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Home , 2017 in Ukraine, Andriy Kobolyev, Centrenergo, DTEK, Groysman Government, Hennadiy Zubko

REFORMS IN AFTER REVOLUTION OF DIGNITY

What was done, why not more and what to do next This publicaon was produced with financial Responsibility for the informaon and views set out assistance from the EBRD-Ukraine Stabilisaon and in this publicaon lies enrely with the authors. The Sustainable Growth Mul-Donor Account, the EBRD makes no representaon or warranty, express donors of which are Denmark, Finland, France, or implied, as to the accuracy or completeness of the Germany, Italy, Japan, the Netherlands, Norway, informaon set forth in the publicaon. The EBRD Poland, Sweden, Switzerland, the United Kingdom, has not independently verified any of the informaon the United States of America and the European contained in the publicaon and the EBRD accepts Union, the largest donor. The views expressed herein no liability whatsoever for any of the informaon can in no way be taken to reflect the official opinion contained in the publicaon or for any misstatement of the EBRD or any donor of the account. or omission therein. The publicaon remains the property of the EBRD. REFORMS IN UKRAINE AFTER REVOLUTION OF DIGNITY

What was done, why not more and what to do next

Editors

Ivan Miklos Pavlo Kukhta Contents

Foreword 4

Introducon What was done, why not more and what to do next: Ukrainian reforms aer the Revoluon of Dignity 7

Chapter 1 Polical economy of reforms: polical system, governance and corrupon 10

Chapter 2 Macroeconomic policies 35

Chapter 3 Rule of law 48

Chapter 4 Energy policy 75

Chapter 5 Business environment 87

Chapter 6 Land reform 101

Chapter 7 Privasaon and SOE reform 112

Chapter 8 Healthcare reform 132

Chapter 9 Ukraine and the European Union 144

Annex 1 Report on reforms in 2016-17 162

Annex 2 The role of the government and MPs in reform implementaon in Ukraine 167

About SAGSUR (Strategic Advisory Group for Support of Ukrainian Reforms) 173

Glossary of terms 174 Foreword Foreword | 4

Foreword

Maeo Patrone and Peter M. Wagner

When in mid-2014 the revoluonary dust started to At the same me, the Reforms Delivery Office (RDO), sele, Ukraine's new leadership was confronted with the architecture's second component, was entrusted a host of unprecedented challenges. With the with coordinang, facilitang and monitoring the signature of the EU-Ukraine Associaon Agreement reform process across the administraon and and the Deep and Comprehensive Free Trade Area, ensuring that reform plans turn into outcomes felt by the government made every effort to channel the ordinary . post-Maidan enthusiasm into a wider societal and Complemenng the dynamism and local insight of polical consensus around the direcon of key the RSTs and RDO, as the URA's third component, reforms – to bring the country closer to Europe. the Strategic Advisory Group for Support of Since then, the European Union (EU) and the Ukrainian Reforms (SAGSUR) has been providing European Bank for Reconstrucon and Development high-level advice and guidance to the top polical (EBRD) have been leading supporters of reform in leadership of the country. Drawing on their vast Ukraine. This has included innovave approaches experience in leading successful reform processes in such as the EBRD-driven Naonal Reform Council as neighbouring countries (Poland and ) as well an early-day plaorm for reform champions from all as in Ukraine, SAGSUR experts have offered branches of government, parliament and society, as invaluable perspecve to Ukrainian decision-makers well as unprecedentedly large EU-supported on the challenges, risks and rewards that such programmes in crucial reform areas such as endeavours entail. SAGSUR's experience teaches us decentralisaon and public administraon reform. countless lessons, many of which are shared by the Recognising that significantly strengthened group's members themselves on the following pages. implementaon capacity was needed to translate the ambious reform agenda into tangible improvements Since 2014, the EU has mobilised around €14 billion, for Ukrainian cizens, the EU and the EBRD came including more than €1 billion in grants. Over the together in mid-2016 to design a mechanism to same period, the EBRD has invested in 147 projects boost Ukraine's reform implementaon capacity. The in Ukraine, totaling over €4 billion. Ukraine Reforms Architecture (URA) was tailored to the country's specific needs as well as its vast As a first insight, the EU-EBRD partnership potenal. This was the first comprehensive aempt demonstrates the power of joining forces in a of its kind in Ukraine to provide a coherent and common effort to support a country's progress on its aligned framework for reform implementaon – one reform path. Drawing on complementary areas of that would increase capacity within the public experse of the EBRD and the EU, we have been administraon to carry out reforms more efficiently, able to provide a beer-targeted and beer-med while engaging stakeholders across the board more support than we would have been had we acted in substanally in the reform process. isolaon. Stepping out of our usual siloes has brought At its core are the Reform Support Teams (RSTs), undeniable benefits to the way we use our limited currently acve in eight ministries and public resources and the progress that can be made when agencies. They have filled crical capacity gaps in we leverage on one another. Ukraine's public administraon and stand on the Our second insight relates to the recognion that any frontline of the reform implementaon drive. They reform support must be tailored to each country's have notably aracted young reform talent from the unique circumstances. Being cognisant of the context country's impressive pool of highly skilled “leaders in in which we operate is a necessary, but not a the making”, harnessing their enthusiasm and sufficient, precondion for the support offered to commitment to improving lives of their fellow bear the desired fruits. The help provided by cizens. Foreword | 5

internaonal reform supporters must not only be a good fit for the needs, constraints and potenal of a partner country, but also align with the wider goals to which its society aspires. In the case of Ukraine we have built on this societal momentum by empowering reformers with genuine commitment to moving the country closer towards its desired desnaon.

Finally, reform delivery can seldom be executed by a single branch of the government system. Engagement of different branches in the reform process is vital for a legislave change or a policy to bring about the intended results. To effecvely provide support to reform efforts this means assisng the execuve, legislave and, as required, the judiciary in designing, enacng and enforcing the necessary changes. In the case of SAGSUR, involvement of its members in contribung to the 's legislave work has proven to be instrumental in building and maintaining the consensus needed for the adopon of several ground-breaking pieces of legislaon.

Our innovave and unique experiment in Ukraine and its wide recognion has strengthened our belief that by partnering up to provide tailored and comprehensive assistance in support of reform- minded leaders, internaonal development stakeholders can make a tangible contribuon to boosng the chances of reform success.

As Ukraine takes the next steps on its reform journey, we hope that the many lessons accumulated over the two and a half years of SAGSUR's engagement, and shared in this publicaon, will be a useful resource for all those striving to create a prosperous future for all Ukrainians.

Maeo Patrone, Managing Director Eastern Europe and the Caucasus, European Bank for Reconstrucon and Development (EBRD)

Peter M. Wagner, Head of the Support Group for Ukraine, European Commission May 2019 Introducon Introducon | 7

What was done, why not more and what to do next: Ukrainian reforms aer the Revoluon of Dignity

Ivan Miklos

Five years have passed since the Revoluon of ones. A very important contribung factor to this Dignity (also commonly referred to as ), a negave narrave is the fact that Ukraine connues watershed moment in Ukraine's history that took to grapple with myriad problems. The transformaon place at the turn of 2013 and 2014. A hundred process of the country's system from oligarchic, ordinary Ukrainians died in the Maidan square, just corrupt and dysfunconal to one operang on the because they wanted to live in a normal society. They principles of a funconing market economy is ridden protested against the corrupt Yanukovych regime with obstacles and remains far from completed. that was robbing the country not only of its resources Ukraine does not currently occupy the top spot on but above all the hope for a beer future. the global media radar, but when the global news I first came to Ukraine just a few weeks aer the does zoom in on the country, it is mostly concerned Revoluon of Dignity, and in early 2015 I started to with the connuing bale in the Russian-occupied work as an adviser to the Minister of Finance Natalie territories in eastern Ukraine, conflict stand-offs like Jaresko and the Minister of Economy and Trade the most recent one in the Azov sea, or yet another Aivaras Abromavičius. In 2016, I became chief corrupon scandal. War, corrupon, oligarchs and economic adviser to the new Prime Minister scandals. For many media outlets only bad news is . Together with Leszek news. This is the reality, and Ukraine has not done Balcerowicz we were asked by President Petro enough to communicate the posive results of Poroshenko and Prime Minister Groysman to create reforms to audiences within and outside its borders. and lead a small group of foreign and Ukrainian This is feeding into the prevailing negave image of experts (the Strategic Advisory Group for Support of Ukraine in general and Ukrainian reforms in Ukrainian Reforms – SAGSUR). For one year I co-led parcular. SAGSUR together with Leszek Balcerowicz, and Another reason for the harsh assessments of the following his departure I connued as the group's post-Euromaidan changes lies in the underesmaon chairman. of the inherited systemic problems, thus creang The main purpose of this publicaon is to share unrealisc expectaons for the speed and impact of SAGSUR's views on the progress, achievements and reforms. We consider this phenomenon to be an failures of the reform effort undertaken in the five important reason for the dissasfacon of both years following the Revoluon of Dignity. domesc and foreign audiences with reform progress. The dysfunconal and corrupt oligarchic Opinions on the degree to which the reform process system that was built in Ukraine in over twenty years has succeeded vary. The queson whether the glass prior to the Revoluon of Dignity is so deeply rooted, is half full or half empty is a legimate one. However, widespread and potent that removing it is an arduous the widespread narrave, both in Ukraine and and long-term process. This is why we pay great abroad, that nearly nothing or not enough has been aenon to explaining the inherited legacy of the done is greatly inflated. As the dominant discourse oligarchic system – how and why it was created and goes, Ukraine is sll a corrupt, dysfunconal and how it worked, but also what has been done in the oligarchic country with bleak prospects for process of the so-called deoligarchisaon that has successfully integrang itself with the EU and NATO. taken place in the last five years. This so-called Ukrainian fague is further exacerbated by the many challenges the Western Our overall posive assessment of course does not world has been confronted with in recent years, mean that the negave narrave has no relevance including the rise of populism, the ever-looming and that the reform progress could not have been threat of trade wars, migraon pressures, Brexit and beer (faster, deeper and wider). On the contrary, the Eurozone crisis, to name the most consequenal Ukraine could have advanced further than it has in Introducon | 8

building a funconing market economy and fighng corrupon. The biggest obstacle to greater progress has been weak polical will and courage of the current polical ; lack of leadership, ownership and communicaon of reforms. On the other hand, we are convinced and we want to demonstrate in this publicaon that given the inherited systemic condions the progress achieved is tangible and significant.

It is also worth stressing what is not the goal of this publicaon. We do not aim to cover all areas of Ukraine's economic and polical transion and EU integraon process.

We focus here solely on the areas covered by SAGSUR experts in their work with Ukrainian and internaonal policymakers. Within the areas we analyse we concentrate only on the most relevant challenges and changes that are systemically important for the transion from an oligarchic and corrupt rent-seeking system to a funconing market economy based on rule of law and fair compeon.

The main message of this publicaon is that this me (aer the Revoluon of Dignity) is different, and despite all of the struggles Ukraine, for the first me in its history, is laying the necessary foundaons to ulise its potenal and build a funconing market economy. Progress is real and significant, but sll neither sufficient nor irreversible. The elecon year of 2019 will be a serious litmus test for the sustainability of the reform process and Ukraine's determinaon to become a successful and prosperous country. Chapter 1 Chapter 1 | 10 Chapter 1 Polical economy of reforms: polical system, governance and corrupon

Ivan Miklos What happened and why?

The main goal of this chapter is to show what kind of At the beginning of the 1990s when Ukraine was system was created in Ukraine in the period between created as an independent state (along with Slovakia the fall of communism and the Revoluon of Dignity and Latvia), Ukraine, Poland, Romania and Latvia (Euromaidan) and how this system has changed over were approximately at the same economic level the last five years. It will analyse what has been done (measured by GDP per capita), while the economic to change the dysfunconal, corrupt oligarchic level of Slovakia was slightly higher. system, look at the progress that has been made, the limitaons of that progress, and what further change Table 1.1 is required to move Ukraine towards a funconing GDP per capita in PPP in Poland, Slovakia, Romania market economy and liberal parliamentary and Latvia in comparison with Ukraine in per cent democracy. (1992-2017)

Country 1992 (%) 2017 (%) Inherited legacy Ukraine 100 100 Aer the fall of communism Ukraine was considered Latvia 98 316 to be one of the most promising of the former Soviet Romania 101 281 Republics.¹ There were a lot of objecve reasons for Poland 107 339 this posive assessment: the country had a strong Slovakia 133 371 and relavely advanced industrial base supporng the producon of aircra, rockets and space Source: IMF, 2018 exploraon equipment among others; the most The figures in Table 1.1 demonstrate that Ukraine producve soil in Europe – rich raw materials and lags far behind all the other comparable countries. energy sources (especially iron ore, high quality The main reason for this is a lack of comprehensive anthracic , gas and oil); a young and highly reforms, and the related absence of integraon into educated labour force; and an ideal geographical the European Union (EU). locaon at the crossroads between the east and west, north and south. Unlike Ukraine and Romania, Poland and the Slovak Republic (in 1989-92 as part of Czechoslovakia) Unfortunately, this posive legacy was not underwent a comprehensive reform programme (the maintained in the years aer the collapse of so-called radical, or “shock” therapy) from the communism and the creaon of the independent beginning based on the liberalisaon of prices and state.² Ample evidence supports the very pessimisc foreign trade. This consisted of managed devaluaon, appraisal by Oleh Havrylyshyn, professor of an imposed internal currency converbility as well as economics and former Deputy Finance Minister of a restricve fiscal and monetary policy.⁴ Ukraine, whose paper, “Ukraine – Greatest Hopes, Greatest Disappointment”,³ discusses Ukrainian This programme, despite its polical risk, proved to economic development during the 25 years between be very successful and aer an immediate and the fall of communism and the Revoluon of Dignity. relavely short transion recession, it brought macroeconomic stabilisaon and economic growth. Thanks to these programmes Poland and Czechoslovakia (later the Slovak Republic as an

