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The gathering reform storm of 2017 – Ukraine

October 6, 2016

Many Ukrainian eyes are focused on 2017 and what external events will mean for the nation.

How will US policy change when a new president sits in the Oval Office?  What of the elections in France and Germany?  How much of a distraction will BREXIT be when it is eventually triggered?

All good questions – and as stated a few days ago “….. unless the Ukrainian leadership really start making strides (rather than tip-toe) with real and effective reforms US patience will expire sometime in 2017, just as the European patience will.  Real support will ultimately be reduced to little more than that surrounding territorial integrity and sovereignty.”

That statement fails to include Ukraine meeting its obligations to international institutions.  There are agreements with the IMF, World Bank, EIB and EBRD that will either be met – or broken.  This in turn will have a major impact upon FDI if (or possibly when) these agreements go unfulfilled.

To keep a watchful eye upon the external, currently” friendly” influences that will effect Ukraine in 2017 is understandable, but there are some extremely prickly and difficult issues internally that have the ability to magnify or reduce the thus far (surprisingly robust) goodwill of the international community (minus Russia) which seem destined to once again radically and negatively effect Ukrainian standing among its “friends”.

strom

In short there is a reform (or distinct lack of) storm brewing that is going to hit Ukraine in early 2017 and which when it does, the feckless domestic politicians will be once again at its core.  The issues are vividly clear, yet as normal, preparation, professionalism and policy are entirely absent.

Before looking at 2017 however, 2016 has yet to run its reform course.  The next tranche of IMF money, about $1.3 billion, is due in November.  For this tranche to be forthcoming there are but a few obligations to meet.

Clearly insuring reform progression thus far does not reverse is necessary.  The irreversibility of what has been done thus far is highly questionable.  What reforms, if any, can be claimed as being irreversible and consolidated?  Some may be close, but which are truly over the line?  The NBU has done a very good job, but a change of leadership and/or policy could undo almost all that has been done.  NABU is under direct assault by the PGO and Attorney General.  The new national police for the most part is refusing to buckle to corruption despite the police service remaining only half reformed and far from ethical as an institution.  The military are now a capable fighting force, yet its leadership remains poor and con tinuing corruption is as corrosive as the war of exhaustion with Russia in the occupied east.

Nevertheless, aside from holding the reform line that has be advanced thus far,  to meet the requirements for the next IMF tranche NABU should be given the right to wire tapping.  The list of SOEs for privatisation in 2017 completed (notwithstanding the November 2016 second attempt to sell Odessa Port Side – and the equally robust attempts to prevent its sale by vested interests.)  The e-declarations of politicians and relevant public office holders are to be filed in their entirety.  A “fair” budget for 2017 is to have been submitted.

All this to be accomplished by the end of this month so the IMF can give a timely nod of approval for November’s $1.3 billion.

Thus far, “fair” or otherwise, the budget has been submitted for consultation within the Verkhovna Rada.  The outcome of those consultations and the guaranteed subsequent amendments remain to be assessed by the IMF.  The budget however, is possibly the least problematic of the IMF requirements.

An independent NABU logically should not require the SBU to carry out wiretaps on its behalf.  The more people that know that “Mr X” is subject to a wiretap, the more chance there is that “Mr X” will find out.  Having to use a third party brings with it an unnecessary potential for leaks and/or tip-offs.  It should therefore not require stating that a nefarious elite and feckless parliament do not want a self-sufficient NABU that is far more difficult to infiltrate, influence or preempt.

The e-declaration fiasco remains just that.  The  declaration system still fails to meet the legislative framework requirements.  The e-declaration legislation itself also requires some amendment – just not the amendments to remove criminal liability that so many politicians want to see.

The sheer scale of opposition to the e-declaration reform is naked to the observing eye when considering it took EU conditionality to get the e-declaration law passed initially, and then months later it requires IMF  conditionality to actually get e-declarations completed by those who are required to do so (by the end of October).

At the time of writing about 1600 e-declarations have been submitted.  Of those only one of that number is of a parliamentarian (Mikhail Gavriluk).  None of the other 400+ MPs have yet filed.  Not a single member of the Cabinet has either.  About a dozen of the 300 NABU detectives have filed, and only two of the four NAPC members charged with policing e-declarations have done so.  Even if all e-declarations are submitted by the end of October, as stated long ago, court challenges are inevitable when the system still fails to meet the legislative framework it operates within.

In March the blog forecast that by the autumn Ukraine would not need external financing (although it would continue to accept it gratefully), but that it should nevertheless earnestly complete its obligations for reasons of external confidence in the nation’s governance.  Naturally the usual issues of fecklessness loom large, for when it is clear to the political class that there is no impending and immediate fiscal doom, the will to complete prickly reform legislation evaporates – which is where Ukraine finds itself today.

Reform orientated legislation has more or less stopped and requires resuscitation.  In fact it requires steroids if Ukraine is to meets its reform obligations to the IMF (let alone others) for 2017.

There are issues with compiling a list of SOEs ready for privatisation, liquidisation or remaining State owned.  There are at least 20 outstanding audits from those commissioned.

If the next few weeks in meeting the November 2016 and the $1.3 billion IMF tranche requirements appears optimistic, then meeting the obligations for the scheduled February 2017 tranche of $2 billion is perhaps as remote as riding a unicorn naked through the centre of Kyiv without once being snapped by a smartphone.

