The Orange Revolution Comes Up Lemons
A year after a popular uprising in Ukraine, hopes have soured and old rivals are at it again.
(FORTUNE Magazine) - Yulia Tymoshenko's motorcade slices through Odessa, roof lights spinning, Klaxons barking. It's campaign season again, and Ukraine's "samurai in a skirt" is back in action. Which may seem odd to anyone who last checked in on Ukraine during the citrus glow of its so-called Orange Revolution, a little more than a year ago.
Back then Tymoshenko and President Viktor Yushchenko were partners in a populist uprising. But what looked like a fundamental change hasn't turned out that way. Yushchenko's honeymoon lasted about as long as a shackup at Niagara Falls, the bold aspirations of his revolution ground down by the actual administering of what remains a troubled country. Tymoshenko was forced out as Prime Minister last fall in a dispute over reprivatizations. A whipped political opponent, Viktor Yanukovich, is back in the picture. And a gas deal with Russia's largest company has cast doubt on the viability of clean governance in Kiev. Stability hangs in the balance, with Russia standing by to make sure Ukraine continues to teeter through its March 26 parliamentary election. With Ukraine's political parties fractured, its Parliament is destined to be administered by a slipshod coalition of forces that will have difficulty getting anything done, let alone pushing through reforms that were supposed to be well underway by now.
A year of frustrations has darkened the sunny disposition of Ukraine's onetime hero President. The meanest cut came on New Year's Day, when Russia's gas monopoly, Gazprom, breached a contract and turned down the pressure in a pipeline, freezing out Kiev during the coldest winter in decades. Russia was finished subsidizing a country that now covets EU and NATO membership, and it demanded an almost fivefold increase in the price of gas exports.
Although Yushchenko's government forged what appeared to be a favorable agreement with Gazprom--prices only doubled, to $95 per 1,000 cubic meters, still well below European rates--it turned out that the deal didn't guarantee prices much beyond the elections. And it interposed a third party that had little to recommend itself aside from the proper connections: a gas broker called RosUkrEnergo (RUE). Gazprom owns half of RUE, while the other half is controlled by Austria's Raiffeisen Investments on behalf of clients it has refused to identify.
RUE has a dozen employees and no physical assets, yet it earned $500 million last year working with Gazprom across Russia and Central Asia. The Ukraine deal made RUE one of Europe's biggest energy traders overnight, and it echoed the countless agreements that continue to plague this part of the world, exactly the sort of cynical pact that Yushchenko had pledged to bust. Russia was all too happy to let the gas dispute ensnare the faltering President, whose party, Our Ukraine, had slipped below 20% in the polls.
Things grew even stranger when Naftogaz Ukrainy, Gazprom's opposite number in Ukraine, signed a joint-venture agreement with RUE that authorizes an entirely new firm, Ukrgaz-Energo, to handle selling the gas, further muddying things. The deal is so convoluted that anyone you meet in Kiev inevitably grabs paper and pen and sketches a diagram that fills the page with chicken scratch from here to Ashgabat, the capital of Turkmenistan, where a good portion of the gas emanates. It appears there is little the President can do to uncover the owners of RUE's dark half, which many have speculated falls under the control of those same pocket-lining phantoms who have controlled business in Ukraine for the past 15 years. "We can start digging in this direction," says Konstantin Borodin, director of the Energy Research Center of Ukraine. "But as a result, we can meet a mine that will blow up all the diggers, together with Ukraine's economy."
Someone has succeeded in making what should be a simple energy deal between bordering nations into a tangled web that thwarts all scrutiny. But the agreement begs for analysis because Yushchenko signed off on the deal. "What the Kremlin is doing," says Borodin, "is teaching Ukrainians how to treat Russians." Or how to be Russians.
The lesson comes at an inopportune moment for Yushchenko, who has proven unable to fight on so many fronts. The RUE deal is undermining his tilt toward Europe and weakening his standing as domestic politics collapse into disorder. He has also grown hypersensitive to criticism from a domestic press that he recently freed.
In September, Yushchenko sacked Tymoshenko, revealing a split between the two main factions of the Orange Revolution. To push through his choice of a new Prime Minister, Yushchenko made an ill-advised agreement with Viktor Yanukovich, the Kremlin-sponsored candidate he had beaten in 2004. The pact included an immunity pledge for the old guard that makes up Yanukovich's political base, a sure sign that, for expediency's sake, Yushchenko was willing to disregard his campaign slogan, "Bandits to prison." If anyone missed the drift, it became clear when it was discovered that Yushchenko's Justice Minister had lied about receiving a degree from Columbia University.
Now Yushchenko is fighting to retain the power of his office, reneging on an agreement he made during the Orange Revolution to cede a slew of presidential powers to the Prime Minister, who will be selected by the ruling parliamentary faction. Yushchenko has called for a referendum on the issue, but support is flagging. "If this deal goes through," says Tymoshenko, "I'm afraid the only Orange person left in this country will be the President."
Tymoshenko is sitting tranquilly on a divan in an Odessa hotel suite, protected by a cadre of security guards. She has just returned from the Black Sea port of Illichivsk, where she railed against mendacity to a crowd of several thousand. The words she uttered--about sticky fingers in the government, Russia's enduring influence--sounded familiar. It was the exact fare she and Yushchenko had dished out during a revolution designed to eradicate all that.
"Ukraine has changed today," Tymoshenko says, her yellow braids spiraling back off the crown of her skull. "But it's wrong to think that just because we won the elections, we have won a victory against all of those clans. Immediately after it happened, they were a little stunned. But then they survived, got back into shape, and now they're ready to get back into office."
