Ukraine's other war: Reforms and the EU bailout

Russia’s military invasion of Ukraine poses questions for Ukraine’s sovereignty and for the future of other former Soviet states.

But another war is being fought inside Ukraine - to meet the aspirations of last year’s pro-Western uprising by building a normal economy.

The biggest issue is the fight against corruption.

On Monday (22 March), it also threatened to prompt violence when masked gunmen occupied the offices of Ukrnafta, a state-owned oil and gas firm.

The incident took place after Ukrainian president Petro Poroshenko i signed a new law on corporate governance, which deprived Igor Kolomoisky, a billionaire politician with a private army, from exercising control over the company despite having a minority share.

For Aivaras Abromavicius, who has, for the past 100 days, served as Ukraine’s economy minister, fixing Ukraine is just as important as stopping Russian aggression.

He told EUobserver on Tuesday in Brussels that if the government doesn’t deliver on reform, the same movement which ousted the old regime could turn on the new elite.

Political instability in Ukraine would be a propaganda gift to Putin i. But, Abromavicius says, if Ukraine prospers, it could be a model for change in Russia itself.

“To wait is to fail, so we need to act quickly”, he said.

“In his first term, [Russian leader] Vladimir Putin carried out some reforms, but later there was nothing. Russia has chosen its path, so I expect the Russian economy is going to keep experiencing serious stress, in the banking sector, in trade relations. That’s the huge difference between Ukraine and Russia: In Ukraine, there’s no way that one politician can tell the rest of the country which direction to go”.

He added that an EU-Ukraine free-trade pact, which enters into life next year, is “a unique opportunity to totally reorient our trade to the EU. We want to be part of this community, not the other community”.

“If Ukraine is successful it’s going to strike a blow against Russia’s political establishment. That’s why they don’t want us to succeed, because it would bring change also to Russia”.

EU bailout

For its part, the European Parliament on Wednesday voted Yes to a €1.8 billion EU loan to help Ukraine avoid a default.

EU and International Monetary Fund (IMF) aid for Ukraine is different to the Greek or Irish bailouts. But there are similarities.

The amount is smaller: About €14 billion from the EU and €15.5 billion from the IMF compared to more than €300 billion for Greece.

The way it’s used is also different: Some of the funds are to help Ukraine re-structure its debt and to stabilise its currency. Some is to pay for Russian gas. Some is for humanitarian supplies in the conflict zone and some is in the form of EU tariff cuts for Ukraine exports.

But, as in Greece, it’s being disbursed in tranches and the price to pay is austerity and supervision.

Abromavicius is firing tens of thousands of civil servants and liquidating 1,400 non-performing state-owned firms.

He’s increasing tax collection and plans to sell off the “dozen-or-so decent assets” which the state still owns - ports, electricity firms, airplane manufacturers, and vodka makers.

He’s also trying to make it faster to start small businesses and for foreigners to invest by cutting red tape.

There’s no “troika” of EU or IMF officials to oversee reforms.

Instead, the troika is the government: Abromavicius, a former venture capitalist of Lithuanian origin who studied in the US, became a Ukrainian citizen to take up his post.

The country’s new finance minister, Natalie Jaresko, was an investment banker and a US citizen before taking up her Ukrainian passport.

Back to growth?

The scale of their task is staggering.

Ratings firm Moody’s just downgraded Ukrainian bonds to its second-lowest grade and said the outlook is “negative”.

Trade with Russia is down 50 percent. The Ukrainian economy contracted by double digits last year and is to shrink 5.5 percent this year.

The figure would be higher if IMF forecasts included lost output from Russia-occupied Crimea and east Ukraine. If Russia, as widely expected, invades the Ukrainian city of Mariupol, it will seize new assets in Ukraine’s steel and machine-parts sectors.

Abromavicius is “optimistic” the EU and IMF loans will put Ukraine’s debt on a “sustainable” footing, however.

He also predicts Ukraine will return to growth in 2016.

He said Ukraine’s agricultural sector is booming. It had a record harvest of 64 million tonnes last year, filling the EU’s annual quota for tariff-free exports in just one month.

Abromavicius said it could go to 100 million tonnes a year if Ukraine had new technology, while EU quotas will increase when the free-trade pact enters into life next year.

He wants small businesses and the services sector to be the “backbone” of Ukraine’s recovery “as they are in all developed countries”.

But he also noted that foreign investors are showing interest despite the war, with a successful recent auction of 3G licences.

He invited potential buyers to look at IT firms in Lviv, Kiev, and Kharkiv. He mentioned that real estate in downtown Kiev, where prices are at a 10-year low, could be an attractive prospect.

He also urged EU countries to do more: to help increase customs income by conducting joint operations on Ukraine’s borders with Hungary, Poland, Romania, and Slovakia and to lift EU visa requirements.

Corruption

Unlike in Greece, which has seen a backlash against austerity, Abromavicius said Ukrainian society is willing to put up with cuts, but only if the elite plays fair.

“Despite a substantial drop in living standards in just a short period of time, people in Ukraine are ready for even more hardship, but only in return for quick reforms”, he noted.

“In the minds of Ukrainians, it’s very important to show that we’re fighting corruption”.

The Kolomoisky confrontation has been resolved for now. The gunmen left Ukrnafta not long after they arrived. Poroshenko also disciplined the tycoon by forcing him to step down as the governor of Dnipropetrovsk in late-night talks on Tuesday.

Abromavicius told EUobserver it was no small thing to take him on.

“Kolomoisky is considered a hero by a lot of Ukrainians because he stopped Russian aggression in Dnipropetrovsk by consolidating his authority in the region, in a way which other oligarchs didn’t manage to do, as in Donetsk … but what the government is telling the tycoons is: ‘Things have changed and you need to play by the rules’,” the minister said.

The new anti-corruption rules include higher corporate taxes, an end to cheap oil for business barons’ factories, and an end to “transfer pricing” - a practice which saw Ukraine’s biggest firms pay more tax in Cyprus and in Switzerland than at home.

“The influence of the oligarchs on parliament is already lower than at any point since Ukraine’s independence”, Abromavicius claimed.

It remains to be seen what kind of deal Kolomoisky negotiated on Ukrnafta control in return for stepping aside quietly.

But he warned, in remarks to press, that Poroshenko, also a billionaire who made his fortune in the food sector, must go after other oligarchs as well if he’s to avoid accusations of shaking down a business rival.

He said the purge should include illicit gains from the first wave of Ukrainian privatisation in the 1990s.

The message was repeated by Mustafa Nayyem, a former journalist and revolutionary leader, who is now an MP in Poroshenko’s bloc.

“This should be the beginning of a crusade against the influence of the oligarchs … I will do my best to make sure the removal of Igor Kolomoisky doesn’t mean a holiday for other interest groups”, Nayyem wrote in his blog.

It was also repeated by Gabrielius Landsbergis i, the Lithuanian centre-right MEP who shepherded the motion on the €1.8 billion loan through the EU assembly.

"The Kolomoisky case is a good example that Ukraine is serious about solving the problem of certain monopolies and oligarchic structures … Success in this regard is very important in order to reassure the people who are desperately seeking the ‘good news' they were hoping for after the Maidan [the name of the pro-Western uprising]”, he told this website.

Landsbergis noted there’s a risk that Russia will try to use Poroshenko’s confrontation with the oligarchs to strip trouble.

But he added: “The success of Ukraine in terms of reform is important for the whole region and for the EU”.

“European-style reforms, which require societal change, will strip the Kremlin of instruments of leverage”.