Publication: Prism Volume: 5 Issue: 18

By Volodymyr Zviglyanich

The incumbent president of Ukraine, Leonid Kuchma–who believes that Ukraine’s survival as an independent state is inextricably linked to his own re-election for a second term–came to power in 1994 under the banner of market development, private enterprise and a reduction in bureaucracy and its influence on private initiative. He placed the main emphasis on financial stability and privatization as the prerequisites for the rapid establishment of a critical mass of private ownership of production, and, correspondingly, on hampering the restoration of a communist regime in the country. As is well known, the economic basis of Soviet-style socialism was the total nationalization of production and the complete exclusion of private ownership from the experience of society.

Thus privatization–which began in Ukraine after Kuchma came to power (similar processes occurred during Chubais’ voucher privatization in Russia)–was above all politically rather than economically motivated. Its aim was to distribute ownership as much as possible among small shareholders. Essentially, this task is almost completed. According to Aleksandr Paskhaver, president of the Center for Economic Development and Kuchma’s special economic policy adviser, in 1997 the “state’s share of the fixed assets of the production sector fell from 81.4 percent (1990) to 55.7 percent, those of the number of employees (excluding collective farms and small enterprises) from 82.9 percent (1992) to 60.6 percent, and those of profit (excluding agriculture)–to 29.7 percent. By extrapolating these statistics, it may be stated that by early 1999 the state’s share of the fixed assets of the production sector is approaching 50 percent, and of the number of employees–58-55 percent” (Zerkalo nedeli, 26 June 1999). The latter figure is cited by both the president and foreign economists as one of the main achievements of the market reform policy in Ukraine.


Taken in the context of broader social change, however, these figures become meaningless. Unless it is accompanied by major restructuring of production and, most importantly, the creation of a competitive environment, privatization itself leads to more bureaucracy, not less. In Ukraine, issues related to small business development alone are handled by a specially formed state committee (under Aleksandr Kuzhel), and departments and directorates of the cabinet and the president’s administration. As a result, in its number of small and medium businesses Ukraine lags five or ten times behind Poland, and in comparison with developed market economies the difference can be measured in orders of magnitude. Those small and medium-sized businesses which do exist in Ukraine survive mainly by avoiding taxes and cooperating with the criminal structures which offer them protection. There is no transformation of small private capital into medium- and large-scale capital.

Moreover, medium- and large-scale private capital is formed mainly as a result of shady monopolistic operations involving the state. It is fundamentally incapable of gaining experience in the efficient market management of large-scale production, or in implementing investment projects. The top managers in privatized enterprises are effectively the owners of their own enterprises. Since privatization, a huge number of “new” postcommunist directors has been added to the large number of “red” directors. For all the difference in age and education between the two groups, they are united by one thing–the urge, once they have been appointed, to shut themselves away from their colleagues behind the double doors of their offices, to equip themselves with a mobile phone and to buy the latest Mercedes. The upper echelons of the bureaucracy model themselves in an even more monstrous form on the lower ranks of the post-communist establishment–and at a very petty level. For example, at the old Ukrainian Communist Party headquarters on Bankovskaya Street in Kiev, where the president’s administration is now located, rank-and-file communists could come and go by showing KGB officers their party card. No registration of visitors was made. But if you want to visit the president’s administration, or other state departments, you have to undergo a triple check by Ukrainian Security Service officers; you must have your passport with you; and your job, work address and telephone number, the purpose of your visit and the name of the official you are visiting are all written down in a special book. In this model of communication between the bureaucracy and the masses–the only carriers of market relations–only one form of communication can dominate. The perception of the masses and the market as the means for the bureaucracy’s existence, rather than as independent, sovereign elements in social dialog.

Such a model makes it fundamentally impossible to generate experience in market management, a prerequisite of which is the presumption that the parties involved enjoy equal rights. In the Ukrainian model of the market and privatization, all the semantically significant elements are concentrated on the side of the bureaucracy and the power structures. The other side–the masses and the market–are perceived as unpredictable and infantile subjects who can be treated in only one way: They cannot be trusted, and their sovereignty must be limited by raising taxes and issuing a huge number of regulations, which have the result of paralyzing production if they are all implemented simultaneously, but which engender a sense of chronic violation of laws and a guilt complex if they are not implemented.


Furthermore, this social model is stripped of its dynamic of development, or rather the dynamic is seen as the publication of more and more regulations by the bureaucracy. An illusion of activity is created, an imitation of market relations. In reality, however, Ukraine is witnessing a stabilization of crisis economic relations and the creation of an environment in which neither the bureaucracy nor the pseudo-market is interested in social innovation, but merely in preserving the status quo.

It is obvious that the result of real privatization cannot be “stability” in the spirit of the Brezhnev stagnation, but technological innovation, the growth of the middle class, and the attraction of domestic and foreign investment. In Ukraine, however, obsession with privatization has been replaced by an obsession with “stability.” On top of this, there is no recognition of the difference between stabilization in a transition economy and in a developed economy.

For a developed market economy the indicators of stabilization are productivity, inflation and employment. For an economy in transition, particular importance is given to the accumulation of the preconditions for economic growth and, above all, the dynamic and nature of investment.

What happened in Ukraine was that the concepts and procedures for stabilization in developed market systems were imposed on a system of proto-market and pseudo-market, criminalized structures. To this day the monetary, credit and fiscal policy algorithm in Ukraine is the mantra of “decreasing the money supply–reducing the budget deficit–cutting effective demand–lowering inflation.” This results in a general depression of capital–manifested in the absence of the real capitalization of companies’ fixed assets and the lack of a functioning stock exchange–a payment and investment crisis, deep decline in the real sector, capital flight and the criminalization of the economy.

