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1997
Ukraine:
society in transition - cultural aspects
Paul Herbig

Abstract
After gaining independence in the process of the demise of the Soviet Union in 1991, Ukraine embarked on the way of democratization and market reforms. Being one of the most developed among Newly Independent States, at the first days of independence, Ukraine appeared unable, however, to overcome the devastating socio-economic crisis of transition and to jump-start the economic growth.
Ukraine avoided bloody internal conflicts tearing apart some former Soviet Republics. This is mostly due to enormous patience - dominating feature in national character of Ukrainians. However, a growing social discontent may become an important factor in Ukrainian socio-political life in the nearest future.
This paper is an attempt to demonstrate that cultural reality in Ukraine may influence the process of transformation of totalitarian communist state toward democracy and free market economy.
Introduction
Ukraine - the second largest state in Eastern Europe after Russia - gained its independence in August 24, 1991 in the process of demise of the former Soviet Union.
With its one third of the world most fertile black soils, Ukraine traditionally was a breadbasket of the USSR and before it - the Russian Empire. On the other hand, large deposits of coal and iron oars contributed to forming a huge metallurgy and heavy industry, namely machine manufacture and shipbuilding.(In Imperial Russia, Ukraine mined 71% of coal, 72% of iron ore, produced 68% of pig iron, 58% of steel. In general economic structure, Ukraine contributed 70% of Russian mining and only 15% of processing industry - mainly agriculture products processing and transport machine manufacture. (Norma Press Agency, Mar. 13, 1996).
The country that only a decade ago produced more than a ton of grain and steel per Capita of 52 million population had all reasons to expect a better future than that it found after 5 years of independence.
It was generally assumed that Ukraine had the best initial stand and potential for development on the way of market reforms among all other former Soviet Republics. However, the first leadership of the independent Republic wasted the most precious time at the start and, as a result, after nearly 6 years of independence Ukraine's economy is in collapse. Today's life is characterized by rising unemployment, increasing poverty, overwhelming crime and staggering corruption among officials, disillusionment of the majority of population, grave psychological problems, alcoholism, plummeting life expectancy, negative population growth.
Being one of the most lucrative Newly Independent State at the first days of independence for the foreign investments, Ukraine now ranks among the least attractive. As a result, from 1991 to the first quarter of 1997, only $1.4bn were invested in Ukrainian economy by foreign investors (Norma-Press Agency, April 17, 1997 ). Once the third nuclear power in the world, Ukraine has not even made it to be included The Economist list of the newly emerging markets.
The vast majority of population lost their living standards and hit the poverty line. According to recent social surveys, only 5% of population consider themselves wealthy, 20% admit that they are better off now than before the reforms, and 75% lament that they live under the poverty line. Life expectancy for women remains at 72 years, while for men it shrank to 63 years. According to latest prognoses, by the year 2000, Ukrainian population may decrease by 3 mn (Vechirniy Kyiv, Mar. 20, 1997)
Ukraine has to spend up from $1bn to $12 bn annually to fight the aftereffects of Chornobyl nuclear catastrophe for the last 10 years. It lacks finance and resources to relocate the victims and provide appropriate relief to the population of the contaminated areas. High degree of dependence on Russian oil makes it imperative for Ukraine to preserve its nuclear power generating facilities, including unsafe Chornobil.
Now, relying on financial and technological aid from the West, Ukraine painstakingly tries to survive and start climbing back to its proper position in the World Community. But the lack of financing is not the sole obstacle to rebounding. Transition from centrally planned and administered economy to the market, very painful by itself, is complicated by the cultural legacy of the 74 years of communist rule. Political leadership is not only inexperienced in that undertaking, but faces open resistance in the Parliament from former communist bureaucracy.
Inconsistent reforms created havoc in the society, disillusionment of populations, especially older people. As a surprising result, after nearly 6 years of independence and democratic changes many Ukrainians demonstrate their nostalgia about living in a superpower - USSR, willingness of paying with their freedom for cheap food and secure tomorrow. Why it is happening in today's Ukraine?
Ukraine: nation without state
Unlike Jews, who were driven from their native land and dispersed around the world, Ukrainians had always lived in the same area, which is more o less corresponds to today's territory of Ukraine. The Capital city - Kyiv - was mentioned in chronicles in 862 a.d., though the archeological excavations date the history of the city back to the first centuries of our era.
Once prosperous and mighty European state, Kyiv Russ, fell victim of Mongol-Tartar invasion in XIII century and eventually disintegrated. Western and Northern-central parts of it were accommodated by Poland and Lithuania. Southern-central parts preserved its independence as a Cossacks Republic known as Zapoorizzhia Sich between XIV and late XVIII centuries.
