This is an annual event (13th this year) which aims to bring global leaders and thinkers together to jam around global themes of significance and with an anchor around Ukraine. No, I did not break sanctions – it was held in Yalta until Russia’s disputed annexation of Crimea in 2014, after which it has been held in Kyiv.
I attach herein a few big picture thoughts, with a particular focus on Ukraine:
As a starting point, I have attended perhaps 10 or 15 Ukraine-related conferences over the past couple of years, post-Euromaidan Revolution, and the discussion always boils down to an assessment of where Ukraine is in terms of reform and what should now be the priority for reforms going forward.
So how should we assess reform progress in Ukraine thus far?
It is a bit difficult to answer this as it all boils down to expectations and perspectives which typically vary given our own different experiences and interests.
Locals typically would argue that progress has been disappointing, with expectations being high for radical and transformational reform stimulated by the EuroMaidan and the subsequent military struggle to ensure Ukraine’s sovereignty. A typical local view is that this was an opportunity for radical and transformational reform, and indeed reform is essential to Ukraine’s survival as a sovereign state when set against the pressure felt from foreign intervention. Only by reforming can Ukraine acquire a sufficient strength and durability to survive in its current form, and indeed ensure a return to its borders pre-April 2014 and the annexation of Crimea and then the intervention in Donbas. For many the crisis and subsequent war created an opportunity for transformational reform to the European norm or template, and that this opportunity has somehow been wasted by Ukraine’s corrupt and inept political and business elites.
By contrast a typical (and unfortunately I think the dominant) foreign view, meanwhile, is to all too easily write Ukraine off as inevitably bound to fail to reform and as exampled by 25 years since independence of reform promises not being delivered. This latter somewhat defeatist narrative is also often associated with the line that Ukraine would somehow better position itself either back in the Russian orbit or as a bridge between East in West. Moscow and its proxies certainly play on this. However, this interpretation ignores the fact that this bridge position was Ukraine’s state for much of the era of independence and it clearly failed. Meanwhile, opinion polls still clearly show majority support for a European, as opposed to a Russian, orientation.
Reflective of the above I would perhaps argue that local expectations were too high (structural reform by definition and experience is always difficult), and especially given the considerable challenges faced by Ukraine (revolution, annexation, war/foreign intervention, on top of a warped Soviet and then post Soviet transition) while foreign expectations were too low. On this latter account I would argue that reform successes thus far (see below) suggest that Ukraine is more than capable of delivering major reforms, and has already proven an ability therein on numerous accounts but only where there has been the political will.
Indeed, I would argue that a balanced perspective on reform would suggest that there have been some pretty remarkable achievements delivered over the past 18 months, but that there have also been some clear disappointments, particularly with respect to the anti corruption agenda.
In terms of the achievements I would highlight:
Fiscal adjustment
Ukraine has gone from running a budget deficit of 9-10 percent of gross domestic produce only two years ago to perhaps 3-4 percent expected this year. The introduction of the ProZorro procurement system offers the prospect, meanwhile, of major savings in state expenditure – perhaps as much as $2 billion annually.
Debt restructuring
Ukraine completed the restructuring, against expectations, of a weight of private sector external (Eurobond) debt liabilities. It hence avoided a hard and destabilising default scenario.
Energy sector adjustment
Energy prices have been hiked close to cost recovery levels, and this has seen consumption drop. Gas imports have dropped from 40 billion cubic meters plus less than a decade ago to perhaps 10 billion cubic meters now, and the gas import bill has dropped from $10-$12 billion per year 4-5 years ago to perhaps USD1-2bn now, helping reduce both the current account deficit and the quasi fiscal deficit run via Naftogas.
Domestic deflation and foreign exchange adjustment
These factors, plus a tight monetary policy stance since, have cut the current account deficit from 9-10 percent of GDP a few years back to perhaps 2-3 percent of GDP this year.
