The post-Maidan “winner takes it all” approach seems to be the key feature of Ukraine’s current state of affairs: (s)elected oligarchs in power, selective justice to keep others at bay, selective reforms where state and individual interests match or when local and western pressure combined is strong, and selective de-oligarchisation. The threat from Russia remains the main reason why such a selective state should be tolerated at home and supported in the West.
Those who had high expectations are becoming disillusioned. Even without Crimea and Donbas, a post-Maidan Ukraine is framed by political impunity, competition of oligarchs’ interests, a weak central authority and a disenchanted society.
Those with lower expectations could point to the fact that Ukraine as a state has survived, against all odds. Moreover, hundreds of reform steps are currently in progress and are, slowly but surely, pushing the state forward. While there are some reasons to be cautiously optimistic, a reform review, as Carnegie’s Ukraine Reform Monitor aspires to, illustrates a mixed picture at best.
Rebound at Risk
The most visible progress has been made in the stabilisation of Ukraine’s finances. This includes the National Bank of Ukraine’s institutional reforms, a new fiscal policy, a modest reduction in state expenditure, the ongoing stabilisation programme of the International Monetary Fund and the agreement Ukraine reached with private creditors. Rating agencies upgraded the country. Fitch improved Ukraine’s grade to “CCC” first, while Moody's followed suit and upgraded the sovereign rating of the government from Ca to Caa3. Capital inflows to Ukraine increased by 34.1 per cent to 2.55 billion US dollars between January-September 2015, against a 40.7 per cent decrease in outflow in the previous annual period to $526 million ($888 million a year ago). There are promising signs of an eventual recovery. The third quarter GDP show a seven per cent year-on-year contraction, much improved from the 14.7 per cent slump in the second quarter. The National Bank forecasts 2.4 per cent growth for 2016.
However, Ukraine’s rebound may already be at risk due to tax reform controversy and a disputed 2016 state budget. While macroeconomic results are viewed positively abroad, regular Ukrainians face a different reality. Real wages are down to a quarter of what they were in 2014, and the average monthly salary plummeted to $186. The UN estimates that 80 per cent of Ukrainians now live on less than five dollars a day. The winter months will call into question the sustainability of Ukrainians’ political patience, although the growing shadow economy at around 58 per cent is enabling survival.
There is also some modest progress in the energy sector, with increased transparency, decreased gas consumption, Russia’s reduced leverage and greater energy security as a result of reverse gas flow from the EU. However, there is still no independent regulatory body. The package of laws necessary to improve the energy sector further has also been called into question, while most energy assets are still controlled by the oligarchs. Pricing has been justified by demands from the IMF, but without explanation to citizens about what benefits modernising the sector would bring. Subsidies are not given directly to households but to the state company, Naftohaz. Neither transparent regulation nor market competition is present, while Ukrainians are paying up to 450 per cent more this year for their heating, adding to their grievances. Energy efficiency is not a priority, which is shocking considering that almost 20 per cent of Ukraine’s GDP value consists of oil and gas consumption.
The Ukrainian army has become one of the largest military forces in Europe, increasing in size from 146,000 to 280,000 soldiers. Security expenditure has been maintained at five per cent of GDP in 2016, amounting to $4 billion. There is a new online procurement system, but levels of corruption in the army, even in the Donbas war zone, remains significantly high. Official statistics reveal that at least 30 per cent of losses are endured outside combat, pointing to mismanagement and poor leadership. Ukraine has lost a significant portion of its air (in the Donbas conflict) and sea capacity (with the annexation of Crimea) and the integrity of its armed forces (the army, National Guard, and volunteer battalions) remains an open question.
Decentralisation reforms have advanced technically in the past year. Local government powers, administration and funding have all been strengthened. However, a more systemic approach, particularly in terms of the political dimension of decentralisation, remains unresolved and depends on the broader dynamics of the Donbas conflict. There is no consensual vision what kind of political system Ukraine would adopt and how to ensure the division of power to avoid state capture.
Political legitimacy has been restored via the presidential and parliamentary elections last year. Political pluralism and competition, which differentiates Ukraine from Russia, is still there. However, there are signs of intimidation and authoritarian abuse of administrative power. Judging by turnout, the recent local government elections proved that Ukrainians are increasingly fed up with the country’s ruling classes. They feel that reforms are not tackling those fundamental aspects of the political and social framework that the EuroMaidan Revolution was about. The constitutional amendments on decentralisation or the proposed judicial reforms are examples of half-hearted measures aimed at preserving elements of the status quo’s habits and values, under which the ruling elite and society at large continue to live.
An integral part of those habits is the elite’s impunity. The high profile arrests of Yanukovych-era figures on corruption, such as Olena Lukash, the former justice minister, and the failure to proceed with an investigation of allegations of corruption against current political allies, show that holding the rule of law in contempt remains standard practice. Decisions on anti-corruption cases, as well as the management of law enforcement, judicial and security agencies, remain dominated by politics, although not by a single clan, as was the case under Yanukovych.
Some similar, though not identical, urgent steps are being made in the fight against corruption, such as the outsourcing of drug solicitation to international agencies. The government is engaged mostly in a rhetorical exercise when it comes to corruption, and there is a lot of foot-dragging taking place regarding the establishment of special, independent institutions to fight it. As an OECD special monitor report suggests a new anti-corruption framework in Ukraine has significantly improved the legal framework. Nevertheless, the share of public contracts awarded via a non-competitive process is still too high and is on the rise. One example where Ukraine’s law enforcement system failed to produce tangible results is its inability to recover assets allegedly stolen by the Yanukovych regime.
