May 14th 2011,
Over recent weeks, Democratist’s attention has started to shift towards Ukraine. Here are some of our initial thoughts on the current domestic situation;
The two key trends that have dominated Ukrainian politics in the period since Viktor Yanukovich became president last February have been a marked expansion of authoritarianism, and an increase in high-level corruption. As Anders Aslund recently commented in the Kiev Post, reforms introduced as part of a $15 billion IMF loan arrangement have not boosted Ukraine’s competitiveness or market freedom, but have instead benefitted a few businessmen close to the President. Officially the economy appears to be bouncing back from the global financial crisis, with growth projected at 4.5% this year and 6.5% for 2012, but this does not yet appear to be filtering down to the popular level. While the opposition leadership remains weak and unpopular (a result of Orange-era bickering and stagnation), social tension and resentment of the government is increasing, and a number of protests are planned in Kiev over the coming days.
Last year saw a return to the 1996 constitution, which has in turn meant a far greater concentration of power in the Presidency than had been the case under the constitution agreed in 2004 (and followed by former President Yushenko). The Rada has become a compromised and unpopular rubber stamp, with parliamentarians regularly and illegally voting for others who have not bothered to turn up to work, or passing laws at the first reading – sometimes apparently without knowing what they contain. Some MPs switched sides shortly after Yanukovich came to power (perhaps as a result of financial or other inducements) and are therefore very unlikely to be re-elected. There were also a number of credible allegations of electoral fraud in relation to last October’s local elections from the respected non-partisan OPORA NGO, and Freedom House downgraded Ukraine from “Free” to “Partly Free” in its annual Freedom in the World Index for 2011. It currently seems unlikely that Parliamentary elections set for next September will pass smoothly, considering the increasing unpopularity of the current government, even in its Eastern strongholds.
The media (TV and most papers) are owned by oligarchs with close connections to the President, and have very quickly fallen into self-censorship. The IMI Press Freedom NGO reported a drastic decline of freedom of expression in Ukraine last year. Only a couple of smaller independent titles remain, such as Dzerkalo Tyzhnya and Ukrainska Pravda (both owned by the journalists who write for them). Pressure has also been applied to the English-language press, including the Kiev Post, although both the Post and Ukrainian Week magazine are still independent, and both critical of the government.
The judiciary has also become a tool of the regime; the high court and prosecutors office have come under Presidential control, and last year saw a number of selective and politicised criminal cases launched against at least eight Tymoshenko allies, including former interior Minister Yuriy Lutsenko (arrested on 26th December, and still in jail). Meanwhile only one, very junior cabinet minister from the current government, plus a couple of PoR officials, have been charged with corruption. The SBU (Security Service) was reported to have been attempting to place pressure on Ukrainian Catholic University rector Borys Gudziak in May 2010. It’s role since that time remains unclear.
In terms of corruption, while independent Ukraine has always been corrupt (part of the Soviet inheritance) quite a few of the current ministers appear to be trying to steal as much as possible, in as short a time as possible – and regardless of the damage they might be inflicting on the wider economy, to Ukraine’s international reputation, or even whether they are discovered (indicative of how tightly the media and judiciary are controlled by the government, and of a lack of desire to control this problem at the highest level). Ukraine has been slammed on this count by both Transparency International and the World bank. A well placed source has suggested to Democratist that up to 30% of the state budget is siphoned off by various scams.
Perhaps the most instructive case in this regard relates to the grain export quotas that were set after an apparently disastrous harvest last summer (in fact only 13% down on 2009). In August 2010, Deputy PM Andrei Klyuev announced that state control of the grain market needed to be strengthened and a previously unknown company called Khilb Investbud was appointed as the state trading agent in the grain market with exclusive rights to effect all operations connected with grain on behalf of the state. Then in October the government decided to introduce grain export quotas, and who should get a big chunk of the much-prized licenses required in order to export Ukrainian grain, other than the very same Khlib Investbud. It later transpired that, while 49% of Khlib Investbud belonged to the Ukrainian state, the other 51% belongs to a company called Kolossar. Kolossar is partly owned by a man called Mykola Prysazhniuk, who just happens to be…the Minister of Agriculture (and an old friend of President Yanukovich). The other major owner of Kolossar is Russian bank Vneshekonombank. No action has been taken against Prysazhniuk, and there are no plans to withdraw the quota system, despite the fact that Ukraine is a member of the WTO, and grain quotas restrict an important source of export earnings and tax revenue.
A similar degree of murk surrounds the privatization of the national telecommunications company UkrTelecom which, after having large sums of public money invested into it over the past decade, was sold for a minimal $1.3 billion in an auction in which only one firm, a mysterious Austrian private equity firm called EPIC, was permitted to bid, thereby excluding competitors including Deutsche Telekom. UkrTelekom is currently the only company to have a 3G license, and looks set to have a monopoly on 4G services as well.
A similar story is apparent from the introduction of a series of new tax laws passed by the Rada. These seem to have been specifically designed to favour large corporations at the expense of Small and Medium sized Enterprises (SMEs), and allow greater scope for corruption: Tax inspectors are now allowed to raid businesses as often as they want (previously this was a maximum of once per year), and they are able to seize property for up to 96 hours without a court order. One result of this is that FDI into Ukraine (once money reentering the country from Cyprus is discounted) remains negligible. More significantly, there’s a growing sense of anger among SMEs that may well soon spill over into protest.
In terms of the broader economy, it currently looks unlikely that Ukraine will convince the IMF to part with the two remaining $1.6 billion loan tranches to be decided in July because of lack of action on pension reform, VAT and gas prices. However, cash from the UkrTelecom sale was received by the treasury in April, and along with an unexpectedly strong trade balance, and the planned privatization of 700 state-owned companies over the coming year (due to bring in about $1.2 billion), fears that Ukraine will default on its $42.1 billion of short-term public debt due for repayment, refinancing or restructuring in over the summer have waned slightly, although they remain considerable.
Nonetheless, Ukraine is now suffering from a number of serious economic problems including soaring prices (especially food and fuel), a weak credit market, wage arrears and unemployment. As a result, according to an article in 12th May Russian Nezavisimaya Gazeta, in a recent survey some 45% of respondents said that they might be willing to participate in antigovernment protests. While we feel that this figure may be exaggerated, a number of protests are planned in the coming days in Kiev, and the level of participation in these will give a better indication of the level of popular anger.