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Throwing money at Ukraine and hoping it sticks

January 9, 2015

Over the past few days, there have been some solid suggestions regarding the amount of financial aid required by Ukraine, and how to provide it – and indeed a few more Euro billion has been thrown at the problem by the European Commission.  Euro 2 billion down, $47 billion to go – or there abouts.

Now to be fair to the European Commission, it is now at the very least adding a few reform strings to the medium term loans and grants it is throwing at Ukraine.  Euros for reforms, or perhaps reforms for Euros – and in the absence of many other publicly known contractual strings and/or parameters, the issue of which comes first matters.

The previous policy attempts at “more for more” or “less for less” still resulted in Ukraine getting “money for nothing”.

After a decade of living in Ukraine and having witnessed hundreds of millions, indeed Euro billions thrown at Ukraine under the auspices of reform, the net result has been absolutely no return on the capital employed – the European tax payers money, no differently than Ukrainian tax payers money,  disappearing into thin air – or more likely bank accounts in Austria, Cyprus, Riga et al.

To pluck an example of many EU funded reforms – the judicial system – judicial exchanges, certainly on-going since 2005 if not before, were possibly very jolly, not to mention interesting, for those who took part.  Quite what was supposed to come of them, how their success or failure was benchmarked, and over what period of time reform was expected, who knows?  Reform never came – reform still has not come.

For those who personally know any judges, prosecutors, lawyers or police in Ukraine, it becomes very clear that although participation in any such EU funded jollies are always welcomed, Ukrainian judges (and the entire legal system from enforcement to verdict) know exactly what they are supposed to do and how they are supposed to act in a functioning liberal democracy already.  They have always known.  It is not a lack of understanding of how the rule of law is supposed to work that is the issue.

What is required is the removal of political interference in the application of the rule of law – from the judicial appointment system, to the politically motivated predetermined judicial rulings, and the prevention of bought court case outcomes to the highest bidder.  The old Soviet system of rule by law has to be consigned to history.  No longer should the system work by identifying an offender (who has annoyed somebody powerful) and then finding a crime to fit them.  The move to discovering a crime and then identifying an offender and subjecting them to due process, would be a reasonable start.

To pluck another example of many, Prime Minister Yatseniuk’s recent statement that he would like to include a few German civil engineers in the management of Ukravtodor, the State road building company, as Germans know how to build roads.  Unsurprisingly, Ukrainian civil engineers do know how to build roads too – the issue is not with technical engineering know-how.  The issue is with corrupt schemes to cut corners on materials within Ukravtodor, skimming off unknown US$ tens of millions within the management from the allocated funds.  If a German quality road is genuinely desired, open up the next road building scheme to international tender and see if the Germans win.  Give Ukravtodor competition on quality, ability and price.  Insure in the contract a minimum of 60% local labour for any winner.  A road of German quality will be delivered.

In short, no matter where you care to look, particularly in State owned companies or contracts awarded to companies closely linked to the political class, the problem is not a lack of knowledge of what should be done or how to do it – the problem is corruption and the absence of any recourse for the Ukrainian tax payer – or foreign financier (EU, US, WB, IMF, whomever) via the rule of law.

It may very well be that President Poroshenko and Prime Minister Yatseniuk are personally above taking or giving bribes, or cutting contractual corners to skim off additional profits (these days).  But that is certainly not the case for the vast majority of their political colleagues, the management of State entities and institutions, or the companies closely associated to the political class in general.

Thus far there has been precious little that can be realistically identified as a genuine reform in almost a year.  The illegal annexation of Crimea and war in eastern Ukraine are not a universal excuse for the current reform void.  Six weeks of precious legislative time spent cobbling together a coalition document, was then followed by forcing through a national budget in a late night/early morning RADA sitting after far, far less consultation – a budget that is still not yet published anywhere a full 10 days after it was passed, that was subject to agreed oral amendments and a promise to look at it again on 15th February the day it was passed, is hardly encouraging when it comes to seeing Poroshenko/Yatseniuk rhetoric arrive at anything close to transparency or implementation.