¹ In 1992 analysts at Deutsche Bank rated Ukraine's future prospects as being by far the greatest among former Soviet Republics (O. Havrylyshyn, 2014, p.165). ² See more in A. Aslund (2009) ³ O. Havrylyshyn (2014) ⁴ In Poland the programme was launched on 1 January 1990 in leadership of Leszek Balcerowicz, in Czechoslovakia one year later by Vaclav Klaus. Chapter 1 | 11

independent state) avoided hyperinflaon, polical First, Ukraine had stronger historical and cultural, as and economic chaos and macroeconomic well as economic, social and personal relaons with destabilisaon. , on all levels. This created a weaker demand for EU membership, especially in the eastern part of In the case of Romania, missing reforms in the inial the country. Ukraine was under communist rule for a phases of transion were replaced by new reform lot longer than peer countries and thus had lile efforts especially connected with Romanian experience in self-governance, public service and ambions to join the European Union. The EU other crical areas. Another important reason was integraon process (which finally succeeded in 2007) that heavy industry was concentrated in eastern was the strongest reason and incenve for reforms in Ukraine, which was dependent on economic relaons Romania and led to very successful economic with Russia. development aerwards. Second, just like in Romania and Bulgaria (but unlike In Poland, the reform process connued aer the in Poland or Czechoslovakia), there was an absence first stage of reform in 1990-91, although slower, and of new polical and prepared technocrats (such was connected with the successful integraon into as Leszek Balcerowicz or Václav Klaus and people the EU and NATO. around them) with the skills, will and courage to In Slovakia's case, the first successful stages of iniate and drive reforms. In Ukraine, there were no reforms in 1991-92 were followed by it becoming an economists among the new post-communist elites. independent state from 1 January 1993. The new These were dominated by historians, writers or Slovak government neither connued the reforms similar intellectuals. This was also related to the nor achieved successful integraon into the EU. The absence of so-called “instuonal memory”. Unlike Slovak Republic, unlike the rest of its Visegrad Four other central European countries, the former Soviet (V4) neighbours (Poland, Czech Republic and Republics (Balc states excluded) did not have a Hungary), was not invited to enter the Organisaon previous history of funconing state instuons prior for Economic Co-operaon and Development to the Second World War. (OECD) and to start negoaons for EU and NATO It is not a coincidence that those former communist memberships in 1996. Vladimír Mečiar's an-reform countries which removed the old communist government lost power in 1998, which opened up structures from power succeeded in the first stages the possibility for speedy reforms and integraon. of reform, avoiding hyperinflaon and The Slovak Republic eventually joined the EU as part macroeconomic turmoil (and in certain respects the of the largest single enlargement on 1 May, 2004 oligarchic system). Among these countries were (together with other V4 and Balc countries, Czechoslovakia, Hungary, Poland, Slovenia, Estonia, Slovenia, Malta and Cyprus).⁵ Latvia and Lithuania. The Slovak experience demonstrated that the path to Aer the collapse of communism Ukrainian polics aaining EU membership could be successfully (including economic policy) was managed by old completed in just six years if there is a strong enough elites – former communist leaders and directors of will and demand on both sides – the EU and the Soviet state-owned companies – the so-called “red applicant country. directors”. This was a legacy le by the In Ukraine, unlike Poland, Slovakia and Romania, over aer the Soviet state collapsed in 1990-91, while the the enre period between the collapse of Soviet economy had itself already collapsed in the communism and the Revoluon of Dignity, almost 1980s. zero progress was made in either area – reforms or Another problem was the spontaneous privasaon EU integraon. It is important to understand the key that increased the and power of the red reasons for this. directors. Even before the breakdown of communism,

⁵ The Slovak Republic's experience in overcoming legacy of corrupted, an-reform governments under Vladimir Mečiar (1992-98), and the speeding up of reforms aer 1998, can be a useful reference for Ukraine as there were some important similaries between the post Mečiar and post-Euromaidan fallout in respect of economy and polics. Chapter 1 | 12

in the second half of the 1980s during the so-called to tackle a challenge of such magnitude. At the “Perestroika”, Mikhail Gorbachev, former General beginning of the post-communist economic Secretary of the Communist Party of the Soviet transion, the reform process was both a technical Union, eased the condions for new business, thus and a polical challenge. There was no empirical allowing the large state enterprises to conduct evidence refer to and no praccal guidelines on how foreign trade independently. Later on (in 1988), the to do it successfully; in this regard the so-called Law on Cooperaves legalised a wide range of “Balcerowicz Plan” in Poland was really a pioneering private enterprises. Finally at the end of 1989 a aempt. There was also polical unease because the “series of laws on leasehold were adopted that made fall of communism was linked to the so-called it possible for state enterprise managers to purchase “transional recession” which le an unavoidable their enterprises for the profit of those companies”.⁶ legacy over decades – an uncompeve economy and enormous open and hidden, direct and indirect , a Russian polician and debt. businessman of influence, wrote about this period at the end of the Soviet era (of which Ukraine was a In this regard, Ukraine at the beginning of the part): “At the end of 1991, the spontaneous transion period was missing both technical and privasaon was steamrolling all over. It was the polical precondions, for a successful reform. Even the of the common property, but this the was not in Russia there was a parally successful aempt to illegal, because legal schemes of “deetasaon” did carry out a comprehensive reform programme from not exist.”⁷ the beginning of 1992. Deputy Prime Minister and Finance Minister, Yegor Gaidar, was the driving force On 1 December 1991 Ukrainians voted for naonal of this reform, which was very similar to the independence (90 per cent voted in favour) and the Balcerowicz Plan, launched in 1990, and Klaus' former communist chairman of the Ukrainian programme iniated in 1991. The condions in parliament, , was elected as Soviet Russia meant the programme ulmately failed president.⁸ because of a lack of polical support, insufficient Kravchuk's government had very lile interest in control over the central bank and the persistence of economic reforms, arguing that the first priority was the rouble zone that caused hyperinflaon in all 15 to build instuons of the new, independent state. In former Soviet republics. his words, “a baby must crawl before it can walk”. Unlike Russia, Ukraine made no aempt at any kind Another explicitly expressed reason was the effort to of comprehensive reform programme. Apart from the “protect society from the pain of the so-called shock absence of technical experse, polical will and therapy”.⁹ Both of these reasons were erroneous as courage, another important reason for the absence of demonstrated by the experience of the Balc states reforms was the increasing power of the “new elites” (and the Slovak Republic) which simultaneously did created from the old communist “nomenklatura”, the both with success – building new state instuons red directors of state-owned companies and also the and implemenng economic reforms along with “new businessmen”, oen coming from the secret integraon into the EU and Eurozone. In addion, the police and organised crime circles. Milking these shock therapy was much less socially painful than state-owned companies by establishing parallel absence of reforms. private businesses was the usual everyday pracce of The primary reason for poor reform progress in the red directors and new businessmen by the end of Ukraine from the outset was a lack of experse the 1980s. By the 1990s these pracces had reached (naonal economic thinking was absent as it had mass proporons. Huge volumes of resources were previously been undertaken by Moscow) as well as funnelled, in this way, into the new private sector. “In insufficient polical will, understanding and courage the Kravchuk years the amounts were not large

⁶ A. Aslund (2014), p91 ⁷ A. Aslund (2014), p93 ⁸ It is important to note that Kravchuk was never a reformer, even during Gorbachev's Perestroika he was more a cric than a supporter. ⁹ O. Havrylyshyn (2014), p172-173 Chapter 1 | 13

enough for the new capitalists to reach oligarch finally to gain the most of vouchers and then also status, but their embryonic rise dates to his state property. presidency”.¹⁰ The potenal of the “Orange Revoluon” in 2004-05 Simeon Djankov's evaluaon of the Bulgarian was completely lost during the presidency of Viktor experience can be applied to Ukraine as well: “The Yushchenko, and as a result of this biggest mistake in … [the] transion process was the came to power and misused his stronger presidenal failure to adopt a lustraon law…”.¹¹ competences in an aempt to establish an authoritarian regime, in turn elevang himself and his In 1994 became the new president. family to become one of the most powerful oligarchs He served as Prime Minister during the Kravchuk in the country. years and prior to that he was one of the most influenal red directors. At the beginning of his first On the eve of the “Revoluon of Dignity” Ukrainian term in 1994-95, some progress was achieved in polical and economic system was a textbook macroeconomic stabilisaon. A new economic team example of a failed state captured by a narrow group led by Deputy Prime Minister, , in of immensely powerful oligarchs. They concentrated cooperaon with the Naonal Bank of Ukraine economic and polical power, controlling the media (headed by ) and backed by the and creang a system that allowed for the misuse of Internaonal Monetary Fund (IMF) programme, their polical and economic monopolisc posion for achieved significant results: inflaon was brought the further extracon of rent for themselves. back under control (from 10,000 per cent in 1993, to One of the most characterisc features of this 182 per cent in 1995); a new converble currency, dysfunconal, corrupt oligarchic system was of the the Hryvnia, was introduced together with a more absence of free and fair compeon in both the liberalised foreign exchange market; prices and trade polical and economic arenas. Free and fair were deregulated; and a reduced fiscal deficit compeon is a necessary precondion for a liberal achieved. The problem was that these changes were democracy and a funconing market economy. The not strong and comprehensive enough and the state plays a decisive role in the creaon of an opposion to the “new elites” was so influenal that instuonal framework that shapes the behaviour of these reform efforts survived only unl the summer the subjects of polical and economic life. An of 1996, when Prime Minister was instuonal framework that protects free and fair appointed and regulaon and smulus-based policies compeon (in both arenas), punishes those who won over real reforms, liberalisaon and refuse to respect the rules and try to misuse their deregulaon.¹² polical or economic power for the sake of their own The biggest factor that contributed to the creaon of narrow interests.¹³ the most powerful oligarchs was privasaon, which In this regard, the post-communist transion was a was never transparent, open and compeve. The process of creang a new instuonal framework process was fully controlled by the new elites and aer the breakdown of the old instuonal managed in their favour. Even the mass “voucher framework of the command economy, which privasaon” that was introduced but eventually provided no space for free and fair compeon, collapsed, did not result in the redistribuon of the neither polically nor economically. The biggest naonal property into the hands of the ordinary problem of this transion was that aer the very people. Instead, it became just another tool for quick, and in principle, unexpected, collapse of expanding the wealth and influence of the oligarchs communism, the old instuonal framework who were able to use the chaos and mismanagement disappeared and the building of a new one (vital for a connected with this process to their advantage and funconing market economy and liberal democracy)

¹⁰ O. Havrylyshyn (2014), p172 ¹¹ S. Djankov (2014), p144 ¹² O. Havrylyshyn (2014), p175 ¹³ According to Acemoglu and Robinson's terminology, Ukrainian system was based on the predominance of exclusive over inclusive instuons. Chapter 1 | 14

was very difficult, full of conflicts, misunderstandings that, in 2012, Ukraine's health ministry was and hardships. If the new elites are not creang this overpaying for HIV and TB (tuberculosis) medicaons new instuonal framework intenonally and by 150-300 per cent, compared to the charies that deliberately with a goal of protecng polical and bought the same drugs; and it was at a me when economic freedom (thus free and fair compeon in there wasn't enough money to provide an-retroviral both areas), then spontaneous, unmanaged medicines to everyone who needed them”. development unavoidably leads to the creaon of a The system was so dysfunconal that the state was dysfunconal, corrupt oligarchic system. One of the not even able to provide basic goods and services for most significant features of this corrupt system was its people and as a result, even doctors who were not the absence of the rule of law and poor protecon of normally corrupt, were forced to ask paents for property rights. unofficial payments for providing them with This is exactly what happened in Ukraine between necessary drugs or equipment. The common pracce the collapse of communism and the Revoluon of in Ukrainian state hospitals became such that Dignity in 2013-14 paents had to first buy the necessary drugs or equipment at the pharmacy and only then the doctor An oligarchic system does not necessarily mean that would treat the wound in the hospital. corrupon and extracon of rent was only carried out by the highest representaves of the new elite, With regards to corrupon, the agent connues: “I especially the oligarchs. They are, of course, the most don't think there's corrupon in Ukraine and I'll visible, most influenal and richest representaves of explain why. Corrupon exists when you have a the oligarchic system of elites. But corrupon, in all healthy state; and it takes up just 10, or maximum of aspects and definions of this phenomenon, was an 15, per cent of the country. When it takes up 99 per inherent feature of the enre system. Corrupon was cent of the country, that's not corrupon, that is the a deeply rooted and widespread on all levels within state. Do you understand the logic? It's total. It's total Ukrainian society. at all levels. Even an old granny selling sunflower seeds is part of this, because the policeman going past takes five or ten hryvnias from her. She gives, he Box 1. Corrupon in the healthcare system takes and this suits them both fine, because she knows she's got someone looking out for her." Invesgave journalist Oliver Bullough¹⁴ wrote about The desny of the above-menoned secret service corrupon within Ukrainian healthcare. agent is also very illustrave. His report (with He met an SBU (security service) agent that was concrete names of doctors, persons and companies) responsible for the preparaon of a report on the was confidenal, only intended for the government, state of corrupon in the healthcare sector in 2008. but somebody leaked it to the media and even in He described a “system devoted not to treang the Ukrainian condions where people were accustomed needs of an ailing populaon, but instead to making to bad behaviour from their officials, it created a very money for a caste of privileged insiders”. Ukrainian strong and negave response. healthcare costs are socialised, in that the The reacon to the report was immediate. In October government pays for the facilies, the buildings and 2008 an assailant threw a grenade at the agent's car. the infrastructure. The profits, however, are The agent survived but suffered serious injuries. privased, in that the doctors get to keep what they Aerwards he said, “The pharmaceucal mafia earn, of course illegally, mainly by unofficial payments ordered the hit. But the invesgaon was never that are not taxed at all. finished. It was closed, someone paid for that, and so Also, government purchases within healthcare (as it never led to anything… It would have been in the well as in other areas) were ineffecve and corrupt. interest of any one of the clans that are sll working For example, “an-corrupon acvists worked out the system.”

