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Poland, Belarus & Ukraine Report: March 23, 2005

23 March 2005, Volume 7, Number 14
WILL MARKET VENDORS TURN TO POLITICS? On 1 March, small retail traders went on an open-ended strike, protesting a new taxation rule requiring that they pay an 18 percent value-added tax (VAT) on goods imported from Russia. Beginning 1 January, Belarus switched to the country-of-destination principle in VAT collection in trade with Russia. The protesters, operators of stalls and kiosks at outdoor markets throughout Belarus, want the government to abolish VAT for individual entrepreneurs who pay the so-called single tax (a fixed sum of some $150 per month). According to organizers of the strike, some 80,000 vendors have refused to pay VAT on Russian imports.

Three weeks later, the strike is continuing, although on a considerably lesser scale than during its first days. President Alyaksandr Lukashenka took an unprecedented step on 10 March when he visited a market in Minsk and promised vendors that the government will soon address their concerns regarding the VAT payment on commodities imported from Russia. Lukashenka said the government may negotiate only the VAT payment system, not whether or not the tax should be paid. "The transition to the new principle of VAT collection in trade with Russia should be made as painlessly as possible for sole entrepreneurs," he added.

A week later Lukashenka vowed to issue a decree in the near future to improve conditions for the operation of vendors. The decree will reportedly allow market vendors to continue until 1 July to pay VAT on Russian imports without producing documents confirming the amount of their purchases and prices. Lukashenka instructed the government to work out a new mechanism for VAT payment after 1 July. Lukashenka also suggested that local administrations lower rents for outdoor market stalls and kiosks, effectively compensating vendors for losses brought on by VAT payments.

Will these steps by the government mollify the protesting vendors? This will largely depends on what mechanism for VAT payment the government will propose after 1 July. The essential problem seems to be that Belarus has no customs border with Russia. Belarusian vendors, who buy goods at big outdoor markets in Moscow or other Russian cities -- where as a rule nobody wants to give them any purchase documentation -- practically do not have any reliable records confirming what they ship to Belarus. If the government comes with a very rigorous proposal regarding the purchase documentation for Russian exports, the protest may not die out soon.

The behavior of the authorities toward the protesting vendors has already been surprising. When some 3,000 vendors gathered in front of the government building in Minsk on 10 February with a petition signed by some 30,000 against the VAT payment on Russian imports, police did not intervene, even though it was an unauthorized rally. What's more, the rally was addressed by Deputy Prime Minister Anatol Kabyakou -- a situation that nobody remembers to have happened in Belarus in the last five or six years. So far, the authorities have been used to ignore opposition rallies if they were sanctioned or use police forces to deal with unauthorized ones. And by the end of February Lukashenka amazed everybody even more by issuing a decree that lowered VAT for foodstuffs and goods for children to 10 percent.

Carrots aside, Lukashenka has also used the stick. The authorities have twice jailed Anatol Shumchanka, a leader of the striking vendors, for calling for unsanctioned protests. Shumchanka was not released after his second jail term but placed in a pre-trial detention center on hooliganism charges for allegedly beating his cellmate. The new charge -- which Shumchanka claims to be a provocation -- may carry punishment of up to two years in prison. Shumchanka, who repeatedly called on vendors to come up only with economic demands and not to make the strike political, may now want to reconsider his stance, as it is widely believed that if his colleagues remain silent on his lot, he may indeed get a prison term significantly longer than the two previous jail terms.

Importantly, the vendors' protest has shown the soft underbelly of Lukashenka's regime. First, the protest has shown that the regime is really afraid of large-scale social unrest. As long as the regime has to deal with several dozen oppositionists on the street, it routinely sends riot police to respond. But when a protest involves a wider social group, police methods are deemed inadvisable. Apart from some 100,000 market vendors, the problem of VAT payments on Russian imports affects also hundreds of thousands of customers -- essentially Lukashenka's bread-and-butter supporters -- who are too poor to buy foodstuffs or other basics in shops and purchase them at outdoor markets. Police batons won't do much good in such a situation.