A recent survey by Pact, a US NGO based in Ukraine, shows a slow decline in the number of people experiencing corruption and a significant decline in voluntary bribes. The survey also highlighted an increased perception of the fact that corruption is connected to institutions that are high on the media agenda, such as the prosecutor’s office and the courts. An improvement in people’s awareness about corruption and an increased desire to act against it have not yet necessarily translated into action. Thus, although the old centralised corruption may be gone, rent seeking schemes remain and have instead become “decentralised”.
Public opinion surveys show that a majority of Ukrainians do not believe in the success of reforms (only 30 per cent do) and citizens have named the government and oligarchs as major obstacles. The key reasons for the socio-economic crisis, according to respondents, are telling: 72 per cent of Ukrainians blamed corruption, 54 per cent pointed to an oligarch-controlled economy, 47 per cent named government incompetence and 35 per cent believed it was the result of an absence of economic strategy. However, only 30 per cent indicated that the war in Donbas was the key obstacle to reform.
Nevertheless, in the current social, economic and political framework, Ukrainians are more worried about their own economic and material survival than about reforming their country. Interestingly, neither the government nor civic groups are championing the biggest priority that citizens named in reform-related surveys: healthcare. According to the Democratic Initiatives Foundation, “every third Ukrainian can no longer tolerate a further decline in the standard of living due to material status” and “every fourth citizen does not believe in the success of reforms”. These figures should act as a stark warning to the authorities.
The Carnegie Endowment’s Ukraine Reform Monitor concludes that low-level reforms have undoubtedly created progress. As Russia reacted to the EuroMaidan Revolution with the drastic step of annexing Crimea and aiding the armed resistance in Donbas, Ukraine was stretched between reforms and war. Key political and judicial reforms were hijacked with the emergence of the Donbas war, which has become the unfortunate legacy of the protracted Maidan saga. Thus, the reforms have suffered from half-hearted measures and widespread perceptions of poor communication and co-ordination. Meanwhile, Ukrainian bureaucracy, which often operates under the influence of rent seeking interests, remains entrenched and opposed to reform.
The oligarchs’ wealth has been reduced, but they are not out of the system and their informal impact remains strong. Almost all of them have encountered significant losses. Many of them are locked in protracted debt restructuring talks with creditors. However, there are virtually no signs that they will focus on the modernisation of the state, as opposed to fighting for their own interests. Especially as Petro Poroshenko, Ukraine’s president, who did not make his fortune via “classic” rent seeking schemes, is expanding his business empire on the contrary to his election promises. According to a Ukrainian newspaper, he has been the only one to increase his fortune since the EuroMaidan Revolution.
No consensual and sustainable vision
There is no doubt that corruption remains the biggest threat to Ukraine’s national security. The “rule by law” erodes state institutions and limits the government’s ability to exercise authority and build trust of citizens. These reforms should not be treated by the West as Ukraine’s “art of possible”, but as an urgent necessity, no matter what real and/or exaggerated risks Russia presents.
Internal political risks remain extensive and civil society is turning increasingly towards “radical” reforms. Activists are growing impatient with the continuous dysfunctionality of politics, the remaining stubborn resilience of the old system and old societal habits. Civil disobedience (yet again) has been turning violent, as was the case with the Crimean Tatar blockade of the peninsula. In the eastern city of Kryvyi Rih, opponents of the disputed elected mayor, Yuriy Vilkul, are threatening the authorities with “people’s power” after occupying city hall. Oligarchs are consolidating their power, fearful that they could lose even more power to Kyiv by supporting new faces, likely introducing even more political fragmentation.
In the meantime, Kyiv is barely able to catch up with these events. Poroshenko’s policy of putting out fires offers no sustainable political vision, although it provides continued impunity in exchange for political loyalty. The EuroMaidan’s political legacy thus far has not been reforming the country but, following Russia’s intervention, maintaining its divisions between the (majority) of winners and the (minority of) former rulers. Even though the new Ukraine is turned firmly towards the West, it remains as selective as its predecessor.
It is time for the West to adopt a selective strategy as well. The overall pace of reforms is slow because the reformers are in the minority. A minority strategy might help; a gradual step-by-step change regarding key priorities alongside the necessary communication and education efforts to re-engage with disillusioned Ukrainians. Instead of relying on individuals, it must focus on the gradual reform of state institutions. An integral part of this should be reform of the education system to cultivate a new, European, generation of Ukrainians. This may reduce resistance as (a large) part of society needs more time to absorb the change the government is (self) pressed to do.
Ukraine's economic problems have been underestimated and misunderstood. What the West needs to realise is that the country is obviously lacking an economic trajectory which would trigger modernisation. Modernisation requires far more aid. Hitherto, more aid would require a more transparent, accountable and effective state and a much better business environment – aka reform. As there are neither such resources nor political will in the West and reform is slow in Ukraine, the country will likely be kept afloat.
The European Neighbourhood Policy review designated economic development and job creation as Ukraine’s first priority. To its credit, the European Union has created institutions to assist with this, namely the Advisory Mission to Civilian Security Sector Reform (EUAM) and the Ukraine Support Group. However, they need to perform better. Unless domestic reforms deliver, the West will get what it pays for: a fragile and frustrated state on its border that has turned its back on Russia.