¹⁴ O. Bullough (2018), p107-108. Chapter 1 | 15

A dysfunconal corrupt system is not only ineffecve In 2014 the Ukrainian public finance deficit exceeded and passive in the protecon of the public interest; it 10 per cent of GDP, the biggest item being the deficit is almost the opposite, becoming a tool for of Naogaz at a level of 5.5 per cent of GDP. Apart destroying public interest, for the sake of a few and from the fiscal deficit disarray, Naogaz also had a their narrow interests. profound impact on external accounts. 2012-13 saw the total bill for imported gas amount to US$ 25 For example, law enforcement instuons were not billion, so it was the major reason behind the drain in only passive in the protecon of property rights; they foreign exchange reserves. were misused, and acvely engaged in the process of property rights violaon. Tax authories were not Before the Revoluon of Dignity, the second source only tolerang tax evasion, they also were acve in of big corrupon was the banking system. Ukraine bribes, creang tax evasion schemes and loopholes had around 180 banks, but the majority of them did as well as blackmailing businesses. Control and not serve as tradional commercial banks, but as regulaon instuons were acvely creang new ATM machines for the bank owners. The model was permissions and licences for demanding bribes and very simple in principle. Banks collected money from so on. The most serious as well as the most difficult savers and companies and then gave the same problem was the intertwining of law enforcement money out as credits, mostly to companies directly or instuons and organised crime. indirectly controlled by bank owners (related party lending). Borrowers did not return money and savers Corrupon was omnipresent, but there were some then had to be compensated by the state-guarantee areas where economic corrupon was the most fund, which meant, in principle, by state, or prevalent, especially in respect of costs. taxpayers', money. The amount of money milked in The first and maybe the most important was the this way out of taxpayers was enormous. energy sector including electricity, oil and in The Naonal Bank of Ukraine (NBU), for example, parcular, . Gas imports from Russia were regarding PrivatBank in January 2018, announced, not only an enormous avenue for corrupon but also “an independent probe of the bank's historical a tool for interfering with Ukrainian polics, violang operaons found [it] had been used for “large-scale the independence and sovereignty of the country.¹⁵ and coordinated” fraudulent schemes spanning at There were a lot of schemes in the energy sector that least a decade before the bank's naonalisaon in milked the state, consumers and taxpayers. The most December 2016 and resulng in losses of at least notorious being the one by the state-owned US$ 5.5 billion”.¹⁶ company Naogaz, who had the monopoly on gas Other problems included state-owned banks which and regulated the price of gas for households. provided loans under polical influence. Unl 1 April 2015 the average price for households The third largest area of big corrupon was in tax was only 12 per cent of the market price (for administraon. There were many methods used, companies and export). For more than two decades probably the most prolific of which was blackmail the gap between the full commercial price and the with regard to VAT rebates. The typical precondion regulated price for households was enormous and for a VAT refund was a bribe at a return of 20-30 per created vast opportunies for “dirty business” where cent of the sum. gas was bought for households at the regulated low price and then sold at the full commercial price either Another “Eldorado” of corrupon was public to other companies, or for export. This kind of procurement, where the state and its instuons “business” was finally paid for by the taxpayers to purchased goods, services and investments at higher cover the mounng debt of Naogaz. prices but usually at a lower quality in comparison with private counterparts.

¹⁵ For more details see Box 3 on page 20. ¹⁶ Ahead of its naonalisaon in December 2016, more than 95 per cent of PrivatBank's corporate lending was to pares related to former shareholders and their affiliates, with 75 per cent of the loan book consolidated into loans for 36 related-party borrowers. The majority of these loans remain overdue and unpaid, resulng in a loss to the bank of at least US$ 5.5 billion. Naonal Bank of Ukraine. Chapter 1 | 16

Customs was yet another area that experienced high infrastructure were more than 80 per cent controlled levels of corrupon, with smuggling and bribes being by monopolies or oligopolies. In these areas oligarchs more the rule than the excepon. played a decisive role either as direct owners of the companies, or by de facto controlling (in cooperaon Yet another of the biggest sources of corrupon were with policians) the most important state-owned the state-owned companies. Ukraine sll has around companies (like Naogaz, or 3,500 state-owned companies that are, in principle, UkrGasVydobuvannya – a gas extracon company). outdated, ineffecve and loss-making. More than half of them are not funconal at all. State-owned companies are sll being milked for the sake of Box 2. State capture by oligarchs private companies and the polical pares that control them, in the name of the state. How poorly state instuons funconed and how the state, in reality, was a servant of the oligarchs, is How the oligarchic system works illustrated by the arcle from Ukrainian Week¹⁸ published on 31 August 2012. Despite the fact that the whole polical and “A good example is the posion of Rafael Kuzmin, economic system is corrupt, the most important First Deputy Chair of the An-monopoly Commiee, systemic feature of corrupon is the almost unlimited who insists that and , power of the oligarchs. Power comes from the two Ukrainian tycoons referred to as key Party of capitulaon of polical and state instuons to the Regions' sponsors unl recently, are not monopolists. narrow interests of a few of the richest and most Meanwhile, independent economists esmate that influenal people, who captured the state and DTEK, a group of power plants owned by Rinat shaped the rules of the game. On the flip side, only Akhmetov, controls over 35 per cent of the electricity the oligarchs are strong enough to stand up and supply market. Dmytro Firtash's enes control 100 defend themselves against the predatory state, per cent of facilies producing making it somewhat a two-way street. and nearly 50-60 per cent of and In the beginning, accumulated the producon facilies. Meanwhile, Mr Kuzmin refers to biggest part of their wealth from the commodity- the as a monopolist. The group is based industries¹⁷ that became a quick and easy owned by and Hennadiy source of large profit – without investment, Boholiubov who are sll outside the Party of Regions. entrepreneurship and real compeon. Later on, However, Mr Kuzmin admied that the An- once they almost fully occupied the sector, they monopoly Commiee had no proof of Privat Group's shied their interest and money away from monopolisc acvity because its different companies commodity producon and towards less profitable are owned by various offshore enes. areas like banking, retail, energy supply, airlines, “, a major Ukrainian telephone operator, chemicals and construcon. A few of the biggest has recently been bought by a lile-known company oligarchs quickly monopolised these industries and linked to the president's family, according to The took control of significant parts of the economy and Ukrainian Week's sources. Prior to being sold to connued in their “rent-seeking” style of doing private investors, Ukrtelecom had been on the list of business. At the same me they gained control over natural monopolies dominang the naonwide the media to influence public opinion in their favour. markets for local telephone service and According to the data of the An-monopoly telecommunicaon channel rental. However, it was Commiee for 2013-14, the following markets were removed from that list in June 2011 although the fully occupied by monopolies or oligopolies in company controls nearly 70 per cent of the city Ukraine: extracve industries, power, gas, heat landline telephone market and 75 per cent of the supply, water supply and sewage. Transport and

¹⁷ Especially in metallurgy and the chemical industry concentrated in Eastern Ukraine. ¹⁸ O. Kramar (2012) Chapter 1 | 17

intercity and internaonal telephone connecon Table 1.2 markets. Cumulave amount of FDI per capita in Ukraine, Romania, Poland, Latvia and Slovakia (1993-2017 in “Another factor that hampers the struggle against US$) monopolists is Ukraine's legislaon, which, unlike American antrust laws, does not qualify a Country FDI per capita in 1993-2017 (US$) company's monopolist posion as a violaon. Thus, a Ukraine 1.878 company may control 50 per cent of the market and Romania 4.901 nobody will pay aenon provided that it tolerates other players (at least from the An-monopoly Poland 6.734 Commiee's standpoint, even though the Commiee Latvia 9.226 may be encouraged to take a selecve approach). Slovakia 10.449

“An-monopoly authories in developed countries Source: World Bank open data disclose the registers of private corporaons displaying elements of dominaon. Even the Russian The figures in Table 1.2 demonstrate how Ukraine An-monopoly Service keeps a record of commercial aracted much less foreign direct investment (FDI) enes whose share on a certain market exceeds 35 compared to other countries. Even then, about one per cent or commercial enes that dominate in third of the figures shown were from Cypriot specific markets. Meanwhile, the Ukrainian An- investments, that is, mostly funds of Ukrainian monopoly Commiee's press service told The oligarchs previously taken out from Ukraine.¹⁹ Ukrainian Week that “Under the effecve Law on Protecon of property rights was not the only reason Natural Monopolies, the Commiee is required to behind the low FDI in Ukraine. The acve resistance keep a record of natural monopolies, but not other by the oligarchs to potenal competors acted as an monopolies.” How effecvely can the state protect addional barrier. In the extracve industries, for compeon by following this procedure?” instance, corrupon in the process resulted in problems with receiving licences, standard producon sharing agreements and internaonal A very significant systemic feature and a reason for arbitraon clauses among other issues. the poor performance of the Ukrainian economy was the lack of investment in the export-oriented Other reasons why the rate of investment from the tradeable goods sectors that could help significantly non-oligarchic sector was very low include: improve economic producvity and boost growth. macroeconomic instability; poor prospects for small and medium-size business development; high levels Many factors could be held responsible for this but of informal economy; an underdeveloped banking the most important were very poor protecon of sector with widespread corrupt pracces (such as property rights, macroeconomic instability and lack of related-party lending); very high indebtedness; and interest or ability of new elites to develop their poor payment discipline. business and, therefore, the country's economy as a whole. Public investment was also limited, especially due to slow economic growth, depleted funds as a result of Oligarchs in principle do not develop their high corrupon, low efficiency of use of public businesses, invest, restructure or modernise their resources, widespread tax evasion, as well as own companies (or the state-owned enterprises unsustainably high expenditure in unreformed social controlled by them). They are focused much more on security system (for example, pension expenditures making a quick return; and instead of then invesng were at 18 per cent of GDP in 2010, while a this money back into the Ukraine, they move it to sustainable level is around 8 per cent, but not more safe havens abroad. According to various sources, than 10 per cent). around 80 per cent of the capital made in 2013 by the five biggest oligarchs was siphoned off abroad.

¹⁹ See more at: hps://bank.gov.ua/doccatalog/document?id=73849830 (Ukrainian) Chapter 1 | 18

The result of this underinvestment in economic Source: Calculaons based on the World`s Top Exports: development is a lack of compeveness, hp://www.worldstopexports.com/ukraines-top-10- degradaon of assets, obsolete equipment and an exports/ inflexible structure of the economy and industry. It is clear from Table 1.4 that while in Poland, Slovakia Instead of the “creave destrucon” that is and Romania, the most important export items are characterisc of a free and fair compeve system, industrial products, in Ukraine commodies hold a the Ukrainian oligarchic system can be defined only prominent posion in the country's export mix. The by “destrucon”. reason is simple – the compeveness of commodity This kind of uncompeve economy reduces export items is possible to sustain without investment (or ability and potenal as shown in Table 1.3. with low investment) and without reforms. This compeveness is sustained by permanent Table 1.3 devaluaon which allows for low labour costs. Overall export in Ukraine, Poland, Slovakia, Romania and Latvia Table 1.5 Currency rate appreciaon (+) or depreciaon (-): 1996 2017 (US$ (US$ 1996 2017 local currencies against US$ in per cent (1995 = 100 Country billion) billion) (%) (%) per cent)

Ukraine 20.3 53.7 100 100 Currency 2008 (%) 2017 (%) Poland 35.3 280 173 521 Czech crown (CZK) +35.7 +11.9 Slovakia 14.5 92.2 71 171 Polish zloty (PLN) +0.65 -55.8 Romania 9.7 87.8 47 163 Slovak crown (SKK) +28.1 € from 2009 Latvia 2.4 1.3 12 34 (UAH) -358 -1.805

Source: World Bank open data Source: Calculaons based on the World Bank Under these condions, the Ukrainian industrial open data potenal, that was relavely strong at the end of the In the case of Ukraine, a significant poron of its communist era, was largely destroyed over the last export commodies (that is the biggest part of the few decades. Thirty years ago the Ukrainian overall export) is either directly or indirectly machinery industry was more developed and controlled by oligarchs. advanced than the Polish, Slovak or Romanian industries. Ukraine produced aircra and rockets How much Ukraine lost during the last nearly three while Slovakia's producon was predominantly in decades is evident from an analysis of the Top 500 tanks and canons. How this changed is shown in companies in central Europe (CE).²¹ Table 1.4. The figures in Table 1.6 show very clearly how much Table 1.4 Ukraine is lagging behind. Poland has 182 companies Structure of export in Ukraine, Poland, Slovakia and among the CE top 500, Ukraine has only 29 and even Romania (2017,²⁰ in per cent) Slovakia, eight mes smaller in populaon than Ukraine, has 32. In respect of mul-naonal Advanced products Commodies companies among the CE Top 500, Slovakia has 25 Country (%) (%) and Poland 92, whereas Ukraine has only three. Ukraine 9.8 63.9 Poland 41.6 17.2 Slovakia 51.5 14.5 Romania 51.6 16.6

²⁰ Calculated from the 10 biggest export items of the listed countries and a share of these items in total export. ²¹ Deloie, Central Europe Top 500 Chapter 1 | 19

Table 1.6 Top 500 companies in central Europe – Ukraine, Poland, Slovakia and Romania (2016)

Country CE External Local Mul-naonal State-owned Together (populaon) comparator industry Local industry company enterprise Ukraine (45.00 million) 1 3 15 3 7 29 Poland (37.97 million) 3 21 32 92 34 182 Romania (19.7 million) 2 2 37 5 46 Slovak Republic (5.43 million) 2 25 5 32

Source: Deloie, 2017, World Bank, 2016 company among its seven. But while five out of seven Slovak companies are owned by mulnaonal As menoned earlier, Ukraine and Slovakia at the concerns – 1. Volkswagen, 2. Kia, 4. Samsung, 5. beginning of the 1990s found themselves in very Peugeot and 7. US Steel – Ukraine only has one – 5. similar situaon. Their economic level was ArcelorMial. Lastly, among these seven biggest approximately the same, both countries were faced Slovak companies, four are advanced industrial with the need to build instuons of newly- producers. Ukraine has no such kind of company established independent states, and both countries among its top seven. were in transion from centrally planned to market economies. At that me, the industrial base and As the same source²³ indicates, the financial sector development was more advanced in Ukraine. But shows an even bleaker picture. Out of the top 50 what is the situaon now? The economic level banks in Central Europe there are fieen in Poland, measured in GDP per capita is almost four mes six in Romania, four in Slovakia but only two in higher in purchasing power parity in the Slovak Ukraine. While the assets of the Slovak Republic's Republic (and almost seven mes higher in dollars in four banks are €45.5 billion, the assets of the two nominal GDP). Slovak exports in absolute terms are Ukrainian banks amount to €16.5 billion. The almost twice as high as Ukrainian exports and while situaon among the top 50 insurance companies in the majority of Slovak export consists of advanced Central Europe is even worse – sixteen of them are in machinery and industrial products, dominant export Poland, five in Romania, four in Slovakia but none in arcles in Ukraine are commodies and agricultural Ukraine. products. Investment, especially foreign direct investment, is Looking in detail at the Ukrainian and Slovak important and without a significantly higher FDI companies listed among the Top 100 companies by influx Ukraine cannot successfully restructure its revenue in Central Europe, we can see how the economy and unlock its potenal. For this, a change differing industries reflect the economic disparity. in its instuonal framework is needed. Ukraine features very low down in the global value chain, Coincidentally, Ukraine and Slovakia both have seven which means that its parcipaon in global companies among the CE Top 100,²² but their producon and trade with complex, sophiscated ownership, producon and advancement is very products and services is highly insufficient. As the different. World Bank's Global Value Chain Report showed, Among the seven Ukrainian companies, three are “higher technology industries that produce a more state-owned – 1. Naogaz, 3. Energorynok and 6. specialised product are more sensive to instuonal Ukrainian Railways. Slovakia has no state-owned quality… [whereas] poor instuons can constrict the

