Inside Ukraine

December 5, 2014 №40 Content

The Government Policy ...... 1

Financial assistance in exchange for reforms ...... 1

Four scenarios on Donbas and none of them is official ...... 2

Georgian experience in reintegration of self-proclaimed republics ...... 3

Economic Situation ...... 4

Ukraine should introduce 3G technology with no further delay ...... 4

A course on aviation reform ...... 5

Energy efficiency in the concept of national package of reforms ...... 6

Political competition ...... 8

Parliament has chosen a new government ...... 8

Political parties are getting ready for local elections ...... 9

Inside Ukraine 40 The Government Policy Ukraine approaches a point of no return in re- to conduct reforms and how to arrange control form-making. Last year Vilnius became a sort of over their implementation. Therefore, they count the Rubicon for eurointegration, when only revolu- on individuals, hoping that it will shift responsibil- tion and casualties changed foreign policy vector of ity for potential failures on foreigners in the cabinet the country. Now we are approaching “Vilnius of or partners in the coalition. reforms”, when in case of the government inaction There is a lack of clearly articulated strategy on return to reforms will be possible only through so- Donbas. Government takes decisions aimed to ab- cial upheavals. solutely remove Ukrainian institutions from self- Meanwhile, it seems that neither President nor proclaimed republics. No official explanations from Prime Minister understands importance of the mo- Kyiv breed suspicion that there may be some unof- ment. They spend time on distribution of portfolios ficial agreement on freezing the conflict in the East. behind closed doors, when society and internation- An interesting illustration how to build relations al partners require specific results. Government has with temporarily occupied territories is provided not offered a clear vision for reforms in public ser- by Georgia when Tbilisi tries to use soft power in vice, decentralization, judicial system, economic order to keep self-proclaimed republics in the orbit deregulation. Authorities do not understand how of its influence. Financial assistance in exchange for reforms

Formation of a new cabinet showed that parlia- ners are not ready to introduce new principles of mentary majority does not have a single team for appointments, based on transparency. reforms and a clear vision There is a lack Distribution of minister positions took place of their implementation. of team unity without public discussion and nomination of cer- Meanwhile, election win- for reforms tain politicians for some of them was of provocative

Inside Ukraine 40 1 The Government Policy character. For instance, “People’s Front” and “Bloc tries, foreign partners may focus more attention on of Petro Poroshenko” offered Andriy Sadovyi to be- institutional aid, when hundreds of public servants come vice-prime-minister on decentralization in will be taught in government sector abroad and will order to make him responsible for one of the most use this knowledge for development of democratic problematic, yet most urgent areas of reforms. Sa- institutions in Ukraine. dovyi’s refusal of the offer and involvement of for- In a critical situation Ukraine faces now delay eigners for government positions show that in a with reforms is a threat to national security. Govern- number of important spheres neither President, nor ment does not have time for preparations. “Honey Prime Minister has a clear vision of reforms and try moon” of a new cabinet will be short if government to avoid personal responsibility for potential failures. fails to convince the society that it has started re- Meanwhile, Western partners and civil society forms instead of multiplying their concepts. become more persistent in demanding specific re- For the last nine months there has hardly been any sults from the government. progress on issues of decentralization, justice reform, Johannes Hahn, the EU Commissioner for Eu- and public service. In fight against corruption tone ropean Neighborhood Policy and Enlargement Ne- of declarations is correct, anticorruption package of gotiations, stated that Ukraine should consider the reforms was approved in Delay with reforms EU not as a donor, but a friendly investor. At the October 2014, but its im- is a threat same time, Ukrainian government is supposed to plementation was not yet to national security present specific suggestions on reforms related to initiated. Reform of law rule of law and fight against corruption. Financial enforcement agencies exists in the form of a concept. assistance will be provided only under specific sug- What is more, deregulation reform has several con- gestions, with a rigid control over use of the funds. cepts, but they have not made life of Ukrainian and Except for financing advisory groups in minis- foreign businesses easier. Four scenarios on Donbas and none of them is official Actions of Ukrainian government as regards and evacuates civil servants. Ukrainian government Donbas do not go further than sporadic decisions, follows this path now, but this choice will lead to which do not develop into a comprehensive strat- the conflict being frozen and destroys connections egy with a clear vector. Sporadic actions between Kyiv and Ukrainian citizens who remained There are not so many of government in Donbas. At the same time, the government was scenarios, but final not brave enough to put do not transform Kyiv wants to fight choice of government’s it straight that it will fight into a comprehensive separatism with behavior model should separatism with econom- strategy economic means be clearly articulated with a clear vector ic means. to Ukrainians citizens The third option is similar to the previous, with the both in Donbas and in the rest of Ukraine. only exception that all financial efforts of government The first scenario is military offensive, for which as regards Donbas will be directed to meet the needs Ukraine does not have resources, especially taking of IDPs as a true voice of Ukrainian Donbas. In future into account active relocation of Russian weapons these citizens may be used to spread the Ukrainian and soldiers to the territory since the Minsk proto- influence in the temporarily occupied region. col was signed. The fourth one is so called Georgian scenario, Under the second, Ukrainian government creates when the territories, which are not controlled by a defense line along the ATO (antiterrorist opera- Kyiv are recognized as temporarily occupied and tion) zone, starts economic blockade of the territory, the government is ready to spend money on pro- continues diplomatic efforts to strengthen interna- grams for local people in order to be able to return tional pressure on Russia, suspends social payments the region at least in the long run.

