Reform's Slow Pace Ruffles Ukraine Economy

Inflation rises, output drops as new nation prints money, separates itself from Russia

THE starkest sign of the economic woes of this former Soviet republic is the rising value of Russia's ruble, battered and more worthless by the day in Moscow, against the Ukrainian karbovanets.

When Ukraine first introduced its own currency two years ago, in the early days of establishing independence, one karbovanets bought more than one ruble. Today, at the Ukrainian National Bank exchange rate, a ruble costs more than four karbovanets.

The strength of the ruble is less about any success of Russia's reforms than Ukraine's decision to try a slow road to the market economy. Prime Minister Leonid Kuchma basically acknowledged that earlier this week when he asked the Ukrainian parliament to extend his government's special powers to decree economic reforms and to give the government more authority by placing the central bank under his control.

"Our country needs strong executive power and support from the parliament. We must put an end to the period of chaos and vagueness," Mr. Kuchma told the legislature, a body still dominated by former Communists representing huge state-run factories and collective farms.

The parliament has frequently frustrated even Kuchma's moderate reform proposals, using its right to veto his decrees. The parliament and the National Bank have also pumped huge subsidies into the state sector.

Kuchma presented a reform program, including agrarian and banking reforms, privatization, trade liberalization, anti-inflation measures, and introduction of a convertible currency.

The contrast between Ukraine and Russia provides plentiful evidence of the need to speed reforms here. The torrent of commercial activity that flows through Moscow, from the kiosks filled with foreign goods to entrepreneurs in their flashy Mercedes, is a mere trickle in Kiev. The presence of foreign companies, while growing, is a fraction of what Russia attracts.

Where tens of thousands of enterprises have been sold into private hands in Russia, Ukraine has privatized only 68 small enterprises. While Russian reformers freed most prices from state control, prices remain regulated in Ukraine and state-run enterprises enjoy extensive advantages.

Ukraine has "done nothing to create a friendly environment for entrepreneurship," says Greta Bull, an American economist who has been here three years.

This is a painful reality for Ukrainians, who earnestly believed that once they were freed from Moscow's greedy grasp they would enjoy relative prosperity based upon the country's abundant agricultural and natural wealth and its powerful industrial base. In their imaginings, Ukraine would quickly resume its destiny as a great European nation, 55 million strong, turning its back on the former Soviet Union.

Instead Ukraine's economy has performed even worse than Russia's. Inflation is running faster, peaking at 50 percent a month in December and now at about 30 percent. Economic output is down 10 percent from last year.

And Ukraine is bracing for yet another shock - Russia plans to significantly increase the cost of vital supplies of oil and gas to close to world levels. Ukraine is dependent on Russia for 90 percent of its oil and 60 percent of its gas. The move would "kill the economy," Ms. Bull warns.

Depending upon their political persuasion, Ukrainians find different sources for their troubles. The nationalist and democratic groups blame continued dependence on Russia and the resistance to reform from the former Communist bureaucracy whose representatives still dominate the parliament. The former Communists, for their part, point to a policy of isolation from Russia and a breakdown of the old, state-run industrial order.

The only point of agreement is an almost universal criticism of Ukrainian President Leonid Kravchuk for having ceded responsibility to the government. Unlike Russian President Boris Yeltsin, Mr. Kravchuk is uninvolved in running the administration. "The President should be a leader and not just stand aside," says Taras Stetskiv,a top adviser to Kuchma advisor and a deputy in parliament.

BUT many Western analysts here see the current crisis as a consequence of the failed policy, supported by all political forces, of trying to insulate Ukraine from Russia's economic turmoil and pursue a slower path to reform. The introduction of the karbonovets, for example, was initially a temporary measure intended to protect Ukraine from Russian inflation and block Russians from buying up Ukrainian goods whose prices were kept under control. The interim currency was to be replaced by a real, internally

convertible currency.

At the same time, the Ukrainian government thought it could avoid the collapse of production that Russia has faced by retaining state control over its enterprises. But the inter-dependence of Russian and Ukrainian economies and enterprises made it impossible to avoid inflation and a collapse in production.

The Ukrainian government essentially recognized this mistake when Mr. Kuchma, the former manager of a giant missile plant, was named prime minister last October. Kuchma brought some reform figures into the cabinet, including from the nationalist Rukh movement, and got parliament to grant the government special powers for six months.

But initial hopes that reforms would take off have met with frustration. "We expected more from the government," says Rukh leader Vyacheslav Chornovil, who supports a faster shift to the free-market. He points to the activity of the former communist bureaucracy in blocking reforms at the local level and in the parliament. But he also is critical of the Kuchma government for yielding to this pressure, as evidenced in the forced resignation of reform Vice Premier Igor Yukhnovsky in March and the downgradin g in April of the power of Viktor Pinzenik, the vice premier for economic reform.

"I agree that during this half year we didn't have tangible results," acknowledges Kuchma advisor Stetskiv, but he promises that an extension of power will bring new reformers to the government. Privatization and taking on inflation are the government's priorities, he says.

The main obstacle to privatization, as in Russia, are the powerful directors of state enterprises, as well as local administrations, which actively oppose it, Stetskiv explains. But he also admits that Kuchma, who comes from those ranks, "was vacillating until March."

As for anti-inflation, the Prime Minister's advisor places sole responsibility for failure on the National Bank. Bank chairman Viktor Yushchenko, who opposes the move to place the bank under the government's control, blamed the government for the credit flow. "Everyone wants the market and everyone wants subsidies to get there," he told parliament earlier this week.

While the government claims to want to curb spending, even reformists are fearful of triggering mass unemployment by allowing state-run firms to go fold.