The UAH has stabilized, foreign exchange reserves accumulated and increasing from a low of $5 billion just two years back to $14 billion plus at present, more than three months of import cover (from just a few weeks). That the above has been achieved despite only limited disbursements under the International Monetary Fund lending program over the past year has been quite remarkable and reflects the benefits of reverse currency substitution which has come with the stabilisation and reform of the banking sector, and some moderation in the conflict in the East, plus broader reform.
Banking sector reform
Some 80 failing banks have been closed (nearly half the total) over the past 12-18 months, at huge personal risk to the National Bank of Ukraine officials who rolled this out. Remaining banks are being recapitalized, and have programs for rehabilitation and return (some were never in good health) to good health. The regulatory and supervisory regime around banks has been transformed to one now fit for purpose. Perhaps with the exception of one systemically important privately owned bank (no guesses which one this is), the sector no longer seems to pose a large latent systemic threat/contingent liability to the sovereign.
NBU reform
This has been incredible, with the bank rationalized and also made fit for purpose, with its head count shrunk from 11,000 to 5,000, and plans still to go further. The bank functions have been rationalised/revamped/refocused and monetary policy regime transformed towards an inflation targeting regime with a floating foreign exchange. NBU management and performance has been transformed beyond recognition, to one which is now showing “best practice” for the region.
Growth/inflation improvement
This is a sign of improved macro-policy choices – inflation has dropped from a peak of 60 percent a year ago to 6-7 percent now. From a low base admittedly (15 percent real GDP decline from peak to trough post-EuroMaidan), the economy is now growing, with real GDP growth of 1 percent expected this year.
Who would, or indeed did, expect this macro stability/recovery 12-18 months ago? No one.
In many respects this is an incredible achievement given the buffeting that the Ukrainian economy has undergone over the past two years, and in addition in an environment of lower prices for semi-finished products (a mainstay of exports) and then sanctions/transit bans from Russia on trade.
Unfortunately the population probably don’t feel much benefit from the above, given the drop in dollar incomes, and erosion of spending power with accumulated inflation, plus the impacts of fiscal austerity and energy price liberalization. But the stage has been set for growth, development and improvements in living standards. Try telling them that though.
Probably the population would be willing to accept the sacrifice of reduced standards of living if they had seem some improvement in other reform areas, such as the fight against corruption (burden sharing), or government service delivery. But herein progress has been much more limited – with the exception perhaps of the revamp of the police, and some cuts in regulation/red tape.
Indeed, there have been numerous failings/disappointments:
First, the failure to complete any major state asset sales is a huge disappointment, as a successful and transparent sale could have provided a great advertisement for the country, suggesting institutional capability plus also interesting assets are available for sale. The attempt to sell the Odessa chemical plant, arguably, was that opportunity, but it’s failure in the end this summer has had the opposite effect, sending a message of incapacity.
Second, and perhaps as frustrating for the population as the decline in living standards, has been the failure to bring any meaningful and perceptible reduction in corruption, which continually comes up from surveys of opinion as the number one compliant of business and the population at large. Indeed, I would argue that the ability of the administration to address this issue, and to more generally improve the business environment, which includes reducing red tape, bureaucracy and regulation, will now determine how well the economy is able to take advantage of the hard won macroeconomic stability achieved and as noted above. This will determine whether the economy grows at 1-2 percent per year or 4-5% over the next 4-5 years, and really transforms sufficient to bring a meaningful improvement in the lives of ordinary Ukrainians.
The government will and does argue that it has laid the foundations for reining in corruption, by introducing the new e-declaration system, introducing a national corruption agency and bureau, introducing independent supervisory boards at state-owned enterprises, and moving to reform the Prosecutor General’s Office and judiciary.
Critics would argue that this is all window-dressing and ruling elites are simply not interested in changing a system from which they still benefit greatly. Are all these efforts just creating a Ukrainian version of the Potemkin village (a “Poroshenko Village”) when it comes to fighting corruption and graft? Time will tell, albeit 2.5 years after the EuroMaidan and the fact that no one seems to have been brought to account for past and arguably continuing graft/corruption is particularly telling.