²² World Bank (2016). Ukraine has 45 million inhabitants, while the Slovak Republic has only 5.43 million. ²³ Deloie, Central Europe Top 500. Chapter 1 | 20

domesc producon of these types of intermediate By that me, Firtash was rich. In the country's 2010 goods”.²⁴ The reason being that more advanced and presidenal elecon, Firtash, by his own admission, complex products and services that have stronger aided the pro-Russian Viktor Yanukovych. A US and complex value chains are more contract- diplomac cable described Firtash as a “major intensive. Countries with beer instuons, such as financial backer” of Yanukovych. property rights and rule of law, parcipate more in The report connues with accounts suggesng that the global value chains. Ukraine needs to graduate without Firtash there would not have been a from exporng primary commodies to become a Yanukovych victory. major parcipant in global value chain exports. While global value chain exports account for less than 10 With Yanukovych president, Tymoshenko stepped per cent of Ukraine's total, other comparable down as prime minister. Business associates of countries lead the way with Poland at 27 per cent, Firtash were appointed to influenal posions in the Romania and Turkey at 38 per cent and Vietnam at new administraon. He had allies in the corridors of 59 per cent. power, and ambious plans to expand his business empire and get back into the gas trade. His friends in Russia were happy to help him... Box 3. The story of Dmytro Firtash In June 2010, Firtash established a company called On 26 November 2014 Reuters published a special Ostchem Investments in Cyprus. A month later, report²⁵ analysing the story of successful Ukrainian Gazprombank registered a credit line to the company oligarch Dmytro Firtash, based on a very detailed of US$ 815 million, according to Cypriot documents. analysis of Cypriot, Russian and Ukrainian customs In September, Ostchem Investments bought a 90 per and tax documentaon. cent stake in the Srol ferliser plant in Ukraine. It was perfect synergy: Firtash knew the gas business, In July 2004, a new company, RosUkrEnergo [RUE], and natural gas is a major feedstock for making became the intermediary for gas deals between ferliser. Russia and Ukraine. The owners of RUE were unknown at first, but it later emerged that nearly all Further loans and deals with Firtash companies of the company was owned by Firtash and [Russian followed. energy company] . RUE bought gas cheaply Reuters found that by March 2011, Gazprombank and sold it on at a higher price in Ukraine and Europe. had registered credit lines of up to US$ 11.15 billion This arrangement guaranteed profits for RUE and to Firtash's companies. The companies may not have was hugely controversial among Ukrainians who saw borrowed that whole sum, but the documents RUE as an unnecessary intermediary. Another US indicate that loans up to that amount were available, diplomac cable, from March 2009, described RUE according to Cypriot lawyers. as a “cash cow” and a “serious source of... polical patronage.” In a website posng, RUE said that in In the space of seven months in 2011 alone, Firtash 2007 it sold nearly US$ 10 billion worth of gas and acquired control of two more ferliser plants in had a net income of US$ 795 million. Ukraine: Severodonetsk and Azot. He also bought the Nika-Tera sea port, through which Aer , herself a former gas trader, ferliser and other dry bulk goods are shipped. He became prime minister of Ukraine in 2008, she acquired a lender called and invested in reacted to public anger about the gas trade and the tanium processing industry. moved to cut Firtash and RUE out of the business. She struck her own gas deal with then-Russian Prime Such was his expansion that Firtash became the fih Minister Vladimir Pun in 2009. largest ferliser producer in Europe. When asked in 2011 where the money came from to pay for his acquisions, Firtash was coy. At a press conference

²⁴ World Bank (2017). ²⁵ See more at: hps://www.reuters.com/invesgates/special-report/comrade-capitalism-the-kiev-connecon/ Chapter 1 | 21

called to announce his purchase of the Stromquist, head of Russian energy analysis at Severodonetsk plant, he declined to name his major Eurasia Group, a polical risk research firm. lenders. “It's a secret,” he told Ukrainian journalists. In addion, the profits from the subsequent resale of But a Gazprombank manager told Reuters that the the gas were all reaped offshore by companies that Russian bank had led a consorum of lenders which did not benefit the Russian taxpayer. Those profits in in 2011 agreed to lend about US$ 7 billion to Firtash. 2012 and 2013 would have meant an addional US$ The official said Gazprombank itself lent Firtash US$ 2 billion for Gazprom, whose ulmate majority 2.2 billion, and that Firtash sll owed the bank US$ owners are Russia's cizens. 2.08 billion. The official declined to name other lenders in the consorum. The loss Ukraine incurred due to absence of reforms Firtash had money, polical connecons and in the decades aer the fall of communism can be businesses that relied on large supplies of gas. What illustrated by looking at the average salary, pension, he needed next was fuel. life expectancy, income inequality and emigraon figures. During the last 25 years the life expectancy In January 2011, Firtash signed an unpublished of people in European post-communist countries has agreement – seen by Reuters – with Gazprom to buy increased by 5-7 years on average. The only gas through a company called in excepons are Ukraine, Belarus and Moldova where Cyprus, of which he is the sole listed director. the life expectancy has increased much less, or not at all. The gas deal was later extended to include sales to Ostchem Gas Trading AG in Switzerland. This was also agreed by Naogaz, Ukraine's state-owned gas Polical pares and state instuons firm, where Yanukovych had installed new senior management. Firtash needed Naogaz's sign-off Ukraine, since independence in 1991, has been a because it controlled pipelines delivering gas and, country with a pluralisc parliamentary democracy unl that point, had an exclusive deal to import gas and a mixed semi-presidenal and semi- from Gazprom. parliamentary polical system. The power of the president has varied over me, but the execuve Russian customs records seen by Reuters show that power has remained divided between the president in 2012, Moscow sold the gas to Firtash for US$ 230 and the government. On one hand, it serves as an per 1,000 cubic metres (the standard unit used in gas insurance against a potenal usurpaon of absolute sales). In 2013 the average cost was US$ 267 per power by one person, as happened in Belarus and unit. Those prices were at least one-third less than Russia. However, on the other hand this semi- those paid by Ukraine's Naogaz. presidenal system creates a lot of tension between Ukrainian customs documents and corporate filings the key power holders at the helm of the state, and show that Firtash's Ostchem companies in Cyprus imposes transacon costs, conflicts and difficules in and Switzerland resold the gas to his chemical plants the reform process that is, by definion, polically in Ukraine for US$ 430 per unit. The prices and very difficult and sensive. volumes suggest that the two offshore Ostchem Polical pares in Ukraine were replacing each other companies made an operang profit of approximately in power and in opposion, some old pares US$ 3.7 billion in two years. disappeared and new ones were established but the The real loser in the deal, though, was Gazprom. The core problem was that almost all pares, as well as a arrangement, which Pun described during a press majority of their MPs and government conference as having been made with the “input of representaves, did not want to put an end to the the Russian leadership,” meant Russia sold its gas to oligarchic instuonal system. What they wanted Firtash for at least US$ 100 per unit less than it could was purely to parcipate in, and take advantage of it. have made in western Europe, according to Emily Even aer the Orange Revoluon in 2004, no real change came because the oligarchs and “new elites” Chapter 1 | 22

were strongly rooted and did not have any interest in the oligarchs. real change. In essence, the polical pares in However, some changes in the society did occur. A Ukraine were not important influencers within the strong civil society (CSO) sector was created and its polical system. The three biggest oligarchic groups influence grew parcularly aer the Orange (, and ) and the president held Revoluon.²⁶ Another strong agent of change was the real polical power. It was especially the case when journalists at the me, especially the new generaon the Ukrainian polical system was a presidenal one of journalists. Although the TV channels and majority (during the reigns of Kuchma and Yanukovych). Those of other media outlets were controlled by the four centres of power controlled the polical pares, oligarchs, they did not like each other, which meant government and parliament. The only aempt to that any revelaon of corrupon and scandal about change this system was when the president lost other oligarchs was allowed and somemes even some of his power – in the first instance, aer the encouraged. Apart from the media owned by the Orange Revoluon and in the second aer the oligarchs, there were also some independent media Revoluon of Dignity. outlets whose influence was growing because of Another reason for such a weak demand for reform their professionalism and independence. Despite all was that Ukraine was to some extent a divided of the above-menoned distorons within the country in respect of its geopolical orientaon. polical system, pluralisc parliamentary democracy Historically western Ukraine was always more in Ukraine, unlike Russia or Belarus, survived thanks inclined towards Europe and the European Union and to a strong civil society. the east favoured Russia and the Commonwealth of Business associaons were another factor that Independent States. Even ethnically a strong created growing pressure and a demand for change, proporon of Ukrainian cizens idenfied as Russian parcularly those of them who united foreign and Russian interference in Ukrainian business and business with non-oligarchic and non-rent-seeking polics was deep-rooted (as disclosed in the report in businesses. Box 3). Ukraine's economic dependence on Russia was significant. Half of the gas and oil came from All those change agents had more and more there and Russia was also the country's biggest and arguments in favour of real change because as me most important trade partner. Russian propaganda went on it increasingly obvious how dysfunconal against the EU and especially against NATO was also and corrupt the Ukrainian oligarchic system was. The influenal in Ukraine. laer was chief among the root causes for Ukraine's falling behind other countries that undertook reforms The Ukrainian polical system has been pluralisc and successfully integrated themselves into the EU. with elecons (including all presidenal elecons) being open and compeve in the sense of the Precondions for change gradually grew and for the uncertainty of who will win, but this did not mean first me, during the Orange Revoluon, the pro- compeon was free and fair. The key reason of this reform and pro-European groups within society was the influence of oligarchs (through money and demonstrated their zeal for change. At that me, the media – especially TV channels) on the elecon their efforts did not yield a major transformaon and process. At the end of the day, it was irrelevant who the oligarchic forces prevailed. The second won the elecons as all polical pares were under opportunity presented itself during and aer the the influence of parcular oligarchs, while the Revoluon of Dignity. The queson is whether this strongest of them supported the pares or policians me things are different. Is Ukraine able to succeed most useful to them. Therefore, aer any elecons in making change happen? Can it make the necessary the only change was in the relave strength of reforms? Will it be able to harness its potenal and influence over the state and state instuons among finally complete its transformaon into a modern and the different oligarchic groups. Under these prosperous European country? circumstances there was no real chance for systemic change, or there being any criminal consequences for The conclusion, in principle, is YES. But...

²⁶ And even more aer Revoluon of Dignity. Chapter 1 | 23

What has been done

For the first me in Ukrainian history, in the five countries are beneficial not purely from a trade or an years aer the Revoluon of Dignity there is economic perspecve, but also for broader economic evidence of real shi away from the dysfunconal, and geopolical reasons. More demanding export corrupt, oligarchic instuonal system based on rent- markets are pushing for higher quality products; seeking, and towards a funconal market economy therefore it is helpful for modernisaon and provides based on free and fair compeon. The glass is sll a boost to the compeveness of Ukrainian only half full. A lot has been done but there remains a producers. Trade relaons are also helpful for lot to do. The concern is that what has been achieved encouraging an influx of foreign direct investment is not free of risk of reversal. from partner countries.

Geopolical reorientaon Table 2.1 Trade reorientaon aer the Revoluon of Dignity One of the biggest obstacles to succeeding in the (2013, 2018 in per cent) implementaon of reforms and the EU integraon was the lack of naonal consensus on the 2013 (%) 2018 (%) geopolical orientaon of the country before the Export to Russia 26.06 11.60 Revoluon of Dignity. Especially aer Pun came to Import from Russia 28.90 13.35 power, a more aggressive opponent of the West and the EU than his predecessors, it became clear that an Export to EU 28.12 40.60 ambivalent “in between” posion could not work. Import from EU 37.90 41.50 Close historical, cultural, polical, economic and Source: hp://www.ukrstat.gov.ua trade relaons, as well as very similar systems of crony capitalism, did not allow for the creaon of a The substanal posive effect of economic solid pro-European consensus, despite it being very reorientaon away from Russia and towards the EU clear that without reforms and EU integraon, and Asian countries lies also in the diminishing risk of Ukraine was predesned for failure. polical and economic interference of the Russian regime and oligarchs in Ukrainian polics and In this respect, the Revoluon of Dignity, as well as economy. In this respect it has been of great the annexaon of by Russia and its importance for Ukraine to significantly reduce its aggression towards eastern Ukraine, were decisive dependency on Russian gas over the years, and factors in the creaon of a naonal consensus to join instead import it by reverse flow from Poland, forces with the EU and NATO and to undertake the Slovakia and Hungary. necessary reforms to achieve this goal. Deoligarchisaon It is thus possible to say that by annexing Crimea and military aggression in eastern Ukraine Pun made the Aer the Revoluon of Dignity there was a strong biggest strategic mistake of his life – he gained demand for the so-called “deoligarchisaon” of Crimea, but in doing so he lost Ukraine.²⁷ society. The majority of voters welcomed the end of Yanukovych's regime and they expected change, with During the last five years, relaons between Ukraine deoligarchisaon and the prosecuon of oligarchs, as and Russia have declined significantly, which is well as an improvement in their own social and understandable as a consequence of the open and economic situaon. Reality has not sasfied this heated economic and trade wars. On one side, it has demand, but the queson remains. How realisc deepened the recession with all related costs, but on were these expectaons? the other side it has sped up the reorientaon of Ukrainian trade and economic relaons towards the Ukraine started reforms but faced a deep recession more advanced and demanding markets of EU and immediately aer the Revoluon of Dignity. This Asia (see Table 1.7). Economic relaons with these situaon was unavoidable, not as a result of, or

