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Strategies & Market Trends : Investment in Russia and Eastern Europe

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To: Paul Berliner who wrote (926)3/4/1999 9:50:00 PM
From: CIMA   of 1301
 
Ukraine's Political Pendulum Swings Toward Moscow

Summary:

On March 3, Ukraine's Supreme Council voted in favor of a
resolution on Ukraine's participation in the Commonwealth of
Independent States' Inter-Parliamentary Assembly (MPA). The
move, together with the recently approved friendship treaty
between Ukraine and Russia, indicates that Ukraine is swinging
the pendulum of Ukrainian politics toward rapprochement with
Moscow, despite a seven-year period of strengthening its ties to
the West. Pro-Russia forces in Ukraine are gaining control over
the country that has been exhausted by the slow and ineffective
process of economic transformation. Yet the reformists and
Ukrainian nationalists will not surrender so easily and we expect
the struggle between Ukrainian factions favoring Russian ties and
those opposing them to intensify in the near future.

Analysis:

On March 3, Ukraine's Supreme Council voted in favor of a
resolution on Ukraine's participation in the Commonwealth of
Independent States' Inter-Parliamentary Assembly (MPA). The MPA
was founded in 1992 – one year after the establishment of the CIS
– and its main mission is to coordinate legislation in the CIS
framework. By joining the MPA, Ukraine does not automatically
become a CIS member. The move, however, indicates that Ukraine,
after a seven-year period of strengthening its ties to the West,
is now shifting toward a path of political and economic
rapprochement with Moscow.

Approval by the Ukrainian parliament of the resolution on joining
the MPA was preceded by the approval of the Russian-Ukrainian
friendship treaty and by ratification of the treaty on Ukraine
borders by the Russian Federation Council in February. There is
no doubt that elements in Kiev, denied financial support for
Ukraine's economic reforms by the IMF since the fall of 1998, are
now hoping to survive economically by renewing cooperation with
Russia and the rest of the CIS. At the same time, other factions
in Ukraine continue to signal Ukraine's desire to continue
integration with the West. We expect the struggle between the
pro-Russian factions and both Ukrainian nationalist and pro-
reform forces, to intensify in the near future with factions
opposing Moscow having the short end of the rope.

The idea of Ukraine joining the MPA has been promoted in the
Ukrainian parliament by parliamentary speaker Oleksandr Tkachenko
since December 1998, when a Ukrainian parliamentary delegation
under Tkachenko's lead visited Moscow. One month later, in
January 1999, Tkachenko proposed a vote on joining the MPA during
the regular session of the Ukrainian parliament. The proposal
sparked a fierce struggle between communist and nationalist
factions in the parliament. The proposal failed, with only 176
deputies votes in favor, far short of the 226 necessary for the
resolution to be approved. When the resolution on Ukraine
joining the MPA was put on vote again on March 3, however, it was
passed by 230 votes to 42, with two abstentions. The discussion
preceding the vote was extremely dynamic and emotional, as the
issue of Ukraine's relationship with Moscow is a sensitive topic
in a country that has been dominated by Russia for centuries.
The Ukrainian nationalist deputies, members of the Rukh Party,
reportedly tried to snatch the microphone from parliamentary
speaker Tkachenko in an attempt to prevent the vote.

In their commentaries following the approval of the resolution,
representatives of pro-reform forces in Ukraine expressed their
belief that the move is indicative of a shift in the country's
political orientation from the West towards Russia. Hennady
Udovenko, former Ukrainian Foreign Minister was quoted as saying
that "MPS was the first step towards recreation of the Soviet
Union in some form." The nationalist Rukh Party member
Vyacheslav Chornovil addressed his colleagues in the parliament
by saying: "We are in the process of changing the vector of
Ukrainian politics from a European to a Russian orientation."
Contrary to these voices Ukrainian President Leonid Kuchma and
Prime Minister Valeriy Pustovoytenko expressed their satisfaction
with the vote.

Russian State Duma speaker Gennady Seleznyov hailed the outcome
of the March 3 vote shortly after its announcement. Seleznyov
told journalists at a press conference in Geneva, where he was on
a three-day official visit, that he was "very happy because our
ranks have got a reinforcement." Ukraine and Russia recently
made several important steps towards harmonizing their bilateral
relations. On February 17, the Russian State Duma approved the
1997 Treaty of Friendship, Cooperation, and Partnership between
Russia and Ukraine, and on March 2, Russian President Boris
Yeltsin ratified the treaty. The passing of the treaty by the
Russian parliament has been delayed repeatedly due to unresolved
issues complicating the mutual relations, such as the status of
the city of Sevastopol and the division of the Black Sea fleet.
The approved treaty recognizes the territorial sovereignty of
Ukraine and the country's existing borders.

There is a little doubt that the approval of the friendship
treaty between Russia and Ukraine and Ukraine's entry into the
MPA, were both results of intensive negotiations between
Ukrainian and Russian communists. It is very likely, that
Tkachenko's delegation that visited Moscow in December won the
Russian side's backing for the friendship treaty by making
certain concessions involving the separatist territory of Crimea
and Ukraine's participation in the MPA. Only a couple of days
after the Moscow visit, the Ukrainian parliament implemented
constitutional changes that guaranteed greater autonomy to Crimea
and strengthened Crimea's political representation in the
country's legislative body. This move was initiated by
Tkachenko, and apparently, before being implemented, did not go
through required legislative channels.

The recent developments indicate that pro-Russia forces in
Ukraine are gaining control over the country that has been
exhausted by a slow and ineffective process of economic
transformation. And yet, the reformist factions keep expressing
their desire to joint the Western structures such as NATO and the
European Union. Most recently, the head of the Department for
the European Union of the Ukrainian Foreign Ministry, Viktor
Masshtaby, said at a briefing in Kiev on March 2, that his
country's goal is to become a full member of the EU. Masshtaby
said that the Ukrainian legislators are making intensive efforts
to adapt the country's legislation to European standards.
Western institutions, primarily the IMF, made it clear that no
further financial help would be given to Ukraine, unless the
country makes progress in transforming its legislative
environment and economic structures. With a deteriorating
economy, Ukraine is now standing at a crossroads. The question
is whether the democratic forces in the country are strong enough
to sustain the implementation of pro-reform policies in a
drastically declining economic environment. More to the point,
the question is whether the pro-Western factions can entice their
Western allies to deliver benefits that outweigh what Russia has
to offer.

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