Ukraine’s Reforms: Promises Still Unfulfilled

The main reason for the Ukrainian revolution of 2013/2014 was the opposition of the most active part of society to the increasingly authoritarian rule of Victor Yanukovych and the lack of reforms. Thus the Maidan was a call not just for democracy, but in equal measure for modernization of the country.

Not surprisingly, the political elites that took power after deposing Yanukovych put the word “reforms” on their standards. In one of his first speeches, the newly elected President Petro Poroshenko spoke about the need for far-reaching reforms, invoking the Shakespearean “to be or not to be.” The new five-party coalition, formed after the early parliamentary elections in late 2014, agreed on a program of ambitious reforms, and since it possessed a constitutional majority, one could reasonably hope that this document would be systematically implemented. It seemed there was a widespread consensus in Kyiv that the necessity of a comprehensive modernization in all crucial areas was no less important for Ukraine’s future than the Russian aggression.

However, it soon turned out that there would be no reforming blitzkrieg. In the first month after the Maidan, a time when social mobilization and readiness to bear the costs of reforms were at their highest, very little happened. Although the Parliament adopted the law on devolution and the fight against corruption, Ukrainian politicians were mostly absorbed with the election campaign and the war against Russia. The conflict in the East of the country often served as an excuse for inactivity in reforming the state.

In 2015, the Ukrainian government managed to initiate changes in a number of important spheres, nevertheless, it still does not guarantee the success of reforms.

First, the decentralization reform was prepared, necessary to create a properly functioning local government structures, which is intended at stimulating regional development. The document, well received by most experts, passed successfully its first reading in the Parliament in August. The second reading was scheduled for December 2015, but it was postponed, as the government predicted that it would not receive sufficient support from the deputies. Decentralization involves changes in the Constitution and thus requires a qualified majority. Yet, some members of the ruling coalition refused to support the bill, because it contains clauses on the “special way of functioning of local government in some districts of the Donetsk and Lugansk provinces.” According to some deputies, this would open the way to endowing the Donbass with an autonomous status. These clauses are an implementation of the Minsk Peace Agreement from February 2015. As we can see, merging devolution with special status for Donbass blocked this very important reform, and the prospects for its passing now seem remote.

Second, anti-corruption bodies have been created: the National Anti-Corruption Bureau and the National Agency for Preventing Corruption have been tasked with revealing and fighting corruption. As a result of the long process of building these institutions, political bargaining around the nominations of their bosses, and the protracted recruitment of their officers, they are still inoperative. Meanwhile, the problem of corruption invariably belongs to the most important challenges facing Ukraine. In all public opinion polls corruption is named as a leading problem to be solved. At the same time, more than half of Ukrainians believe that the situation in this area is worse than before the Maidan.

Third, Kyiv undertook the reform of the judiciary, which President Poroshenko called “the mother of all reforms” in one of his first speeches. Two laws have been passed, on the restoration of trust in the courts and on the prosecutor’s office, aimed at a far-reaching shakeup among judges and prosecutors. The changes so far have been going in the right direction, but they are still insufficient and require further action, including an effective fight against corruption in the courts themselves. Moreover, the reform has met with strong resistance from the judicial circles.

Fourth, gas reform has been initiated—it is one of the most important changes, as it will have an impact not only on the energy sector, but also on many other areas of the functioning of the Ukrainian state. Repairing the financial situation of Naftogaz, the Ukrainian monopolist on this market generating losses to the tune of 7% of Ukrainian GDP, would have a positive effect on public finances. Improving energy efficiency, now among the lowest in the world, would decrease the dependence on imported gas. Introducing transparency and new standards would remove the corruption tax on gas sales, which since the 1990s is one of the main sources of illegal income for the ruling elite, making them very reluctant to reform the sector. In April 2015, the Parliament passed the long-awaited law on the natural gas market, which provides for creating a competitive market based on the rules of the EU third energy package, lifting the Naftogaz monopoly and dividing this corporation. Gas prices for private citizens and the public sector, traditionally subsidized by the government, will be gradually raised to the market level. The law, although a very important decision, is just the beginning of the difficult process of reforming the gas market and it will require many additional executive decrees. But we can already see significant delays, also regarding the law on a new energy regulator, and splitting Naftogaz into smaller energy companies.