²⁷ T. Galis and A. Duleba (2016). Chapter 1 | 24

consequence of reforms, but as a consequence of the condions and rules of the game. Donbass, for absence of reforms many years prior to the instance, was the centre of a classic oligarchic model Revoluon of Dignity. It was also the price paid for of business pracce. Obsolete and abandoned Russian aggression against Ukraine and the commodity companies without investment, annexaon of Crimea. This was the same kind of modernisaon and qualified management, served transion recession that came aer the breakdown their owners only as cash cows. They were of communism and meant only recovering debt and sustainable only thanks to a cheap labour force and accounts that were accumulated and hidden during permanent devaluaon. the non-reform period. An important effect of the new situaon (aer the While Ukraine is sll a country with high levels of Revoluon of Dignity) was the increasing mobility corrupon and a strong formal and informal power of and flexibility of the labour force. oligarchs, there are good reasons for arguing that Crisis and conflict increased the internal and external significant progress has been achieved in decreasing migraon of people²⁹ and completely changed the the oligarchs' power and interference. The current labour market – while before the Revoluon of state of affairs is far from ideal and is certainly not Dignity it was a buyer's market, aer it became a irreversible, but progress is real. seller's market. Employers had to compete for labour, The power the oligarchs hold (both economically and therefore there was a permanent pressure to polically) is related to their wealth and the increase wages, also supported by a minimum wage opportunies available for them to connue in their increase. old rent-seeking pracce. Both wealth and rent- Currency rate development is a new phenomenon as seeking opportunies have been reduced over the well. The country has been plagued by a regime last five years. overseeing a fixed exchange rate for almost 20 years, While the wealth of the top 100 richest Ukrainians which led to the accumulaon of enormous was around 52 per cent of GDP in the last year of macroeconomic imbalances. The dramac Yanukovych's regime, today (2018) it is at about 20 devaluaon and loss of FX reserves in 2014-15 per cent, and the wealth of the top 10 richest prompted the central bank to abandon the fixed Ukrainians fell from 29 per cent to 10 per cent of exchange rate regime and adopt an inflaon GDP.²⁸ targeng policy combined with a flexible exchange rate. As a result, while the exchange rate is volale Much more important than the figures are reasons from day to day, it has remained rather stable over behind them. What has changed over the last five the last three years, balancing external accounts and years and what is the impact of the new condions, contribung to sustainable disinflaon. not only on the level of wealth and power of the oligarchs, but on their ability to connue their rent- During the last four years the currency has not only seeking pracces? stabilised, but in real terms even strengthened (due to higher inflaon rather than nominal depreciaon). Economic recession aer the Revoluon of Dignity, In this situaon, the old business model, based on the Russian war, the annexaon of Crimea and cheap labour and a weak currency, cannot work and conflict in eastern Ukraine are among many of the oligarchs will either have to invest, modernise and reasons for the richest Ukrainians' fall in wealth. beer manage their companies, or they will lose their Many of their assets were destroyed or lost. On one compeveness. hand it had a negave effect not only on the oligarchs' fortune but also on the economy as a Another important change over this period has been whole. On the other hand, it helped to change the new relaons between state instuons and

²⁸ See more at: hps://ukrainianweek.com/Economics/222503 ²⁹ The Ministry of Social Policy calculated that about 3.2 million Ukrainians work abroad on a permanent basis. With 16 million Ukrainians working inside Ukraine, this would mean that 17 per cent of the total workforce is abroad, largely in the EU. The ministry reported that 7 to 9 million people a year parcipate in the migraon process. Many work part me in the EU under the new 90-day visa-free tourism rules (Ukrainian Business News, 31.12.2018). Chapter 1 | 25

businesses (especially oligarchic business). The best well as technical assistance and investment from and also the strongest example comes from the internaonal financial instuons like the IMF, World banking sector and the Naonal Bank of Ukraine Bank, the European Bank for Reconstrucon and (NBU). NBU is doubtlessly the most successful Development (EBRD), European Investment Bank example of reform aer the Revoluon of Dignity, (EIB), Internaonal Finance Corporaon (IFC) and showing how a truly independent and professionally others. managed instuon can and should operate and how Another way of measuring the level of significantly it can change outdated rules by imposing “oligarchisaon” within the economy was by The new relaons and regulaons on the oligarchs and Economist's “crony-capitalism index”. It measures the the government. The cleaning up of the banking proporon of wealth in the country that system meant that many oligarchs lost their own comes from the so-called “crony sectors”. In 2014 banks that they used as a tool for siphoning public Ukraine aained second place in the world with 89 money into their own pockets. The closing of more per cent, only Malaysia faring worse with 98 per cent. than 100 banks, the naonalisaon of Privatbank, imposion of strict supervision over commercial Table 2.2 banks, enforcement of the new rules, but also an Crony-capitalism index (in per cent) and Corrupon independent and professional monetary policy are all Percepon Index (ranking out of 174 countries) new phenomena in the Ukrainian banking system. Country 2014 2016 In the case of Ukraine, this change is important not Malaysia 98% 51 98% 55 only for monetary policy and the financial sector, but for serving as an example of how to change an old Ukraine 89% 142 86% 131 instuon that used to serve the short-term interests Russia 84% 136 84% 131 of policians and tycoons into an independent, Singapore 80% 7 72% 7 professional instuon protecng the public interest Poland 75% 36 24% 29 – in this case a stable currency, low inflaon and a USA 16% 17 14% 18 sound financial sector. South Korea 6.5% 44 9% 52 NBU also illustrated how big a problem Source: The Economist and Transparency Internaonal overemployment was, as well as inefficiency within the Ukrainian public sector and how it is possible to A high posion on the crony-capitalism index does tackle this in a short period of me. The number of not automacally denote a high level of corrupon. employees at the NBU was reduced by 70 per cent Singapore, for example, which is very high on the aer the Revoluon of Dignity whilst professionalism crony-capitalism index (80 per cent in 2014 and 72 and performance increased significantly at the same per cent in 2016), at the same me occupies a very me. low posion on the Corrupon Percepons Index (7th lowest in the world). But in case of Ukraine (and Another new instuon (in this case really new) that Russia) it is clear that there is a strong connecon played a fundamental role in change at this me is between crony-capitalism and corrupon. In other the Naonal An-corrupon Bureau of Ukraine words, the oligarchs have played a very destrucve (NABU) which invesgates large-scale corrupon role in Ukraine's economy as well as society as a cases. It is no surprise that the NBU and its former whole. Deoligarchisaon is therefore a very real head Valeriya Gontareva, as well as the NABU and its challenge. head Artem Sytnyk, were and sll are, the main targets of anger and aacks from the proponents and The power of oligarchs in Ukrainian society has, beneficiaries of the old corrupt oligarchic system. however, declined in the last five years due to the non-oligarchic part of the economy growing much There are, of course, many more posive instuonal faster than the so-called crony sectors. changes that have been achieved during the last five years. Examples are the implementaon of the Among the rent-seeking, or crony sectors, are Associaon Agreement with the European Union as construcon, real estate, gambling, mining, steel, Chapter 1 | 26

aluminium and other metals, oil, gas and other Another important step in deoligarchisaon was commodity industries that mainly involve extracng made by improving corporate governance in the most natural resources from the ground.³⁰ important state-owned enterprises (SOEs).³²

Good, or profit-seeking sectors, include technology, It is important to stress that despite these companies manufacturing, pharmaceucals, telecoms, retail, e- being the epicentre of large-scale systemic commerce and entertainment. The figures in Table corrupon early on, as previously menoned, 2.3 show that the rent-seeking sectors grew much systemic changes were made within the two biggest more slowly over the last five years than the profit- SOEs – the unbundling of Naogaz and restructuring seeking sectors. of Ukrainian Railways. Although much remains to be done, improvements in the last year have been Table 2.3 significant. The development of the “profit-seeking” and “rent- seeking” sectors aer the Revoluon of Dignity in The most important areas of achievement, which are per cent of growth (+) or decline (-) changing the old instuonal system to a new one, are as follows: 2014- 2016- 2014- Sector 2015 2018 2018 Macroeconomic stabilisaon Technology -0.6 +29.8 +29.2 Reducing the share of redistribuon, curbing and and telecoms Profit- stabilising the public finance deficit and public debt, Manufacturing seeking -23.8 +14.5 -9.3 creang an independent and professional central Retail -29.5 +24.7 -4.8 bank, implemenng a floang currency rate regime, Mining -29.2 -0.5 -29.7 stabilising the currency rate under a floang regime, Rent- Electricity stabilising and decreasing inflaon, cleaning up the seeking -20.5 +2.6 -17.9 and gas banking sector, imposing independent and professional supervision over commercial banks and Source: Calculaons based on Ukrstat - increasing foreign currency reserves. All of these hp://www.ukrstat.gov.ua/ developments at a macroeconomic level have been a According to the data in Table 2.3, all sectors besides tremendous success and, for the first me in the technology hit a deep recession between 2014-15, , are changing the system.³³ but recovery was significantly stronger in the profit- An-corrupon policy seeking sectors (that were immune to the crony pracces) and much weaker in the rent-seeking Any country that wants to fight corrupon has to do sectors (mining and electricity and gas). it on three fronts at the very least:

Even before the Revoluon of Dignity, Ukraine had • Through prosecuon very developed and dynamic crony-free sectors, • By reducing the space for corrupon where, in principle, there was healthy free and fair • Through transparency and public control. compeon, such as in agriculture, retail, taxi services, currency exchange among other services, The most significant progress has been made on the but especially in IT. During the last few years these second front – reducing space for corrupon.³⁴ sectors have flourished and growth has been remarkable.³¹

³⁰ R. Sharma (2016), p110-111 ³¹ The IT industry grew by 30 per cent during the first half of 2018 (UBN, 1.11.18). E-commerce is the most dynamic sector this year according to Novoye Vremya’s annual lisng of Ukraine’s top 100 brands (UBN, 28.11.18). Four million Ukrainians – more than 10 per cent of the adult populaon - have signed up with BlaBlaCar. Nicolas Brusson, a founder of the online marketplace for carpooling, told the Kyiv Internaonal Economic Forum “we have seen phenomenal growth here... Ukraine is the fastest growth country of the 22 countries where we work.” (UBN, 19.10.18) ³² A more detailed analysis can be found in Chapter 6 on page 101. ³³ For more detail see Chapter 2 on page 35. ³⁴ For prosecuon see Chapter 3 on page 48 and transparency and public control. Chapter 1 | 27

The biggest sources of large-scale corrupon were Banks gas, banks, taxes, public procurement, customs, state As already menoned, the banking sector was owned-enterprises and overregulaon. another source of large-scale corrupon.³⁷ This Gas channel has been almost³⁸ completely cut-off aer NBU closed more than 100 out of 185 commercial The natural gas sector was for many years the most banks and imposed strict supervision rules, increased corrupt part of the Ukrainian economy, at least capital adequacy, strengthened risk control and regarding the amount of money stolen by crony restricted related party lending. As a result of these players. The biggest sources were import contracts changes there is not only much lower corrupon in with Russian energy company, Gazprom, a price this area, but a cleaned-up banking sector. 2018 saw arbitrage based on the significant gap between its recovery as it finally began working adequately regulated household tariffs and market price tariffs and producing profit.³⁹ for businesses, as well as producon sharing agreements between UkrGasVydobuvannya (UGV – a Taxes subsidiary of the state-owned Naogaz) and private Between 2015-17, the government prepared and companies. implemented systemic measures for reducing Over the last five years, these three of the biggest corrupon in tax administraon through: corrupon channels have been fully or almost shut: • the introducon of electronic VAT administraon • There is no gas imported from Russia (thanks to the (from 2016) reverse flow from Slovakia, Poland and Hungary). • the automac VAT refund (from 2017) • The price gap was closed in April 2016 and any • the introducon of the special risk assessment addional gap created since then unl October criteria monitoring system. 2018 was smaller (approximately 60 per cent). The first part of this gap was reduced on 1 November Several measures were implemented to eliminate tax 2018 (tariffs increased by 23.5 per cent) and as of evasion, formerly controlled by the tax administraon spring 2019 there is no difference between (and so-called conversion plaorms). It has been household gas tariffs and market price of gas. calculated that the tax revenues collected as a result • Producon sharing agreements that milked UGV in of decreasing corrupon within the tax system favour of private companies were cancelled. amount to approximately US$ 3 billion.⁴⁰

Despite corrupon schemes sll exisng.³⁵ their size Public procurement is incomparable with the past and implemented The electronic public procurement system, , measures have resulted in a significant reducon in was implemented for all central execuve authories government losses. Ukrainian Instute for Economic in April 2016 and for all other public instuons Research and Policy Consulng (IER) esmates that (including local government) from August 2016. The in the gas sector alone this is esmated at US$ 3 system has significantly reduced abuse in public billion per annum.³⁶ spending and as esmated by the Ministry of

³⁵ “The old game of selling gas to factories at household rates sll costs Naogaz about US$ 350 million a year”, Andriy Kobolyev, the company CEO, said [on 13 November 2018] at a conference organised in Kyiv… “Although abuses have largely ended, middlemen companies sll manage to sell 1-2 billion cubic meters of subsidised ‘household’ gas every year to companies”, the reports. See more: hps://www.ubn.news/thursday-november-15/. ³⁶ IER (2018), p7. ³⁷ Privatbank alone, according NBU, stole about US$ 5.5 billion of taxpayer’s money in ten years. ³⁸ “Ukraine sll has 15 to 18 banks ‘whose business model we consider unviable,’ Kateryna Rozhkova, First Deputy Governor of the Naonal Bank of Ukraine, tells a financial conference in Kyiv.” 15 October 2018 – UBN, hps://www.ubn.news/monday-october-15/. ³⁹ “[From 1 December 2018,] Ukrainian banks made US$ 715 million in profits – eleven mes more than in the same period the year before, Kateryna Rozhkova, First Deputy Governor of the Naonal Bank of Ukraine, reported on Facebook. ‘Of course, the year is not over yet,’ she wrote, awaing full year numbers. But, she said, ‘the banking sector is gradually, but surely recovering.’” 2 January 2019, UBN, hps://www.ubn.news/wednesday-january-2/. ⁴⁰ IERPC, 2018, 8. Chapter 1 | 28

Economic Development and Trade, yearly savings are As highlighted above, the majority of avenues for US$ 2 billion. Reform of the public procurement large economic corrupon have been significantly system, and ProZorro, are sll a work in progress.⁴¹ reduced over the last five years. Insufficient progress has been achieved within customs and state-owned Deregulaon and open data from state registers enterprises although some changes have been made Significant progress has been achieved in in these areas, or at least precondions set up for deregulaon and as a result of this also corrupon future changes to be insgated. sources for bureaucrats have been reduced, although there is sll a lot of room for improvement. Ukraine Why more has not been done improved its posion in the World Bank's Doing Business rang from 112 in 2014 to 76 in 2018, by There are two reasons for why slow progress has reducing the number of mandatory licences and been made in the process of instuonal change permits.⁴² Another area of progress is an open data from the old, rent-seeking (oligarchic) model to a new portal that offers access to a number of state funconing market economy and a parliamentary registers that were previously closed, allowing democracy based on free and fair compeon. bureaucrats tremendous opportunies for manipulaon and corrupon. The first reasons are objecve ones (impossible to change, or overcome in a short period of me) and Customs the second are subjecve (based on insufficient will and courage and/or the prevailing narrow private Despite aempts to improve customs regulaon, interests among new polical leaders). results are insufficient and customs (together with SOEs) remain a significant avenue for major The objecve reasons for slower than expected corrupon. For the future, this has to be one of the progress being made (especially by Ukrainians as well key priories, not only in the fight against corrupon, as Western partners), are very strong. In principle, the but also for the improvement of the business problem was, and sll is, that unlike the situaon environment, the increase of public revenues and aer the breakdown of communism, there was no exports and smooth integraon into EU value chains. instuonal vacuum aer the Revoluon of Dignity in which new elites could relavely quickly introduce State-owned enterprises a new instuonal framework (rules of the game). State-owned enterprises (SOEs) are at present the The country was at war with Russia and in severe biggest source of corrupon (as regularly asserted by recession and key economic sectors were under the NABU). Since 2014 some progress has been made in direct, or indirect, control of oligarchs. At the the corporate governance of the biggest SOEs, and beginning of the Russian aggression, Ukraine did not since 2018 significant progress made within small have a real army capable fighng, and at least one privasaon. However, progress has been close to oligarch (Kolomoyskyi), was helped by his own zero within large privasaon, despite new private sources to stop separasts from annexing privasaon laws that have been in place since the more territory than they had gained before in the beginning of 2018 which introduced procedures for Eastern Ukraine. Law enforcement instuons and standard internaonal tenders with the assistance of public administraon were corrupt, ineffecve and foreign advisers.⁴³ Comming to the process of also serving the narrow private interests of insiders reducing corrupon in order to gain serious, or outsiders, rather than the public interest. The strategic, investors for these companies has to be media, especially TV channels (which are the most one of the most important priories for the next influenal) were and sll are predominantly owned government.

