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Digging the Trenches

European officials have described the Eastern Partnership summit in Vilnius this November as a last chance to sign the Association Agreement and move forward with Ukraine’s European integration project before the 2015 presidential elections.

July 23, 2013 - Jakub Parusinski - Articles and Commentary

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However, this doesn’t mean Kyiv has broken out into a flurry of law-passing and reform. Instead, the country has ground to a political and economic standstill with the administration focusing on a single goal: not to rock the boat and keep the country in a state of stasis until Viktor Yanukovych can be re-elected in early 2015.

No easy job

This will be no easy job. Ukraine entered the year in recession, and little to no growth is expected in 2013. Meanwhile, the rapid increase in public spending since 2010 – both in the form of social handouts and infrastructure investments – has caused public debt to soar and widened the fiscal gap between revenues and expenditures. With record dollar-denominated debt redemptions this year, Kyiv has ramped up tax collection, sold foreign currency reserves, borrowed from state-owned banks, and issued bonds on international markets. Nonetheless, the inflow cannot keep up with galloping social spending, and many economist believe Ukraine is on the brink of a balance of payments crisis.

Ironically, the only two measures that have not been used are the ones that would be most effective in reviving the economy: devaluation and a loan from the International Monetary Fund. But neither is politically feasible – the IMF loan requires a hike in gas prices, which President Viktor Yanukovych has vowed not to do; devaluation could set off a chain reaction and would be taken as a sign of weakness.

This has taken its toll on the quality of public services. Many regions have seen hot water supplies cut, and not just for the usual two weeks for renovation works, but in some cases for months. Distribution of foreign passports (most former Soviet states still have two kinds) has been held up since May, which some have also linked to budgeting issues though the official explanation is bureaucratic confusion. Meanwhile, the state of many of the country’s roads remains dismal and medical services are lacking.

As if dollar-denominated debt redemptions were not enough, there are also troubles on the gas front. Amid increasingly tense relations, Russia has stonewalled Ukraine saying that a new gas deal can only come if the strategic gas transit system is sold or European integration is aborted in favour of the Eurasian vector. As a result, Ukraine is gearing up for a potential gas war this winter: Russian gas imports are being cut, European ones are being boosted and domestic producers could soon be forced to hand over half of their production. It will certainly be hard to get by, but Ukraine has neither the money nor, it appears, the will to buy more from its northern neighbour.

Meanwhile, the government is trying to keep key sectors of the economy chugging along and its base happy for the next 18 months no matter the cost. Subsidies to state-owned coal mines are a case in point. With costs of producing a ton of coal at 1,400 hryvnias ($170), they sell their products at 500 hryvnias ($60) and taxpayers cover the rest. In the first half of 2013 their output dropped by 16 per cent compared to the same period in 2012, while subsidies increased by 38 per cent – a discrepancy that is mostly explained by outdated equipment and technology, market saturation and corruption.

But miners are far from the only category pumping the budget dry. Although a glance at Ukraine’s destitute, ageing villages may indicate otherwise, the post-Soviet nation maintains one of the most expensive pension systems in the world. At 18 per cent of GDP, Ukraine’s social spending is, proportionally, one-and-a-half times that of France, and more than twice the size of Sweden’s. Both groups, the miners and the pensioners, are part of the ruling Party of Region’s base.

Sharing the wealth

While populist policies continue to push the country toward crisis, the Yanukovych “family,” a group of loyalist close to the president, has continued to amass wealth and political power. The president’s son, Oleksandr Yanukovych, is fast on his way to become the world’s second richest dentist, after Turkmen dictator Gurbanguly Berdimuhamedov. Last year Forbes identified him as the top recipient of public tenders; according to Focus magazine, his wealth is estimated at almost $200 million.

Serhiy Kurchenko, a 27 year-old mystery multimillionaire, has seen an even more meteoric rise. Still unknown in early 2012, the youthful oligarch was first exposed in a Forbes Ukraine article titled “The Gas King of All Ukraine”, which revealed him as one of the country’s biggest petroleum product importers and linked him to gas smuggling. Since then, he has bought one of Ukraine’s top football clubs, a strategic refinery from energy giant Lukoil, and the media holding UMH that owns Forbes Ukraine itself. There is no way this could be achieved without connections; Kurchenko is widely believed to be a front for Oleksandr Yanukovych.

Nor has the “family” limited itself to wealth accumulation. One after another, Yanukovych has installed loyalists at strategic posts. This began with the financial centres, the National Bank of Ukraine, the Ministry of Finance, and the tax authorities (now the Ministry of Revenues and Duties). These moves have allowed the “family” to extend its control over financial flows, to regulate them and to use the banks to steer the economy. More recently, this power has been cemented through loyalist appointments to the Constitutional Court and the Central Electoral Commission.