Ukrainian Cossacks lead the successful liberation war from Poland in 1648-1654. But faced with the threat of waging war on the three fronts: with Poland, Turkey and Russia, Ukraine signed a Pereyaslav unification treaty with Russia. Russian czars pursued a assimilation policy on the Ukrainian territories. Ukrainian language was banned from higher society. Schools were using Russian instead. Press was Russian as well. Bu the end of XIX century, Ukraine lost all features of independent state, that were preserved in Pereyaslav Treaty, and transformed in one of the Russian provinces. Even the name -Rus- was stolen from Ukrainians and adopted by Moscovites. By this fact, new Moscovite princes, and later czars, demonstrated their alleged succession to the Second Rome - Byzantine Empire - through Kyivan Rus, which in many ways indeed inherited a lot of Byzantine culture, Christianity, script, architecture.
Moscow itself was founded in 1147 by Yuri Dolgorukiy, the son of Kyiv prince, who is buried in one of the numerous Kyiv's churches. One of the wealthiest and most beautiful medieval European cities, a prominent cultural and religious center, Kyiv for centuries remained an ultimate symbol of supreme power in all Slavic states that in succession captured and owned it. Only Russia undertook to downplay Kyiv's role in order to emphasize its own growing might and importance. All, that for centuries was known as Kyiv Rus, was addressed as Malorossia -Little Russia- in contrast with Great Russia. Ukrainians, that called themselves Rusichi in the times of Kyiv Rus, in Russian Empire were called Malorossy or Little Russians with pejorative particle malo - little.
The name Ukrażna (correct version of it) has a root krai, which means end, edge, remote area. It hard to say today when did this self-name appear and become widely spread in Ukraine. Was it used by Rusichi in the times of Kyiv Rus, or was it a self-name of one of the early southern Slavic tribes that eventually ended up in Kyiv Rus? There is no definite answer to this question. But its wide use was recorded in written chronicles of XIII-XVI centuries.
How many Ukrainians in the World? In Ukraine, from 52 million of its population 75% are Ukrainians. Approximately 20 million Ukrainians live in Russia and other former Soviet republics, up to 10 million live around the world. Altogether, it is around 80 million.
Major religion in today's Ukraine is Christianity. Orthodox church prevails in the central and eastern parts, Roman Catholic and Greek Catholic - in the West.
You can hardly find a more hospitable, more friendly and humorous nation. Typical Ukrainian is a hard working, industrious, very independently minded, good Christian. He or she is witty, ready to crack a joke, and laugh at himself. Wide Ukrainian steppes provided for independent farm living. Freedom was an ultimate value for Ukrainians epitomized by Cossacks - noble nights of the steppes - and later worshipped by their descendants. Fertile Ukrainian black soil provided abundance of food. That is probably why Ukrainians never envied anybody and never had territorial claims to their neighbors. However, anti-Ukrainian assimilation policy of Czarist Russia and later Communist Moscow, created deep resentment and even extreme forms of Ukrainian nationalism.
Cultural legacy of the Communist rule
The ideological brainwashing during the Soviet rule, augmented by the physical elimination of the opponents created ugly twists in Ukrainian character. This new creature, designed by Stalin as an abiding screw in the Soviet Communist system, later was nicknamed Homo Soveticus, by critics of the system.
Ukraine had not avoided the black period of history of all peoples of the former Soviet Union. The communist rule left its deep mark not only on the human culture but also on its nature. The traditional values of Christianity were tramped in the dirt by the mighty propaganda machine of the communist leaders. Instead, a utopic tales of proletarian dictatorship, antagonism of classes and irreconcilable hostility and struggle with the world bourgeoisie were hammered in people's minds from early childhood to the grave stone - even the cross on the grave was prohibited by the Communists: regardless, believer or atheist, everybody had to be buried under the red star. Brainwashing was mastered to the extremes. Children were reporting to KGB on the allegedly anti-Soviet activities of their parents.
Uncounted millions of aristocrats, intellectuals, simply honest people who would not compromise their beliefs were physically terminated during the Civil War 1918-1921 and the years of Red Terror that followed; lucky few managed to escape into emigration. The communist ideologues never concealed that they were breeding a new type of humane being: the ugly creature that later received the name Homo Soveticus.
Soveticus in this case means the ones that do not remember their history, rejected religion and norms of Christianity, normal moral and ethics. Even cultural legacy of the preceding generations was mostly outlawed and, if permitted, was carefully measured and supplied with "ideologically correct" comments. Therefore, Soveticus had a very primitive level of culture.