Second, the vendors' protest obviously presents a challenge to Lukashenka's boast that Belarus under his leadership is, politically and economically, the happiest and most stable country in the former Soviet area. Therefore, while making some small concessions to the protesters, the government is also trying to avoid creating an impression that it may bend to the protesters' will. For this reason, Lukashenka will never release vendors from paying VAT altogether, even though the economic gain for the state from this tax is quite insignificant. According to estimates by independent experts, the state budget can expect hardly much more than $0.5 million per year in VAT on Russian imports by small retail traders.

The vendors' protest should also serve as a fingerpost for the Belarusian political opposition, which has repeatedly failed to mobilize any significant groups of voters for its agenda in recent years. Belarusians have turned out to be largely deaf and blind to such issues as democratic governance, civil society, media freedom, and human rights in their country. But when it comes to economic issues, Belarusians' patience and forbearance seem to have a limit. The opposition might well take note on how to use such outbreaks of economic discontent to its advantage in the run-up to the 2006 presidential election. (Jan Maksymiuk)

CLEANING UP UKRAINE. President Viktor Yushchenko's point men in the promised battle against crime and corruption in the administration of former President Leonid Kuchma have switched into high gear. On 16 March, investigations were opened in a number of cases that could result in the arrests of many of Kuchma's top managers.

On 16 March, Interfax reported that Prime Minister Yuliya Tymoshenko revealed a list of state-owned companies that will be "thoroughly investigated for gray schemes." First on the list is Naftohaz Ukrayiny and three of its subsidiary companies. Naftohaz has long been suspected of engaging in dubious gas transportation schemes from Turkmenistan, which resulted in huge losses for the Ukrainian economy. In early March, Yuriy Boyko, appointed by Kuchma to head the state oil and gas monopoly, was fired and replaced by Oleksiy Ivchenko, a member of parliament. The investigations will be conducted by the Interior Ministry and the Security Service (SBU), along with investigators from the state Tax Administration.

Tymoshenko also named UkrSpetzExport, the state arms sales company. UkrSpetzExport has been accused of selling the Kolchuga radar system to Iraq on Kuchma's instructions and of selling cruise missiles to Iran. On 18 March, Prosecutor-General Svyatoslav Piskun admitted the cruise missiles had, in fact, been sold to China and Iran -- but without nuclear warheads.

The Prosecutor-General's Office announced on 18 March that it had questioned a number of former high officials in the Kuchma administration, including Leonid Derkach, the former head of the SBU, who is suspected of complicity in the murder of journalist Heorhiy Gongadze in 2000 and in a range of offenses, from unauthorized wiretaps of members of parliament to illegal arms sales. Also brought in for questioning was Viktor Medvedchuk, the former head of Kuchma's administration, and Viktor Kivalov, the former head of the Central Electoral Commission. According to the Ukrainian Service of RFE/RL, both men are suspected of complicity in rigging the second round of presidential elections in 2004. Volodymyr Lytvyn, the speaker of parliament, was also questioned in conjunction with the Gongadze case, in which he is suspected of complicity in kidnapping.

Interior Minister Yuriy Lutsenko announced on 16 March that an arrest warrant has been issued for Russian businessman Maksim Kurochkin on charges of complicity in a massive scheme to defraud the state, the Ukrainian Service of RFE/RL reported. The case concerns the illegal transfer from state ownership of a number of properties by Ihor Bakay, the former head of Naftohaz, who, in his role as head of Kuchma's presidential property office, is alleged to have illegally transferred millions of dollars worth of property to Kurochkin prior to the election campaign of 2004. Kurochkin was the deputy head of the so-called Russian Club in Kyiv, established by Russian political consultant Gleb Pavlovskii, which lobbied on behalf of former prime minister and presidential candidate Viktor Yanukovych. Kurochkin, according to Lutsenko, is also wanted on unspecified criminal charges. Sources in Kyiv believe these might be related to Yushchenko's dioxin poisoning. On 17 March, Kurochkin denied these charges and called them "politically motivated." Pavlovskii also has been accused of plotting the poisoning but also denies any involvement.

