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Ukraine: Breadbasket Or Basket Case?


International Business

UKRAINE: BREADBASKET OR BASKET CASE?

Leonid Kravchuk has been on a roll. Since his election nine months ago, the 58-year-old President of newly independent Ukraine has jetted about meeting such world leaders as George Bush and Jacques Delors. He has faced down Boris Yeltsin for Ukraine's share of the former Soviet Navy's Black Sea fleet. And he has set about making Ukraine, a richly endowed country the size of France and the breadbasket of the former Soviet Union, a separate economic and political entity that can function without Moscow's historic diktat.

But now, Kravchuk's party seems to be about over. The Ukrainian economy is collapsing around him, and suddenly the political flak is flying. Faced with a choice between economic shock therapy and more gradual reform, the onetime ideology chief of the Ukrainian Communist Party is going the cautious route.

STRIKE ZONE. Signs of strain are everywhere. Since January, industrial production has slumped 15% and prices are soaring 30% each month. Trade unions plan a series of one-day strikes in the transportation, mining, and machine-building industries in October. They want to oust the conservatives in Kravchuk's government. "The government is made up of people from the old guard, the former commanders of the Communist system. They are not interested in reforms," claims Vyacheslav Chornovil, leader of Rukh, a once-outlawed political group.

Another blow has come from Moscow. Worried about the threat of hyperinflation, Russian Prime Minister Yegor T. Gaidar has demanded that Ukraine stop expanding Russia's money supply by issuing ruble credits to Ukrainian factories that buy Russian goods. So, in mid-September, the Russian Central Bank froze Ukrainian trade payments. That should bring most commerce between Russia and Ukraine -- about 70% of all trade within the former Soviet Union -- to a crashing halt.

For now, Kravchuk plans to stay his course. He'll unveil a new economic package on Sept. 29. But it's likely to show that Ukrainian efforts still have far to go. For example, the plan calls for the reintroduction of some price controls only nine months after Kravchuk lifted them. A lid will be kept on prices for basics such as bread, meat, and energy. Plans to sell off defense, coal mining, and nuclear engineering industries will be slowed.

Kravchuk, meanwhile, is playing fast and loose with the International Monetary Fund. It wants him to build a market economy, fast. While the government will try to slash its huge budget deficit, Kravchuk told BUSINESS WEEK that Ukraine won't pay much heed to meeting stiff IMF targets. The IMF isn't buying Kravchuk's pay now, reform later approach. The Ukrainians "don't seem to understand what it takes" to make a market economy, an IMF official says.

THE NEW CURRENCY. Even so, Kravchuk hopes that the IMF will provide $ 5 billion as a stabilization fund for the hryvna -- the new convertible currency he plans to introduce in the country sometime next year. He believes the new currency would protect Ukraine from the hyperinflation afflicting Russia and other former Soviet states. But that could prove illusory if Ukraine follows a loose monetary policy. What's more, officers at the country's new National Bank claim that Ukraine simply is not ready for the new currency.

One reason for Kravchuk's stubborn insistence on a gradual change is his background. Typically, the ideological head of a Communist Party is a conservative dogmatist. Kravchuk fits that mold. Even so, Kravchuk will eventually have to move faster -- or face being swept aside by a more radical rival.Rose Brady and Roma Ihnatowycz in Kiev


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