Fifth, the new government launched reforms in the economic sphere; most importantly, it has stabilized the macroeconomic situation, stopped the depreciation of the hryvna, increased currency reserves, and partly reduced foreign debt thanks to an agreement with Western creditors (debt reduction amounted to $3.6 billion). This was to a large extent possible thanks to the $17.5 billion IMF aid program. Measures have also been taken to deregulate the economy, and changes in the tax system have been started. Still, there is no comprehensive approach to improving the operating conditions for small and medium-sized businesses, which would allow them to emerge from the unofficial economy, estimated to be worth about half of the GDP. The deep economic crisis (in the last year the GDP fell by about 11%) induces Kyiv to look for sources of income without always looking at the negative impact of imposing these taxes. The actions of the Ukrainian authorities in improving conditions for economic activity are well illustrated by the most recent Doing Business 2016 report, which registered improvement just in three out of ten categories studied, which ultimately ranked Ukraine at 83rd place in the world. We can only hope that Kyiv would want—and be able—to use the economic potential of the association agreement (DCFTA) with the EU, which came into force in January 2016 and is in fact an ambitious program of modernization of the Ukrainian economy.

So what conclusions can be drawn from the post-Maidan reforms? In “normal” circumstances the changes introduced in the last dozen months would have to be regarded as significant progress. However, the Ukrainian government is acting in an emergency situation; with an unfinished conflict with Russia, which is very interested in a fiasco of the New Ukraine project, and with aroused and often unrealistic expectations of the Ukrainian society, which after the revolution hoped for reforms with quickly noticeable results. The authorities also have to make up for the long-standing indolence of the previous administrations. As a result, the overall reforms so far, when we take into account the immediate context, must be assessed as largely insufficient.

The reforms in recent months have been introduced with more and more difficulties and with growing resistance of strong interest groups, including some oligarchs, who invariably remain key political players. Moreover, many important reforms (including the gas reform and creating the anti-corruption institutions) were effectively imposed by the IMF, which repeatedly threatened a withdrawal of funds if a given reform, previously agreed under the Extended Fund Facility Program, would not be passed. The Fund still remains one of the most important pro-reform factors in Ukraine. Another is the Ukrainian society, which seems to have been irreversibly empowered by the Maidan—the rulers have to take civic pressure into account.

A serious obstacle in the process of reforms is the often visible lack of political will on the part of the authorities, for only this can explain their often surprising procrastination. After the Maidan it was difficult to expect reforming “miracles”, since only a part of the Ukrainian political elite was replaced. The majority of the most important politicians today, including the president and prime minister, served important government functions in the last decade. After the revolution there was also no change in the mechanisms of Ukrainian politics, where most of the parties still have an “owner,” who finances them and expects them to take care of his interests in exchange. Moreover, some participants of Ukrainian politics traditionally attempt to use their office in building their own business, which is particularly noticeable in the case of the current prime minister. This can also explain the lack of interest in a real fight against corruption. Although anti-corruption bodies have been created, there has been no breakthrough in this sphere, and the funding provided for them in the new budget is too low to make them efficient. Consequently, without real improvement in the fight against corruption it is difficult to expect changes in other areas.

The process of reforming the state would certainly be faster if Ukraine was ruled by a government with a stable parliamentary majority, rather than by an increasingly fragile coalition, which a few months ago was reduced to four parties of often opposing interests. As a result, the government is regularly forced to resort to the opposition’s backing, as some of the coalition members vote against government bills. Another obstacle in introducing the changes is the low efficiency of the poorly paid and corrupt bureaucracy.

Last but not least, the clearly visible difficulties of the Ukrainian transformation result from its complex nature. Changes must be introduced simultaneously in important spheres of government and economy, which has no analogy in the post-Soviet area. No one (except for the much smaller Georgia) has attempted abandoning the post-communist system, characterized by a significant impact of informal groups (oligarchs) on government and deeply ingrained corruption.

The positive changes which have been already undertaken do not guarantee the success of Ukrainian reforms and are not irreversible. The task of creating a new system according to European standards is still relevant. The Ukrainian authorities are facing very difficult challenges, which will require consistency, will, and political stability. The operating mode of the Parliament repeatedly raises questions about the efficiency of the current governing coalition and everybody is preparing—just in case—for possible early elections. As the time passes from the second Ukrainian revolution, the question returns if this time it may be successful. We can only repeat the words of the US Vice President Joe Biden, who in December 2015 spoke in the Ukrainian Verkhovna Rada: “The whole world is watching you […]. It may be your last moment. Please for the sake of the rest of us, selfishly on my part, don’t waste it. Seize the opportunity.”