The battle for reform in Kyiv

Insight
Charles Grant
16 September 2015

Ukraine’s reformist government is achieving results. But vested interests are blocking many key reforms, and corruption remains a major problem. Mikheil Saakashvili, the controversial governor of Odessa, is dividing the reformers in Kyiv, as I discovered on my recent visit.

Ukraine’s pro-EU, pro-reform coalition has made real progress since taking office nearly a year ago. The current lull in fighting in the Donbass makes it easier for the government to work on reform. So does slightly better economic news: the government has struck a deal with its creditors to reschedule debt, while the economy may soon stop shrinking.

But the obstacles to reform remain huge, as became evident during a recent trip to Kyiv which included the Yalta European Strategy conference (YES is an annual event which can no longer take place in Russian-occupied Yalta). The problems include corruption, the erosion of public support for the reformers, the government’s political weakness and the excessively centralised nature of Ukraine’s state. And now the ambitions of Mikheil Saakashvili – once the reforming president of Georgia, now the reforming governor of Ukraine’s Odessa region – threaten to destabilise the political system.

 

The governing coalition, which includes the parties of both President Petro Poroshenko and Prime Minister Arseniy Yatsenyuk, has several achievements to its credit. A new police force has started to patrol in four large cities and is apparently uncorrupt. Energy markets have been liberalised and the price of gas is rising (though Naftogaz, the state gas monopoly, still needs reform and privatisation). The bloated civil service lost 20 per cent of its staff last year and will lose a similar proportion this year. After much delay, an anti-corruption bureau has been established – though it cannot start work until a special anti-corruption prosecutor is appointed. The banking sector has been reformed, with a third of the country’s banks being wound up. Private militias are being integrated into the official armed forces.

But there is massive resistance to change. As Saakashvili explained to the YES conference, parallel to the official government is a shadow government, consisting of oligarchs and the officials and the MPs they control, which stymies reform. The key ministries are now clean at the top, but not further down. Many judges, prosecutors, bosses of state-owned enterprises, customs officials and politicians are corrupt.

The most passionate reformers in the government say that corruption is Ukraine’s number one problem. They complain that both the president and the prime minister are too cautious in confronting vested interests, and they argue that unless leaders go for a radical break with the past, the opportunity to clean up the country will be lost. So the reformers argue that all the judges and prosecutors should be sacked. The state-owned enterprises, which lost €6-7 billion last year according to Saakashvili, resist reform and privatisation; ministers often find it impossible to fire their senior executives.

Serhiy Leshchenko, a reformist member of the Rada (Parliament), and of Poroshenko's party, says that one significant problem is corrupt judges letting crooks go free. He estimates that about half the members of the Rada are corrupt or controlled by oligarchs. His personal priority is to push through an act of parliament that would provide for state funding of political parties.

Despite the reforms that have been achieved, opinion polls suggest that the public gives the government virtually no credit. Citizens and businesses still encounter corruption, red tape and customs problems. And they know little about the government’s successes because it is hopeless at communications. For example, prosecutors pursuing corrupt individuals do not explain their work to the public. Television programmes seldom feature anything about reform.

So it is not surprising that support for the governing parties is eroding. The Opposition Bloc party, made up of those aligned with former President Viktor Yanukovych, has more support than it did. Two new parties have recently been formed. UKROP, close to the oligarch Igor Kolomoyskyi and to Right Sector, a far-right nationalist group, is strongly anti-Poroshenko. The other new party is Responsible Citizen, led by Boryslav Bereza, who is running for mayor of Kyiv. Though he used to be close to Right Sector his party’s focus is on anti-corruption and encouraging an open society.

The government’s growing unpopularity means that in recent months fewer MPs have been willing to vote for key reforms. It is not even certain that the Rada will pass the recent debt restructuring package, which is essential for economic stability. Tensions between Poroshenko and Yatsenyuk, always present, are worsening. This rivalry is about power and differences of style as much as clashes over policy: Poroshenko, an oligarch who became known as the ‘chocolate king’, is a more consensual figure, while Yatsenyuk, a lifelong politician, has sharper edges. Yatsenyuk’s own party is so unpopular that it has decided not to compete in next month’s local elections.

 

Poroshenko appointed Saakashvili as governor of Odessa in May, hoping that he would tackle corruption with as much energy as he had done when he was president of Georgia. But the appointment is causing ructions among Ukraine’s reformists. Saakashvili is one of several foreigners recently appointed to top jobs in Ukraine, but he is the only one to attack the prime minister in public. He has accused Yatsenyuk of delaying reforms (such as the introduction of an e-customs system in Odessa) and of protecting Kolomoyskyi (whom Poroshenko sacked as governor of Dnipropretovsk in March) and says that he should go.

