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Ukraine in 2017: A summary

The situation in Ukraine, at first glance, looks good: the military conflict is frozen, the macroeconomic stability has been achieved, the economy has started to grow, and the West continues to support the country. Despite the successes, however, Ukraine has failed to meet the expectations of its citizens.

January 25, 2018 - Valerii Pekar - AnalysisBlogs and podcasts

Ukraine: The European frontier – a blog curated by Valerii Pekar.

Ukrainians agree that the past year has been one of the disappointments. Was that really the case, or, perhaps, is it a consequence of exaggerated expectations and negative perceptions? To answer this question, it is worth to look at the main achievements and failures, breakthroughs and disappointments of the year 2017.

Undoubtedly, the biggest achievement was the visa-free regime with the European Union, although many Ukrainians had lost hope that the agreement would ever be signed. It is not just about the long-term impact of the opportunity for a much larger number of Ukrainians to travel to Europe and see it with their own eyes. Much more important is the fact that Ukraine managed to fulfil numerous EU requirements to modernise its legislation and institutions.

Moreover, on September 1st the Association with the EU came into force.

Importantly, in 2017 Ukraine launched the healthcare, educational and pension reforms. Despite the fact that the implementation of the medical reform will only begin in 2018, and only some general decisions were made in the case of the educational reform, while the pension reform includes only some basic solutions and has not achieved any strategic goals, the reforms constitute a long-awaited break from the Soviet legacy in the area of social policy.

The third important success is the actual beginning of the implementation of public administration reform. Although it is equally stretched in time, it is gradually gaining momentum.

Nevertheless, Ukrainians have so far seen few results of these reforms. The visa-free travel is an exception, but travelling to Europe is hardly a top priority for most people. For the moment, Ukrainian citizens expect tangible changes: the rise in incomes and access to justice.

However, there is one change, the effects of which are visible to everyone: the number of road constructions, which has increased due to the reform of the construction financing model. The maritime reform, which is conducted with a similarly high intensity, is visible only to experts.

Other important successes include significant deregulation (although a lot remains to be done), the national export strategy and active works on export reorientation, Ukraine’s return to the Eurobond market, the launch of ProZorro.Sales online auction platform (currently used mostly for bankrupts’ asset sales, but in future will also facilitate a transparent privatisation), and the adoption of the law on electronic trust services (Ukraine became the first Eastern Partnership country to integrate its legislation with the EU in this area). Ukraine also has achievements in the area of decentralisation: local budgets are now pumped with money as never before, and experts generally positively evaluate the processes of creating new united communities (in Ukrainian: obyednana terytorialna hromada, OTH). Finally, what began was a long-awaited revival of the Ukrainian cinema.

Some 2017 reforms were controversial, and the judicial reform is clearly one of them. While all Supreme Court judges have been exchanged under the control of civil society – which is a positive development – even the openness and public control failed to prevent the appointment of many objectionable persons with shady property and a long history of unjust rulings, including prosecution of activists during EuroMaidan and decisions abolished by the European Court of Human Rights.

Reforms in the energy sector have been equally controversial. On the one hand, Ukraine unanimously won a dispute against Gazprom in the Stockholm Arbitration Court. In addition, a competitive electricity market was introduced. However, in the situation of a monopoly, this decision can work against the consumers. Likewise the adopted model of coal prices – called “Rotterdam +” – has already led to an increase in the tariffs in favour of the monopolists. Rental rates for gas extraction have lowered (albeit only for new wells), but rental rates for oil remained unchanged (not reasonable since Ukraine now imports more oil than gas).

But 2017 has also brought some undoubted failures. The extremely low level of economic freedom, which impedes growth and keeps the country in a trap of poverty, remains a major disappointment. The first problem is business security: the interference of numerous law enforcement agencies such as the Security Service of Ukraine (SBU) took unprecedented proportions last year and, despite the adoption of a restrictive law, is still a major problem for business. Privatisation and agricultural land market opening were again postponed, and these two constitute the biggest disappointments of the year.

Similarly, the third stimulus for growth, namely the introduction of an exit capital tax instead of a corporate income tax, was also postponed. The very positive automatic VAT refund, however, had to be supported by automatic blocking of VAT invoices, which hit not only fraudsters but also dozens of thousands of honest businesses. And the end of the year brought the unprecedented pressure on transparent public procurement through the adoption in the first parliament reading of a highly corrupt bill named “Buy Ukrainian” (See the previous article focused on Ukraine’s economy). All in all, despite the negative business climate, the numerous stories of entrepreneurial success in various areas of the economy and the arrival of several prominent strategic investors (mostly through large infrastructure projects) spark optimism.

Another undeniable disappointment of the year is the anti-corruption struggle. On the one hand, both National Anticorruption Bureau (NABU) and the Prosecutor General’s Office opened up and handed many cases to the courts. On the other hand, in the courts, some of these cases were discontinued, and the rest were suspended. These failures have been accompanied by the conflict between these two law enforcement agencies, constant pressure on NABU and anti-corruption activists, the attempts to influenced NABU’s independence. There has also been a delay in the creation of the Anti-corruption court. The most important anti-corruption reform, namely the reform of state-owned enterprises’ management, has been suspended.

It should be noted that the institutional capacity for reforms remains weak: the parliament is often incapable of implementing change, MPs have low attendance rate, rulemaking skills degrade, and the vast majority of the government reformers of the first wave had left their positions. At the same time, people they could be replaced with have only begun to be recruited, and there is a long way ahead of them to gain power.

In general, the situation in the country, at the first glance, looks good: the military conflict is frozen, the macroeconomic stability has been achieved, the economy has started to grow, internal political rivalries remain storms in a teacup, and the West continues to support Ukraine. However, this situation contrasts with the failed expectations of citizens: an active minority seeks much more intensive reforms, while a passive majority waits for an expansion of welfare programmes. As far as we know, the greatest threat to social stability does not appear at the moment of the greatest challenges (this moment seems to have passed), but after the situation begins to improve.

Slow, limited and contradictory changes exhaust the economy, politics and the social system. If a surgery is to bring long-term effects, but there is no anaesthesia and no one stops the bleeding, the patient will not survive. The only solution to the pain and bleeding of Ukraine – which is the continuing brain drain – is not populism, but a rapid economic growth and the elimination of poverty, accompanied by some real anti-corruption measures.

Valerii Pekar is a co-founder of the Nova Kraina Civic Platform, a lecturer at the Kyiv-Mohyla Business School and a former member of the National Reform Council. He curates a blog titled Ukraine: The European frontier.

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