The past several months have demonstrated that Ukraine’s challenges are increasingly domestic rather than external.
In early 2016, the administration of Ukrainian President Petro
Poroshenko suffered a series of major setbacks that threatened a new political
crisis in Ukraine. The government failed to secure the necessary support in the
parliament for a decentralization reform. This in turn raised new doubts about
the feasibility of the Minsk process aimed at settling the conflict in eastern
Ukraine and the prospects for peace there.
The country was rocked by several scandals involving corruption
allegations against Poroshenko’s team and charges that the president was
turning a blind eye to corruption. The government adopted the 2016 budget
necessary for the IMF to deliver the next tranche of its financial assistance,
but the aid was delayed pending resolution of the corruption scandals. The
cabinet of Prime Minister Arseniy Yatsenyuk survived a parliamentary vote of no
confidence on February 16, but two ruling coalition partners (Batkivshchyna or
Fatherland and Samopomich or Self-Reliance) officially left the coalition. The
trade portion of the EU-Ukraine Association Agreement, delayed at Russia’s
insistence, entered into force on January 1.
Political
and Judicial Reform
Constitutional Reforms
·
The Constitutional Court of Ukraine completed its
review of and approved a package of judicial reforms, including amendments to
the constitution designed to strengthen judicial independence.
·
The government’s package of decentralization reforms
failed to gain the necessary 300 votes in the parliament to become law. The
main obstacle was a controversial set of provisions for the special status of
the separatist-held territories in eastern Ukraine, required under the Minsk
accords. As a compromise, the parliament changed its procedural rules to allow more time to debate
the package in 2016. This change gave the government more time to build support
for the provisions, avoided what would have been an embarrassing failure by the
administration to live up to its commitments under the terms of the Minsk
accords, and—at least temporarily—kept the governing coalition together and
averted early elections.
Civil Service
Reform
·
The parliament approved a long-postponed law on the civil service. The law introduces a
distinction between political appointments and civil service posts, requires
that civil service posts be filled through open competition, prohibits
political lobbying for senior civil service appointments, introduces term
limits for political appointees, and makes civil service processes and salaries
transparent to the public. The process of implementing this reform, however,
will no doubt be lengthy and encounter many obstacles from the entrenched
government bureaucracy.
Corruption
·
The economy minister, Aivaras Abromavičius, resigned on February 3 citing
government corruption and the Poroshenko administration’s lack of commitment to
fight it. His resignation triggered a major domestic political crisis, raised
the possibility of the ruling coalition’s collapse, prompted protests from the
country’s key donors, and resulted in a delay of the next tranche of IMF
assistance.
·
Abromavičius’s resignation was followed on February 15
by that of the deputy prosecutor general, Vitaliy Kasko, also in protest of the
government’s lack of action against corruption as well as attempts to sideline
him by Prosecutor General Viktor Shokin, who has been widely criticized for
turning a blind eye to corruption.
·
On February 16, the day the government presented its
annual report to the parliament, Poroshenko called on Yatsenyuk and Shokin
to resign. While media reports claimed Shokin had resigned, at
the time of writing there was no confirmation of this by the Prosecutor
General’s Office as he was on vacation at the
time. The Yatsenyuk cabinet survived a parliamentary vote of no
confidence, a result that was largely seen as an effort to avoid early
elections and accelerate the next tranche of IMF assistance.
·
A new anticorruption movement led by Mikheil Saakashvili,
governor of Odessa and a former Georgian president, was launched in December
2015. Having embraced “purification” of the political system as its slogan, the movement
already has the support of several prominent political figures and civic
activists from around Ukraine.
Economic Policy
EU Trade
Agreement
·
On January 1, 2016, an agreement establishing an EU-Ukraine
Deep and Comprehensive Free Trade Area entered into force. Russia retaliated with sanctions on Ukrainian exports. Ukraine
responded by imposing trade sanctions on Russian goods. These moves were largely
symbolic and had no significant impact on trade between the two countries, which had already declined
dramatically with total Russian-Ukrainian trade turnover falling from $50.6 billion in
2011 to $12.5 billion in the first ten months of 2015.