Kolomoyskyi hit back, saying that the governor of Odessa was a “snotty addict” and that, as a “snapping dog without a muzzle”, he should be put down and returned to Georgia. Yatsenyuk defended himself at the YES conference by saying that his job was to run the government, not the judiciary and the prosecutors, and that he could not prevent their releasing senior figures whose arrest he had ordered. He also pointed out that the government had taken over companies controlled by Kolomoyskyi, such as UkrTransNafta, the state pipeline operator.

Many reform-minded officials and politicians say that Saakashvili has merely told the truth: Kolomoyskyi was guilty of abusing his position as a governor and Yatsenyuk has stalled on certain reforms. Serhiy Leshchenko says that Saakashvili’s focus on using the media is exactly what the country needs; the Georgian understands that the government should do a better job of selling its reforms.

But other reformers are sceptical about Saakashvili. A senior figure in the finance ministry says that he is difficult to work with because whatever one says to him immediately appears in the press. The critics wish he would focus on real work in Odessa rather than media stunts; they say he should not speak out on national issues when he is just a regional governor. They complain that his priority is to advance his own career – whether in Ukraine, possibly as prime minister, or back in Georgia, or on the world stage. But the critics admit that he is popular with many Ukrainians.

In a western country, either Yatsenyuk or Saakashvili would have to go after such a public row. But when I put this to a senior aide of Poroshenko he indicated that this might not be the case in Ukraine. He said there was truth in what Saakashvili had said but that he exaggerated, and that he needed to remember that he was not a national politician.

The situation in South-East Ukraine – which though militarily quiet is diplomatically blocked – constantly threatens to weaken the reformers in Kyiv. Poroshenko told YES that he was fully committed to the Minsk agreements between Ukraine and Russia and that they were the only route to peace. Yatsenyuk told the same conference that he was more sceptical of the agreements but accepted that for the time being there was no alternative.

A few days before the conference, a nationalist demonstration outside the Rada ended with the throwing of a grenade and the death of three policemen. The demonstrators opposed the government’s plan to amend the constitution to allow a ‘special status’ for the rebel-held areas of the Donbass. Such a status, demanded by Russia and the rebels, is a key provision of the Minsk agreements. Ukraine’s nationalists oppose the special status and may be able to block the constitutional amendment in the Rada, since it requires a two-thirds majority to pass.

Distinct from the argument about a special status for parts of the Donbass, decentralisation for the whole country is another major challenge for the political class. The extreme centralisation of the state is a major constraint on both economic growth and reform. In Odessa, the many permits required for foreign direct investment require complex approvals from the authorities in Kyiv, often involving bribes. In Ukraine’s 700-odd district governments, a deputy head cannot be sacked without the approval of the central government in Kyiv. The Mayor of Kyiv, Vitali Klitschko, complains that he cannot change parking rules in his city, to allow vehicle clamping, without the Rada’s permission.

There is much talk of decentralisation but so far it has not happened. Though desirable, it would be no panacea: if it happened too fast, it could merely entrench the positions of regionally-based oligarchs. So a precondition for decentralisation should be progress on ‘de-oligarchisation’ and the rule of law.

If the ceasefire continues to hold in the Donbass, the economy will benefit – as will, probably, the fortunes of the reformist government. The (Ukrainian American) finance minister, Natalie Jaresko, and the (Lithuanian) economy minister, Aivaras Abromavicius, have done a fair job of stabilising the economy. Inflation is around 50 per cent but falling. The economy shrank 7.5 per cent last year and may shrink a further 10 per cent this year, but modest growth is forecast for 2016. The debt restructuring will help, assuming the Rada passes it: government debt will drop by $4 billion, annual interest payments by $1.5 billion and maturities will be extended by four years.

The deep and comprehensive free trade agreement (DCFTA) between Ukraine and the EU will be fully implemented on January 1st 2016, according to Poroshenko. Implementation had been postponed because of pressure from Russia (which claimed that the agreement would harm its economy). Russia has threatened to retaliate against trade with Ukraine, if the DCFTA is implemented. I asked Jaresko how damaging such retaliation could be. She said it would hurt but that Ukraine could cope; Russia’s sanctions, border blockages, health controls and so on had already cut

Ukraine’s exports to it by 80 per cent. She thought the DCFTA would encourage foreign investors to treat Ukraine as a base from which they could export to Europe.

President Poroshenko had a clear message for the West at the YES conference: he urged both the EU itself, and the EU and the US, to remain united vis-à-vis Russia, so that they can more effectively protect Ukraine’s interests. Conversely, however, the West is counting on Poroshenko to hold together his country’s reformers, so that they can tackle vested interests, strengthen the economy and improve the lot of ordinary Ukrainians. The more the reformers fight each other, the more likely they are to fail.

Charles Grant is director of the Centre for European Reform.