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Country Commercial Guides for FY 2000: Ukraine Report prepared by U.S. Embassy Kiev, Released July 1999R Note*

Chapter III: Political Environment

A. Nature of Bilateral Relationship with the U.S.

The United States strongly supports Ukraine's independence, sovereignty, and territorial integrity and is providing substantial technical assistance to help Ukraine make the changes necessary to solidify a democratic society based on rule-of-law, reform its economy, and integrate with the world economic system. A stable, independent, democratic, and market-oriented Ukraine is in the U.S. national interest; such a Ukraine will be a key partner in dealing with post-Cold War problems, like proliferation, and in shaping a more stable and secure Europe.

Starting in late 1993, the United States and Ukraine began to develop closer economic and commercial ties. The United States pursued a broad engagement of Ukraine across all fields and at all levels. The U.S. economic assistance program for Ukraine, administered by the U.S. Agency for International Development (USAID), in 1995 became one of the largest American aid programs in the world. Funds granted through the Nunn-Lugar Cooperative Threat Reduction Program, targeted to assist the elimination of nuclear weapon systems and infrastructure in Ukraine, are also supporting efforts to build an export control system and protect against proliferation. In 1998, the United States pledged some $325 million to support Ukraine's efforts with economic transformation and nuclear disarmament.

At the center of the United States' strategic partnership with Ukraine today is the U.S.-Ukraine Binational (Gore-Kuchma) Commission. Established in 1996, the main purpose of this Commission is to provide a mechanism for regular review and deepening of bilateral political, economic, commercial, and military cooperation. The annual meetings of the full Gore-Kuchma Commission are focused on four main areas: trade and investment, economic reform, foreign policy issues, and security issues. Various components of the Commission meet and consult on a regular basis to monitor implementation of select programs. Both sides have paid special attention to improving the foreign investment climate in Ukraine and used the forum as a vehicle for addressing specific business disputes and removing obstacles to the development of new business ventures.

B. Major Political Issues Affecting the Business Climate

The course of political reform was reinforced with the Ukrainian Parliament's June 28, 1996 passage of a new Constitution. The new Constitution recognizes the right to private ownership of land and property. It also strengthens provisions on the rule-of-law and provides for a more independent judiciary, promising more effective legal protections for investors. It could also help facilitate passage of a long-delayed new Civil Code, which contains a Western-style commercial code.

These principles, while laying the groundwork for market-economy reforms, are thus far more theoretical than practical. A lack of legislation in many areas of economic activity, as well as the absence of a reliable system to enforce existing legislation, are obstacles to achieving an investment climate that will attract substantial foreign investment. Key questions, such as land ownership, land purchase by foreigners, privatization conditions, and taxation reform remain unresolved.

Increasing corruption and crime, while not as serious a problem in Ukraine as in Russia, is a significant factor inhibiting legitimate business activity and foreign investment in Ukraine. President Kuchma has declared the fight against organized crime to be one of the top priorities of his administration, but up to this point little real progress has been made.

There is a broad understanding of these problems within Ukrainian official circles and a general consensus among reformers on the need to ensure that foreign investors are greeted with a more favorable legal and regulatory climate in the future. The hard work of translating that consensus into law is one of the most important challenges facing the Ukrainian political system today. Ensuring that these laws are effectively executed is an equally great challenge.

Ukrainian-Russian economic relations will likely continue to influence the larger investment picture in Ukraine. Areas of particular strain involve energy supplies and gas transit. Concern also exists about possible Russian attempts to exert economic pressure on Ukraine, particularly in the trade area.

C. Political System, Election Schedule, Orientation of Major Political Parties

Ukraine continues to make steady, if slow, progress toward developing a democratic state based on the rule of law. Under Ukraine's first post-Soviet Constitution, adopted on June 28, 1996, power was formally divided among three branches of government -- the executive, the national legislature, and the judiciary. Although the new Constitution has not definitively resolved the formal division of powers among the three branches of government, it has provided the Ukrainians with a strong, legal framework for addressing this problem. More importantly, it has codified the fundamental rights of free speech, freedom of the press and assembly, and freedom of religion for all Ukrainians.

Ukraine's unicameral Parliament, known as the Verkhovna Rada, has 450 seats and is elected to a four-year term. Beginning with the March 1998 elections, half of the Rada's seats are filled from individual single-seat districts, while the other half are filled from political party lists. Ukrainians elected a new Rada in March 1998. Leftist parties such as the Communists, Socialists, and Peasants made modest gains in the elections, but an influx of new business-oriented deputies elected in single-seat districts has diluted their influence somewhat.

The Ukrainian Prime Minister, whom the President nominates, is subject to the Rada's approval. The Prime Minister is responsible for heading the government and his primary duties include selecting and chairing the Council of Ministers. The division of powers between the Presidency and the Prime Minister's office, however, has often proved to be an issue of contention. President Kuchma has dismissed three prime ministers in the past four years, although the current prime minister has been in office since July 1997.

Ukraine's Presidency remains the preeminent post in the Ukrainian government. The President is the commander-in-chief of the armed forces and may veto Rada legislation. The Rada can override Presidential vetoes by a two-thirds vote. Under the new Constitution, Ukrainians hold presidential elections every five years and are scheduled to return to the polls in October 1999.