2 Inside Ukraine 40 The Government Policy Georgian experience in reintegration of self-proclaimed republics Tbilisi builds up its policy as regards self-pro- There are 350 thousand IDPs in Georgia, while claimed republics from the position that Georgia population of the country is 4.5 million people. As may offer more than Russia to Abkhazia and South a matter of comparison, as of December 1, 2014 500 Ossetia. In particular, there is the Ministry for Rec- thousand IDPs were officially registered in Ukraine, onciliation and Civic Equality in Georgia. Its ma- while the UN claims that the real figures surpassed jor area of activities is reintegration of population 1 million people. in self-proclaimed republics into national political At the beginning of Georgian-Abkhazian con- processes. flict IDPs were placed in state residences and health A considerable attention is paid to healthcare resorts, since the government expected to solve the and education. For instance, access to healthcare problem in the short term. However, freeze of the is cheaper and easier for owners of Georgian pass- conflict resulted in the fact that now the govern- ports in Abkhazia or Georgia ment allows IDPs to privatize state real estate where South Ossetia than to av- reintegrates they have lived for years. After Russian-Georgian erage citizen in Georgia. republics through war of 2008 foreign investors were also actively in- Georgian government education volved in construction of new real estate for IDPs. also ensures free immu- and healthcare Georgia is ready to make financial expenditure nization of population. in order to have a possibility to return the territory As well, Georgians from Abkhazia may study for in the long run. Ukraine follows another scenario free in Georgian universities. Due to the fact that - it is enough to mention the government’s decision they are concentrated on the same territory, they to distribute UAH 198 mln. of budget subsidies have Georgian schools. Just to compare, pro-Rus- allocated to southern districts of Luhansk region sian authorities in Donbas and Crimea do utmost to among five regions. Out of the five only Dniprop- squeeze everything Ukrainian out of this territory. etrovsk region borders with the ATO zone. Also, Georgian authorities have no problems is- These funds may have been used to finance em- suing passports to local residents and do not raise ployees of state enterprises in the front-line zone or the issue of withdrawal of already issued passports. initiate target programs for IDPs who have left the As a matter of comparison, on November 3, 2014 region. It is financial sup- National Bank of Ukraine adopted the resolution port of front-line zone Subsidies saved on which treats citizens in Crimea as non-residents of under control of Ukraini- financing of some Ukraine. an authorities and social districts in Donbas Georgian authorities are convinced that it is nec- work with local people may have been essary to keep infrastructure ties between self-pro- which is a true defense used for the needs claimed republics and the line that may stop spread of the front-line It is necessary to area rest of Georgia. One may keep infrastructure of separatism. cut water and electricity ties between Georgians try to use soft power to reintegrate supply in one move, yet it republics and the self-proclaimed republics. Since there is no mili- will be extremely difficult rest of the country tary solution to the situation in Crimea and Don- to restore it. bas, Ukrainian authorities should also learn how to A prominent place in official policy on Abkha- work with population in separatist regions, at least zia and South Ossetia is taken by the issue of IDPs, defending pro-Ukrainian people on temporarily the number of which exceeds Ukrainian indicators. occupied territory.

