However much the Orange Revolution heightened interest in Ukraine’s economic potential, a great deal remains to be done before foreign investors come charging through the doors.
And with the country’s new leaders apparently thinking more about how they can consolidate their victory in parliamentary elections - not due until March - potential investors could hardly be blamed for being cautious.
Since he took power in January, Viktor Yushchenko, Ukraine’s new pro-western, liberal president, has moved more slowly than many hoped to launch free-market reforms. His government has spent most of its first months dealing with personnel and tackling immediate problems, such as inflation.
This deflation of expectations was evident during a visit by reform advisers organised by the UN Development Programme. Mr Yushchenko and his prime minister, Yulia Tymoshenko, stood up the group.
One member, Mart Laar, the former Estonian prime minister, said he understood Ukraine’s new leaders were busy “working like a fire brigade” to tackle inflation. The group’s co-chair, Swedish economist Anders Aslund, said: “You don’t undertake major social economic reforms just before an election. One simply has to accept this as a fact.”
The reforms that Mr Yuschenko’s team has focused on are the kind that rarely please investors - collecting taxes and increasing pensions and public wages. Mr Yushchenko has been consistent in saying these were top priorities. Economists such as Mr Aslund protested when Mr Yushchenko’s opponent doubled pension payments a month before the elections, but Mr Yushchenko responded by claiming only he had a realistic plan to find funding.
His and Ms Tymoshenko’s first moves have been an amended budget with more social spending, an end to various kinds of tax privileges and a crackdown on tax and customs evasion.
The finance ministry says revenues to the government’s general fund were up 68 per cent in January-April over the same period last year, without any increase in the general tax rates.
The social spending has a bright side for such businesses as consumer goods manufacturers and importers. But some foreign investors have been hit by the closed loopholes, and a few are even suing the government over its decision to cancel tax and customs holidays they claim were guaranteed when they invested in “special economic zones”.
More unsettling, Mr Yushchenko plans to challenge up to 40 of the privatisation sales carried out by the former government, and he has been slow to clarify which ones.
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Longer term, the project could make key industrial sectors more competitive by weakening the dominant position of local oligarchs. The immediate effect, however, has been to scare the oligarchs, who have reduced investments. Partly because of that, growth was down to 5.4 per cent in the first quarter after reaching 12 per cent last year.
Mr Yushchenko’s priorities were underscored by his appointment of a critic of privatisation, Valentina Semenyuk, as head of the privatisation agency, the State Property Fund. Ms Semenyuk, a member of the Socialist party, advocates using the privatisation review to return property to state hands, and argues that the state should seek to earn profits from its enterprises and sell only loss-makers.
Ms Tymoshenko, who heads the centrist Fatherland party, advocates a stronger state role in key markets and has used temporary price caps on petrol to keep down inflation. Liberals from Mr Yushchenko’s Our Ukraine bloc, however, control the finance and economy ministries.
Next year’s parliamentary elections will determine whether one of these competing economic views - liberal, centrist and Socialist - will come to the fore in Mr Yushchenko’s presidency, or if the current, uneasy cohabitation will continue.
Mr Yushchenko, whose powers would be sharply reduced, now appears to regret having agreed to these changes and has said the issue could be re-opened through a national referendum.
In spite of the uncertainties, sentiments about Ukraine’s long-term future remain positive, especially in the banking and retail sectors. Ukraine is seen as the next frontier for the big western groups already active in central Europe.
Austria’s Raiffeisen Bank, already Ukraine’s seventh-largest banking group, is in exclusive talks with the owners of the second-largest bank, Aval, a deal that could be worth up to $600m.
The main influx of foreign investment this year has been in treasury bills, driven by a conviction among economists that Ukraine’s hryvnya currency is undervalued and likely to appreciate.