The communist dictatorship was in many ways no better than its fascist variant. Millions of people were tortured and eliminated in the GULAG (Soviet concentration camps and prison system). Millions were used for slave labor on the so called Communism Construction Sites. No one knows exact figure. Some historians suggest that Stalin regime between W.W.I and W.W.II eliminated more than 20 million people. Only during an artificial famine in Ukraine, 7 million Ukrainians were starved to death, killed during forceful relocation to Siberia, died in the GULAG. The human life lost its price and importance. The Party and the State expected its citizens to sacrifice their lives without complaining. The highest value in the totalitarian State is the State, regardless furer or a general secretary. This genocide against its own people had a long reaching consequences. The cream of the nation was destroyed. The regime was selecting and breeding its faithful servants from the lowest strata of population with degraded moral and cultural values, degenerated intellectual capabilities. This selection had even visual manifestation on the most common facial types of the "builders of communism". What is even more terrifying, this type had genetically penetrated the nation and damaged its genofond!
Ukrainians, who used to work in the fields from dawn to dusk singing their famous melodic and lyrical songs, under the soviet rule lost all their skills. Farming is no longer a prestigious occupation in the predominantly agricultural Ukraine. Neither is the work in the industry. Even private entrepreneurship, legitimized with overthrow of Communism, also is not of the value. On the other hand, crime, racket, extortion, prostitution - all evils of the human kind - flourish and recruit more and more youth. The polls among the seniors in high schools show that the most popular "occupation" among boys is racket, prostitution - among girls. Crime in the streets got very young. Teenagers commit the majority of criminal acts. Most of them are extremely cruel, merciless, thoughtless. Soulless environment backfired with soulless generations of debilitated Homo Soveticus. The circle is complete.
Czarist policy of russification of Ukraine was continued by the Communists. Present Ukrainian Government and the Parliament, Army command and state security, state officials are predominantly Russians (Vechirniy Kyiv, Mar. 17, 1997). They resist by all means to ukrainization of Ukraine. State language de-facto remains Russian. Ukrainian language - foreign in its own country. With 72% of Ukrainian population hardly 10 % of schools are Ukrainian: mostly Russian.
This adherence to Russian language by State officials is attributed to the fact that most of them are former communist functionaries. Communist nomenclature was all hand-picked Russian or pro-Russian. Domination of the former communist bureaucrats in all spheres of administration and legislature is one of the most important reasons why Ukraine has not become Ukrainian yet, why the reforms are not going and even had not really started.
The seven decades of Communist rule left a heavy print on the mentality, moral and socio-psychological conditions of Ukrainian people. The policy of Communist regime was specifically aimed at eradication of the very roots of entrepreneurship both in the industry and in agriculture.
All Ukrainian entrepreneurs of the beginning of the century were physically eliminated or emigrated. The most productive farmers in the agriculture were branded as culaks - communist euphemism for a prosperous farmer - and eliminated or exiled to Siberia, where most of them died. Millions of Ukrainian peasants who survived the Bolsheviks' revolution and the Civil War were starved to death by Stalin in the 30s. The natural way of agriculture was interrupted. Instead, the giant collective farms were forcefully created with a kind of serfdomship organization: Until 60s, peasants didn't have passports and couldn't leave their village. Economic motivation for labor was substituted with fear and terror: 5 minutes late to working station - 5 years in the camps, picking up the ears of wheat or rye - 10 years. The workers in the industry were paid 4-8% of the created value, the peasants in the collective farms were paid in kind with the products of their farms.
Any one that showed signs of individuality or questioned the justice of the regime was mercilessly eliminated. Even without World War II Communism in the Former Soviet Union annihilated up to 20 millions of innocent people. The price of the human life depreciated to the extreme.
The needs and interests of people were cynically neglected while the ruling party- and bureaucratic elite enjoyed incomparably higher living standards. The Party and the government lied to the people, and the people learned to pay back with the same lies in everyday life. The ordinary people were robbed by the State - and their natural response was to steal from the State, from its plants, farms, shops, wherever possible.
Economic legacy of Soviet Empire
After adoption of a new Constitution, June 31, 1996, Ukraine shook off the last political legacy of the Soviet Empire, but not economic. With the collapse of the USSR, Ukraine is living through a painful process of separation from its monstrous economic structure. At the same time, transition from the State-administrated Communist-type economy to the market economy is taking place.