Budget
·
On December 25, 2015, the parliament approved the state budget for 2016. The budget projects a
deficit of 3.7 percent of GDP, in line with IMF requirements. This budget’s most important
change is a cut in the social security tax—the so-called single social
contribution—to a flat rate of 22 percent of income. This contribution is the
main source of revenue for the state pension fund, which is already chronically
underfunded and whose deficit will now increase.
Relations With
the IMF
·
Citing the slow pace of reforms and allegations of corruption, the IMF postponed the
delivery of the third (September 2015) and fourth (December 2015) tranches of
the Extended Fund Facility program. The IMF decided to delay the installments after
Abromavičius’s resignation and charges against the Poroshenko administration.
The charges were echoed by Western governments and renewed pressure on the
Poroshenko administration to be more active in fighting corruption. A cabinet reshuffle is also expected as a result.
·
In December 2015, Ukraine defaulted on its $3 billion
debt owed to Russia. New IMF rules adopted in November prevented
this default from disrupting the IMF program. Russian Finance Minister Anton
Siluanov announced that Russia would sue Ukraine in the London Court of
International Arbitration but left the door open to negotiations.
Currency
Pressures
·
The hryvnia came under more pressure due to falling
export prices. The interbank exchange rate was down from 22.9 hryvnia to the U.S. dollar in late October 2015 to 24.7 hryvnia to the dollar in mid-January 2016; black
market rates reached 27.5 hryvnia. In
response, the central bank introduced de facto rationing on the official
foreign exchange market. The falling currency will make it harder for the
central bank to meet its inflation target.
Reform of
Naftogaz
·
The cabinet approved the reform of corporate
governance of the state-owned energy giant Naftogaz. The reform is required for
Ukraine to receive loans from the European Bank of Reconstruction and
Development (EBRD) and the European Investment Bank (EIB) to support the
modernization of the Urengoy–Pomary–Uzhhorod gas pipeline. The reform is
expected to reduce Naftogaz’s deficit and align the company’s corporate
governance with the principles of the Organization for Economic Cooperation and
Development (OECD).
National Security
The Occupied
Territories
·
The situation in Ukraine’s eastern Donbas
region remained tense. The Organization for Security and Cooperation in Europe (OSCE) and Ukrainian government sources reported daily
explosions and small-arms and heavy-machine-gun fire during this period.
The ceasefire between Ukrainian forces and
Russian-backed separatists was frequently violated along
the ceasefire line, more frequently from the separatists’ than from the
Kyiv-controlled side.
·
Russia and the West took new diplomatic steps to
encourage the implementation of the Minsk accords. Moscow named Russian
Security Council member and former Duma speaker Boris Gryzlov as its new
representative to the Trilateral Contact Group, which brings together Russia,
Ukraine, and the OSCE. The appointment of political heavyweight Gryzlov was
widely interpreted as a positive sign. U.S. Assistant Secretary of State for
European and Eurasian Affairs Victoria Nuland met Kremlin aide Vyacheslav
Surkov in Kaliningrad, Russia, to discuss the implementation of the Minsk
accords. The meeting fueled further speculation about an imminent breakthrough.
However, none of these moves has produced tangible results so far.
·
The government imposed a ban on trade with Crimea, which took effect on January
17. Crimea continues to suffer from electricity blackouts caused in part by
explosions that resulted in a cutoff of electricity from Ukraine. The
explosions had reportedly been carried out by Crimean Tatar activists supported
by Ukrainian nationalist organizations. Although the damaged power lines were
repaired, Crimea is still experiencing outages because the contract for the
peninsula’s energy supply expired at the end of December 2015 and has not been
renewed. The Ukrainian authorities—under pressure from the Crimean Tatars—insist that Crimea be defined
in the contract as a “temporarily occupied territory,” a demand to which Russia
will not agree.
