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Online Extra: Ukraine's Delicate Balance


Ukraine has been lurching from one political crisis to another since the so-called Orange Revolution of late 2004. On Sept. 30, voters will head to the polls yet again in an attempt to resolve a protracted power struggle between President Viktor Yushchenko and his former presidential rival Viktor Yanukovych, who has been Prime Minister for a year. Yet despite the political standoff, Ukraine's economy is doing surprisingly well. BusinessWeek's Moscow bureau chief Jason Bush asked Ukrainian Finance Minister Mykola Azarov, a close ally of Yanukovych, to explain the disconnect between his country's unstable political situation and its impressive economic performance. Here are edited excerpts.

How is the economic situation in Ukraine? Should foreign investors be interested in this country?

Our government has worked for about a year. In that time we've been able to restore the growth rate of the economy. GDP [gross domestic product] has risen by 8% over the first six months [of 2007]. Inflation was about 4%. Investment has increased by 30%. Exports have risen by around 34%. So I think the economy is developing quite well. Of course, it could probably work even more effectively if it weren't for the political crisis that was provoked by the President's decision to dissolve parliament [earlier this year]. It was an absolutely unprovoked decision, which has effectively brought structural reforms to a standstill. It puts future rapid economic growth in doubt.

Why is the economy developing so well despite the political situation?

You know, the economy is operating under inertia. It has developed a certain momentum, and political instability doesn't particularly affect it. But maybe without the political crisis we'd have growth of 12% or 13%. The main thing is that the political crisis has interrupted structural reforms: pension reform, tax reform, judicial reform, which Ukraine badly needs as a post-Soviet state.

What are the general principles of this government's economic policy?

Our principles are, first of all, the creation of an innovative economic model. The global economy is based more and more on services, and high technology. We have to restructure our typical industrial economy into a post-industrial economy, a knowledge economy. We have to speed up economic growth because Ukraine is significantly behind in economic development. Our annual GDP per capita is only $3,000. It's very low. We have to reach $30,000. So we have to increase GDP by 10 times. And you can't produce 10 times more steel, or 10 times more wheat. So we have to change the structure of the economy.

What is the external economic policy? How important are relations with the West or with Russia?

Our government has taken very serious steps to enter the World Trade Organization. We are supporters of a liberal and open economy. We haven't just made declarations, we have taken real steps. We're in favor of very good relations with both the East and the West. We don't see any contradictions here. It's strategically important for us to have good relations with both Russia and the European Union.

How do people of this government regard the Orange Revolution? It's a kind of paradox that the people who were opposed to Yushchenko are now back in government.

The events known as the Orange Revolution were an entirely natural attempt by people to achieve justice. It reflected the people's aspirations for a more honest and more just government, capable of fulfilling the promises that were generously offered by the leaders of the so-called Orange Revolution. [But] there wasn't a revolution because nothing changed. There were no reforms carried out by the leaders who came to power, and people were very quickly disillusioned. Of course, you can't say there hasn't been progress. If you compare the situation today to 10 years ago, the progress is absolutely obvious. But it isn't fast enough to satisfy people. People want rapid results. The economy doesn't work like that.

What will be the way out of this political situation? Will a compromise be found?

No, I don't think the elections will solve anything. The same configuration of political forces will be repeated. The last elections were only a year ago. How much can change in one year? It means the confrontation will continue, because I don't see any constructive forces that will work with us to carry out reforms. We have a Ukrainian fairy tale: If you lay out the table cloth, all the food will appear on it [by magic]. It reflects the mentality of our people. If we want to catch up with Europe, we have to understand that it's a very long and difficult path, requiring the united efforts of our society and of our political elite. If someday we manage that, Ukraine is [destined] to succeed.


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