Inside Ukraine 40 3 Economic Situation The delay in the implementation of reforms in The aviation reform may result in the monopoli- the aviation and telecommunications industries is zation of domestic aviation market to suit the inter- a clear demonstration of a lack of political will and ests of one specific company. Thus Ukrainians may capacity of the government to implement reforms be deprived of cheap flights from low cost airlines, as well as the resistance of some stakeholders. while international companies will have no other Ukraine is the only European country to fall be- choice but to leave Ukrainian market. hind in the introduction of 3G, the third generation Ukraine is one of European outsiders in energy of mobile telecommunications technology. The efficiency. The government measures to increase main reasons for such lagging behind are lobbying energy efficiency are of an institutional and declar- of the main players in the relevant markets, the ab- ative nature. sence of political will, corruption and red tape. Ukraine should introduce 3G technology with no further delay

After taking office, Ukrainian President Petro of countries have already gone as far as to introduce Poroshenko repeatedly stated that it was necessary 4G, the fourth generation of mobile telephony. How- to introduce the last gen- Petro Poroshenko ever, over the last years the central executive body in eration of 3G mobile tele- defined the the communications industry and telecommunica- communications tech- introduction tions regulatory bodies demonstrated a total inabil- nology in Ukraine with of 3G technology ity to introduce 3G and The main reasons no further delay. as one of the 4G in Ukraine. The main for the delay It has been a long while most important reasons for the delay are a are lobby of since business and con- innovations strong lobby of telecom- monopolists, lack sumers got ready to wel- munication monopolists, of political will and come the introduction of 3G mobile telecommunica- lack of political will and corruption . tions technology. Today, Ukraine is the only European corruption in state bodies. country to have failed to introduce 3G mobile tele- Introduction of modern telecommunications communications technology. Moreover, the majority technologies helps increase competitive capacity

4 Inside Ukraine 40 Economic Situation and create additional stimuli for GDP growth. As monopolization of 3G technology. Nevertheless, the world practice shows, 1000 users of broadband such a delay in the sale of 3G licenses was not in Internet provide for 88 jobs, a 10% increase in the the interests of telecommunications market players. broadband Internet coverage increases a country’s At the end of September, the NCCIR approved GDP by 1%, the increase of broadband Internet the draft resolution of the Cabinet of Ministers speed increases a country’s GDP by 0.3%. which stipulated conditions for the sale of 3G li- Despite the President’s statements on the neces- censes. According to the document, all three 3G sity to implement telecommunications reform as licenses will be offered up for bid simultaneously, soon as possible, the situation with 3G has not im- the initial cost of which will be UAH 2.44 billion. proved yet. Winners of the bid will cover a conversion of mili- At first, budget revenues from introduction of tary frequencies (in total, UAH 1.6 billion). Opera- 3G technology were estimated at UAH 5 billion. In tors belonging to Russian companies and individu- particular, it was expected that after announcing als (more than 50% of shares) may be banned from an open call for bids, the state would receive about placing the bid. The date for the auction has not UAH 3 billion within 4-5 been announced yet, since the Cabinet of Ministers In summer, months for 3G licenses. failed to agree on the draft resolution with the NC- potential Ukrainian Ministry of CIR, referring to different reasons to justify such a profits from the Defense was expected decision. introduction of 3G to receive about UAH 2 In general, the Cabinet of Ministers rejected technology were billion under a conver- NCCIR bid regulations four times. The government estimated at about sion agreement for the was not pleased with the procedure set to estimate UAH 5 billion purpose of the develop- the cost of the license. It also objected to the Rus- ment of communications system. Also, Ukrainian sian origin of operators. On November 26, 2014 officials hoped that introduction of 3G technology the Cabinet of Ministers The Cabinet would provide for additional investment by opera- put forward a proposal to of Ministers tors into communications industry, with the invest- increase price for a 3G li- rejected NCCIR bid ment worth at least UAH 5 billion during 2014-2015. cense pro rata to hryvnya regulations 4 times According to the Presidential Decree as of July devaluation. “On ensuring conditions for introduction of mod- If all the three licenses are sold through an open ern telecommunications technologies”, the Nation- bidding procedure provided there are three poten- al Commission for the State Regulation of Com- tial buyers (MTS Ukraine, Kyivstar, Astelit), there is munications and Informatization (NCCIR) was to a risk of selling them at a minimal price. The Neth- announce a call for bids by October 30, 2014. At erlands and Hong Kong have experienced a simi- first, it was planned to offer up three 3G licenses. lar situation when licenses in those countries were However, the government decided to offer just one sold at a lower price than it had been expected. It 3G license, with the remaining two kept until 2018. is better to attract foreign investment and increase This government decision drew a lot of criticism, as the number of licenses to four, which will ensure the sale of only one 3G license could lead to the better competitiveness and raise licensing profits. A course on aviation reform The way aviation reform is being implemented Reforming of aviation industry is possible reflects the principles and methods of reform im- through signing of the agreement on “open skies” plementation in Ukraine. Official statements on between Ukraine and the Reforming of aviation reform have been first made at the begin- EU, which has been post- aviation industry is ning of this year. In May 2014, expert groups which poned. possible through were created within the Ministry of Infrastructure The last reason for the signing of the began to elaborate a concept of transport reform, delay was a disagreement agreement including aviation reform. However, this reform re- between Spain and Great on “open skies” mained on paper and was never implemented. Britain as to the wording

