Eight months: why the 2005 coalition collapsed, and what it cost

On 8 September the entire cabinet was dismissed, eight months after taking office on a wave of public support that had no precedent in this country. The immediate trigger was a set of mutual corruption accusations between senior figures who had campaigned together the previous winter.

The interesting question is not who was right in that dispute. It is why a government with enormous political capital managed to spend it in eight months, and what that cost the economy.

The re-privatisation problem

The new administration arrived with a commitment to review privatisations conducted under the previous government. The commitment was defensible: several large transactions had been arranged rather than competed, and the most notorious of them had transferred the country's largest steel plant at a fraction of a plausible market price.

The problem was scope. Ministers gave figures for the number of enterprises under review that ranged from thirty to three thousand depending on who was speaking and when. No list was published. No criteria were defined. No end date was set.

An investor cannot price that. A defined review of twelve named transactions with a six-month deadline is a manageable risk. An undefined review of an unknown number of transactions with no deadline is an open-ended liability attached to every asset in the country, and the rational response is to stop committing capital until it resolves.

That is what happened. Foreign direct investment inquiries that spiked in January went quiet by spring. Domestic groups postponed expansion. Growth fell from above eleven per cent in 2004 to under three per cent this year, and while the steel cycle explains much of that, it does not explain the collapse in fixed capital formation.

What the Kryvorizhstal re-auction proved

The exception was handled correctly, and it is worth recording because it shows what the whole programme could have looked like.

The 2004 sale of Kryvorizhstal was annulled by the courts. A new auction was held in October, broadcast live on television, with international bidders and no restrictions designed to favour a domestic buyer. The plant sold for roughly six times the original price to a foreign strategic investor.

That single transaction did more for Ukraine's investment reputation than the entire review programme did against it. It demonstrated that a competitive process was possible, that the state could capture the value it had previously given away, and that a foreign buyer would not be discriminated against.

The lesson generalises. If a government wants to revisit past transactions, the way to do it without destroying the investment climate is to name the transactions, set a deadline, and re-run each one as an open competitive process where the previous buyer may bid again.

The institutional lesson

The deeper failure was structural. The coalition combined political forces with genuinely incompatible economic programmes — one committed to market liberalisation, one to state-directed industrial policy and social spending — held together only by opposition to a common opponent who was no longer in power.

This pattern recurs in Ukrainian politics with unusual regularity. Coalitions form against something, win, and then discover they have no agreed programme for governing. The 2005 collapse is the first clear instance; it is not the last.

What to take from this

For anyone assessing Ukrainian political risk, the practical indicator is not the ideological composition of a government. It is whether the coalition holding it together has a written, specific and costed programme, or whether it has only a shared adversary.

The second kind lasts about a year. Plan contract terms, capital commitments and management continuity accordingly.

Related in this archive

• The Orange Revolution: what seventeen days on a square changed for business
• 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 2005: a mandate spent and a precedent set

What the re-privatisation argument means for an investor can be put in one sentence: if a completed transaction can be reopened, the price of every future transaction rises. The transparent re-auction of Kryvorizhstal showed the other side of it — an open process fetched several times what a closed one had. The institutional lesson sits between those two facts.