The poster boy for this trend is Ukraine's richest man, Rinat Akhmetov, a steel and coal billionaire running for Parliament under the flag of the Party of the Regions, Yanukovich's group. Akhmetov claims that, if elected (which appears likely), he'll relinquish business in favor of politics. Yanukovich has said that should his party gain control of Parliament, he may put forth Akhmetov for Prime Minister.
With that possibility not far from reality, many are blaming Tymoshenko for having taken a vindictive approach to Ukrainian business during her seven months as Prime Minister. Tymoshenko compiled a list of privatizations she wanted reopened and ignited a costly fight with the gasoline industry. Her efforts met with little success, but they angered enough people that opposing forces within Yushchenko's inner circle prevailed in ousting her. "You don't take all the oligarchs out of power who control 60% of GDP," says John David Suggitt, managing partner of Concorde Capital, a Ukraine investment bank. "You don't try to throw them in jail. You don't try to take away their businesses and expect them to invest $1 billion in new machinery."
This is where justice and commerce have often parted company. Exacting change depends on your stomach for the consequences. To be fair, Yushchenko has not shied away from reform. His biggest achievement so far may be the undoing of one of the largest privatization deals in the former Soviet Union, reselling the Kryvorizhstal steel complex, which former President Leonid Kuchma's son-in-law, the oligarch Viktor Pinchuk, and Akhmetov had purchased for $800 million. In a televised auction, Mittal Steel bought a 93% stake in Kryvorizhstal for $4.8 billion, nearly double the expected price. Rewards have come from Washington, where both houses of Congress have approved a measure to grant Ukraine permanent normal trade relations with the U.S. But for every Kryvorizhstal there comes a RosUkrEnergo, killing the momentum.
The RUE deal can be viewed as part of Gazprom's bid to win back Soviet-era control over Ukraine's gas industry, as well as gas routes to Europe. Russia is using one of its most strategic resources as a weapon to discipline Ukraine, with down-the-line effects for Europe, which receives a quarter of its gas from Russia, mostly via Ukraine. "Russia is an irrational empire," says Oleksander Danyluk, an advisor to Ukraine's current Prime Minister, Yuriy Yekhanurov. "Russia is one step ahead--they're always one step ahead."
All this turmoil has the big foreign money sitting on the sidelines, waiting to see just what may happen in Europe's last great growth market. Delay seems the best bet for now, with Yanukovich's party leading all pre-election polling at nearly 30%. Should Yanukovich's party win, Ukraine's pipeline system could very well be available for a grab by Moscow, and any number of Orange possibilities could fall by the wayside.
Was it too much to ask Yushchenko to transform this wild country into something compatible with the West? Was it sensible for him to make such promises? "There's nothing worse than a fallen hero," says Roland Nash, head of research for Renaissance Capital, Russia's largest independent investment bank, which reopened its Ukraine office last year. Nash is chatting outside Renaissance's Ukrainian investor conference in an old central-bank building in Kiev, with white pillars and a chipped yellow faÃ§ade, and chauffeured cars piled up at the entrance. Several hundred international investors have come here to make closed-door deals while the hum of presentations drones on and on.
As much as anyone, Renaissance threw in with Yushchenko, going so far as to hand out orange nametags at last year's conference. This time the nametags are wrapped in clear plastic. Nash and his crowd say they would prefer something approaching Vladimir Putin's managed democracy instead of the uncertain energy that Ukraine transmits to the world. Russia may have clamped down on some basic freedoms, but the Russian stock market grew by 83% last year, producing the type of return that the big money had thought possible when Ukraine embraced a new set of values. "It's such a well- understood story," Nash says. "Investors have seen what happened in Eastern Europe ten, 15 years ago, and now there's Ukraine. Even with all the problems, we have many companies that are interested. That should indicate just how much money could come in if they got it right."
Some of that money is on display a few hours later at a well-heeled hotel, where Nash and his potential investors are front-loading for a little of the wildness that Ukrainian nightlife can provide. But one shouldn't let the pepper vodka or the beautiful women cloud the greater issues. With monthly salaries of about $300 and a population of almost 50 million, Ukraine has great potential as both a center for cheap manufacturing and an emerging consumer market. So much, though, relies on political stewardship. "The mark of a great leader is making great changes," Nash says. "A year ago Yushchenko was one of the most popular leaders in the world. He had the will of the people behind him. He could have made changes, but he didn't. He disappointed absolutely. Being not corrupt was enough during the Orange Revolution but not enough to run a country."
Despite the disappointment, one fact cannot be erased: Several hundred thousand people jammed the center of Kiev in 2004 to protest the underhanded practices of the old regime. The gambit worked, and the population grasps its power. Now Russia is putting that populist muscle to the test. "This deal has created a mechanism for control over Ukraine," Tymoshenko says of the Gazprom agreement. "There is so much political influence of Russia in Ukraine--everywhere."
Tymoshenko's party, with numbers similar to Yushchenko's in the polls, may prove pivotal in the new Parliament, swinging power to one of the other parties. If she doesn't join a coalition, she says, she'll gladly end up in the opposition. But whoever is in a position to control Ukraine--be it the President, the Prime Minister, or a filibustering segment of Parliament--temptation will remain. The unaccountable funds available through the dark half of RUE only perpetuate a cycle that preys on the less idealistic side of the human condition. It may take a genuine revolution to sort out the mess.