Inside Ukraine 40 5 Economic Situation on territorial use of some part of Gibraltar. “Open with by foreign and new operators, which will only skies” grant the authority to Ukrainian and Euro- add to the monopolization of the market by its big- pean companies to operate flights between Ukraine gest operator – “Ukrainian International Airlines” and all the EU member states without an intergov- (UIA). However, as of today the Ministry of Justice ernmental agreement on air routes, which will pro- suspended implementation of this decree until all vide for an increased presence of low cost airlines. proposals have been made. While signing of the agreement is postponed, it is Nevertheless, this is not the last accusation necessary to implement domestic reforms aimed at against the State Aviation Service. “Trans Aero reducing air conveyance fares, increasing air secu- Handling” company accused the head of the State rity and expanding the geography of air conveyance. Aviation Service of protraction with certification to The relevant agency is not particularly interested suit the interests of “Ukrainian International Air- in implementation of reforms aimed at ensuring lines”. A similar position is expressed by UM Air. A transparent competitive- combination of these events can be taken as a proof ness. This is confirmed The relevant agency that state bodies attempt to monopolize aviation by a new procedure for is not interested market in the interests of UIA. It should be men- the issuance and revoca- in transparent tioned that the State Aviation Service is headed by tion of rights to use air competitiveness Denys Antoniuk, who used to work as director of routes, which was elaborated by the State Aviation airline route networks and alliances development Service and approved by the ministerial decree as department at UIA. of October 24, 2014. This ministerial decree creates Thus, instead of reforming the market and cre- additional obstacles for obtaining the permission ating a competitive environment, there is a clear to operate international flights. Most complaints attempt to create additional obstacles for mar- concerned the following: 50% of corporate capital ket players in the interests of one of the oligarch of an airline should belong to or be actually con- groups. As a result, in foreseeable future one should trolled, directly or indirectly, by Ukrainian citi- not expect lowering of air tickets price and exten- zens; airlines should operate regular flights within sion of conveyance geography, whereas airlines will Ukraine during the period of at least 12 months in a be forced to either work under financial losses, or row. Such requirements will be difficult to comply leave Ukrainian market. Energy efficiency in the concept of national package of reforms As of today, the strategic goal of Ukrainian gov- would allow for establishing economic mechanism ernment is not only to reduce energy dependence for energy efficiency. Second, it was planned to and diversify energy supplies, but also to increase conduct a large-scale energy audit in the country energy efficiency through certain regulatory mea- and introduce energy management system, which sures. For example, some years ago Poland imple- would ensure effective management and control mented energy efficiency programs which allowed over implementation of energy efficiency policy for reducing energy spending by 35%. In qualita- aimed at enterprises and central executive bodies tive terms, this reform now allows the Polish gov- in Kyiv and Ukrainian regions. Third, it is necessary ernment to save around USD 3.5 billion annually. to elaborate special methodology to measure ener- On November 26, 2014 the Cabinet of Minis- gy efficiency of construction and introduce techni- ters adopted the action plan on the implementa- cal requirements as to energy-saving for newly built tion of EU directives in energy sector. First, it was buildings as well as for buildings to be reconstruct- decided to launch energy The implementation ed and overhauled. efficiency program and of EU directives The issue of energy efficiency is singled out in the reduce dependence on in energy sector coalition agreement as of November 2, 2014. In the energy imports, which first place, it touches upon instalment of electricity,