Despite the reform orientated legislative work completed in the energy sphere, the Ukrainian energy market remains entirely impenetrable, thus looking to 2017 the privatisation of Centrenergo is perhaps the only realistic chance of breaking into this market if it be sold to a foreign investor.  As such, the sale of Odessa Port Side in November has to be seen as a fair and transparent process by all onlookers.

Whatever the case, there is no way the list of SOEs for privatising, liquidisation or remaining State owned will be completed (and made publicly accessible upon the Ministry of Economic Development) by the year end.  Even if the only list of those SOEs identified for liquidisation is completed by then, there is simply little interest within the Verkhovna Rada to kill off such entities.  Gathering 226 votes for an exercise where none have any interests close to the New Year break is somewhat unlikely.  Auditors will not be rushed either.

Likewise “supervisory boards” such as that Naftogaz currently has (and which seems to be working well) for another 10 major SOEs is very unlikely to be achieved prior to 2017 as planned.  There is really no political will to do it – and a good deal of vested interests that will obstruct it.

Thus this reform requirement will roll over into 2017.

Fecklessness, lobbying/nefarious acts, and legislative short-comings aside – now to ever-present populism.

There two obligatory reforms by year end 2016 that seem simply beyond reach, will thus roll over into 2017, and yet are still unlikely to get through the Verkhovna Rada to facilitate the $2 billion February IMF tranche – thus finally breaking the IMF agreement and dealing a critical blow to “friendly” transatlantic assistance beyond issues of Ukrainian sovereignty and territorial integrity.

The first is the long-standing issue of pension reform that almost every government has stated it will tackle – but hasn’t.  Pensions from the age of 50 are simply unsustainable, and to be blunt most people continue to work way past being 50 because the pensions do not sustain them.

It is a policy that has to be addressed, but one that when push comes to shove, and despite a decade of rhetoric regarding the necessity of raising the pension age, every Ukrainian leadership succumbs to populism.

Nevertheless it simply has to be raised.

It is foolish to believe that any attempt to raise it significantly in one go will ever get through the Verkhovna Rada.  A system, for example, of raising the retirement age by 1 year every 2 years over 20 years (or a variation therefore) may stand a chance – however slim.  A system of greater contributions equating to greater pensions may also find some traction – but enough?  The populists however (Ms Tymoshenko, Mr Lyashko etc) will always seize upon pension reform for short term politicking and pre-election electioneering rather than looking at long-term policy necessities.

There are also existing process issues relating to checking the authenticity of claimants – something aggravated by the large number of internally displaced people.

Most difficult of all however, is the issue of land reform.  Ukraine has obligated itself to creating legislation regarding agricultural land reform by the end of October 2016.  That simply is not going to happen.  As of the time of writing the blog cannot even find a draft law registered regarding the issue.

It may be that the IMF will allow this sensitive/populist issue to roll over into 2017 and allocate the November 2016 tranche if all other conditions are met.  It will not issue the $2 billion tranche in February 2017 without this issue being tackled however.

Ms Tymoshenko is already noisily calling for the current moratorium upon the sale of agricultural land to be extended to 2022.  The Radicals being equally as populist will enthusiastically support her.

The sly oligarchy or slightly less mega-rich will look to provide/create agri-loan businesses with formidable foreclosure clauses to assume agricultural land of those farmers they lend to should the sale of agricultural land be permitted.  Huge ranges of State land will be swiftly leased through cronyism prior to any right to buy.  The farmers must be given more time to save the capital to buy the land they current lease and farm.  All such reasons will be presented not to create an agricultural land market.  Those farmers that do own their land will be tricked out of it by the unscrupulous, or simply coerced into selling it for a pittance – by continuing to stop them being able to sell the land they currently own, we are saving them from themselves (rather than infringing upon their rights to sell their own property).

There will be some societal “buy in” for some of that rhetoric, but that rhetoric can perhaps be employed to create safeguards within any laws creating a land market – if anybody actually drafts a law to create a land market that will be fair, regulated, and if necessary contain legislative restraints.  (Perhaps Ms Tymoshenko would like to draft a law that explains how a land market will be created after her 2022 moratorium expires?)

If it proves simply impossible (as is likely) to find the political will not only to lift the current moratorium but also prevent its extension, then perhaps legislation creating a fair land leasing market  is an alternative?

If the land cannot be bought and sold in a (regulated) free market environment, then create a transparent free market where leases for the land can be.  Some imagination might be required, but there is surely some way to create a land market that brings about transparent and fair benefits to all and around which Ukraine and its “friends” can agree as constituting positive market driven reform.

Although it is possible to continue with examples that are going to lead to a reform storm in 2017, it is perhaps unnecessary insofar as highlighting how swiftly matters are going to come to a head and when a probable breach of IMF conditionality occurs – with undoubted repercussions with a newly installed US Administration and immediately prior to both French and German electioneering.

Indeed it may also become the catalyst for the long anticipated early Verhovna Rada elections in Ukraine (which are unlikely to bring about a reformist critical mass as current election laws stand).

* * * * *

A note to regular readers – For the next few days your author will be in Poland locked behind closed doors with a dozen sages and otherwise insightful boffins from across the region.  Although undoubtedly returning far wiser, the normal rambling and low-brow blog entries will continue upon return.

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