Huge frustrations seem to be building in society over the lack of real or indeed any progress on the number one issue, which is fighting corruption and ensuring the rule of law.
Two years in, after the start of the EuroMaidan protests, and no one seems to have been brought to account either for the wrongs of the former administration or in general for prior and subsequent corruption and wrongdoing.
Allegations abound over continuing corruption.
Note therein that a survey I did in conjunction with the Kyiv Post of its readership showed that 93 percent f respondents thought that the rule of law and corruption was now the biggest constraint to development.
Some argue that the problem is the political class itself, or at least a weight of it, which is terrified to open a Pandora’s box over corruption, given that they have seen in countries elsewhere in the region, such as Romania and Croatia, that once started, investigations can go right to the top.
The point is still made that a weight of the current Verkovna Rada is still “old school” in terms of oligarchic business interests, and they are blocking these key reforms.
That’s the corruption angle, but then the current tribulations over passage of the new tax code and budget for 2016 is causing severe angst in the reform team in government.
Note therein that they have put together an IMF compliant budget and tax code with a deficit of 3.7 percent of gross domestic product.
But a rival tax code, which could see the deficit explode again to over 10 percent of GDP, has been proposed by the head of the Verkhovna Rada’s tax committee, who also happens to be in President Petro Poroshenko’s faction in parliament, and seemingly still seems to be close to the president.
Worryingly both the head (Yuriy Lutsenko) and deputy head (Ihor Kononenko) of the president’s faction have vigorously endorsed the rival tax code that would blow a hole in the IMF program.
Note that this tax plan does not even attempt to formulate a budget, they just roll out tax-cutting measures without any attempt to figure out the budget implications.
Suffice to say approval of that latter rival tax plan will put in jeopardy the whole $25 billion Western support package for Ukraine.
Surprisingly there seem to be elements in the Poroshenko team which now seem to be pushing an agenda suggesting that Ukraine can survive without an IMF program, and this idea seems to be gaining some traction in some of the corridors of power.
Likely this is all linked and goes back to the anti-corruption battle, as there seem to be elements within the administration and the Verkhovna Rada that essentially do not want to push the anti-corruption agenda far, and see pursuing an independent course from the IMF programme as the best means to stall on that agenda.
The concern is that the failure of parliament to back an IMF compliant tax and budget code could see mass resignations across the reform team in the administration, which is already showing signs of extreme frustration and exhaustion at the pressures of rolling out a high-intensity reform program but which has been getting very mixed levels of political support from within some of the important corridors of power.
Depending on how far these resignations extend this would be a disaster for reform momentum in Ukraine, and could step back some of the really transformation reforms already set in motion at places such as the Ministry of Finance and the National Bank of Ukraine.
The fears now are of a populist or revanchist backlash in Ukraine, with very unclear and uncertain outcomes. This could all yield (new protests) — hard to predict that one, given no one called the Orange Revolution or the Euromaidan Revolution.
One certainly gets a sense that the reform team in the administration is feeling forlorn and unsupported, or lacking higher level political leadership and the “vision” again from the political leadership. Still very difficult reforms lie ahead, and the real political leadership seems to be lacking in the “pro-European Union” political bloc in the Verkhovna Rada and elsewhere. People talk about a shadow or shadowy government, run by oligarchic interests.
There is here a lot of focus now on the one-year anniversary of the current government (Dec. 11) after which it can be changed/reshuffled and indeed parliament can propose a no- confidence motion. It is touch and go whether it will survive and we heard differing views.
Logic would still suggest uneasy coalition between the Bloc of President Petro Poroshenko and the Popular Front of Prime Minister Arseniy Yatsenyuk sustains simply as what are the alternatives?
The president’s coalition with parties representing the former Regions Party would surely see Maidan III (a new revolution) and popular unrest again which could well then be used by Ukraine’s external foes to further destabilize the country and take territory.
But in the current atmosphere and given the desire of oligarchic business interests to stall the anti-corruption agenda, anything is kind of possible at this stage.
You can construct a scenario where the coalition sustains, the cabinet suffers a modest reshuffle extending to ministries seen as significantly underperforming, a reasonably IMF compliant budget and tax code is passed at the last minute, at year end, and IMF monies eventually arrive at some point in Q1.
But I am leaving with an impression that this is knife edge, and importantly some might see passage of the tax code/budget as a sufficient sop to the IMF et al., and that the key anti-corruption agenda will be left to whither on the vine.
Just to go back to the importance of the rule of law idea/agenda, and its importance.
The same Kyiv Post survey suggested that respondents did not see the tax level as the key impediment to business, but what was important was the rule of law, or the administration of the existing tax code/law and the ability of the tax authorities to arbitrarily apply that. Everything at the moment seems to come back to the law of the rule of law in Ukraine, which in the end was the basis of the Maidan protests.
I think we could be close to a scenario where we see high-profile resignations of key reform stalwarts in the administration, no budget or tax code and no IMF money, and then the recent macro-stabilization (hard won) unwinds fast again – with extreme pressure on the hryvnia, loss of foreign exchange reserves, et al. I don’t think the market is pricing this, not with bonds trading in the 8.5-9 percent range.
