Re­form Watch

Kyiv Post - - National -

Sum­mary

Ukrainian Fi­nance Min­is­ter Olek­sandr Danyliuk has gone to Wash­ing­ton, D.C. to at­tend the In­ter­na­tional Mone­tary Fund and World Bank An­nual Meet­ings, which this year run from Oct. 9-15. Dur­ing his visit, the min­is­ter is ex­pected to pro­pose a new gas pric­ing for­mula that would al­low the govern­ment to side­step a com­mit­ment to the IMF to raise nat­u­ral gas prices for the pop­u­la­tion.

Ahead of the meet­ings in Wash­ing­ton, Danyliuk gave a se­ries of in­ter­views in which he tried to dampen fears that Ukraine will aban­don the re­form agenda ahead of the pres­i­den­tial and par­lia­men­tary elec­tions in 2019.

Se­cu­rity and De­fense

As Ukraine pre­pared to tout its re­form suc­cesses in Wash­ing­ton at the IMF and World Bank an­nual meet­ings, news broke in Kyiv on Oct. 11 that of­fi­cers from the Na­tional Anti-Cor­rup­tion Bu­reau, or NABU, and the Spe­cial­ized An­tiCor­rup­tion Pros­e­cu­tor’s Of­fice had de­tained two se­nior of­fi­cials at the De­fense Min­istry on charges of em­bez­zle­ment.

Ac­cord­ing to the NABU, Deputy Min­is­ter of De­fense Ihor Pavlovskyi and the head of the min­istry’s pro­cure­ment depart­ment, Volodymyr Hu­lyevych were de­tained in con­nec­tion with a cor­rupt scheme to siphon off money from the de­fense bud­get dur­ing the pro­cure­ment of fuel. The losses to the state were $5.5 mil­lion, the NABU said.

While the case high­lights the in­de­pen­dence of new anti-cor­rup­tion agen­cies, it also shows that, even af­ter three years of war, cor­rup­tion at the De­fense Min­istry may ex­ist at the high­est lev­els. More­over, the min­istry is di­rectly sub­or­di­nate to Pres­i­dent Petro Poroshenko. The scan­dal thus also taints Poroshenko, es­pe­cially as law­maker Sergii Leshchenko has al­leged that the com­pany said to be in­volved in the scheme, Trade Com­mod­ity, is linked to law­mak­ers in the pres­i­dent’s fac­tion in par­lia­ment.

The case will also add to calls for trans­parency in de­fense pro­cure­ment, which is al­most en­tirely shrouded in se­crecy. Deputy Speaker of the Par­lia­ment Ok­sana Sy­roid, who has ac­cess to clas­si­fied in­for­ma­tion, says the over­all sit­u­a­tion is “shock­ing.” Ukrainian Fi­nance Min­is­ter Danyliuk has also spo­ken out against the ex­ces­sive se­crecy in de­fense pro­cure­ment, call­ing it “fully non-trans­par­ent.”

Zenon Zawada, a po­lit­i­cal an­a­lyst at Kyiv-based in­vest­ment bank Con­corde Cap­i­tal, wrote on Oct. 12 in the com­pany’s Ukraine Daily news­let­ter that the de­ten­tions are “a pos­i­tive step in what’s oth­er­wise a large cesspool of on­go­ing cor­rup­tion in the de­fense in­dus­try, as ex­posed by lo­cal me­dia and ac­tivist politi­cians.”

De­fense spend­ing in Ukraine has risen dra­mat­i­cally since Rus­sia launched its war on Ukraine in 2014. This year, the bud­get is $4.9 bil­lion, which is more than 5 per­cent of Ukraine’s gross do­mes­tic prod­uct. The de­fense bud­get is set to rise by an­other 26 per­cent in 2018, to $6.3 bil­lion.

Ju­di­cial

Mean­while, Ukrainian Pres­i­dent Petro Poroshenko’s plan to set up an anti-cor­rup­tion cham­ber within Ukraine ex­ist­ing court sys­tem was roundly re­jected by the Euro­pean Com­mis­sion for Democ­racy through Law, bet­ter known as the Venice Com­mis­sion, on Oct. 9.

The com­mis­sion rec­om­mended that Ukraine in­stead adopt leg­is­la­tion to cre­ate in­de­pen­dent anti-cor­rup­tion courts, as de­manded by civil so­ci­ety or­ga­ni­za­tions and Ukraine’s ma­jor for­eign cred­i­tors.

Poroshenko has balked at that idea, as this would make the ju­di­ciary ef­fec­tively in­de­pen­dent of the other branches of power. Ukraine’s weak, politi­cized and cor­rupt ju­di­ciary has failed to con­vict any ma­jor fig­ures since the EuroMaidan Rev­o­lu­tion that drove Pres­i­dent Vik­tor Yanukovych from power on Feb. 22, 2014. Poroshenko’s crit­ics say the pres­i­dent aims to keep con­trol over the ju­di­ciary to pre­vent it turn­ing on Ukraine’s po­lit­i­cal elite.

