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.
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.
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.
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)