With the departure of President Viktor Yanukovych in Ukraine, questions arise over whether a new democratic government will avoid the mistakes of disagreement and disorder that occurred after the Orange Revolution in 2004–05. Three lessons are vital. Early parliamentary elections and the adoption of a parliamentary system are needed, while thoughtless reprivatization of any companies must be avoided.
In the fall of 2004, I co-chaired a Blue Ribbon Commission sponsored by the United Nations that produced a reform program for the next president. After Viktor Yushchenko’s electoral victory in December 2004, I spent a miserable week in January 2005 trying to sell our program.
After his victory in a free and fair election, the ailing Yushchenko took two weeks’ leave, not taking phone calls even from his closest associates, thus aggravating the infighting among them. Then, he went on a world tour celebrating the Orange Revolution for the next three months. When he came home, his allies were fighting because of the lack of presidential engagement. In September, his government fell apart in disheartening acrimony. This disaster must not be repeated.
As the movement calling for Yanukovych’s ouster grew in Ukraine last week, the parliament revived the presidential-parliamentary 2004 constitution that Yanukovych had illegally let his Constitutional Court abolish in October 2010 to help him gain more power. Yet, the 2004 constitution is not very good. It does not hang together logically, as became apparent in 2008–09, when president Viktor Yushchenko, who served from 2005 to 2010, vetoed almost everything Prime Minister Yulia Tymoshenko tried to do. Ukraine needs to adopt a new constitution with a normal European parliamentary system including checks and balances. This should be done before the presidential elections that are now scheduled for May 25. Otherwise a new president may battle with parliament and produce a stalemate as Yushchenko did.
Another problem with the Orange Revolution was that the victorious revolutionaries focused on the parliamentary elections in March 2006. To gain votes, in the spring of 2005 they pursued irresponsible spending programs, giveaways, and tax policies designed to enhance their popularity rather than badly needed legal and economic reforms that might have caused some unhappiness among the voters.
This last week, a democratic majority of deputies in the Ukrainian parliament was formed thanks to defections from Yanukovych, but Ukraine’s October 2012 parliamentary elections were too flawed to be legitimate. Therefore, new parliamentary elections should take place no later than the presidential elections in May.
The third problem from the last decade was the government’s preoccupation in the first half of 2005 with reprivatization of all kinds of enterprises that had been nationalized under communism. The idea was to reduce the wealth of the oligarchs who had grown rich from privatized enterprises, but the debate became highly destructive. Each policymaker had his or her own views of methods and ranges of reprivatization, ranging from two dozen to thousands of reprivatized enterprises.
As a consequence, property rights became completely insecure. Some businessmen defended their property, sharply cutting their investments, while others geared up for asset grabs, reducing investment to hoard cash. Economic growth fell drastically by one percentage point a month. By September 2005, the economy had stopped growing. In the end, only one big enterprise, the steel mill Kryvorizhstal, was reprivatized. This mistake must not be repeated.
With Yanukovych’s downfall, the demands for confiscation of the property of his allies and family members are already strong and justified. They cite evidence that these funds have been embezzled, extorted, or stolen. Therefore, the government should adopt a policy to confiscate embezzled or extorted funds. These are clear legal concepts that must be pursued while the vague notion of “reprivatization” should be avoided. Preferably, the investigation should focus on property held by Yanukovych, his immediate family, and corrupt top state officials. The extent of confiscation should be settled once and for all in court cases against Yanukovych and his associates.
For the rest, all businesses should be offered conditions so that they can thrive, while taxation should be shifted from small firms to larger companies, reversing the damage done by the Tax Code Yanukovych had adopted in 2010. In particular, the transfer pricing and other privileges of the big companies should be restricted.
After the Orange Revolution, the victors were caught in euphoria. The economy had grown by 12 percent in 2004, limiting economic concerns. Democracy appeared secure, and no Russian threat was apparent. Today the situation is much more sinister. Last year, the economy stagnated. The Maidan has been tainted with blood, and the Russian threat remains real. Any democratic government needs to concentrate on saving the nation.
This time the West needs to engage in an effort to support Ukraine in its moment of fear and hope. The International Monetary Fund (IMF) is always ready to jump in and can provide substantial early financing, in return for Ukraine carrying out the necessary economic reforms. The European Union can contribute with significant cofinancing of an IMF agreement. The European Association Agreement, which Yanukovych embraced and then rejected under Russian pressure last year, provoking the current crisis, can be signed quickly by a democratic Ukrainian government. Signing it would open the door for Ukraine for considerable European assistance to reform the Ukrainian state.
The greatest external concern facing Ukraine is the threat of Russian aggression through trade sanctions, gas supply cuts, and covert military action. The West should focus on this as one of the most urgent security threats in the world.