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. Last Updated: 07/27/2016

Vote Puts Kiev's Economic Performance on Trial

APConstruction cranes dotting the skyline as cars clog Kiev's streets last week.
KIEV -- For the leaders of Ukraine's Orange Revolution, who inherited a $6 billion budget hole and an impoverished population impatient to see corruption eradicated, getting a handle on the economy was never going to be simple.

And 15 months later, with parliamentary elections looming, Ukrainian voters have shifted their focus from regime change to how the government has handled the economy. Their votes on Sunday will help determine whether the changes needed to modernize the economy and open it further to the West are pushed through.

The popular mood is not encouraging for proponents of reform. Alexander Ivanov, a 43-year-old electrician, said salaries have failed to keep pace with rising prices for daily items. "Workers now buy their sausage for 30 hryvna [$6], and wages haven't gone up," he said. "I don't think people in politics pay any attention to the ordinary people."

Still, investors are bullish. Construction cranes dot Kiev's skyline and BMWs speed down boulevards, while a mix of languages can be heard in restaurants packed with foreign executives who are rushing to cut deals in a huge market largely free of competition.

"The government doesn't get involved in the day-to-day affairs of ordinary businessmen," said Alex Frishberg, a veteran Kiev-based lawyer, adding that politicians were too busy with "constant infighting."

"What you have in Kiev is the purest form of capitalism," he said.

The economy has taken plenty of hits. Erratic policies under former Prime Minister Yulia Tymoshenko in the early months of the Orange government -- compounded by a 30 percent decline in late 2004 in international prices for steel, Ukraine's key export -- squashed economic growth from 12.1 percent in 2004 to just 2.6 percent in 2005. President Viktor Yushchenko's opponents have hammered a January gas deal with Russia, which saw the price of gas imports nearly double to $95 per 1,000 cubic meters, as potentially lethal for Ukraine's gas-intensive and inefficient industries. And corruption remains entrenched.

On the other hand, foreign direct investment came in at a record $7.9 billion in 2005 -- nearly as much as had entered the country since its independence in 1991. That jump came almost solely through the reprivatization of the Kryvorizhstal steel plant, which Mittal Steel bought last fall for $4.8 billion. The auction was a huge vote of business confidence for Yushchenko, who had promised during his campaign to smash the nepotistic excesses of the old regime.

Then came a series of acquisitions of Ukraine's top banks. Within the last six months, Austria's Raiffeisen bought a controlling stake in Aval Bank for more than $1 billion, France's BNP Paribas snapped up 51 percent of Ukrsibbank for about $500 million, and Italy's Banca Intesa acquired more than 85 percent of Ukrsotsbank for just over $1 billion.

Further support came from the European Union when it granted Ukraine market economy status, began talks on easier visa rules and agreed to sign a free trade deal after Kiev joins the World Trade Organization.

That has gone a long way to calm the nerves of local and foreign investors after the roller-coaster stewardship of Tymoshenko, who was fired in September.

As part of an anti-corruption drive under Tymoshenko, foreign investors were left smarting after the sudden termination of the tax havens provided by free economic zones. Her pledge to review some 3,000 questionable privatizations shook faith in property rights.

But there were successes. The anti-corruption campaign saw tax revenues rise by about 70 percent -- plastering over the 32 billion hryvna ($6.4 billion) budget deficit opened by the populist spending policies of former Prime Minister Viktor Yanukovych before the 2004 election. Still, many Ukrainians have been disillusioned with Yushchenko's promises of prosperity through closer ties to the EU, and analysts predict a strong showing by Yanukovych's pro-Moscow Party of the Regions bloc.

There are high expectations of a parliamentary majority formed between Yushchenko and his rival Yanukovych, who is bankrolled by Rynat Akhmetov, a former Kryvorizhstal shareholder who today is worth $1.7 billion according to Forbes magazine. Akhmetov is running for parliament and is rumored to have his eye on the prime minister's office.

Kamen Zahariev, country director for the European Bank for Reconstruction and Development, noted that Ukraine has had 11 prime ministers in the past 15 years and said that above all, political stability would be key to economic progress. "Really, our hope is for a clear result and for a majority to be formed that would allow a government to stay in place for a year or 18 months," Zahariev said.