World View: Much still to be resolved in Ukraine

Now that Ukraine's orange revolution has produced the democratic election of the pro-western, market-oriented Viktor Yushchenko, market expectations for Ukraine are positively rosy.

Bond spreads are narrowing, financial analysts are talking up Ukraine's equity market, and investors are breathing a deep sigh of relief. But too much optimism is misplaced - for Mr Yushchenko or for investors in Ukraine. There is still substantial political risk in the country as the new president's real work begins. Mr Yushchenko and his country now face the most daunting political challenges of Ukraine's young life as a nation. Investors should watch closely and remain cautious.

Ukraine's fault lines have not suddenly disappeared. Even after Mr Yushchenko's opponent, former prime minister Viktor Yanukovych, was all but abandoned by his Russian allies, key local governors, Ukraine's oligarchs, and his own campaign manager, he still won 44.2 per cent of the popular vote. Millions of Ukrainians, particularly in the southern and eastern regions of the country, are ethnically Russian, speak Russian as a first language, worship in the Russian Orthodox Church and support ever closer ties between Kiev and Moscow. Mr Yanukovych is still their man. They see that Ukrainian nationalists from the west and north of the country have pushed the Ukrainian-speaking, Catholic and pro-European Mr Yushchenko to power and wonder if their political concerns will be ignored.

If these pro-Yanukovych Ukrainians don't believe the Yushchenko administration will protect their interests, the new prime minister's governance challenges will be even more difficult. While the presidential race of 2004 is over, Mr Yanukovych may continue to inflame suspicion of his rival's agenda and position himself as the key opposition figure before the parliamentary elections in 2006.

While Mr Yushchenko has broad parliamentary support today, he cannot be sure the support will survive the first decisions of his presidency. Mr Yushchenko will make some crucial choices over the next few weeks; he will nominate a prime minister and a cabinet. The new president would do well to ensure all Ukraine's influential political groups have some representation. He has already made one smart move: he opted to keep Volodymyr Lytvyn as parliamentary speaker. Mr Lytvyn's agrarian party will be closely aligned with Mr Yushchenko in the coming year and will give the new president political an inroad with some of those Ukrainians most suspicious of his plans.

But Ukraine's parliamentary system remains highly fragmented; keeping it productive will be a full-time job. If Mr Yushchenko takes actions that splinter parliamentary cohesion - by nominating hardliner Yulia Tymoshenko as prime minister, for example - he risks creating instant opposition to his reform programme from parliamentary groups who fear their interests may be brushed aside.

Mr Yushchenko must also be sure he can rein in those on his team who, in the name of fighting corruption, are eager to launch a frontal assault on the oligarchs who profited from the rigged privatisation deals of Leonid Kuchma's era. There is concern that a prime minister with strong business interests of his own, such as Petro Poroshenko, might leap at the chance to do this. Some in the Yushchenko camp would undoubtedly like to go after Mr Yanukovych and Mr Kuchma on charges of electoral fraud.

In spite of its obvious divisions, Ukraine has been surprisingly stable over its brief history precisely because its politicians have understood it can only be governed effectively from the centre. Fighting corruption is a worthwhile and necessary goal but to pick a fight before he is ready to win would be a mistake for Ukraine's new president. Attacking powerful men who have the capacity to divide the nation further may be bold but it is also dangerous and foolish.

Finally, Mr Yushchenko must deftly manage Ukraine's important relationship with Russia. Russian president Vladimir Putin unapologetically campaigned for Mr Yanukovych and has protested at what he calls the "western interference" in Ukraine's domestic politics that helped rescue Mr Yushchenko's candidacy from widespread vote- rigging. Sergei Ivanov, minister of defence, speaking in New York this month, warned of the dangers of exporting revolutions to the region. As the beneficiary of such a revolution, Mr Yushchenko knows that no one toasted his victory in the Kremlin and that he should not expect bear hugs when he visits.

When Moscow wants to undermine Kiev, it often accuses Ukrainians of stealing gas from the pipelines that move Russian energy across Ukraine toward Europe. Such complaints play on the fears of investors who worry that Russia will use Ukraine's substantial dependence on Russian energy to undermine politically those who try to loosen Ukraine's ties with its neighbour. With Mr Yushchenko in power, manipulation from Moscow becomes more likely.

Mr Yushchenko may heighten Russian-Ukrainian tensions if he visits Washington before he calls on Mr Putin, or if he refuses to engage the Russian president in talks on the "single economic space" that Russia hopes to create with Ukraine, Belarus and Kazakhstan. Candidate Yushchenko expressed the fears of millions of Ukrainians that the plan to integrate more closely the economies of the four former Soviet neighbours will separate Ukraine further from the world economy, that it constitutes a thinly veiled attempt by Moscow to restore some of its Soviet-era influence in the region and that the project could upset Ukraine's plans to join the World Trade Organisation. But if Mr Yushchenko refuses even to discuss the plan, Russian resentment may burden the new president with a dangerous and determined enemy that enjoys real influence inside his country.

Make no mistake, Ukraine is without question a better place to invest now that Mr Yushchenko is set to replace Mr Kuchma. The new president has broad political and business support - not to mention the goodwill of much of the international community - but Viktor Yushchenko must do more than win a bitterly contested election, he must govern a deeply divided nation.

Ian Bremmer is president of Eurasia Group and senior fellow at the World Policy Institute.