6 Inside Ukraine 40 Economic Situation water and gas meters in high-rise buildings and com- gy efficiency, energy audits etc. As a result, Ukraine plete withdrawal of subsidies in electricity and gas faces the risk to spend budget funds on creation markets. However, introduction of commercial reg- of a structure with unprofessional staff. European ister for consumed natural gas, thermal energy, and experience confirms that introduction of energy centralized water supply is planned to start from 2017. management in self- The implementation Today an important step to be taken to ensure a governance bodies yield of EU directives stable development of national economy is indus- positive results. However, in energy sector trial energy audits, mainly as regards major compa- the blind import of West- nies. Changes will come only if Ukrainian govern- ern experience does not always work in Ukrainian ment stop granting subsidies for domestic giants of realities. Institutionalization of energy manage- chemical and metallurgy industry. Only then eco- ment is possible only after solving the issues such nomic mechanisms for energy efficiency will start as training, job retraining and vocational courses working. Ukrainian companies’ top management for specialists, i.e. creation of a strong educational will be interested in enhancing energy efficiency and qualification base. and investing in more energy-saving technologies. Measures which have been announced by the The refusal of the government to grant subsidies government to introduce energy passports for for companies will spur technical modernization of buildings raise doubt as to rationality of financial those companies. Such innovations will not need costs and use of human resources. Even without additional spending and will not lead to decrease this stage it is clear that Soviet-era housing needs in budget revenues. thermal and energy reconstruction. For example, Introduction of energy management system Poland implemented reforms in energy sector in at institutional level will require professional staff. the 1990s without additional examination and in- The main task of energy managers in the EU coun- spection of buildings by solely investing in recon- tries is to ensure high energy efficiency, rational use struction of heating sys- Energy passports of human capital and resources. Today we can see a tem and heat insulation for buildings may sharp deficit in skilled personnel, who would have for all buildings built be- be waste of money special education and practical experience in ener- fore 1984.

Inside Ukraine 40 7 Political competition Verkhovna Rada approved a new government, tion actions, form a new opposition group called voting for the whole cabinet, but not individual “Ukrop”. It will include Dmytro Yarosh, Borys Fila- ministers. Coalition promised to hold a public tov, Boryslav Bereza etc. discussion about potential ministers, yet consul- Local elections will become the last step in a re- tations over candidates took place behind closed set of local political elites. Political parties which doors – the practice which was widely used in the will receive control over local councils will be able times of Viktor Yanukovych. to formulate regional policy and influence deci- Some MPs, who are not satisfied with the coali- sion-making at the local level. Parliament has chosen a new government

Parliamentary coalition voted for a new cabi- age voting. A positive thing is that some candidates net of ministers. Wave of criticism on the part of made presentations on reforms of their ministries. civil society and experts was caused by process of It is the first time in Ukrainian politics that there consultations over ministerial candidates. Leaders will be a separate Ministry for Informational Policy, of coalition factions assured that cabinet formation headed by Yuriy Stets. It Ministry would be transparent. Fi- is unknown what func- Consultations for European nal project of the cabinet tions the ministry will over ministerial Integration proposal had only one perform, what tasks are candidates lacked is more needed candidate per each min- set for the agency, how transparency than Ministry istry, which automatically it will interact with other for Informational excluded any possibility for competitiveness. Thus, state agencies at the local Policy formal list of candidates was ready before the pack- level. Taking into account