Ihor Bakay, who was under investigation in the past for a variety of offenses, among them defrauding the Russian gas company Itera of millions of dollars and of using Naftohaz funds to help pay for Kuchma's 1999 election campaign, is said to have fled to Russia. The earlier investigation was headed by then Prosecutor-General Svyatoslav Piskun who at the time never completed his investigation of Bakay.

On 15 March, the Gongadze case picked up momentum, and the head of the SBU, Oleksander Turchynov, announced that Kuchma might be prosecuted. Turchynov also stated that Mykola Melnychenko -- one of Kuchma's former bodyguards who said he made secret tapes implicating Kuchma in Gongadze's murder -- has been given assurances of his personal safety by President Viktor Yushchenko when he returns to Ukraine to testify in the case, but that he first has to turn over to the government all of his recordings, as well as the devices used to record the conversations. After these are authenticated, they will be introduced as evidence.

Viktor Pynzenyk, the minister of finance, announced on 15 March that Yanukovych's former government must say how it spent $3.2 billion, which remains unaccounted for from last year's budget. The funds missing include money earmarked for the construction of a new bridge over the Dnipro River, the construction of a new highway from Kyiv to Odessa, and a line of credit to the Pivdenmash enterprise in Dnipropetrovsk.

A new investigation by the Interior Ministry has shown that former Railways Minister Heorhiy Kirpa might have been responsible for embezzling tens of millions of dollars earmarked for the new bridge, construction on which stopped months ago. Kirpa, who committed suicide after the election, is believed to have funneled ministry money to the Yanukovych campaign.

As these events were unfolding, Kuchma gave an interview on 16 March to the Russian newspaper "Vremya novostei," in which he again claimed that the Melnychenko tapes are fake and were part of a plot to depose him. He criticized the government for dropping charges against Melnychenko in return for his cooperation in the investigation. Kuchma gave a somewhat contradictory explanation when he stated that, "[Melnychenko] committed an illegal act by taping the office, and he should be held responsible for this." (Roman Kupchinsky)

"The Commonwealth of Independent States has turned into something incomprehensible. We make decisions, but none of them is in fact executed." -- Belarusian President Alyaksandr Lukashenka to a gathering of CIS foreign ministers in Minsk on 18 March; quoted by Belapan.

"When I was considering the appointment of a prime minister, I quarreled with anyone I could, with anyone I met on the street...I proposed that some comrades, realistic candidates [for the premiership], outline three conceptions for forming the government and other [power] institutions with [their] leaders. I myself set to working out these three conceptions. It took me nearly two weeks. Subsequently, there was a final part. I set the following conditions to some candidates: You have 24 hours and two sheets of blank paper. Please write down how you see your role if the prime minister is someone else, not you. I had in mind the harmonization of the system. I had in mind the leadership of the government, the parliament, and the [National Security and] Defense Council. When on the following day none of them presented such a paper to me, I said: 'Under such circumstances, I'm going to make a personal decision.' And before we flew to Moscow [on 24 January], I said I did not want the Ukrainian nation to have an impression that I was going to Moscow to get agreement on a prime minister. Therefore, I made the decision on [Yuliya] Tymoshenko as prime minister in the airport, to demonstrate [that the decision was made transparently and locally]." -- Ukrainian President Viktor Yushchenko on his appointment of Tymoshenko as prime minister, in an interview with the Moscow-based "Kommersant-Daily" on 18 March.

"I made my decision at the very start: There can be no talk of a third [presidential] term [for me]. I'm a realist. I did not want to place Ukraine in the situation of a pariah in the democratic world...I and [Belarusian President Alyaksandr Lukashenka] are in different weight categories. The market for Belarusian goods is basically in Russia. But they have problems anyway. Ukraine's production cannot be 'digested' by Russia, which can take no more than 30 percent of what we produce. Therefore, we cannot find ourselves in economic isolation." -- Former Ukrainian President Leonid Kuchma in an interview with the Moscow-based "Vremya novostei" on 16 March.

Compiled by Jan Maksymiuk