But with the ver­dict of the Venice Com­mis­sion now in, Poroshenko has had to change tack. Even be­fore the de­ci­sion of the com­mis­sion was of­fi­cially an­nounced, de­tails of its find­ings were be­ing leaked, and Poroshenko on Oct. 4 an­nounced he was drop­ping his op­po­si­tion to anti-cor­rup­tion courts and would set up work­ing groups to ex­plore how to cre­ate them.

How­ever, the pres­i­dent’s crit­ics say this is yet an­other de­lay­ing tac­tic. Poroshenko may also at­tempt to sab­o­tage the new sys­tem by mak­ing sure that ap­peals against anti-cor­rup­tion court rul­ings are con­sid­ered by the al­ready ex­ist­ing crim­i­nal law panel of the Supreme Court, ex­perts say.

Mean­while, the long-awaited re­form of the Supreme Court has also been sab­o­taged, crit­ics of the pres­i­dent claim. Ac­cord­ing to them, the com­pe­ti­tion to ap­point new jus­tices to the court was rigged, and the rec­om­men­da­tions of a civil so­ci­ety or­ga­ni­za­tion that vet­ted can­di­dates were ig­nored. As a re­sult, the new Supreme Court re­mains un­der the heavy in­flu­ence of Ukraine’s po­lit­i­cal elite, crit­ics say.

Fi­nan­cial

The Na­tional Bank of Ukraine be­gan to pub­lish the monthly fi­nan­cial state­ments of all Ukrainian banks for the first time since the in­sti­tu­tion's in­cep­tion, the cen­tral bank an­nounced last week. The move brings a level of added trans­parency to a bank­ing sec­tor that has been plagued for years by fraud­u­lent cap­i­tal­iza­tion fig­ures, and where bank own­ers have man­aged to siphon off bil­lions of dol­lars in de­posits through in­sider lend­ing schemes, while cook­ing the books of their in­sti­tu­tions.

The NBU’s in­for­ma­tion will show the struc­ture of each bank’s loan port­fo­lio, along with its trial bal­ance - a list of all the deb­its and cred­its on each bank’s ledger. The cen­tral bank also prom­ises to be­gin pub­lish­ing in­for­ma­tion on each bank’s reg­u­la­tory cap­i­tal struc­ture.

The move, though likely to be ap­plauded by in­vestors and anti-cor­rup­tion ac­tivists dis­mayed by the opac­ity of Ukraine’s fi­nan­cial sys­tem, could be wa­tered down by per­sis­tent al­le­ga­tions that the bank has, in the past, mis­rep­re­sented the cap­i­tal­iza­tion amounts of Ukrainian banks.

En­ergy

Ukraine may try to bend its gas pric­ing rules in or­der to avoid hav­ing to raise gas prices for house­holds un­til next July. Ac­cord­ing to Reuters, the govern­ment is to pro­pose a new pric­ing for­mula to the In­ter­na­tional Mone­tary Fund that would see prices rise by 4.8 per­cent.

Un­der a pre­vi­ous agree­ment with the IMF, Ukraine can keep prices un­changed if the price rise cal­cu­lated us­ing the pric­ing for­mula is less than 10 per­cent.

The price rise cal­cu­lated us­ing the cur­rent, IMF-ap­proved for­mula would be 17.6 per­cent – thus Ukraine will pro­pose that the for­mula be changed, an un­named source close to the mat­ter told Reuters.

Ukraine’s heav­ily sub­si­dized gas prices have been a source of cor­rup­tion and a huge bur­den on the state bud­get for years, and the IMF has made re­form of the sec­tor a con­di­tion for fur­ther dis­bur­sals of its $17.5 bil­lion loan pack­age for Ukraine. The fund has al­ready doled out $8.4 bil­lion un­der its cur­rent pro­gram with Ukraine, but there are fears that Kyiv might start to drag its feet on tak­ing fur­ther painful re­form mea­sures in the run-up to pres­i­den­tial and par­lia­men­tary elec­tion in 2019, plac­ing at risk the al­ready de­layed dis­bur­sal of an­other $1.9 bil­lion tranche of the loan.

Th­ese fears have been fur­ther stoked by Ukraine’s suc­cess­ful $3 bil­lion Eurobond place­ment last month, which ex­perts say could also en­cour­age the govern­ment to put the brakes on un­pop­u­lar re­forms.

A crow sits on a gate out­side the Supreme Court of Ukraine on Oct.12 in Kyiv. (Oleg Pe­tra­siuk)

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