8 Inside Ukraine 40 Political Competition difficulties with implementation of the Association A group of MPs who do not support coalition Agreement with the EU, it makes more sense to es- actions initiated formation of opposition group tablish a separate Ministry for European integra- called “Ukrop”, which also competes for leader- tion, but not Informational Policy. ship in one of the parliamentary committees. This Political battles are ongoing as regards distribu- group includes ten MPs, among which there are tion of parliamentary committees which are to be Dmytro Yarosh, Borys Right-wing MPs given to opposition. Coalition assured that “Oppo- Filatov, Volodymyr Para- will form a sition bloc” would not be the only opposition. The syuk. Organizers are sure separate group niche may also be taken by parliamentary groups of that they will get 19 MPs in the parliament Ihor Yeremeyev and Vitali Khomutynnik as well as to form a full-fledged by independent MPs. parliamentary group. Political parties are getting ready for local elections Decentralization will shift decision-making pro- bly make “Bloc of Petro Poroshenko” develop lo- cess and a portion of budget funds to a local level. cal branches, especially in the capital. By-elections According to the coalition agreement signed, FPTP in Kyiv city council will show what behavior mod- system will remain for elections of village councils. el “UDAR” and “Bloc of Petro Poroshenko” will Elections to district, regional and city councils will choose in relations with each other. be held according to proportional representation “Opposition bloc” understands that decentral- system with open lists. Such an electoral system ization of state power can give a chance to retain fits current situation in Ukraine the best. Yet fulfill- the impact of this political force on local councils ment of coalition agreement will depend on politi- in eastern and southern “Opposition bloc” cal situation and party interests of key players. Ukraine. Recently, one of wants to use Vitali Klitschko announced that “UDAR” will the leaders of this force decentralization take part in local elections independently. After Serhiy Lyovochkin noted in its own interest parliamentary elections Vitali Klitschko had two that regional structures options for his political future. are strenuously preparing for local elections. The first scenario was to merge with “Bloc of Petro The speakers of “Opposition bloc” traditionally Poroshenko”, to remain Kyiv mayor and gradually use populist social rhetoric, which contributed to lose chances for return in big politics. Moreover, a Party of the Regions’ victory in previous elections. worrisome signal for Vitali Klitschko was the fact that The party continues criticizing and imposing re- his closest aide Vitali Kovalchuk and a number of in- sponsibility for committed crimes upon Viktor fluential MPs are getting closer to Petro Poroshenko. Yanukovych and his family. The lack of reforms in The second option is to keep party structure and the government and further impoverishment of influence on the President, while continuing an the population may serve as a ground for political independent game. Separate participation in local comeback of ex-members of the Party of Regions. elections creates a number of challenges for par- A top priority task for leaders of party structures ties of Vitali Klitschko and Petro Poroshenko. For is to develop network of electoral campaign offices a short period of time a lot of “UDAR” party ac- and to update the list of party members at the lo- tivists were taken by propresidential party. Lack of cal level. On the eve of local elections, leadership trustworthy party members may negatively affect of “Opposition bloc” may Party of the the party capacity to hold an efficient election cam- hold the next congress Regions may be paign in the regions. Gradual withdrawal of Vitali where Party of the Re- dissolved Klitschko from the President’s party will inevita- gions may be dissolved.

Inside Ukraine 40 9 The aim of the publication is to provide objective information on current political events in Ukraine and thorough analysis of major tendencies in domestic politics. Such analysis will assist in setting priorities in the process of implementing reforms in Ukraine and in evaluating quality of state decisions from the viewpoint of their impact and sustainability. Special attention is paid to evaluation of political competition in Ukraine and ability of key political players to address challenges.

@2014 International Center for Policy Studies (ICPS) If citing please give reference on the ICPS

Idea of the project: Vira Nanivska

Responsible for the project: Iaroslav Kovalchuk

Responsible for the chapters:

The Government Policy — Iaroslav Kovalchuk Economic Situation — Vasyl Povoroznyk Political Competition — Anatoliy Oktysyuk

Team of ICPS experts: Vira Nanivska, Iaroslav Kovalchuk, Vasyl Povoroznyk, Angela Bochi, Anatoliy Oktysyuk, Olena Zakha- rova, Volodymyr Prytula, Nataliia Slobodian, Vasyl Filipchuk.

This issue is made possible by financial support of International Renaissance Foundation. Views ex- pressed in the issue do not necessarily reflect those of International Renaissance Foundation

Inside Ukraine 40