⁴¹ “In the latest balefront between geeks and corruptors, ProZorro is applying new soware that uses 35 indicators to review all government tenders for potenal fraud. Suspicious tenders are automacally forwarded to the State Audit Service for review.” Maksym Nefyodov, First Deputy Minister of Economic Development and Trade, told UNIAN: “It's even more suspicious when several indicators are triggered simultaneously.” 31 October 2018 – UBN, hps://www.ubn.news/wednesday-october-31/. ⁴² See more in Chapter 5 on page 87. ⁴³ See more in Chapter 6 on page 101. Chapter 1 | 29

by the oligarchs⁴⁴ and served their interests alone. than a purely technical one. Experience and knowledge have informed which reforms (both In these circumstances the oligarchs were well successful as well as failed) implemented in dozens of equipped and had the resources to protect post-communist countries have worked and have not themselves and their interests. worked. Everything Ukraine needs to do to make Another objecve reason is that, despite the reform change happen has been wrien in official of formal instuons (laws, decrees and so on) taking documents that were passed and signed aer the place relavely quickly, the immediate effect was Revoluon of Dignity.⁴⁷ The challenge of course is small and making it difficult to see real posive the praccal polical implementaon of these results. The main reason is that the implementaon promises and commitments. and enforcement of new formal rules depends on the Praccal experience from successfully reformed change of old instuons which is oen gradual. countries shows that the most important polical Another, even more long-term issue is the precondions of success in the reform process are relaonship between formal and informal (voluntarily strong leadership, ownership and communicaon of shared and accepted) rules and values. In the least reforms.⁴⁸ Leadership means leaders (policians who corrupt countries the majority of people are honest, are reformers) with the vision, will and courage to they do not steal and bribe, not because it is implement reforms despite polical risk and conflict. prohibited by law but because they do not consider it Ownership means a strong convicon in seeing morally correct. In these countries, correct, informal necessary reforms through. Lastly communicaon rules and values were culvated over generaons⁴⁵ should be resolute and reless, cing clear goals and when there was in principle very lile disncon the reasons for reforms. Being prepared for a public between formal and informal rules. The legacy le to fight against an-reform forces that might be Ukraine (as well as in other post-communist profing from an unreformed system and therefore countries) was much more problemac⁴⁶ in this area use all their power to prevent systemic change, is – informal rules were deformed and destroyed over necessary. decades and changing this will take generaons. An example of both objecve and subjecve Even if new elites had come into power in Ukraine obstacles hindering quicker and deeper reforms aer the Revoluon of Dignity, with a strong vision, (especially deoligarchisaon) can be illustrated in the will and courage to build a new system, with no area of privasaon over the last five years. connecons to the old system of elites and oligarchs, it would have been extremely difficult, or even As explained in Chapter 7 on page 112 there has impossible, for systemic change to take place with been almost no progress achieved within large any speed. privasaon following the Revoluon of Dignity despite this goal being clearly arculated by all The subjecve reasons for slower than expected government and coalion programmes. progress in deoligarchisaon are based on the fact that in principle there were no new elites who took The reasons are very complex but in principle it has power aer the Revoluon of Dignity. The majority been because of insufficient public demand for of the key polical posions that were filled aer the privasaon as well as a very weak desire to (free and fair) elecons in 2014, were held by more privase. In Ukraine privasaon had become progressive, pro-reform and pro-EU policians, but synonymous with the oligarchs' abuse of the system, also sll by some who were from the old system. buying companies for peanuts and then not developing them, only to use them as cash cows Reforms today are much more of a polical challenge (covered earlier in this report). This reputaon is the

⁴⁴ TV channels owned by the four biggest oligarchs (Akhmetov, Kolomoyskyi, Firtash and Pinchuk) control 75 per cent of the TV market. (hp://ukraine.mom-rsf.org/ua/ukraine/) ⁴⁵ In Sweden, the “Freedom of Informaon Act” was passed by parliament in 1773. ⁴⁶ “Who doesn’t steal is robbing his own family” was a popular proverb in Czechoslovakia during the communist regime. ⁴⁷ The Coalion Agreement, Strategy 2020, Associaon Agreement, Government Programme, IMF Programme.) ⁴⁸ I. Miklos (2014), p131-133 Chapter 1 | 30

main reason why the majority of the populaon sll no interest in such small investments. Whereas, as does not support the privasaon of large detailed earlier, it was in the area of large companies. At the same me, those policians (and privasaon where trust was lacking, so few changes businessmen including oligarchs), who profit from were made. having control over SOEs, also do not want to lose Lack of leadership and ownership leads to weak will this source of personal enrichment and a tool for and courage to stand up to privasaon opponents. polical party financing.⁴⁹ The importance of SOEs as In that case, communicaon is also very weak and a source of “rent exploitaon” is also connected with defensive and as a result public opinion cannot be reducing space in other areas such as gas, public swayed in favour of privasaon. There is a strong procurement, tax administraon, the banking sector, contradicon here because, at present, one of the as a consequence of reform and the deoligarchisaon biggest, if not the biggest source of corrupon progress. (especially polical corrupon) in Ukraine are the An addional problem is that there is no privasaon large-scale SOEs (as repeatedly stressed by NABU). ministry, nor any privasaon minister in the Effecve communicaon is crucial in order to Ukrainian government. Nobody owns this agenda convince people that transparent, open and and nobody is personally responsible for this effort. compeve privasaon is in place which will aract Line ministries and ministers have a conflict of reputable foreign investors, leading to posive interest because they do not want to lose control results for the country, economy and the SOEs over “their” companies and the State Property Fund themselves. The reducon of corrupon, especially of Ukraine is not a polical instuon, it only has to polical corrupon,⁵² is what people want to see execute the polical decisions of the government. evidence of before they can trust in these systems on Apart from weak public demand there is also an a larger scale. addional fear for those who want to, and who have Specific to Ukraine are the relaonships between the the right to privase (like State Property Fund three centres of power within the legislave process representaves) and that is the threat of public (president, government and parliament). As accusaon or potenal criminal prosecuon. In case SAGSUR's member Yaroslav Zheleznyak's analysis of a corrupt and dependent judiciary system, shows,⁵³ the cooperaon between government and parcularly with the media being under the control of parliament during all the elecon periods aer the those whose interest is prolonging the status quo, country aained independence was crucial. The this is not simply a theorecal threat. approval rate of the government's legislave Prior to 2018, the old privasaon laws created a proposals during this me was very low – between serious obstacle for any potenal desire to privase. 22 per cent and 37 per cent (for the three Aer a long fight, new privasaon laws that governments aer the Revoluon of Dignity unlocked the possibility for privasaon were –Yatsenyuk's two and the Groysman governments). passed.⁵⁰ Aer that point, from mid-2018, electronic While during last three governments before the aucons (using the ProZorro system) were launched Revoluon of Dignity (Tymoshenko's and two Azarov which insgated a quick and fruiul development governments) it was between 20 per cent and 55 per within small privasaon.⁵¹ However, the progress in cent. large privasaon was negligible, the main reason It is a very unusual result in comparison with other being that, in case of small privasaon, the public developed or successfully transioning countries, had no real objecons and those in power also had

⁴⁹ Elecon campaigning in Ukraine is extremely costly even in comparison with much richer countries. The main reason being that polical power means also tremendous opportunies for enrichment through rent-seeking pracces. ⁵⁰ See more in Chapter 6 on page 101. ⁵¹ A list of 792 “small” state properes has been approved for aucon this year by the State Property Fund. Each property is valued at less than US$ 9 million. About three quarters appear to be real estate. Vitaly Trubarov, Head of the Fund, wrote on Facebook that 10 belong to – 3 January 2019, UBN, hps://www.ubn.news/Thursday-january-3/ ⁵² Despite the strong personal support of Prime Minister Groysman for speeding up this process, the fact that real progress is very slow shows the strength of opposion to large-scale privasaon. ⁵³ See Annex 1 on page 162. Chapter 1 | 31

where the approval rate is usually significantly higher, In economic terms, the most important mission will more than 90 per cent. Ukrainian figures show that be to sustain macroeconomic stability and the there is insufficient trust and cooperaon between independence of the central bank as well as to the government and parliament, as well as non- connue reforms to strengthen the protecon of standard coalion-opposion relaons. Normally the property rights, law enforcement, deregulaon, majority of the legislaon (especially reform liberalisaon, privasaon, an open market for new legislaon) is prepared by the government and then domesc and foreign business, professional and approved by the coalion MPs that are backing their independent regulaon where necessary (natural coalion government. In Ukraine it is very different: monopolies), strong an-monopoly policy and coalion and opposion support varies from case to instuons and competent and effecve public case and usually new laws are approved or rejected administraon among others. Much has been done in by ad hoc majories across all pares whether they these areas, but sll not enough, and the situaon is are part of the coalion or not. Another anomaly is sll not irreversible. that the majority of new legislaon proposals are not There are many domains in which reforms are prepared by the government but by various groups of needed but what is crucial is to idenfy which ones MPs. are fundamental for real and definive change in the Between January 2015 and November 2018, system – delivering the Ukraine from the corrupt, parliament approved 272 pro-reform legislave oligarchic kleptocracy into a healthy, modern, proposals, 10 per cent of which were proposed by compeve market economy. In this author's the president, 33 per cent by the government and 57 opinion, apart from sustaining and protecng all the per cent by the parliament (groups of MPs). reforms and achievements that have been made over the last five years (as described in this publicaon), The legimate queson is why and how, in this there are six crucial areas indispensable for success situaon, was Ukraine able to pass so many pro- going forward: reform laws. The explanaon⁵⁴ is that a decisive role was played by new, mostly young pro-reform MPs (so • Rule of law and protecon of property rights. called young blood). What is interesng and key, is • Privasaon. that these members hail from all pares (coalion • Land market liberalisaon. and opposion) and some of them are independent • Restructuring, demonopolisaon and opening MPs. They played a decisive role not only in regulated and closed sectors such as the energy supporng pro-reform legislaon, but also in the sector and railway transport. struggle against dangerous an-reform legislave proposals that aimed to cancel or deform some of the • Tax administraon and customs reform (especially reforms that had been passed before, or proposals customs where very lile has been done unl now). that intended to introduce corrupon and rent- • Public administraon and public sector reform. seeking schemes for crony businessmen and their If there is progress in the above-menoned areas in polical allies. the next few years, Ukraine can expect much higher For future reform progress it is essenal to harness foreign direct investment influx and higher, the force of these pro-reform MPs in parliament. sustainable economic growth. If not, reversal back to the old system will be very difficult to avoid.

What to do next? Internaonal instuons have played significant roles in aiding Ukraine's reform process aer the The state of affairs described above demands Revoluon of Dignity. The European Union and IMF connued implementaon of systemic changes by especially helped with the necessary reforms. The reducing the space for rent-seeking pracces and IMF's influence was parcularly strong due to expanding the space for free and fair compeon, in Ukraine's financial vulnerability. Without IMF money both polical as well as economic arenas. it would have been impossible to cover debt

⁵⁴ For more details see Yaroslav Zheleznyak's analysis in Annex 2 on page 167. Chapter 1 | 32

repayments and avoid default. This support was References condional upon delivering on the reform commitments agreed between IMF and Ukraine. D. Acemoglu and J. A. Robinson (2013), Why Naons Fail, Profile Books, Ltd., London. EU (and NATO) membership is very important for Ukraine and its people, as well as being in the A. Aslund (2009), How Ukraine Became a Market interest of the Western world. Therefore it is key to Economy and Democracy, Peterson Instute for offer Ukraine realisc euro and euro-Atlanc Internaonal Economics, Washington, D.C. perspecve to movate its leaders and cizens to A. Aslund, “Russia: The Arduous Transion to a persist through the difficult but much needed reform Market Economy”, in A. Aslund and S. Djankov (eds) process. (2014) The Great Rebirth, Peterson Instute for Looking ahead to the future, it is important to Internaonal Economics, Washington, D.C. understand that Ukrainian dependence on IMF and A. Aslund (2015) Ukraine: What Went Wrong and other official creditors (mainly the World Bank and How to Fix It, Peterson Instute for Instuonal European Union) will last through to the 2019 Economics, Washington, D.C. elecon year, and likely through to 2020 and 2021, due to high debt repayments. As Ukraine's posion in O. Bullough (2018), Moneyland, Why Thieves and global markets has not improved, it is fair to expect Crooks Now Rule the World and How to Take it Back, that any new polical representaon that will come Profile Books, Ltd., London. to power aer the 2019 presidenal and parliamentary elecons will have to accept this Centre for Economic Strategy (December 2018), How situaon and commit to the reform path. Much Does the Budget Lose Due to the Lack of Good Governance? See: hps://ces.org.ua/en/how- Even an-reform populists who have promised to much-does-the-budget-lose-due-to-the-lack-of- halve gas tariffs and want to remove the independent good-governance/. status of the NBU will have to choose between two opons – either do it, lose the IMF programme and The Economist Crony Capitalism Index support and unavoidably face default (with high hp://infographics.economist.com/2016/Cronyism_i devaluaon and inflaon as consequence), or ndex/ (accessed 14 June 2019). connue with reforms and sustain the IMF Deloie (2016), Central Europe Top 500: An era of programme. digital transformaon. See This harsh reality decreases the risk of reform failure hps://www2.deloie.com/content/dam/Deloie/gl in the short term, although some risk sll exists. obal/Documents/About-Deloie/central-europe/ce- However, much bigger risk is potenal reform top-500-2016.pdf deprivaon in the medium term when the IMF S. Djankov (2014), “Bulgaria: The Greatest leverage in Ukrainian condions will not work. If Vacillaons”, in A. Aslund and S. Djankov (eds): The reforms connue aer 2019, we can expect growth Great Rebirth, Peterson Instute for Internaonal of around 3.5- 4.0 per cent, which is sufficient to Economics, Washington, D.C. bridge the most vulnerable period and dependence on IMF financing. The queson is, however, what Dragon Daily, Dragon Capital Reports, 2015-19 happens next? This is, in this author's opinion, the hps://dragon-capital.com/ most important challenge and task for all pro-reform T. Gális and A. Duleba (2016), Rusko, Ukrajina a my, forces in Ukraine as well as abroad. Premedia, Slovakia Supporng “young blood” in polics and public World Bank (2017) Measuring and analyzing the administraon, supporng pro-reform NGOs, think impact of GVCs on economic development, tanks and independent media and communicang Washington, D.C. the necessity of reform will be crucial. Chapter 1 | 33

O. Havrylyshyn (2014), “Ukraine – Greatest Hopes, Associaon Agreement - hps://eur- Greatest Disappointments”, in A. Aslund and S. lex.europa.eu/legal- Djankov (eds): The Great Rebirth, Peterson Instute for content/EN/TXT/?qid=1413961918333&uri=CELEX Internaonal Economics, Washington, D.C. :22014A0529%2801%29

IMF (October 2018), World Economic Outlook: Government Programme - Challenges to Steady Growth, Washington, D.C. hps://www.kmu.gov.ua/diyalnist/programa- diyalnos-uryadu Instute for Economic Research and Policy Consulng (IER) (2018), Ukraine's Fight Against IMF Programme Corrupon, The Economic Front, Dnipropetrovsk hps://www.imf.org/en/Countries/UKR

O. Kramar, Government in the Service of Monopolies, Ukrainian Week, 31 August 2012

I. Miklos (2014) “Slovakia: The Latecomer that Caught Up”, in A. Aslund and S. Djankov (eds): The Great Rebirth, Peterson Instute for Internaonal Economics, Washington, D.C.

