Ukraine's Economy Stumbles

Some blame lack of reforms; others say only solution is economic union with Russia

OLEG CHERANOVSKY'S office at the Kharkov Aviation Institute is decorated with pictures of jet fighters and bombers, the pride of the once-mighty Soviet Air Force. Each one is signed by Soviet officials, thanking Mr. Cheranovsky's institute for the work it performed in designing these planes.

Money once flowed here from Moscow in rivers, irrigating scores of aircraft factories and electronic plants across Ukraine. Now it has drawn to a trickle, creating a situation where Cheranovsky's engineers design and make fiberglass sailboats to sell in order to eat.

For the scientist, and for many others in the giant factories and scientific institutes that predominate in this heavily industrialized eastern Ukraine, there is only one solution to the country's economic woes - bringing down the customs posts along the nearby Ukrainian-Russian border and rejoining the two economies with a common currency and economic structure.

``The scale of Ukraine's influence on Russia and Russian influence on Ukraine is too great, the interrelationship and inter-dependence of both economies is too high,'' says Vladimir Grinev, former deputy speaker of Ukraine's parliament and a prominent leader of a moderate pro-Russian political bloc, along with former Prime Minister Leonid Kuchma.

Mr. Grinev says he favors formation of an economic union between Ukraine, Russia, Belarus, and other former Soviet republics. While he stops short of rejoining the ruble zone, the former physics professor wants payments, customs, and banking union between Ukraine and Russia, saying this is similar to the first stage of Western Europe's economic integration.

Dependable energy supply

A key issue, particularly in the industrial east, is dependable and cheap supplies of Russian energy. Ukraine is heavily dependent on Russia for oil, natural gas, and uranium fuel for its power reactors, as well as oil products such as gasoline. But Russia demands that Ukraine pay world prices for these energy sources. Ukrainian roads are empty because of the shortage of gasoline. With hardly any hard currency reserves, Ukraine has piled up a huge unpaid debt to Russian gas producers, triggering threats of a cutoff of the supply to Ukraine's factories and power plants.

Grinev and Mr. Kuchma, as well as others in pro-Russian circles, say they can trade Ukrainian political backing for a Russian-led union in favor of cheaper energy and raw material prices. ``Prices for energy carriers should be stable both in Ukraine and Russia,'' Grinev says, in effect seeking access to the still-subsidized, cheaper internal Russian prices.

Such ideas are very popular in Ukraine these days, which is suffering from the twin cataclysms of a sharp drop in production levels and hyperinflation, which reached 80 percent in December alone. Russia is suffering from a similar phenomenon but at significantly less onerous levels, leading many Ukrainians to look with envy across the new border.

``We just ask ourselves a question: What can a Russian afford with his salary and what can I afford,'' says Valery Mescheryakov, a parliamentary deputy running for reelection in Kharkov on a pro-economic union platform. He tells the tale of his mother-in-law who visited her sister in the Russian city of Ivanova. ``She immediately calculated that her sister can buy 25 kilograms of butter with her monthly pension and she can buy 3 kilograms. Now try and persuade her that an independent Ukraine is a supreme good.''

Politicians such as Mr. Mescheryakov deny that Russia's relative wealth is linked to the success of market reforms. They insist that such reforms have failed, a view shared by many Russian politicians with whom they have close ties.

This view is sharply contested by young Ukrainian economists, who insist that the problems of the economy have nothing to do with broken ties to Russia, but rather with the near absence of market reforms in Ukraine over the past two years. ``There is no energy problem; there is a problem of economic reform,'' says Viktor Pynzenyk, a former deputy prime minister who left the government after attempts to introduce the kind of radical reforms pursued in Poland and in Russia by Yegor Gaidar.

Hopes for access again to cheap Russian energy are ``dreams'' and ``illusions,'' says Mr. Pynzenyk, who won a seat in the new parliament in the March 27 elections. ``No one will subsidize anybody and we should get used to it.'' The move to world prices is good for Ukraine, he argues, forcing enterprises to face the real cost of production. ``We lived in a kingdom of curved mirrors, which made many enterprises seem efficient,'' he says. ``Only world prices show who is who.''

Financial stability crucial

Reformers contend that what is urgently needed in Ukraine are steps toward financial stabilization, bringing inflation to heel in order to give the national currency some real value. Also important are moves to liberalize both prices and controls over foreign trade. Then the market will give Ukraine some more reliable indicators as to where to orient its economic activity, reformers say.

``Who said it is profitable to broaden our trade with Russia?'' argues Volodymyr Lanovoy, an economist who led abortive efforts at reform in the government. ``To broaden trade with Russia means to increase Ukrainian debts to Russia.... I simply support a pragmatic approach. We should buy and sell where it is profitable.''

There are some large enterprises in this eastern center that tend to share this view. ``Ruptured ties with Russia are a consequence of the wrong methods of carrying out reform,'' says Alexander Bek, marketing director of Khartron, a major defense electronics enterprise in Kharkov.

The 11,000-employee company used to manufacture guidance systems for Soviet rockets; it is now trying to create a new market for itself in making control systems for oil and gas pipelines, chemical factories, and nuclear power plants. Its dependency on Russian-originated orders has dropped in the last few years from 95 percent to 45 percent, Mr. Bek says.

What is needed, he adds, is a convertible currency for Ukraine, free flow of capital, and freedom to buy and sell land and private property. He says he sees little value in joining a Russian ruble zone, as the neighboring former Soviet republic of Belarus is now attempting to do. ``If Ukraine, Belarus, and Russia are reintegrated,'' Bek says, ``it will be a bigger mess.''