Ukraine has to deal with grave consequences of Moscow's imperial policy. Its industry is oversized and disproportional. Its environmentally hazardous metallurgy and disproportional machine manufacturing, chemical and petrochemical industry designed to serve the USSR’s export needs are locked on Russian resources. Devastating catastrophe of Chornobyl and its aftereffects, which Ukraine has to face alone, is also a part of these consequences.
A little smaller than Texas in territory but three times larger in population, Ukraine was rightfully considered to be the bread basket of the former Soviet Union, satisfying more than 25% of its agricultural needs. However, the real role of Ukrainian economy was concealed behind the iron curtain of secrecy. About 60 % of Ukrainian economy worked for the Soviet military-industrial complex, contributing up to 40% of the total Soviet defense industry output.
Designed, administered and funded from Moscow, Ukrainian heavy industry was inefficient and wasteful in material and energy consumption. The energy consumption per 1987 dollar of GDP in 1993 was 107.7 thousand Btu vs. 16.3 Btu in the U.S. (CIA World Factbook - Ukraine). The Soviet defense industry had to produce all necessary hardware for sustaining a strategic power balance between the two superpowers - USA and the USSR. Lacking a quality component, the Soviet military industry compensated with quantity. The expenses never were an obstacle. Effectiveness was reached on the cost of efficiency. The Military industry obtained all necessary resources, best scientific potential, skilled labor, unlimited finances. The rest of the industry settled for what was left after such allocation of scarce resources. It never produced enough consumer goods of reasonable quality. Instead, it manufactured the biggest military cargo planes in the World - AN-124 and AN-225, - intercontinental ballistic missiles, rocket launchers for Soviet Space Program, and the bulk of the Soviet Navy surface ships including all aircraft carriers.
The fall of the Soviet Empire was not forged in the secret underground facilities in endless Siberian Taiga or Kazakhstan's steppes. To the great extend, it was an unbearable dead burden of unproductive military spending and wasteful defense industry that brought to a complete halt Soviet Economy. After disintegration of the USSR, the Newly Independent States had to face the consequences. Ukrainian economy as the mostly involved in defense industry suffered the most.
Economic collapse
With economic "growth" -90% during the period from 1989 to 1997, Ukraine’s GDP is projected at only $53 bn in 1997 (Norma Press Agency, April 17, 1997) to compare with $248 bn in 1990 (EIU Country Report 3rd quarter 1996). During 1996, decline continued and reached 12%. In comparison, Mexico’s 6.9% decrease in GDP in 1995 was considered to be the worst economic crisis in 60 years. For Ukraine, however it was a national catastrophe.
Only the black market or "informal" economy thrived. Substantial part of economy went into the "shadow sector" estimate around 60-70%. The Government sees no other ways but legalize "shadow capital" in order to make it work for economy.
According to officials, Ukrainian economy needs, at least $40 bn in investments to improve the economic situation. As of April 1997, only $1.4bn was invested in Ukraine. With unavailable funding, the very efforts of supporting inefficient and obsolete industry by the state is a deadly mistake rooted in the Soviet era mentality.
The former communists dominated Ukrainian government and legislators fail to realize that the task of economic transformation is unfeasible without massive financial injections and that the only source of investment in the economy is foreign capital.
The new Ukrainian reach have pumped their capital into foreign countries. Russia, a traditional source of finance for Ukraine, has similar problems. According to a recent statement of Russian officials, Russia will need $900 bn to restructure and modernize its economy. Estimates show that to double its GDP in 18 years Ukraine will need $38 bn investments annually.
However inconsistency of reforms and lack of foreign-investor friendly legislation keeps potential investors at distance.
One of the possible solutions in attracting foreign capital and technical expertise was considered to be the joint ventures. The number of JVs was growing steadily during last 6 years and by the April 1997 exceeded 4,000 (Norma-Press Agency) with Ukrainians providing cheap labor and manufacturing space. Some JVs pay their happy workers up to $100.00 a month, while average salary in the state-run industry is $80 (Fax Gazeta, Mar 8, 1997), if paid at all. In many fields of the economy, including mining, education, health care, and even in the Armed Forces, wages are not paid for months.
In popular belief, the Government deliberately blocked payments to keep up with its promises to the IMF and the World Bank to curb the inflation as a prerequisite for loans. True or not, but inflation was stopped and in June and July 1996 it was 0.1%. At the same time, unpaid wages reached $0.56 bn.