Reuters: Pun’s allies channelled billions to Ukraine oligarch, 26 November 2014 see hps://www.reuters.com/arcle/russia-capitalism- gas-special-report-pix/special-report-puns-allies- channelled-billions-to-ukraine-oligarch- idUSL3N0TF4QD20141126

R. Sharma, (2016), The Rise and Fall of Naons, W.W. Northon & Co, New York

Ukraine Business News (UBN) (2018-19)

VoxUkraine: Finding the Balance. Should Ukraine Change Its System of Government?, 27 December 2018 See hps://voxukraine.org/en/finding-the- balance-should-ukraine-change-its-system-of- government-new-perspecves/

Ретроспективний аналіз даних щодо обсягів прямих іноземних інвестицій, в яких кінцевим контролюючим інвестором є резидент (round tripping) за 2010р. - 2018р. (Retrospecve analysis of data on volumes of direct foreign investments in which the ulmate controlling investor is a resident (round tripping) for 2010-18)

The Coalion Agreement - www.afo.com.ua/doc/Coalion_Agreement_2014.pdf

Strategy 2020 - hps://zakon.rada.gov.ua/laws/show/5/2015 Chapter 2 Chapter 2 | 35 Chapter 2 Macroeconomic policies

Pavlo Kukhta Chart 1 GDP per capita, PPP (current internaonal US$) Despite reform efforts in recent years, Ukraine's relave posion among European economies can 35000 only be described as dismal. At US$2,656 as of 2017, the country's nominal GDP per capita in US dollars is 30000 the lowest in Europe.¹ Because of this underdeveloped economy, its people are some of the 25000 poorest in Europe: while mean wages in Ukraine 20000 were less than €300 in 2018, all of its EU neighbours just across the Western border enjoyed much higher 15000 mean wages of above €1,000. 10000

Official numbers show very lile or no economic 5000 growth since the country's independence in 0 1991.The official GDP per capita in PPP terms was 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 only 36 per cent higher in 2017 than in 1991, Ukraine Poland Romania compared with, for example, 490 per cent in Poland Russian Federaon or 540 per cent in Romania.² Growth can be parally concealed by the large shadow economy, but even Table 1 accounng for that it is obvious that Ukraine has Average annual inflaon and GDP growth in 1991-99 fallen far behind its neighbours. Inflaon How did Ukraine's economic condions become so (end of period), GDP growth, Country %³ %⁴ dire? The systemic polical economic reasons are covered in detail in the first part of this report, while Ukraine 1.547 -9.2 here we'll review the macroeconomic policies that led Poland 27 3.7 to this outcome. Romania 123 -1.4 Russia 191 -5.1 Bad legacy: Ukraine's economy before 2014 The GDP slump in Ukraine was deeper during the 1990s than in its neighbouring countries and its It is important to note that Ukraine started its post- macroeconomic condions were significantly less communist period at approximately the same level of stable. While most post-communist countries economic development as Poland and higher than suffered from hyperinflaon, Ukraine experienced it Romania (though not Russia, which had higher per on a larger scale and it took longer than most Eastern capita GDP from the beginning). It is the country's European countries (though comparable to the post- abysmal economic performance aerwards, Soviet states) to return inflaon to at least double parcularly during the 1990s, that has led to it falling digits, which took unl 1996. back so significantly behind its neighbours.

¹ IMF World Economic Outlook, October 2018. On a PPP basis the GPD numbers are larger though, 8,340 internaonal dollars per capita in 2017. ² World Bank World Development Indicators ³ IMF World Economic Outlook Database October 2018 ⁴ World Bank World Development Indicators Chapter 2 | 36

This difference can be explained by the very slow • arbitrage of the, on average, about 10 mes price start of market reforms in Ukraine, which led to much differenal between the regulated domesc prices less sound economic policy than in other transion of commodies and their prices in the world countries. The average of six EBRD Transion market, via the state licensing of exports (with Indicators, each of which is a score of the country on rents esmated at up to 20 per cent of GDP) a scale from 1 to 4+ on a specific transion metric,⁵ • arbitrage of the price differenal between imported such as privasaon or price liberalisaon, is a good Russian natural gas and its higher domesc price illustraon of this late progress, with Ukraine only catching up (even with such relavely late starters as • massive subsidised credits from the state (for Romania and Russia) by the second half of the 1990s. example, with an interest rate of 20 per cent in 1992, when inflaon amounted to 10,155 per cent) Chart 2 Average of six EBRD Transion Indicators • direct budget subsidies, which amounted to 8-10 per cent of GDP⁶ at the me.

4.5 These policies were largely responsible for the 4.0 devastang economic collapse during the early years 3.5 of Ukraine's independence. They were also the inial 3.0 breeding ground for corrupon and oligarchic

2.5 businesses that have plagued the country ever since. A large shadow economy and massive illegality were 2.0 another result, further undermining the already weak 1.5 rule of law and weakening the property rights 1.0 throughout the country. 0.5

0.0 Box 1: New York Times arcles on the chaos 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 of Ukraine's early years Ukraine Poland Romania Russian Federaon The economic chaos and mismanagement caused by the absence of proper market reforms was well Unreformed communist instuons and legislave covered by Western press during the early years of norms, with their omnipresent opportunies for Ukraine's independence. For example, these three polical interference in the economy and largely arcles with very telling names from the New York informal governance (known infamously as Times: “Ukraine Quesons the Price of “telephone rule”), were thus combined in Ukraine Independence”,⁷ “A Ukrainian Could Envy Russia's with the cancellaon of Soviet restricons on private Economy”,⁸ “Ukraine's Miners Bemoan the Cost of property and private economic acvity. This resulted Independence”.⁹ in massive opportunies for rent-seeking and rampant populism, which were the driving force The quotes from these arcles are no less telling: behind the economic destrucon of early 1990s and “So retrograde is Ukraine on the quesons of reform, have been constantly present in Ukraine ever since. that some economists reckon it resembles a lile Some of the most harmful policies born out of these Soviet Union.” opportunies in the early 1990s were: “The Parliament has issued decrees blocking privasaon of medium and large-scale industry.”

⁵ www.ebrd.com/cs/Satellite?c=Content&cid=1395237866249&d=&pagename=EBRD%2FContent%2FContentLayout [05-04-2019] ⁶ “Ukraine: What Went Wrong and How to Fix It”, Anders Aslund ⁷ hps://www.nymes.com/1993/09/08/world/ukraine-quesons-the-price-tag-of-independence.html [05-04-2019] ⁸ hps://www.nymes.com/1993/08/01/weekinreview/the-world-a-ukrainian-could-envy-russia-s-economy.html [05-04-2019] ⁹ hps://www.nymes.com/1993/07/17/world/ukraine-s-miners-bemoan-the-cost-of-independence.html [05-04-2019] Chapter 2 | 37

“In Ukraine there is lile talk of cung huge state one of the hospitals were, unbelievably, carried out credits to hopelessly bankrupt state industries. [...] So without anaesthecs; yet health officials were far this year, economists say, credits have already reported to have embezzled millions of dollars. exceeded the total gross naonal product the Government rather opmiscally predicted for Basic market reforms, which limited all these 1993.” excesses somewhat, were implemented quite late Even a cursory glance at these reports by the compared with other countries, only aer 1994, Western press shows an extremely bleak picture. when Leonid Kuchma became president. These Without a proper transion to a market-based included monetary stabilisaon, launching the first system, the economy became totally dysfunconal, IMF programme and large-scale privasaon. Aer with enterprises living on barter schemes, lacking inflaon started dropping, a new currency - hryvnia - money for basic investment and paying their workers was introduced. The second dose of reform came as with their own produce. The reports speak of a response to the Russian financial crisis of 1998, workers at a tyre factory in Bila Tserkva (a small town which hurt Ukraine's economy badly. This included not far from Kyiv) trying to sell the tyres they've further liberalising measures and a large-scale fiscal produced to passing motorists. People speak of their stabilisaon, which steadied the economy and savings being wiped out in half a year, just to buy returned the country's public finance to a healthy food. state.

Another dimension is also clear from the media By 2001, Ukraine was in relavely good reports: that of Ukraine's inability to reform the macroeconomic condion: a fiscal deficit of a lile economy making the country extremely weak and less than 3 per cent of GDP, relavely low burden of vulnerable in the internaonal arena, especially, in its public spending (general government spending stood dealings with Russia. With a ruined economy and at 35 per cent of GDP), single digit inflaon, a stable total dependence on imports of Russian energy, the currency rate and current account surplus of 3.6 per country was forced to give up half of its cent of GDP, with most of the country's exports fleet and agree to start dismantling its nuclear arsenal being commodity-based. It was therefore posioned – both considered important military assets that were quite well to take advantage of the global commodity “part of Ukraine's claim to a place of importance in price boom that was just beginning. In 2000-08 the world” as one arcle put it.57 Even worse, for commodity prices almost tripled,¹⁰ fuelling massive some cizens the self-inflicted economic collapse has growth in commodity producers, such as Ukraine. become a source of disappointment in the idea of At first glance, Ukraine's economy was doing Ukrainian independence itself, especially in the extremely well during that period. The average Donbass region in the east. annual real GDP growth stood at 7 per cent. Inflaon Finally, the media reports very clearly illustrate the was relavely high at 12.5 per cent per year, though massive corrupon generated by heavy-handed if the years 2000 (when high inflaon was a legacy of government regulaon of the economy. The state the 1998 crisis) and 2008 (when high inflaon was was buying coal from the coal mines at US$ 9 per caused by an incoming world financial crisis) are tonne, yet the price on the world market was US$ 22 taken out, average inflaon in 2001-07 stood at 9.5 per tonne – clearly a huge opportunity for arbitrage per cent, not unreasonable considering the country and corrupon. One of the New York Times arcles was receiving massive capital inflows and had a fixed openly says that “Ukrainian bureaucrats enriched currency rate regime. Budget deficits were relavely themselves last year by selling cheap Russian oil at low at 2.4 per cent of GDP and government debt was world prices on the world market”, while the country falling fast, from 44 per cent of GDP in 2000 to its accrued a debt of more than US$ 2 billion to Russia trough of just 12 per cent of GDP in 2007. for that subsidised oil. The pharmaceucal plants Yet hidden behind these numbers was an were on their knees and major cancer operaons at accumulaon of economic imbalances, an almost

¹⁰ Based on the Commodity Price Index as calculated by the IMF in World Economic Outlook Database October 2018 Chapter 2 | 38

total absence of structural reforms and a gradually of GDP in 2000 to a peak of 10.3 per cent of GDP in deteriorang compeveness of the economy. 2004, aer which it started dropping and turned into Despite the Orange Revoluon of 2004, very lile a deficit by 2006, dropping fast aerwards (to -6.8 instuonal development had taken place. Indicators per cent of GDP when the financial crisis hit in 2008) such as the Index of Economic Freedom¹¹ or World – a very sharp adjustment, hinng at a loss of Governance Indicators¹² demonstrate only a slight external compeveness. improvement throughout the period. Essenally, the It is therefore no surprise that Ukraine was one of opportunity to introduce reforms during rapid the worst-hit economies in the world during the economic growth, which would have been much 2008-09 financial crisis. In 2009, Ukrainian GDP easier polically, was squandered. dropped by 15 per cent according to IMF data, the Despite nominally healthy public finances, problems largest recorded decline in the world that year. The and imbalances were quickly accumulang in the fiscal posion deteriorated dramacally, with deficit fiscal sector. The burden of public spending grew of 6 per cent of GDP in 2009-10 and government from 35.5 per cent of GDP in 2000 to 45.4 per cent debt growing to 41 per cent of GDP by 2010.The of GDP in 2008, with public revenues growing in Ukrainian currency lost about 40 per cent of its value, parallel from 32.3 per cent of GDP to 42.4 per cent with the currency rate dropping from 5 UAH per US of GDP, with obviously negave implicaons for the dollar to 8 UAH per US dollar during the crisis. compeveness of the economy. This massive A short economic followed in 2010-11, driven expansion in public spending was largely driven by by a rebound in world commodity prices and global social expenditure, fuelled by rampant populism in demand, with GDP growth averaging 4.8 per cent per the polical class and exacerbated by the worsening annum. The revival was short-lived, however, and by demographic situaon. In parcular, pension 2012 world commodity prices went into longer-term spending doubled from 8 per cent of GDP in 2000 to decline, driving economic growth in Ukraine to zero¹⁶ almost 16 per cent of GDP in 2008, becoming one of and bringing to an end the economic model built on the highest in the world and clearly unsustainable for exploitaon of natural resources and inherited Soviet Ukraine's underdeveloped economy. heavy industry. The Naonal Bank of Ukraine (NBU) remained The Yanukovych regime, which came to power in the polically dependent and relavely weak as beginning of 2010, tried, nevertheless, to sustain that regulator. Lending was growing at extraordinary pace defunct economic model. Instead of execung the – the amount of outstanding credit grew by more necessary fiscal, currency and monetary adjustments, than 17 mes in 2002-08,¹³ which, coupled with it tried to keep in place the imbalances present in the weak oversight, led to huge malpracces in the economy, despite them worsening in the zero-growth financial sector and the prevalence of “oligarchic environment of 2012-13. banking”.¹⁴ A large part of that lending became non- performing aer the 2008 financial crisis–the large The currency, which remained pegged to the US volume of non-performing loans haunts the dollar in the fixed exchange rate regime, was clearly Ukrainian banking system to this very day. overvalued, driving the current account deficit from - 2.2 per cent of GDP in 2010 to -9.2 per cent of GDP The fixed currency exchange rate regime was in 2013, the highest in the country's history. To maintained throughout the whole period, which sustain this overvalued exchange rate, reserves were contributed to the build-up of imbalances. The spent quickly, from US$ 34.5 billion at the end of current account surplus first rose from 4.5 per cent 2010 to US$ 20.4 billion at the end of 2013. The