Explanations for the lack of perceptible change in reining in corruption are various. Either you buy the official line that with institutions now being rolled out change will now finally come. Or less charitable is the interpretation that Ukraine’s oligarchic and political elites simply don’t want change. And the fact that the political system has been captured by oligarchic interests who are resisting change might suggest that there won’t be change until the political system itself is changed (to fully PR), bringing in new reform minded political leaders unassociated with Ukraine’s old oligarchic order. Such political change seems unlikely at this stage – oligarchs see capture of domestic politics as a tried and tested self-defense/survival skill against their rivals – so how can their behavior be encouraged to change to play by the rule of law?
I guess at the moment Ukraine’s oligarchic and political elites are resisting the process of change as they assume (perhaps correctly) that once reforms of the judiciary, Prosecutor General’s Office office, and with various anti-corruption initiatives being rolled out, they will finally be brought to account, and face sanction (jail) for past malpractice of which there was likely plenty.
Two options come to mind to change oligarchic/elite behavior and resistance to change.
First, either the anti-corruption and judicial system has to prove its metal, by actually bringing individuals to account – “bandits to jail” with the examples therein of Romania and Croatia where high level scalps were taken (up to prime minister level in both cases) as examples that no one was above the law and change was expected, even demanded. But in both those latter cases, the European Union accession and membership process (as yet not open to Ukraine) helped build institutional capacity in the judiciary and the Prosecutor General’s Office to ensure successful prosecution.
Second, and if the institutional structure is not up to the task in Ukraine – and unlikely to be so for some time to come – then a compromise or transitory solution might be more appropriate. As I have argued before this might need to involve some form of “Truth and reconciliation” process, with declaration of assets and then windfall taxes imposed, with clean behavior and zero tolerance expected after some cut off date. An amnesty might be the only way to prevent elites continuously sabotaging the anticorruption agenda that really is so critically important now to improving the business environment and raising Ukraine’s long term growth potential.
During the YES conference it worried me that some President Petro Poroshenko administration officials seemed to fail to grasp the centrality of the anti-corruption agenda.
One such official argued that the biggest problem for business was a lack of finance, and that the administration needed to work to get financing channels working and only then that the economy would recover.
This surely misses the point that the world is currently flush with liquidity, and this finance does not flow to Ukraine, and Ukrainian companies, because the business environment is so bad and corruption so high.
Foreign trust is just not there – why would foreigners invest and finance Ukraine, when there are plenty of cash-rich Ukrainian oligarchs who are not willing to?
It struck me as worrying that the focus seemed to be on the wrong issue and perhaps this was recognition of an inability or unwillingness to really change and reform.
It was also particularly worrying that just the day before the conference (and ironically just after signoff on the latest long-delayed IMF review), a furor emerged over the subordination of the key Ukrtransgaz gas transit system from Naftogas to the Ministry of Economy, against the agreement of the Naftogas management and its independent supervisory board (including international financial institutions), raising as a result huge concerns over corporate governance reforms around SOEs, which have also been seen as central to fighting graft and corruption. The latter eventuality suggested that the administration did not really understand the reforms that had been rolled out – again leaving an impression that they are simply window dressing. Importantly this move now threatens further lending under the IMF programme, and existing and future IFI loans, it might also undermine the Stockholm arbitration case with Gazprom.
I guess with respect to the anti-corruption agenda, with institutions seemingly now put in place, there are no excuses anymore for the Poroshenko administration not to deliver – they should now be judged by results.
But beware a populist backlash in Ukraine.
It might be argued that Ukrainian oligarchic elites game plan is to stall the anti-graft agenda, and get back to business as usual in Ukraine where they divide up political power, and the economy between themselves – actually stalling economic development and resulting in the (continued) impoverishment of the population.
The above may well be true but what was interesting during the YES conference was the focus by speakers on the global trend towards the emergence of new anti establishment, nationalist and populist forces and movements (Brexit, Donald Trump, Marie Le Pen, et al.).
However, among speakers, there was a failure to link this back to Ukraine itself. But I can easily see a failure of the Poroshenko administration to adequately address the anti-corruption agenda, addressing an underlying concern of the population, leading to victory in the 2019 presidential elections for similar populist, national or “opposition” forces.