Legal environment for foreign business
An example of fruitful joint ventures - Mexico's maquiladoras that generate more than $31 bn in revenue and $6bn in income (El Financiero, Feb. 2-9, 1997) - was very inspiring for Ukraine. In 1994, the package of highly important laws that regulate foreign economic relations, export-import operations, free-trade zones, joint ventures and foreign investments in Ukraine and repatriation of income were adopted. Most of them were drafted with the help of foreign experts and lawyers. In many cases, the appropriate law of certain western country was taken as a model, and Ukrainian draft law was completely based on it. By the August 1994, most of these laws were adopted by the Ukrainian Parliament, thus creating legal foundation for foreign investments and joint ventures. However, the legislators failed to adopt the Civil Code and Land Code - the fundamental laws that regulate property rights including buying and selling land (taboo for Communists!). The left majority in the Parliament realized that adoption of these two laws would eliminate the last barriers on the way of developing real market relations in the economy.
According to “The Law of Ukraine on Foreign Investments”, all assets of foreign companies doing business in Ukraine were guaranteed from nationalization, and the income, obtained in the course of such business, after reasonable tax was transferable to the home country. Moreover, the law provided special incentives for the foreign firms to invest in joint ventures: two- to five-year tax holidays after the first profit was declared.
In April 1997, the Parliament in a suicidal move lifted some benefits, namely tax holidays, for foreign investors. President Kouchma had to exercise his right of veto to preserve the status quo.

Joint Ventures
The government expected that foreign capital would flow into Ukraine after such drastic and friendly legal changes. Indeed, the number of joint ventures was growing day in, day out. Some of them demonstrated a real success to Ukrainian standards. For example, Tambrand, Pratt & Whitney, Proctor & Gamble, and others. In most cases Ukrainian partners provided manufacturing space, labor, energy and expertise in complex dealing with local bureaucracy. Foreign firms contributed technology, equipment and product know-how.
One of the first joint ventures was Johnson & Johnson, with its production of liquid detergents for household. Joint production was easy to start since Ukraine had a well developed chemical industry and redundant production facilities right in the capital city - Kyiv. Very fast - during several months - its trademark became well familiar in Ukrainian market, demand was stable and the company expanded its product line. This fact didn’t give credit to Ukrainian managers: they lacked elementary marketing skills and initiative to launch such a simple but highly successful product line by themselves. Luckily, they had enough sense to use American expertise.
The other successful JVs were based on the same principle: Ukrainian labor and manufacturing space, very inexpensive to the World standards.
How to create a joint venture in Ukraine
Many foreign businessmen who came to Ukraine looking for possible partners in joint business ventures were confused by the complex chain of subordination in State-run economy.
At the grass-root level - manufacturing plants - the process of negotiations is the easiest and most constructive. Plant managers, as no one else, know the capacity, capabilities and problems of their plants. As a rule, they found mutual understanding with their foreign counterparts and normally a Letter of Intent has to be signed to fix the results of initial negotiations.
The next level - regional industry authorities. Normally, it’s the least competent and empowered intermediaries between field plants and the Ministry in charge of corresponding industry. Regional level is one of the rudiments of Soviet system. Regional bureaucrats are responsible for nothing and have no leverage to control local industrial plants. However, without their signature hardly a single paper can be cleared through the Ministry. This creates conditions for corruption.
Next-to-the-highest level of authority in the particular industry is the Ministry. Though often manned with highly professional experts in their fields, the Ministry also performs residual functions of the administrative system. Ministerial bureaucrats cannot adopt so far to the reality of the fact that the spectrum of their functions in new market environment has to be reduced to monitoring, gathering statistics, making scientific recommendation. However, in case of creation of a Joint Venture with foreign partner, the signature of the Minister or its First Deputy gives high chances to pass the last bastion of red tape - State Committee of State Property. Since most of the field plants are considered to remain a public property, allocation of any part of this property for joint use (and consequently joint liability) with foreign legal entity requires State authorization (which actually makes sense, but again creates conditions for corruption).
Cabinet of Ministers (the Government) in some cases may consider appropriateness of the particular Join Venture at its level and may even issue a special decree (ordnance) on this subject. This makes the process of creation of a JV extremely complex and lengthy (up to 16-18 months), but such authorization at the highest level opens all doors for the JV in the future.
Very few JVs were considered by presidential administration and required his personal blessing.
The final step in creation of the JV is its registration in the Ministry of Finance, which also may take from one to 3 months.
And, naturally, personal connections and networking are of great importance not only for registration, but during operation of the JV as well. Large firms establish their agents of influence and develop direct contacts with high ranking officials up to the very top. Corruption at all levels brings the final touch to the complete picture.
Working in this environment requires a scrupulous knowledge of all these aspects. Besides, local city or oblast (administrative unit with population up to several millions) authorities may become either powerful allies or vigilant opponents of the JV. All this add headaches and gray hair to JV’s managers.
Why they did not work?