The few reforms that have moved from rhetoric to legislation have yet to be put to the test in any way, shape, or form.  Reform is not complete simply because the law changes – 90% of reform is about effective implementation and consistency in adhering to the changes made over the long term as anybody but the feckless political Ukrainian class are aware.

Though it cannot be expected, and indeed it is perhaps not wise, to leap from reform mountain top to reform mountain top, ignoring the bureaucratic valleys in between, there are a lot of small reform steps that can, and could have, already been taken – yet have not.

Whether Mr Soros sees the $50 billion stumped up for Ukraine – or not, and whether the European Commission continues to just do enough when trickling through funding to Ukraine to avoid financial apocalypse, be those funds tied to reform – or not, throwing money at the same Ukrainian elite (minus only Viktor Yanukovych and a few others) requires far more management than has ever previously been given with regard to the funds invested if desired results are to be achieved.

Indeed, perhaps the EU should reform the way it intends financially support Ukraine if it is to move away from simply throwing Euro at the nation and hoping that some of it sticks to what it was intended for.  Repeating historical mistakes is pointless.

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What perhaps should be required, if not voluntarily offered, from every and all donors to Ukraine, is a set of publicly stated benchmarks and a timescale in which they are expected to be achieved for the money in any reform sphere.  A reform return on capital employed transparently and publicly accounted for.

That will require enforced transparency from external actors, for as the 2015 budget saga ably displays, it will not come from within, despite any rhetoric.  Thus to be effective, external funding requires external quality assurance regarding reforms for Euros/USD.  It requires robust external auditing and publicly, loudly and unashamedly crying foul whenever shenanigans are discovered.  It requires stating which Ukrainian government official is personally responsible for what amount of Euro funding in relation to which reform.  Personal responsibility, accountability and ownership of the specific reform and funding in question has to be made clear to all.

Perhaps even that is not enough considering the absolute immunity Ukrainian politicians enjoy, together with the political control that robustly remains over the judicial system.

Perhaps it is necessary to include clauses in any loan agreements from western nations and institutions, that where ever external auditors discover any corruption in funded ventures, the Ukrainian government will compensate the loaning entity – with additional damages, and insured investigations/prosecutions of the corrupt offender(s) – regardless of their status.  Any failure to do so immediately turns off that particular funding tap until such contractual clauses are met, and/or reduces the funding for the next project by the amount subject to corruption plus damages.

It would be a tactic that will undoubtedly be extremely unpopular with the Ukrainian political and business elite – but incredibly popular with Ukrainian civil society, media and public alike.

Another alternative would be to fund reforms and infrastructure development directly, cutting out the central government entirely where practicable.  Again unpopular with the political and business elite (if you can separate the two) but very likely to be well received by those who really matter – the people of Ukraine.

Whatever the case, continuing to simply throw money at Ukraine as the EU has historically, is very likely to produce the same poor results.  It may well be wise to consider reforming the way the EU sponsors reform in Ukraine.  Simply put, neither President Poroshenko, Prime Minister Yatseniuk. the political or business elites will reform without being forced to do so.  The hard choices will be ducked, delayed and fudged until the government eventually falls.

Thus regardless of whether the EU (and US, IMF, EBRD, EIB, WB etc) like it or not, they are going to have to drive the reform process whist attempting to give the appearance that the Ukrainians are actually doing so – if that perception can be achieved and maintained.  If they are not prepared to drive the reform process, then they will continue to throw Euro at Ukraine and hope that some of it sticks where it was intended to stick – regardless of what past experience ably displays when it comes to poor results.

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One comment

  1. Well said, sir. I dream of this: “Perhaps it is necessary to include clauses in any loan agreements from western nations and institutions, that where ever external auditors discover any corruption in funded ventures, the Ukrainian government will compensate the loaning entity – with additional damages, and insured investigations/prosecutions of the corrupt offender(s) – regardless of their status. Any failure to do so immediately turns off that particular funding tap until such contractual clauses are met, and/or reduces the funding for the next project by the amount subject to corruption plus damages.

    It would be a tactic that will undoubtedly be extremely unpopular with the Ukrainian political and business elite – but incredibly popular with Ukrainian civil society, media and public alike.”



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