The Orange Revolution: what seventeen days on a square changed for business

The second round of the presidential election was held on 21 November and declared for the prime minister by a margin of around three per cent. Exit polls said the opposite. Within forty-eight hours the centre of Kyiv was occupied by a permanent protest that lasted until the Supreme Court annulled the result on 3 December and ordered a repeat vote for 26 December.

Most accounts of this period are written in the language of political values. This entry is deliberately narrower, because the commercial consequences of what happened are specific and they outlast the mood.

The precedent that was set

The court did something Ukrainian courts had not done: it examined evidence of falsification, found it sufficient and voided an official result declared by the central electoral commission. Whatever one thinks about the composition of that court or the pressure it was under, the ruling established that an election outcome in this country could be litigated and reversed.

For a business audience the significance is indirect but large. A state where the highest court can overrule the executive on the single most consequential decision available to it is a different risk environment from one where it cannot. That capability has been demonstrated once. Whether it survives is a separate question, and the next fifteen years give a mixed answer.

The constitutional bargain

The repeat vote was made possible by a package deal passed in parliament on 8 December, which also amended the constitution to transfer significant powers from the president to parliament from 2006.

This is the part that matters most for the operating environment, and it is the part least discussed at the time. The amendments were drafted quickly, as the price of a political settlement, and they left the boundary between presidential and parliamentary authority ambiguous. That ambiguity produces three years of institutional deadlock from 2006 onward, two snap elections, and a Constitutional Court unable to resolve disputes it was designed to resolve.

The general lesson is worth stating because it recurs: constitutional provisions written as part of a crisis bargain tend to be optimised for ending the crisis rather than for governing afterwards.

What business should expect next

Three things follow predictably from a change of government of this kind, and firms operating here should plan for all three.

First, a review of privatisations. Any incoming administration that campaigned against the previous one's corruption will examine the transactions that defined it. Some of those examinations will be justified. All of them create uncertainty about title, and uncertainty about title stops investment more effectively than any tax rate.

Second, personnel churn at the operational level. Customs, tax administration and the licensing agencies will see leadership changes down several layers. Existing informal arrangements will stop working; the formal rules will be applied more literally for a period, which helps businesses that were already compliant and hurts those that were not.

Third, an expectations gap. The economy is currently growing at above eleven per cent on steel exports. That is a commodity cycle, not a policy achievement, and it will turn. A government that takes office on a wave of expectation in a year of record growth will be judged against that year, which is the worst possible baseline.

What to do about it

The practical advice for the next twelve months is unromantic. Get title documentation for any Ukrainian asset in order and make sure the chain of transactions is documented back to the original privatisation. Renegotiate nothing important until the composition of the new government is clear. Assume administrative decisions will slow to a halt between now and March.

And separate the two questions that are going to be conflated in every conversation for the next year: whether Ukraine is becoming a better country to live in, and whether it is becoming a more predictable country to invest in. In 2005 the answers point in different directions.

Related in this archive

• Eight months: why the 2005 coalition collapsed, and what it cost
• Bucharest 2008: a promise without a date, and what it cost to price
• Elections and investment: what actually changes and what does not
• Ukraine Annual Review 2004: the best year and the wrong lesson

I was a student in Kyiv in those days and have nothing to add about the politics of it. What I saw later from the business side is this: that an election result could be argued in court meant contracts could be argued there too. Predictability in a country depends less on who wins than on where an objection can be taken.