Examples of successful joint ventures in Ukraine are scarce. The majority are barely existing. New investors are not standing in line to form joint ventures with Ukrainians. Not many business find it appropriate to take hardships associated with establishing themselves in newly emerging markets. The most obvious reasons of this failure are as follows:
1. Lack of stable and favorable laws, regulating foreign business and investments.
2. Frequent changes in legislature, reflecting the efforts of communists to hamper market reforms.
3. Corruption among officials at all levels. Extortion and racket practices.
4. High cost associated with penetrating into the local markets.
5. Ignorance of majority of local bureaucrats and their unwillingness to learn and cooperate.
6. Low level of local management standards, lack of creative initiative and innovation.
7. Low productivity of labor.
Privatization
The key problem of transformation of a State administered economy into a market economy - privatization - is also very far from solution. The State has to distribute to the millions of citizens their share in public property accumulated during 74 years of "collective" or state ownership. Ideally, this is supposed to create a society of owners, economically independent from the state.
In case of Ukraine, this internal process of privatization was complicated by external process of division and distribution of the property created by all states - members of the Soviet Union and now left in Russia as a legitimate hair of the USSR. At the same time, Russia has similar claims to former Soviet states. Ukraine has more than 100 property claims to Russia and 180 reciprocal from Russia. Similar claims exist between Ukraine and Belorussia and Moldova (Vechirniy Kyiv). This process of external property division is far from being completed
The first steps on the way of privatization were marked with canning efforts of state plants managers (or Red Barons, as people call them), posing as representatives of their employees to obtain their respective enterprises in long-term lease with first option to by-out. Through their lobby in the Parliament the Red Barons managed to succeed in this initial form of privatization - rent with the option to buy-out. This type of privatization became extremely unpopular and was stopped soon.
Then - starting in 1994 and still under way - came sales of small service and retail shops, cafes, bars, hotels - called the Mass Small Privatization. It was conducted on the auction basis for cash. Foreigners were not admitted. The transfers were conditioned by mandatory preserving the main activity of the shops: a bakery had to remain a bakery for 3 years, a grocery store had to remain a grocery for the same time. Both individuals and different funds were allowed to bid. This stage became famous for the wide spread fraud and cheating. Hundreds of private trusts were created to solicit inexperienced people to invest in privatization projects. After collecting, often the last, savings of trusting citizens, those one-day trusts disappeared with all the money. Hundreds of millions of dollars - if not billions - changed their owners in such a manner. Not a single person was prosecuted and found guilty for these crimes. Even the law had no provisions for defining such form of cheating.
At the same time, 1994, the new form of privatization for special certificates was started. Printed in the U.S., privatization certificates had many levels of protection against counterfeit. Certificates couldn't be sold or used in any fashion other than exchanged for shares of stock of industrial enterprises designated for privatization by the State Property Fund. The Fund allocated up to 300 enterprises for privatization each month.
Simultaneously, the so called "compensation certificates" - intended to compensate those who lost their savings in Savings Bank due to inflation - were design to participate in this process of exchange for shares of stock. The authorities optimistically expected all the population to complete exchange of the certificates for shares by the end of 1996. This would have completed the stage known as Mass Big Privatization.
However the population is very skeptical about this form of privatization. For decades people used to expect only the worst from the State. This time, not without reasons, people believed that the State left the most lucrative enterprises for itself or for special investors. That belief was based on the list of 8,000 - later decreased to 6,000 - industrial enterprises exempt from privatization. The fact that the list was pulled through the Parliament by the Communists and their allies, made people even more suspicious.
The State Property Fund, according to its head, Yuri Yeakhanourov, developed a concept of the next stage of privatization to attract large investments in the industry. "Not to give away the property," like before, but to "sell it to concentrated owner, who is able to invest and create and maintain new jobs" (Vechirniy Kyiv).
Corruption
Corruption among government officials and Mafia flourish. An estimated 50 powerful clans that include public officials, businessmen and their families have divided control over all economic activities, especially export related. Ukrainian law-enforcement officials assert that more than $25 bn left the country illegally by 1995 and was accumulated in the foreign banks with diminishing chances of returning that money into Ukrainian economy.
According to the former Prime Minster and former KGB chief Yevgen Marchouk, there were numerous attempts of large criminal capital to buy-out Ukrainian enterprises through the front companies or individuals. Criminal clans that control Ukrainian economy were behind this scheme (Zerkalo Nedely, May 8, 1996). The privatization process contained also mass violations of existing laws. Former KGB head new much more than said. Soon after his interview he was fired from his position and replaced with old peer of President Kouchma from his days in Dnipropetrovsk, former mayor Mr. Pavlo Lazarenko. Later, in April 1997, another Dnipropetrovsk crony became a vice-prime minister on economic reforms.
