13:36 PM Wednesday, November 14, 2018
With elections coming, are Ukraine’s elites defaulting to old ways?
On a visit to Kyiv, Timothy Ash sees fearful politicians reasserting themselves against new anti-corruption agencies
image/svg+xml Kyiv Lutsk Rivne Zhytomyr Lviv Ternopil Khmelnytskyi Uzhgorod Chernivtsi Vinnytsia Chernigiv Sumy Kharkiv Poltava Cherkasy Kirovohrad Lugansk Dnipropetrovsk Donetsk Zaporizhzhia Mykolaiv Odesa Kherson Simferopol Sevastopol Ivano- Frankivsk

I have spent the last couple of days in Kyiv, helping with the launch of our Chatham House report, The Struggle for Ukraine, which was published back in October. The trip enabled some interesting interaction with policy makers, politicians, academics, representatives of civil society, journalists, diplomats and international financial institutions.

My own chapter from the Chatham House report sends a message that:

  • The status quo maintained over the period 1991-2013 was not working for the bulk of Ukrainians. Euromaidan was the breaking point that things needed to change. Growth and development needed to be more inclusive, and not just for the benefit of a narrow section of Ukrainian society -- it’s oligarchic and politically connected elite. Ukrainians had the choice in 2013/14 between a Western, European orientation, moving towards the European Union, or an Eastern orientation through deeper integration with the Russia-dominated Eurasian Union. In the end, and despite foreign annexation (of Crimea) and invasion of Eastern Ukraine by Russia and its proxies, the bulk of Ukrainians chose the former.
  • But reform is incomplete. We are now approaching a critical juncture, perhaps make or break. Basic macro stability had been restored. The foundation for growth is there. But the key determinant of whether Ukraine grows at 2%, as at present, or 5% plus, as really needed, is whether the business environment can be improved to the point where domestic and foreign investment flows.

b) Experience with reform over the past four years since Euromaidan suggests that Ukraine is absolutely reformable. Indeed, some remarkable reform achievements have been delivered, including energy sector reform, fiscal and balance of payments adjustment, introduction of Prozorro, e-Declarations, banking sector reform, NABU, NBU reform, et al. So despite the huge challenges facing Ukraine - and perhaps because of them - Ukraine has proven able to push on and deliver radical reform. Ukraine has a vibrant, dedicated, technically competent (international standard) group of reform technocrats who have proven able to devise innovative solutions and deliver these.

Святий Миколай knows who has been naughty and who has been nice this year. But, given the general state of elite denial, Ukrainian politicians would be traumatized to wake up Tuesday morning to find pieces of coal under their pillows. (UNIAN)

The critical issue now is addressing corruption. Sadly, the reality is that nearly a quarter of a century of warped development on an oligarchic-dominated rent seeking, state capture model has meant that corruption became endemic and almost an industry in its own right.

If Ukraine wants to move on, and move to a Western, European model of development, corruption and rent seeking behavior has to be reined in. This is not saying that Western Europe is squeaky clean. It is far from it. But the challenges faced by business because of corruption and rent seeking behavior are still multiples worse than in Western countries. To enable domestic and foreign business to do better, and to bring more inclusive growth, corruption has to be moderated, and reduced. No one is saying it has to be eradicated overnight - albeit that would be nice. But there has to be some noticeable improvement. If delivered, it would deliver more investment, growth, jobs and higher living standards for a greater cross section of society. In Ukraine, it is not that just per capita GDP is low, around $3,000 per capita, but the distribution is warped so that a few hundred oligarchic families/groups/clans take the bulk of this wealth -- to the neglect of the vast majority of the rest of the population.

In Europe and the US, post Brexit and Trump, all the talk is about the need to deliver inclusive growth. Such discussion should be center stage in Ukraine Or else the risks of a more populist agenda emerging are clear. In this latter scenario, existing oligarchic groups might not all prosper so well. So, as a group, they should also surely have an interest in delivering growth, and inclusive growth. They should have an interest in cleaning up the business environment.

Ok, so the above perhaps reflects a rather academic perspective. But what do I currently see on the ground? Do I see/feel this appetite to address corruption and improve the business environment to deliver inclusive growth?

Unfortunately, that was not my big take out from this week’s visit. It has been my understanding for some months now that Ukraine’s reform progress is being pulled off course -- going backwards even -- as politicians first focus on looming elections, and, second, worry about what could result from successful implementation of an anti corruption agenda.

In terms of specifics, the IMF extended fund facility has been off track now since the last review was completed last April. Indeed, even the completion of the third review in April was somewhat half hearted, given that numerous prior actions were not complete. Waivers were given essentially in acknowledgement of the brave, and in many respects landmark, decision to nationalize Privatbank. But even since April, there has been backtracking with failure to hike gas prices, as agreed with the IMF as a condition for the third review.

We can then add pension reform which has still failed to meet IMF approval, slow progress in addressing the problems at Privatbank, failure to deliver on promises of land reform (moratorium on land sales extended again to 2019), threats to the ProZorro system from the Buy Ukraine program, and risks to VAT reform. A myriad of tax break/changes in the 2018 budget raise big issues for the IMF in terms of sustainability. The on-going battle over NABU raises real concerns over commitment to fighting corruption.

