligarchy of Ukraine today is that they are all becoming fish that are too big for this rather murky pond. Whilst they had little choice but to support Victor Yanukovich in his election bid, as many considered Tymoshenko to be the greater of the two evils, they now recognise that the publicity surrounding this government and administration is seriously damaging their prospects to expand and legitimise their earnings. Reputation today is as important as financial strength and power. People simply do not invest in companies they do not trust and it is becoming extremely difficult to be associated with companies originating from Ukraine simply because of the negative smell attached to the national reputation.

Donetsk businessmen have already lost patience taking the matter into their own hands by successfully using services of leading international PR firms in Brussels to lobby on behalf of their energy interests. The gas conglomerate “Rosukrenergo” has sought to clean up its name via the English Courts rather than using the route of good PR. Others have used philanthropy to great effect in building their personal reputations and Yulia Tymoshenko has used international PR for years, unfortunately she does not have the track record to back up her PR claims.

It is very likely that more oligarchs will start to go it alone and will invest million in trying to convince the world that they are not as greedy as they seem. It would be much cheaper for them to convince the government to change course so that the government spin doctors had something real to promote.

New national budget of Ukraine: For the many or the few?

The end of 2010 saw the national budget go through Verkhovna Rada nearly as quickly as the President signed it. Its authors professed that it constituted a watertight crisis solution. Akin to many European neighbours, the crisis required cuts. The total 2011 budget income accounts for 281 billion UAH. Budget spending is at 321 billion UAH, creating around 40 billion UAH in deficit. There are also plans to take over 90 billion UAH in national and international loans.

So what was cut? Education expenditures were reduced from 20 to 18,5 billion UAH; Funding of international research and technology programmes was reduced ten-fold; Development projects reduced five-fold; Expenses for the publication of Ukrainian language books were cut by 40% - from 33 to 20 billion UAH; Of most concern the financing for disease control was reduced by 58 million UAH to 577 million UAH, despite the fact that Ukraine has the highest infection rate in Europe for tuberculosis, AIDS and cancer.

According to members of the opposition state institutions close to the support structure of the President received increased financing amid the national crisis. In particular: the budget of the General Prosecutor Office has been increased from 1.218 billion UAH to 2.201 billion UAH; The budget of the Ministry of Foreign Affairs has increased from 11.807 to 13.656 billion UAH; The expenses for state administration and health care for state officials were increased by 397 million UAH. Almost every opposition call for revision of the draft budget was ignored. The new budget provides well for top-ranking officials and representatives of the national security services but ordinary citizens will feel the pinch of rapid inflation and rising unemployment. Experts agree that the structure of this newly adopted budget is characteristic of an authoritarian and undemocratic state; this will only widen the divide between the impoverished majority and the wealthy minority, setting the scene for potentially uncontrollable mass social protests later this year.

People First Comment:
If you are a state prosecutor, state administrator or you work for the Ministry of Foreign Affairs then this was a pretty good budget. If however you are a student, a scientist, a driver or you are in need of serious medical care then you are going to have a very difficult year in 2011. Borrowing money from the IMF has come at a very heavy price, a price that is going to be borne by every man women and child in the country, that is unless you happen to be a senior government official. But we have to ask whether this government realises just what sort of rod they are making for their back and that of the President.

According to research carried out in late 2010 by the People First Foundation the key issues for the average Ukrainian family are: jobs, food prices, education, medical care, corruption, representation in government and the rule of law, the very things this budget seeks to attack. This does not bode well for the popularity ratings of the President and unless the government change tack drastically his chances of re-election are slim as the Ukrainian public have very long memories.

Ukraine shows no reduction of investment risk

Ukraine remains a high-risk investment according to the Political Risk Atlas 2011 published by Maplecroft. The nation’s index did improve between 2009-2010, moving from 62nd to 74th place, positioning it between Burkina Faso and the Republic of Timor-Leste. Experts however suggest that investment climate in Ukraine has recently taken a turn for the worse, blaming the deterioration of corporate management and macroeconomic stability, violation of human rights by the law enforcement agencies as well as a critical drop in the quality of education. Although government rhetoric regarding controls over private business is ever on the rise, the environment remains nonviable for the majority of foreign investors.

British experts also mentioned some positive developments: increased stability in the political arena, increased general citizen stress tolerance and a decrease of terrorist threat. The World Bank predicts a continued recovery of the Ukrainian economy in 2011; however, it notes that the speed of recovery in Ukraine is significantly lower than that of equivalent developing countries. Martin Raiser, the World Bank's Director for Ukraine, Belarus and Moldova, observed that Ukraine’s failure to implement structural economic reforms could trigger a local economic crisis with dire consequences. The governing powers should take heed, and recognise that a maintained investment-attractive environment requires the continuity of a stable democratic system. Nevermore clearly could policy reform translate into nationwide profit.