People, mass media openly began blaming the government in concentrating all power in the hands of Dnipropetrovsk Mafia (The Wall Street Journal, April 4, 1997). Before that, the most powerful figures who surrounded former president Kravchouk represented Donetsk clan (another mighty industrial region in Eastern Ukraine). How they privatized Ukraine would probably become never known. During election campaign current President Kouchma promised to fight corruption, organized crime and Mafia. Not a single case was brought to the court since then. Including the case of acting Prime Minister Zviagilskiy from Donetsk clan powerful figure. In 1994, then-acting Prime Minister Yefim Zviagilskiy pocketed dozens of millions of dollars and fled to Israel. He remains a deputy of the Parliament and enjoys deputy's immunity. The parliament members refused to revoke his immunity, rightfully anxious about their own future.
Corruption hit all spheres of activity and like cancer expends it metastases wider and wider. An American businessmen even had quoted the price - $75,000 - he was charged for a signature by a corrupt minister on the document necessary to move from the stalemate the business deal.
The bureaucrats, most of whom retained their positions from the Soviet times are practically in command and control of all the processes occurring in Ukraine. From registering a business, opening a bank account or allocation of land or industrial buildings for private business to distributing foreign aid or credits. Any formal procedure that requires discretion of a bureaucrat may involve corruption. Failure to satisfy growing appetites of corrupt (or as they put in mildly in Ukrainian - "noninterested") bureaucrats -local, city, oblast or state officials - may forever bury any project.
Power for the post soviet bureaucrat means a possibility of personal enrichment. Power means direct access to the state - public - resources. It is at his, bureaucrat, discretion whom to grant permission, whom not to; whom to sell, from whom to by; whom to appoint as an agent. The Communist economy was 100% state controlled. All transaction were performed between state agencies directly. In a post Soviet transitional economies these transactions involve numerous middlemen. Those middlemen admitted to such transactions always remember who let them in and keep their benefactors happy with generous proceeds from the deals. Those who forget - soon loose not only their business but often their life.
According to the same scheme, the directors of state industrial enterprises at the initial stage of transition to market economy surrounded themselves with numerous cooperatives, semi-private small enterprises and marketing firms. Their only purpose was to make quick money. By using the potential and might of the state enterprises this small firms were not limited by the methods the state enterprise were prohibited to use. This is a brilliant example of private entrepreneurship with one exception. This is an illegal trafficking on the public property with the purpose of personal enrichment.
Multimillion foreign credits and aid money went like water in the sand through the hands of state officials and their accomplices in parallel private firms and foundations.
Mafia, regular crime and racket flourish. Most businesses are controlled or pay contribution to racket. In many instances the State Tax Inspection becomes the source of information for racketeers. Corrupt bureaucrats sell confidential information about profits and income taxes of businessmen, disclose their addresses and phone numbers. Special attention is paid to those who deals with import-export operations, oil, agricultural products, metal, cement, fertilizers. Middlemen in these multimillion-dollar transactions obtain substantial commissions and are subject to criminal extortion unless they are protected by their benefactors in the government.
Conclusion
The grave situation that occurred in Ukraine has several layers: socio-economic, political, cultural. The following specific problems were identified in the course of work on this paper:
1. The most important is a problem of former Communist nomenclature remaining in official positions from top to bottom of the State structure and legislature. Its hidden and open resistance is a major impediment on the way of successful transition of Ukraine from communist dictatorship to democracy and free market economy.
2. The transition towards market economy has never been clearly defined and objectives were never stated. Therefore it is hard to have anybody accountable for the general lack of progress.
3. Rampant mass corruption of the state officials, mostly those with active communist past, creates conditions for criminalization and Mafia-type structurization of the society. Real free economic competitions is nonexistent.
4. Privatization process, a backbone of economic transition, was stalled by the efforts of pro-Communist officials and legislators. At the same time, substantial portion of the public property was misappropriated by corrupt officials.
5. Cultural legacy of the communist rule makes majority of population indifferent to changes. With the growing poverty, the aspirations among the population towards returning back to the Soviet Union became wide spread.
6. A deep and wide cultural gap exists between progressively thinking limited group of reformers and the inert majority of population.
7. Democratic forces are dispersed, while the communists become more and more organized, united and influential. Anti-Ukrainian tendencies and activities receive support from abroad.