Saakashvili and his lawyers celebrate his release Monday night. Faced with Kyiv's largest street demonstrations since the 2014 Euromaidan, Judge Larysa Tsokol of Kyiv's Pechera district court dismissed the government's request to keep the Georgian firebrand under house arrest in Kyiv. (UNIAN/Vladimir Gontar)

Eight months after the resignation of Valeria Gontareva as governor of the central bank, the institution does not have a permanent governor. The latter is just perverse, given the importance of the institution. It suggests that political horse trading is still underway. Or, simply, Ukraine’s political leadership does not fully comprehend the importance of the National Bank of Ukraine as an institution, and the import of cementing its credibility in markets and wider society. This undermines the great work done at the NBU over the past few years.

I am left asking myself: why, when the current Administration gives ample lip service to the importance of staying the course on the current IMF program, does it not do more to ensure compliance?

I sat through the Ukrainian presentation at the IMF annual general meeting in Washington in October to hear that there were no major problems with the IMF, and everything would be resolved in a matter of days. We are still waiting.

Why has the fourth review still not been completed when as per the original schedule of the current EFF we should already be on the ninth review? The answer has to be that either the administration has its focus elsewhere, on other priorities. Perhaps, it does not want the fiscal strait jacket of an IMF program going into elections. Perhaps, it thinks that it does not need the money -- with access to market financing.Or, perhaps has some fundamental objections to key components of this IMF program, and more particularly the anti-corruption agenda.

But failure to meet IMF conditionality has broader costs. One was failure to secure the release of the final EUR600m in EU MFA. Despite spin from the Poroshenko Administration, there is really no commitment from the EU to work up a new EUR1.8bn MFA program any time soon.

It is as if Ukraine is flush with cash and does not need the $10bn plus IMF/EU money already on the table.

Some talk up grandiose and completely unrealistic ideas of a Marshall Plan for Ukraine, worth tens of billions of dollars. That sounds like pie in the sky when the Administration is not drawing on existing concessionary financing on the table, because it is unable or unwilling to deliver on the conditions therein.

Staying on track with the IMF would offer the best chance of ratings upgrades, lower financing costs for government and business, kickstarting credit in the economy, and delivering investment, jobs, growth and improving living standards.

Let’s circle back to the anti corruption agenda, which is so critical for Ukraine’s future development. It is fair to say that recent fights between the Prosecutor General’s Office and NABU, the removal of the chairman of the Rada’s anti-corruption committee, more official interest in investigating the financing of anti-corruption NGOs than pursuing allegations of serious and large scale corruption by government officials, and bringing anyone significant to account for corruption, all suggest that the old system is fighting back.

Arguably, the system and the elites have most to lose to the successful and logical conclusion of systems and institutions set up to counter corruption. Elites seem to think that they will be brought to account -- jail time? They are doing their utmost to resist.

The question could be asked: was the system being created, which envisages, individuals brought to account for past misdemeanors, including prison terms, too ambitious at the outset?

I argued several years back that a more workable system, given the widespread, pervasive and even inclusive nature of corruption in Ukraine, would have been to have a Truth and Reconciliation process for corruption. Windfall taxes would be imposed to address historical corruption. Then, there would be zero tolerance for future excesses. Had that been applied, the country’s elites might have been more interested in supporting and facilitating reform of the judiciary and the legal system to ensure future corrupt practice is not tolerated.

The battle over the anti-corruption agenda has become the logjam and seems to be risking broader political stability, as seen in recent days with the Saakashvili demonstrations, arrest, and then release.

Politically, Kyiv seems to be in a state of flux. On the one part there seems to be centralization around the party of power and the Poroshenko Administration. On the other, opposition parties are responding to what they regard as undue and unfair pressure from the Poroshenko Administration in using old tried and tested levers of power, to forge new alliances amid shifting sands.

Street demonstrations, while still relatively small in scale, have the potential in Ukraine, given the experience of the Orange Revolution, and Euromaidan, to build in scale and quickly -- if mismanaged by officials in power.

But a pervasive view which came across on this trip was real uncertainty about where Ukraine is going. There is real nervousness as to whether the pace and direction of reform will be maintained.

Have the old oligarchic elites totally reimposed their control/authority, and is the current situation in Ukraine all that different from the period 2011-2013 in the lead up to the Euromaidan?

There is a real fear of a populist backlash.

Timothy Ash is senior sovereign strategist for emerging markets at BlueBay Asset Management in London and a member of the UBJ Editorial Board.

Slider photo: With a handcuff dangling from his wrist, Mikheil Saakashvili hails supporters who dragged him from a police van on Kostolna Street in the bungled Dec. 5 arrest attempt. (UNIAN)

Posted Dec. 12, 2017

We recommend
China uses debt traps for political leverage, infl...
UBJ Editor Jun 26, 2018
As Ukraine's Verkhovna Rada considers new legislat...
UBJ Editor Jul 19, 2018
Germans are naive -- or deceitful -- to say the pi...
Diane Francis Mar 20, 2018
--> --> -->