The most influential political parties are: (Note: Virtually all Ukrainian political parties remain dominated by key personalities and have not yet developed into mature organizations such as those in many Western democracies. That said, some ideological and nationalistic divisions do exist across the Ukrainian political party spectrum. Eight parties and blocs entered Parliament in the March 1998 elections, and formed their own Rada factions. However, since late 1998, several of these factions have split, and independent deputies have also been instrumental in forming new factions and groups, of which there are now 15 in the Rada.)

Communist Party (KPU):

Ukraine's strongest party organizationally, the Communist Party is anti-Kuchma and anti-reform. The Communists constitute the largest single faction in the Rada but were unable to elect their leader, Petro Symonenko, to the post of Rada Chairman. The Communists generally oppose the 1996 Constitution and, in particular, privatization. They would also like to see a return to some form of central planning, the nationalization of the banking system, the abolishment of the Presidency, and closer ties with Russia. The party's primary base of support lies among disillusioned elderly and middle-aged voters. The Communists received 25% of the vote in the March 1998 party-list portion of the Rada elections.

Rukh:

Established in 1989 as the principal democratic, pro-market, moderate nationalist opposition movement, Rukh was Ukraine's second largest political party, receiving nine percent of the party-list vote in the March 1998 elections. However, the future of the party in unclear after an acrimonious split into two wings in early 1999. The schism was followed shortly by the tragic death of party leader and nationalist icon Vyacheslav Chornovil. Henadiy Udovenko and Yuriy Kostenko now head the two Rukh wings.

Socialist Party:

Led by former Rada Chairman Oleksandr Moroz, the Socialist Party was formed in 1991 to circumvent the government's ban on the Communist Party. The Socialists are less Marxist-Leninist in orientation than the KPU, and Moroz has hinted that he would like to move the Party in the general direction of European social democracy. However, rank and file members still favor state control of key industries and closer ties to Russia and the Commonwealth of Independent States. The Socialists ran in an electoral bloc with the leftist Peasant Party and the bloc received eight and a half percent of the party-list vote in the March 1998 elections. However, the two parties split in October 1998.

Green Party:

The Green Party, formed in the early 1990s, supports environmentally-friendly policies, such as the closure of the Chornobyl nuclear power plant and energy conservation. The Party supports Ukraine's neutrality in most foreign policy matters. The Greens have benefited from an influx of new businessmen who also favor overhauling Ukraine's tax system to better accommodate business and consumer interests. The Party's success in the March 1998 elections came as a surprise to most observers; they received roughly five and a half percent of the party-list vote.

People's Democratic Party (NDP):

The Centrist NDP was formerly known as the "party of power" for its close government connection. It received five percent of the party-list vote in the March 1998 elections, and for a time had the second largest faction in the Rada, after the Communists. However, independent deputies began to leave in late 1998 after some members of the NDP leadership became increasingly critical of the President. The Kuchma opponents finally were forced out in May 1999, and the reconstituted pro-government party is now headed by Prime Minister Pustovoitenko. The NDP's Rada faction is now much diminished. Former faction deputies have been instrumental in creating two new generally pro-administration factions, "Regional Revival," and "Trudova Ukraina" (Labor Ukraine).

Hromada:

Hromada, formed in 1993 by a group of former Communists, was rejuvenated in 1997 when former Prime Minister Pavlo Lazarenko (removed by President Kuchma in July 1997) and Yulia Tymoshenko, former head of the prominent United Energy Systems company, took control. Hromada virulently opposes President Kuchma and the present government. Hromada received roughly four and a half percent of the party-list vote in the March 1998 elections. However, Lazarenko's detention in the United States has thrown the Party into disarray, and Tymoshenko and the majority of Hromada's Rada deputies split off to form their own faction, "Batkivshchina" (Fatherland).

Progressive Socialist Party (PSPU):

Led by Natalia Vitrenko, the Progressive Socialist Party, which broke with the Socialist Party in 1997, has been stridently anti-reform, constituting the hard left of the political spectrum. Leaders of the party have accused the Communists and Socialists of betraying Marxist-Leninist ideals. The PSPU calls for building a Soviet Socialist Ukraine, abolishing the presidency, establishing closer ties with Russia and Belarus, and opposes cooperation with NATO, the IMF, and the World Bank. The Progressive Socialist Party received four percent of the party-list vote in the March 1998 elections.

Social Democratic Party (United) (SDPU(O)):

This small party grew in stature prior to the March 1998 elections by attracting former President Leonid Kravchuk and former Prime Minister Yevhen Marchuk to its electoral slate, and received four percent of the party-list vote in the March 1998 elections. The SDPU (O) favors a "socially-oriented market economy," using market economics to generate resources for better social protection, and is business-oriented. The party deposed its former leader, former Justice Minister Vasyl Onopenko, in October 1998, and Marchuk left the party's faction in 1999 after the SDPU(O) declared its support for Kuchma's reelection. The party is now led by Rada Deputy Speaker Viktor Medvedchuk, and claims his ally, business magnate Hryhoriy Surkis, as a member.

Peasant Party

The leftist Peasant Party entered Parliament in March 1998 in a bloc with the Socialists. However, the two split in October 1998, and the Peasants now have their own small Rada faction, led by Serhiy Dovhan. Rada Speaker Oleksandr Tkachenko is a member of the party.

Reforms and Order Party

This market-oriented, pro-Western party was founded in 1997, but failed to gather the required four percent of the party-list vote in the March 1998 elections to enter the Rada. However, several of its deputies were elected in single-seat districts. In December 1998, these allied with a handful of single-seat nationalists to create what is now called the "Reforms-Congress" faction. The faction is led by former First Deputy Prime Minister Viktor Pynzenyk.