In the Ukrainian context I could see this populist or opposition agenda working in two potentially different directions:
First, victory by a coalition led by the current Opposition Party could see a move to seek compromise and concessions with Moscow, e.g. over the Donbas or Crimea. While, some in the West might appreciate this, the obvious danger is that given the sensitivity of these issues this could only serve to divide Ukraine even further and risking therein a backlash from Ukrainian nationalists. Clearly for many Ukrainians, and after so many deaths, any compromise now over the status of Crimea, Donbas or indeed Ukraine as likely demanded by Russia, would be totally unacceptable. Further internal conflict could result, which then could be further exploited by Moscow.
Second, it is not inconceivable that a nationalist/populist alliance in Ukraine, emerging after 2019, could see pressure for a resumption of military efforts to take back territory in Donbas and even Crimea. This would risk a major escalation of the conflict with Russia, and further and destabilizing Russian intervention.
Either of the above scenarios should not be very appealing for Ukraine’s oligarchic elites as a resumption of conflict within or across Ukraine’s borders could risk a further erosion of the value of their assets. It could also risk Euromaydan II (or III depending on how the Orange Revolution is counted) which could second time around prove terminal for many of these same oligarchs. So I guess thinking through the above, oligarchs in Ukraine should have an interest in cleaning up their acts, and finally responding to the population’s desire for delivery on an anti graft agenda, otherwise they risk being swept aside by populist and nationalist forces which they may not be able to control. Time may not be on their side.
So what about Russia and the West?
What did I glean from YES – well my views did not change much.
In my mind the position and strategy of Russia and Putin towards Ukraine is probably easier to figure out at the moment than that of the West which remains in a state of some considerable disarray and flux – buffeted by those same forces of populism and nationalism as noted above.
My read of Russian strategy towards Ukraine is that Putin has put Ukraine on the back burner for the time being, content to keep the conflict in Donbas lukewarm pending clarity on the future position of the West after completion of the electoral cycle in key Western nations. He still has the option of military re-escalation in Ukraine, but the costs therein are high and likely growing as Ukraine rebuilds its own military capability.
Putin’s strategic objectives with regard to Ukraine have not changed and remain to bring the country back under Russia’s orbit of control. But Putin thinks that the West is facing inevitable decline, and the coalition ranged against it, to defend Ukraine (via sanctions) will more than likely crumble if populists/nationalist emerge victorious in looming US, French and German elections.
Putin may well be correct. After Brexit it is possible to imagine a Trump victory in the US, Le Pen in France and the removal of Merkel even in Germany. Any or all of these outcomes might terminally weaken the Western alliance formed to help counter Russian ambitions towards Ukraine. Ukraine probably better position for scenarios where it will be left even more to its own devises to counter Russian intentions to draw it back under its control.
That said, in the end while Western sanctions were important in raising the costs to Russia of its further intervention in Ukraine, it was Ukraine’s willingness to “shed blood, sweat and tears” in its own defense which was key to encouraging a Russian pivot away from the conflict in Donbas in September 2015 (and towards Syria).
Assuming the West becomes even less willing to bear the costs of helping Ukraine defend its sovereignty (and actually European values), Ukraine will have to bear an even greater part of that burden, or end up looking to cut deals and compromise its position with Russia to ensure peace. However, from my discussions this time in Kyiv at YES, and on numerous other recent visits to Ukraine, I don’t sense yet that Ukrainians are willing to make those kind of concessions to Moscow.
Even if Ukraine had to stand on its own, and that may well be the end game (under a Donald Trump presidency), the nation seems willing to make that choice and the likely sacrifices that will entail. I guess the question then is what risks and sacrifices Putin is then willing to make, in an end game in Ukraine.
Russia, the Russian economy and military, may still dwarf Ukraine and its resources, but in any final conflict, Ukrainians will be defending their own country, while Russia might end up dragged into a large-scale and hugely damaging military conflict over someone else’s country. I don’t think Putin would take that ultimate risk. That hypothesis might though be tested in the future.