People First Comment:
Ukraine, the second largest state in Europe is now wedged between the Saharan state of Burkino Faso and the tiny South East Asian island state to Timor Leste in terms of risk of doing business. That’s quite some achievement for the first year of reforms in light of unprecedented increase of power for the current administration.

There was a time, some year back, when foreign direct investment was nudging $10 billion a year, this year it is unlikely to top $4 billion as investors, fearful of the association find other places to develop. The main investor in Ukraine is Cyprus which implies that most of the current investment is either Russian money buying up assets or Ukrainian money coming home. The international community seem to have completely given up on the country.

You would imagine that the government would take note of this deplorable position and change their policies particularly as foreign investment is one of the fastest sources of new jobs but no. They simply carry on with the same policies that bankrupted the Soviet Union only this time they burden the poor people of this country with a simply massive level of debt that will take decades to repay.

Looking at the current policies of the government one would have to question whether anybody in the whole financial team has ever owned a small company or worked in a modern western style company. Clearly they have not and it will be left up to the people to clear up the results of their ineptitude. The same can be said for the opposition who have yet to demonstrate any ability to plan a national economy. Perhaps it is time for Ukrainians to accept that all their politicians have succeeded in achieving is 3rd world status for a potentially major European power.

Ukrainian authorities attempt to "clean" their reputation by parading a fairytale Ukraine before the knowing eyes of Europe

Whilst the country marches towards becoming an authoritarian state, with a puppet democracy and grievous social deprivation, the government and the presidential administration’s western PR professes of a nation in reverence for their faultless governors. The strategy involves public appearances, promotional videos and editorial articles; validated by careful positioning in respected communication channels. For example, CNN (broadcast and online) recently featured an interview with Prime-Minister Andriy Klyuev professing of Ukraine’s investment attractiveness; this platform will also be utilised for a pro-government advertisement campaign promoting Ukraine as successful and attractive country. The President has been attempting to charm international leaders at the recent economy forum in Davos; it remains to be seen whether or not this was successful.

The blatant disparity between the idyllic ‘PR’ Ukraine and the internationally observable reality is bound to ring alarm bells. According to the report of International Living, Ukraine ranks 73rd in the world rating of quality of life among Namibia, Botswana, Tunisia and Morocco. The State Statistics Committee reports over 500 thousand unemployed; experts expect this figure to rise to 2 million before 2012. The rise in inflation currently tops record levels sentencing hundreds of thousands of Ukrainian families to poverty. These factors combined paint a bleak picture for social stability. Any PR programme initiated in the west should only focus on genuine national achievements – other promotional efforts can only foster further distrust.

People First Comment:
As the government of Ukraine embarks on an international PR drive with lobbying in Brussels, paid news features on CNN, advertising on BBC World and inserts into a major UK newspaper, one has to wonder what its spin doctors hope to achieve. Good PR is the result of achievement, not what you hope to achieve or worse still what you think the world might like to hear. Unfortunately the gap between the spin and reality is either a blatant attempt to mislead the international community or of a wider misunderstanding of the moral and ethical basis of democracy.

The government talks of fighting corruption but does little to address a problem. The traffic police continue to abuse their powers to extort millions from drivers (which under current circumstances is the mildest form of state-condoned banditry), whilst by the financial watchdog ‘Global Financial Integrity’ lists Ukraine as the 3rd worst in Europe for illegal international money transfers. The government talks of austerity and fiscal responsibility cutting millions from the healthcare and education budgets, yet they increase the budget for governmental administration. It’s the same for democratic practice, freedom of speech and assembly, support for industry, the SME sector and job creation. The new tax law alone has already destroyed 800,000 small companies.

Sadly, Ukraine is not adopting European values and the authorities need to think again. The export of democracy from the west looks to have failed and has been overrun by the export of questionable social and political practices from the east where money buys anything and anybody with, of course the exception of the future…

Quote of the week:

For the first time in human history almost all of humanity is politically activated, politically conscious and politically interactive... The resulting global political activism is generating a surge in the quest for personal dignity, cultural respect and economic opportunity in a world painfully scarred by memories of centuries-long alien colonial or imperial domination... [The] major world powers, new and old, also face a novel reality: while the lethality of their military might be greater than ever, their capacity to impose control over the politically awakened masses of the world is at a historic low. To put it bluntly: in earlier times, it was easier to control one million people than to physically kill one million people; today, it is infinitely easier to kill one million people than to control one million people.

Zbigniew Brzezinski

Former U.S. National Security Advisor
Co-Founder of the Trilateral Commission
Member, Board of Trustees, Center for Strategic and International Studies

Democracy Watch is the weekly monitor of the People First Foundation and serves to raise public awareness of how government and parliamentary action is impacting upon Ukrainian democracy and democratic due process. The information is copyright free and may be reproduced but we ask that any comments are reproduced in full and with reference to the People First Foundation.

People First Foundation

1 Skovorody Street, Kyiv 04070, Ukraine

Telephone: +38044 536 1508 / Fax +38044 536 1509

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