Defense
·
The Ministry of Defense’s budget for 2016 increased by 16 percent
compared with 2015. At $2.2 billion, the budget amounts to 2.5 percent
of Ukraine’s GDP. Budgetary expenditures allocated to
armaments and military equipment will be four times higher in
2016 than in 2014.
·
The government signed contracts with Ukrainian
aircraft manufacturer Antonov to build 60 cargo airplanes for the military. Antonov, one of the two
largest aircraft manufacturers in the former Soviet Union, is looking for
alternatives to Russian spare parts for Ukrainian planes to decrease its
reliance on Russia, described as a military adversary in Ukraine’s military doctrine
adopted in September 2015.
National
Police
·
The national police opened its first recruitment center in Kyiv, which will coordinate the
hiring of new personnel and recertification of former militia
officers. The police plans to open ten more centers in Ukraine’s regions
by summer 2016.
·
The new patrol police, created earlier in 2015 and
already deployed in Kyiv and elsewhere, began operating in two more cities, Mykolaiv and Dnipropetrovsk.
Prosecutor
General
·
The prosecutor general appointed 154 new heads of local prosecutors’
offices through a new and nominally
open process; no outside candidates were appointed.
·
A new General Inspectorate for Internal
Investigations was established to fight
corruption in the Prosecutor General’s Office.
Decentralization
·
Amendments to the Tax Code had a positive albeit small
impact on local governments. The ceiling on the local property tax was raised
slightly, the local vehicle tax was changed to target expensive cars, and the
local business tax was simplified. These changes are likely to result in a
modest increase in local revenues.
·
A new law, approved in November and signed by the president in December, transferred the right to
register legal entities and property from central to local governments. This
will enable local governments to expand their tax bases and collect
administrative fees.
Overall
Assessment
The past several months have demonstrated that Ukraine’s challenges are
increasingly domestic rather than external. The ceasefire in eastern Ukraine is
largely holding despite frequent violations thanks to pressure from external
actors. Although the unsettled conflict continues to exact a heavy toll on the
country’s economy, politics, and social fabric, some of the biggest challenges
facing Ukraine have been its long-standing, systemic failures—a corrupt
government and a political system dominated by big business.
The Poroshenko administration’s perceived lack of commitment or ability
to take decisive action against both corruption and the role of big business
emerged as a major impediment to Ukraine’s further progress at home and
relations with major partners abroad. A statement on February 3 by ten ambassadors to Ukraine, including those of the United States, the United Kingdom,
and Canada, was a sign that Ukraine’s partners are disappointed with its
progress. The statement was prompted by Abromavičius’s resignation and echoed
his frustration with the government.
The IMF’s postponement of its next tranche of assistance was a blow both
to Ukraine’s reformers and to its finances, as well as a reminder of past
failed IMF programs. In another serious development reflecting Europe’s
frustration with Ukraine’s slow progress, Danish officials warned that in the event of Kyiv’s failure to implement its portion of the
Minsk accords, the EU would not maintain the sanctions it imposed on Russia following
Moscow’s March 2014 annexation of Crimea.
Although Prime Minister Yatsenyuk and his cabinet have survived a
no-confidence vote, Ukraine appears to be heading for more turbulence in 2016.
Failure to adopt constitutional changes required of Kyiv by the Minsk accords
runs the risk of handing a political victory to Russia, making it possible for
Moscow to shift the blame for the conflict onto Ukraine.
At the same time, by pushing for these constitutional changes, the
Poroshenko administration risks becoming vulnerable to attacks from the
nationalist wing of the political spectrum and seeing its parliamentary
coalition collapse, leading to an early parliamentary election. Because two
partners have left the coalition, the government does not have a parliamentary
majority. It also suffers from strains caused by allegations of corruption and
political and personal rivalries. These tensions may result in a new
parliamentary election, a cabinet reshuffle, or simply more political
maneuvering. Any of these outcomes would be an unwelcome distraction at a time
when a strong coalition is essential for the government’s ability to function
and proceed with reforms necessary to restore the confidence of the Ukrainian
population and the international community.
No comments:
Post a Comment