This procedure must assume a form which corresponds to the transition status of Ukraine’s economy: “accumulating capital–expanding demand–increasing production and employment–increasing budget revenue–reducing the budget deficit–lowering inflation” (Zerkalo nedeli, June 24, 1999).

A policy of genuine stabilization in Ukraine must begin with the financial rehabilitation of companies as the basis for the country’s financial system, a precondition for stable economic growth. In conditions of depressed consumer demand, which the current Ukrainian model of financial “stabilization” is based on, and when salaries and pensions remain unpaid, to expect that GNP will increase by 5-6 percent in 2000–as envisaged in Kuchma’s “Ukraine-2010” plan–is just as utopian as Khrushchev’s promise that communism would be achieved by 1980.

The reality is that the bureaucracy has taken the place of the state as the main customer and regulator of production in the system of administrative. It has created a fundamentally new type of economic management, where barter, concealment of profits and failure to pay suppliers, employees and the budget are used as a way of reducing production costs and the manufacturer accepts barter payments and nonpayments as a way of reducing the price of the product. This pseudo-market system has stabilized, and, what is more, the unprofitable development of the economy as a whole is extremely advantageous to the bureaucracy.


The task of the bureaucracy in pre-election Ukraine is to perform a balancing act between legality and illegality, between total administrative control and the market. It is, in fact, trying to control company activity by means of decrees, regulations and taxes. It has no interest in the growth of the market value of productive capital, because this does not facilitate a growth in its personal wealth but instead impedes the illegal redistribution of ownership. As a result, the bureaucracy is counteracting the growth in legal profitability of capital–the most important element of its growth in value–because the legalization of profit hampers its illegal redistribution. The bureaucracy is counteracting on principle the legal consolidation of capital in the hands of independent entrepreneurs.

The most important element of such legal and socially transparent consolidation is the stock exchange. The defining moment in the development of Ukraine’s pseudo-market at the privatization stage was the prevention of company shares being released onto the stock exchange; instead, “vouchers” were distributed among employees by creating semi-legal schemes for the preferential sale of shares to employees (for which read “management”), and then the quasi-market structures thus created were declared to be “limited liability companies”, “closed joint stock companies” and so on, whose existence was designed to prevent a growth in the market value of the productive capital and the legal redistribution of ownership through the stock exchange. This resulted in unprofitable production, and opaque forms of capital turnover in the activities of these quasi-market oligarchic structures. As a result, the productive capital was turned into the private wealth of the managers. Paradoxically, the reduction in the market value of productive assets, manifested in a steady decline in Ukraine’s GNP, is profitable not only for the bureaucracy, but also for the subjects of these quasi-market structures. When entrepreneurial risk is high, day-to-day consumption and accumulation of unproductive wealth (or total abandonment of production and concentration on the resale of ready-made goods) is more attractive than production.

The existing system of imitating market relations in Ukraine has resulted in greatly prolonging the process of reforming the economy and stabilizing the transitional state between total administrative control and the market. This transitional, highly opaque state of the economy is the basis for quasi-legal “creative lawmaking”, which involves not only constant changes in laws already adopted (for example, the law on foreign investments in Ukraine has been changed three times since 1992), but also substituting laws with decrees and adopting laws which contradict previous laws, the constitution and international norms. Ukraine has yet to move over to the accounting and auditing system used throughout the world. For the eight years it has been independent, the country has had no civil or criminal code–which means that the ownership rights declared in the constitution are not protected by the appropriate standard legal procedures. The fuzziness of the economic model which has taken root in Ukraine is matched by the fuzziness of its laws, which has become one of the guiding “principles” of the state.


Given the indeterminate and incomplete nature of ownership rights, the bureaucratic overregulation of the economy, the soft budgetary policy aimed at selective support for enterprises close to the state, and the practice of selective imposition of penalties (such as tax inspections or Security Service “raids”), and given the inclination of most of the population for a return to a model of centralized economic regulation, the best chances lie with the candidate who can refrain from liberal-democratic calls (like Kuchma’s slogans from 1994), but can offer the electorate a system which will allow them to get on with their lives without changing anything. However paradoxical it may seem, nobody in Ukraine is interested in drastic innovative initiatives; the Ukrainian bureaucracy’s creative transformation of the characteristics of the Soviet economic system match very closely the mentality of the overwhelming majority of the electorate. Representatives of the left may use the social shapelessness of the system created by Kuchma’s “reformers” to reinforce those points that link them with the Soviet past, when vodka and sausage were equally affordable and accessible. Representatives of the right may try to use the wave of mild criticism of the administration to win voters over with promises of legislative reform to consolidate Ukraine’s independence and to facilitate business development. The centrists, including Kuchma himself, will insist on maintaining the status quo and continuing the “reforms.” There will be the traditional promises to fight corruption and organized crime, and anti-western or anti-Russian rhetoric (whichever one prefers).

Kuchma has not achieved any of the economic reforms he promised when coming to power in 1994. All that he has achieved–and this may be the key to a repeat victory–is his bureaucracy’s practical transformation of the main characteristics of the Soviet management system to which society gravitates, intentionally or not.

Volodymyr Zviglyanich is a senior research fellow of the Ukrainian Academy of Sciences’ Institute of Sociology, a research associate at George Washington University, and a senior fellow of the Jamestown Foundation.