All this raises the question of why Ukraine’s wealthiest and most powerful oligarchs have tolerated the rising power of Yanukovych. The pond is shrinking and it would appear that further growth of any group can only come at the expense of others. Yet no visible moves against the “family” can be seen, suggesting that so far the group has grown without stepping on any powerful toes. Yes, the top billionaires are suspected of funding several political parties, but none of these are a particular threat at the moment, and they can hardly be expected to put all their eggs in one basket.

Meanwhile, Ukraine’s richest continue to benefit from favourable privatisations, public contracts and business preferences. The planned EuroBasket championship (the main European basketball tournament due to take place in 2015 – editor’s note) is particularly illustrative. The government will again spend billions of hryvnias it does not have and cover the interest on state bank loans to private investors involved in the process. Tellingly, the construction of the stadiums has already been distributed: four go to billionaire Igor Kolomoisky, one goes to millionaire Dmytro Buriak, one goes to Kurchenko, and one goes to ex-deputy prime minister Boris Kolesnikov. It may be the calm before the storm, but that doesn’t mean there’s no money to be made.

This model also works for the lower echelons. The country may be experiencing recession and deflation, but salaries of professionals living in the biggest cities still keep growing. Fast career growth is another incentive: Kyiv and Donetsk have a surprising amount upper management in their late twenties and early thirties, both in the private and public sectors. With exponentially rising rewards, the most talented and ambitious have nothing to gain from playing against the system.

Silent anger

Yet a struggling economy rigged in favour of big business, as well as failures to deliver public services have led to growing frustration among ordinary citizens. Police abuse and impunity have in some cases pushed the population over the edge, most recently in the village of Vradiyivka in southern Ukraine where the local police station was stormed following the gang rape of a 29 year-old woman, allegedly by two police officers.

This was not the only such incident in recent weeks. A crowd broke into a police station in Fastiv, outside the capital Kyiv, demanding to see the “torture room” where the former mayor had supposedly been abused. Later in Kyiv itself, the alleged beating of a political activist led another crowd to storm a police station and hospitalise nine officers. Throughout the country, a sense of injustice and inability to improve one’s lot has caused frustration to build up.

Analysts in Kyiv have long wondered if and when Ukrainian society would make a comeback on the political scene. Back in 2004, during the Orange Revolution, mass protests managed to overturn the outcome of a rigged election and change the country’s course for years to come. But the new leadership the Orange Revolution brought to power was a disappointment, dealing a harsh blow to civic activism and hopes that Ukraine could ever change. While protests over such issues as tax changes, national language and declining freedoms have surfaced, they are usually limited to small groups and rarely persist more than several days.

Conventional wisdom has it that Ukrainian society is disillusioned with the grand ideals of so-called Western values and economic modernisation. No matter what happens, perhaps barring integration with Russia, most people will accept it and move on. Thus, it would seem that only an outrageous event – a policeman running over an infant, the son of a lawmaker shooting someone on the street – can shake society out of its stupor. The problem with this explanation is that such events have occurred time and again. One horrific crime follows another, with little reaction to be seen.

Dacha season, when urban dwellers forget about the daily grind and flock to the countryside, may be one explanation. But the need for stability is at least as important. After years of chaos most Ukrainians will complain about meagre wages and poor prospects, but will then side with those who deliver, at least a little. Polls show that, for many, democracy means low unemployment and reasonable prices. In this sense Yanukovych has delivered better than his predecessors, and the rising living standards and strong economy beyond Ukraine’s borders are no longer there to inspire hope.

Ukraine has entered a period of economic and political stagnation. The current equilibrium is stable, but brittle. The recent experiences of Brazil, Turkey and Egypt have shown that an attack on the quality of life – be it in the form of higher bus fares, the razing of a park, or simply shoddy garbage collection – can spur a disproportionate reaction. Ukraine’s authorities know this only too well, and they are working hard to make sure everyone that counts gets their share.

Maintaining the current system has thus become the absolute priority. Signing the Association Agreement in Vilnius this November would be nice, but not if it shakes the foundations. A gas deal with Russia, too, would be convenient, but not if it means letting a new heavyweight onto the ring. Right now, it appears, official Kyiv is ready squeeze every penny it can – from the central bank’s foreign reserves, from businesses, from international bond markets – so long as the system keeps plodding along. Until 2015, that is; after that, all bets are off.

Jakub Parusinski is Chief Editor at the English-language weekly Kyiv Post and a contributor to New Eastern Europe‘s Unravelling Ukraine column.

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