8. Internal economic and social hardships are aggravated by hypocritical anti-Ukrainian Russian policy. Russian communists and national-chauvinists are interested in creating centers of tension in Ukraine, its destabilization and eventual reunification, in one form or another, with Russia.
9. The problem of reinstitution of Ukrainian language and culture is exploited by anti-Ukrainian forces in their attempt to divide Ukraine on a language basis and finally to crush its independence.
The Ukrainian society is seriously ill and this illness, if not addressed properly and in timely manner, may lead to total disintegration of the country, loss of its independence and destabilization of the entire political situation in the Central and Eastern Europe.
Ukraine may find itself facing the need of the following remedies in order to repair the situation:
1. Introduce the prohibition on profession, that is ban the former communist officials from all public positions similar to German berufsverbot after W.W.II.
2. Only those former and present communists that publicly denounced the ideology and practices of communism can be admitted to participation in elections of all levels.
3. Create a government of national unity without communists.
4. Adopt a clearly defined and phased in time realistic program of economic reforms.
5. Introduce austerity measures in legislature. Urgently adopt a package of top priority laws reforming the existing economic structure and business practices.
6. Introduce tax rates that will stimulate production and economic activity and entrepreneurship of population. Target figure - maximum 30% tax on individual income and corporate profit.
7. Formalize informal economy. Announce a total amnesty in this sphere.
8. Create the most favorable legal and socio-political environment for foreign investors. Compete aggressively with the rest of emerging markets for foreign investments. Target figure - $30bn a year.
9. Drastically reduce state administrative structures to bare minimum. In same cases tenfold. Replace the system of permits and bureaucratic authorizations of business activities with simplified registering system.
10. Prosecute corrupt public officials. Investigate power abuse and misappropriations in the course of privatization. Open privatization for non-residents.
11. Develop and implement program of Ukrainization of Ukraine in education, culture, mass media, arts.
These are very briefly a few measures that might have brought Ukraine back on track with sensible positive results in the nearest 2-3 years. If these measures are not taken Ukraine may face only two options: either dictatorship of one form ore another; or loss of independence and forceful reunion with Russia.
Ukrainians is a long suffering and a very patient nation. After the centuries of oppression and national humiliation, Ukrainians obtained their long-awaited independent state. To strengthen and preserve it - is their paramount objective.
References
1. Paul R. Gregory, Robert Stuart. Soviet Economic Structure and Performance. 1990.
2. John Edwin Mroz and Oleksandr Pavliuk. Ukraine: Europe's Linchpin. Foreign Affairs, May/June 1996, pp. 52-62.
3. From Plan to Market. World Development Report. 1996, The World Bank.
4. Ukraine: the Social Sector During Transition. 1995, The World Bank.
5. Óę*ŕżíŕ. Ńiëüńüęîăîńďîäŕ*ńüęčé ńĺęňî* ó ďĺ*ĺő3äíčé ďĺ*3îä. Äîńë3äćĺíí˙ ďî ę*ŕżí3. 1995. Ńâ3ňîâčé Áŕíę.
6. Ukraine, Summary. EIU Country Report, 3d quarter 1996.
7. Intrigue versus reform. The Economist. Dec. 14, 1996.
8. Berth of a Nation. Ibid.
9. Nuclear Blackmail and Chernobyl. The Economist, Mar. 1-7, 1997.
10. Financial Times, Feb. 12, 1997.
11. Financial Times, Nov. 1, 1996.
12. Financial Times, Mar. 8-9, 1996.
13. Financial Times, Oct. 23, 1996.
14. Financial Times, Aug. 28, 1996.
15. Financial Times, Dec. 19, 1996.
16. Financial Times, Jan. 31, 1997.
17. The Wall Street Journal, Nov. 4, 1996.
18. The Wall Street Journal, Apr. 4, 1997
19. The Wall Street Journal, Apr. 16, 1997
20. International Herald Tribune, Dec. 20, 1996.
21. International Herald Tribune, Nov. 11, 1996.
22. Houston Chronicle, Oct. 25, 1996.
23. Austin America-Statesman, Oct. 24, 1996
24. The Globe&Mail, Nov. 29, 1996
25. Christian Science Monitor, Jan. 6, 1997
26. Eastern Economist Daily vol.342-402. @gluk.apc.org
27. Vseukraiskiye Vedomosti. www.ukraine.org./vseukr/ved/04.html
28. Fax ăŕçĺňŕ. Norma-Press Agency. www.ukraine.org./ fax.gaz.
29. Vechirniy Kyiv. www. ukraine.org./Vkyiv.
30. Alex Solowjow. Observations of doing business in Ukraine. Interview to the Author. Aug. 18. 1996.