Although parliament is in session and elections are not until 2019, the reform agenda is stalling for two key reasons besides politics: Russia’s war remains a low-intensity, though deadly affair, and Ukraine’s economy and finances are on the rebound -- giving politicians more time to put off the tough decisions.
A new Supreme Court will be named in Ukraine in just two weeks, Ukrainian President Petro Poroshenko said in an interview with Canada’s CBC News on Sept. 25. The president, seemingly recycling a sound bite he picked up from ex-U.S. Secretary of State John Kerry at the Yalta European Strategy conference in Kyiv earlier in the month, said every court in the country would become an anti-corruption court.
Poroshenko has been dragging his heels on introducing anti-corruption courts – one of the demands of the International Monetary Fund to unlock more loans from its $17.5 billion bailout to Ukraine. Ukraine has so far received a total of $8.7 billion in four tranches of the IMF loan. In order to receive the fifth tranche, expected to be worth a further $1.9 billion, Ukraine also has to pass pension reforms, speed up privatization and make progress in fighting corruption, IMF spokesman Gerry Rice said at a briefing in Washington D.C. in mid-September.
However, since the UkraineEuropean Union summit in Kyiv in July, Poroshenko has been pushing for the introduction of anti-corruption panels under the Supreme Court, rather than specialized courts. Critics say this is because such panels would be easier to control, as they would be directly subordinate to the Supreme Court – a body formed by the High Council of Justice, over which Poroshenko already wields considerable influence.
The World Bank and the IMF on Sept. 22 said they were worried that Ukraine is watering down pending pension reform legislation, which could imperil the next tranche of its $17.5 billion IMF loan package ending in 2019. Parliament passed the first reading of the law in July, but it has been modified with dozens of amendments ahead of second reading. Ukraine’s international lenders want Ukraine to pare back spending on the fiscally unsustainable pension sector, reducing the deficites to 3 percent of gross domestic product Ukraine currently spends around 12 percent of its GDP on pensions, but there are almost as many pensioners as workers and the pensions are a paltry $2 per day on average. The law originally aimed to raise Pension Fund revenues by cutting the number of professions that allow early retirement, and increasing the time workers must work to qualify for a pension. However, critics of the law say saving can be made without increasing the amount of time people have to work to gain a pension. Lawmakers are to vote on the legislation at second reading on Oct. 3.
With the moratorium on farmland sales set to expire on Jan. 1, 2018, the World Bank and others are lining up in support of those in Ukraine who want to create an agricultural land market. The ability to buy and sell the nation's fertile land could attract $50 billion in loans and investments. The Agricultural Ministry estimates the longstand ban costs the nation more than $3 billion a year. The World Bank also sees the ban as a brake on Ukraine’s economic development, and one of Ukraine’s other key lenders, the International Monetary Fund, has made removing the ban a condition of its $17.5 billion loan package. Ukraine had promised to lift the ban by the end of December 2016, but with public support only at about 11 percent, parliament last year balked at the move, instead voting to extend the ban for another year.
Meanwhile, with the obstruction of reforms at Ukraine’s state-owned oil and gas company Naftogaz of Ukraine leading to the resignation of the last two remaining independent members of its supervisory board on Sept. 19, the European Bank for Reconstruction and Development said it would pull the plug on its loan for the company unless corporate-governance reforms there get back on track soon. The EBRD has already disbursed $300 million to the company over the last three years, but no new money will be forthcoming until a new, independent supervisory board is appointed, and the government’s blocking of changes to improve the company's performance and management ends, the bank’s regional director Francis Malige said on Sept. 22. Increasing gas prices and eliminating dodgy intermediaries saw the company in 2015 make a profit for its first time in five years. However, analysts say measures to separate the gas transit and storage businesses from Naftogaz have met stiff resistance from within the government, and may have prompted the independent members of the supervisory board to resign after only 18 months on the job.
The numbers in Ukraine look better: inflation down from 61 percent in April 2015 to just 13.5 percent now. The economy back to growth - 2.3 percent in 2016 and roughly the same expected this year. And to top that off, Ukraine’s $3 billion dollar-denominated bond issue on Sept. 18, which has an annual yield of 7.375 percent, was an “unbeliev- ably positive assessment of reforms,” according to Ukrainian President Petro Poroshenko.
However, some analysts are already worrying that the successful bond issue, which according to a report in the Economist was oversubscribed by $7 billion, may encourage Ukraine to ease up on pursuing reforms – especially if demand for high-yield sovereign bonds remains high.
Access to cash from the bond markets may encourage Kyiv to believe it can rely less on the Western international financial institutions that saved it from total economic collapse in the wake of the EuroMaidan Revolution and Russia’s war in 2014. The $17.5 billion lifeline provided by the IMF helped Ukraine stabilize its economy in 2014 and 2015, came with conditions. It’s no coincidence that most progress in Ukraine was made when the IMF’s money was most needed. Now that Ukraine’s need for financial support is less dire and it has other options, the pressure to make changes is lessened. Going off the IMF program has happened time and time again in independent Ukraine's history.
Ukraine has torn up thousands of pages of regulatory acts over the last year, making it much easier to do business in the country, Ukrainian Prime Minister Volodymyr Groysman said at the opening of the Kyiv Investment Forum on Sept. 26.
He said his government had taken practical steps to “create real deregulation” in the country, and that the business environment is improving. He said he expected the new realities will attract more investment to the agriculture, infrastructure and tourism sectors.
Ukraine is now 80th in the World Bank’s Ease of Doing Business ranking, one place up on the previous year. But it only moved up four places in the most recent World Economic Forum's Global Competitive Index, released Sept. 26, moving to 81st among nations from 85th place.
A man comes out of Naftogaz headquarters in Kyiv on Sept. 21. (Volodymyr Petrov)