¹¹ hps://www.heritage.org/index [05-04-2019] ¹² hp://info.worldbank.org/governance/wgi/#home [05-04-2019] ¹³ According to the Naonal Bank of Ukraine data. ¹⁴ All major financial-industrial oligarchic groups had their preferred banks which were used to raise money from the depositors and then lend it to connected businesses from the same group, with the depositors and the state Deposit Guarantee Fund taking the risks of such undiversified lending to related pares. Needless to say, most such loans were quickly classed as non-performing once the economic boom ended. ¹⁵ IMF World Economic Outlook Database October 2018. ¹⁶ Ukraine had zero per cent economic growth in 2012 and 2013. Chapter 2 | 39

independence of the NBU was totally destroyed, with The signs of the coming crisis were already evident in polical cronies of the Yanukovych family taking over 2013 and by early 2014 it has already started its leadership. unfolding, before the end of revoluonary turmoil and the beginning of Russian military acon. Fiscal deficits were persistently high, averaging 4.4 per cent of GDP in 2010-13. While the overvalued Reserves had fallen to less than three months of exchange rate kept the debt-to-GDP rao relavely imports by the end of 2013 and then a further stable, the government debt (measured in US dollars) quarter of them was lost during the first two months was growing quickly, from US$ 40 billion at the end of 2014, before Yanukovych was ousted. The first of 2009 to US$ 73 billion in 2013. round of devaluaon happened in January-February The situaon was clearly unsustainable – Ukraine 2014 (before the Yanukovych regime fell), with the was headed for a massive economic crisis and it was US$ to UAH exchange rate peaking above 10 at the only a maer of me unl it would hit. end of February, before falling back somewhat in early March unl news of Russian military acon in Crisis and reforms: aermath Crimea sent it upwards again. of the Revoluon of Dignity Almost half of the country's GDP was being In a somewhat ironic twist, the economic crisis redistributed through the inefficient and corrupt towards which Ukraine was being driven by the government sector. The budget deficit – including unsustainable policies of the Yanukovych period the deficit of Naogaz, created by the level of mostly unfolded aer Yanukovych was ousted. In household tariffs being below the market prices or addion to the unwinding of Yanukovych-era even cost-recovery–stood at 6.4 per cent of GDP, imbalances, it was deepened significantly by Russian with the level of government debt at an all-me high military and economic acons. of US$ 73.2 billion. Public finances were suffering from an acute liquidity crisis – when the new post- Table 2 revoluonary government came in at the end of The economic crisis of 2014-15 in data¹⁷ February 2014, it found the treasury account contained less than US$ 10,000.¹⁸ 2013 2014 2015 2016 2017 GDP growth, Perhaps, with determined acons by the new 0.0 -6.6 -9.8 2.4 2.5 year on year, % government and support of internaonal financial Inflaon, end organisaons, a macroeconomic crisis could have 0.5 24.9 43.3 12.4 13.7 of period, % been contained at this point, but in March 2014 a US$ to UAH new major factor came into play – massive Russian exchange rate, 7.99 15.62 23.41 26.21 27.52 military acon against Ukraine. end of period Budget deficit On February 27, 2014, the same day that the new (Naogaz deficit -4.8 -4.5 -1.2 -2.2 -1.4 post-revoluonary government was formed in in brackets), (-6.4) (-10) (-2.2) Ukraine, masked Russian troops without insignia took % of GDP over the local parliament of the Crimean region. This Government was the start of a sustained period (ongoing, as of expenditure, 48.1 44.8 43 40.6 41.5 % of GDP 2019) of intensely hosle Russian acvity against Ukraine: the annexaon of Crimea, military acon in NBU reserves, end of period, 20.4 7.5 13.3 15.5 18.8 Donbass, extensive efforts to destabilise the country US$ billion through informaon warfare, trade war, cyber- Current aacks¹⁹ and other acons. account deficit, -9.2 -3.9 1.7 -1.5 -2.2 % of GDP

¹⁷ IMF and NBU data. ¹⁸ hps://www.unian.ua/polics/1818471-pislya-vtechi-yanukovicha-v-skarbnitsi-ukrajini-zalishalosya-trohi-bilshe-108-syach-griven- dokument.html [05-04-2019] ¹⁹ hps://www.wired.com/story/notpetya-cyberaack-ukraine-russia-code-crashed-the-world [05-04-2019] Chapter 2 | 40

Russian military acon has made the economic accounts data, which allows us to disentangle the situaon in Ukraine progressively worse, with more loss of GDP that occurred in the war-torn Donetsk and more hosle acons unfolding throughout 2014- and regions from the GDP loss in the rest of 15. Overall, the war in Donbass, the annexaon of the country, where no military acon occurred. The Crimea (through direct loss of GDP-producing data also conveniently excludes the parts of Donbass territory) and the trade war seem to have had the occupied by Russian-backed separasts, counng worst impact on the economy. With the annexaon them as temporarily lost to the country as GDP- of Crimea, Ukraine lost 3.8 per cent of its GDP, while producing territories. the war in Donbass directly caused more than half of 2016 2017 the GDP loss from the 2014-15 crisis! GDP decline in Ukraine, % year on year -6.6 -9.8 GDP decline in Donbass, Box 2: Contribuon of Russian military acon % of Ukraine's overall to the economic crisis -5 -4 GDP year on year²¹ Russian aggression has generated economic losses GDP decline in Ukraine ex- for Ukraine both directly and indirectly, by impacng Donbass, % of Ukraine's overall -1.6 -5.8 GDP year on year the country's investment aracveness, deepening financial instability and other indirect effects. The As clearly shown by the GDP data, more than half of laer are harder to esmate and would require all economic decline in Ukraine during the crisis of deeper numerical analysis than is envisaged by this 2014-15 actually occurred in the Donbass region and publicaon. The major categories of direct losses, on was a direct product of military acon by the the other hand, are easier to esmate, though the Russians and Russian-backed separasts. If we bear analysis below is by no means comprehensive and in mind the indirect effects on investment, broken only includes a few big and easy to idenfy producon chains and other economic parameters, it categories of losses, mainly to illustrate their scope is clear that the severity of the recession in Ukraine and impact. in 2014-15 was more than doubled by Russian In terms of GDP lost, the largest clearly idenfiable military acon. economic losses from the Russian aggression are the loss of the annexed Crimea (as a GDP-producing Compounded by this new factor, the economic crisis territory) and the loss of territories, labour force and in Ukraine has started to become much more acute. producve assets in Donbass. In 2014, GDP has declined by 6.6 per cent (without including losses in Crimea), while in 2015 an even In 2013, the combined gross regional product of worse decrease of 9.8 per cent has happened. Crimea and the city of Sebastopol (which was a Devaluaon became intense, with UAH to US$ rate separate administrave enty situated in the above 15 by the end of 2014 (a devaluaon of almost peninsula) constuted 57.5 billion UAH, or 3.8 per 100 per cent in one year) and a further drop into mid- cent of Ukraine's GDP. Due to the fact that the 20s in 2015. With such massive devaluaon came peninsula was fully occupied by Russia in 2014, all of substanal inflaon: 24.9 per cent in 2014 and 43.3 this output was lost by Ukraine, thus a loss of 3.8 per per cent in 2015. cent of GDP was solely from the occupaon of Crimea.²⁰ With devaluaon and falling GDP came a massive banking crisis. In 2014-16 almost half of the country's The losses caused directly by warfare in the Donbass banks which held 30 of the sector's assets went region can also be inferred from the regional naonal bankrupt²² and were cleaned up from the market

²⁰ To provide a clearer picture, the GDP of Crimea and Sebastopol was excluded from the naonal accounts data in 2014 and for the previous several years. Its loss thus wasn't calculated into the official numbers for 2014 output loss. Sll, the economic output of the region was lost to Ukraine. ²¹ Author's calculaons based on Ukrainian official Naonal Accounts data. ²² hps://www.osw.waw.pl/en/publikacje/osw-studies/2017-08-11/aermath-crisis-overhaul-ukraines-banking-sector [05-04-2019] Chapter 2 | 41

by the NBU. Losses by the state and by the banks' The normalisaon of the rao of pension spending to clients exceeded US$ 20 billion (about 22 per cent of GDP, from an extraordinarily high 17 per cent in Ukraine's 2016 GDP), with an undetermined, but 2013 (one of the highest in the world) to about 10 large, part of this sum stolen via various schemes. At per cent in 2015, contributed strongly to fiscal the end of 2016, the government had to naonalise consolidaon. This was solidified for the longer term the largest bank in the country – Privatbank, which, by a pension reform in 2017 that introduced gradual combined with the already exisng state-owned ghtening of the eligibility requirements for minimum banks, made more than 60 per cent of the banking length of service (unfolding unl 2028) and an sector government controlled. To a large extent, such automated de-policised mechanism for pension a massive banking crisis was caused by the indexaon. malpracces which existed in the sector, in parcular, Another important component of the spending oligarchic banking coupled with corrupt and consolidaon was the financial revitalisaon of inefficient regulaon, with very weak protecon of Naogaz, executed by raising household gas prices lenders (in terms of legislaon, prosecutorial and to market levels based on import parity (completed judicial pracces and so on) also playing a strong by spring 2016), switching to imporng gas from negave role. European markets rather than Russia and by internal In response to the economic crisis, the post-Maidan improvements within the group, in parcular, in the governments have implemented an impressive gas producer UkrGasVydobuvannya. Thanks to these programme of macroeconomic stabilisaon and efforts, Naogaz group ceased to be a drain on state reform, which has stabilised the economy and coffers (in 2014 its deficit stood at 5.5 per cent of returned it to healthy (albeit somewhat weak) GDP) and became the largest taxpayer in Ukraine²⁵ economic growth by 2016. These reforms were and a huge source of revenue for the country's executed under the framework of several IMF budget. This happened despite the fact that, due to a programmes, with the first two-year programme doubling of natural gas prices in the European under the Stand-By Arrangement launched in 2014 markets, the level of household gas prices again fell and then converted into a new four-year programme significantly below market levels, which forced the under the Extended Fund Facility in 2015,²³ set to government to start increasing them again at the end expire in March 2019. The laer programme was of 2018. than succeeded in late 2018 by the new 14-month The rao of government revenues to GDP has also Stand-By Arrangement, which is set to expire in dropped somewhat (from 41.9 per cent in 2015 to March 2020, allowing Ukraine to have the IMF 38.3 per cent in 2016) aer a significant cut in the support throughout and beyond the 2019 elecon labour tax burden, which was implemented in 2015 period.²⁴ as part of a tax reform to increase Ukraine's The first major component of Ukraine's economic compeveness and to improve the macroeconomic stabilisaon and reform was large- business climate. The rate of the Single Social scale fiscal consolidaon, driven by a sharp decrease Contribuon, paid by companies to the Pension Fund in the rao of general government spending to GDP, and other social funds as surcharge on top of their fromalmost50 per cent in 2013 to less than 41 per employees 'wages, was unified and cut from about cent in 2016.The overall deficit has dropped from 10 40 per cent to 22 per cent. per cent of GDP in 2014 to 2.2 per cent of GDP in 2016 and below that in 2017 and 2018.

²³ hps://www.imf.org/external/pubs//scr/2015/cr1569.pdf [05-04-2019] ²⁴ hps://www.imf.org/en/News/Arcles/2018/10/19/pr18392-imf-and-ukrainian-authories-reach-staff-level-agreement-on-a-new-stand-by- arrangement [05-04-2019] ²⁵ hp://www.naogaz.com/www/3/nakweben.nsf/0/A5D26EB11091BF81C225820A002853F4? OpenDocument&year=2018&month=01&nt=News& [05-04-2019] Chapter 2 | 42

Chart 3 from polical meddling and corrupon in these banks Government and government-guaranteed debt and needs to be resolved in due course.

100 The NBU has abandoned a fixed exchange rate policy, which was one of the prime generators of 80 imbalances in the country's economy and one of the key reasons behind the economic crisis. Instead, the

60 Naonal Bank has implemented a modern inflaon targeng framework, which is beer suited for

40 preserving price stability and financial stability. Inflaon has dropped, from its peak of 43.3 per cent in 2015 to 12.4 per cent in 2016, although by the 20 end of 2018 the NBU had sll not been able to

0 reduce inflaon to its target of 5 per cent. NBU 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 reserves have grown significantly, from the trough of $ billion % of GDP US$ 7.5 billion in 2014 to close to their pre-crisis Devaluaon has led to a sharp increase in the debt- level by 2017 (US$ 18.8 billion versus US$ 20.4 to-GDP rao, which has grown from 41 per cent of billion in 2013). Surprisingly, Ukraine's hryvnia has GDP in 2013 to a peak of 76 per cent of GDP in performed quite well aer it stabilised against the US 2016. At the same me, thanks to fiscal dollar in 2016, and during the rout in emerging consolidaon, the government debt in nominal US market assets in 2018 it has even become something dollar terms has ceased its upward trend (which it of a stellar performer among the emerging market had been in since 2008) and remains somewhat currencies.²⁷ above US$ 70 billion, at approximately the same level Finally, the NBU has undergone a major internal as it was in 2013. Coupled with double-digit growth transformaon. The Bank's internal structure was in nominal GDP, this allowed the debt-to-GDP rao raonalised and its governance was reformed, with a to decrease, with a 20 per cent haircut as part of the flaer hierarchy and a more transparent commiee- 2015 Eurobond restructuring also helping. The debt- based decision-making system.²⁸ Regional units were to-GDP rao was stood at 61 per cent of GDP at the reorganised and unnecessary funcons were cut, end of 2018. which has allowed the number of personnel on the The second major component of post-Maidan Bank's payroll to be reduced by more than half. macroeconomic stabilisaon and reform happened at Internal processes were reorganised and streamlined the Naonal Bank. to increase the Bank's efficiency. New legislaon passed by Parliament significantly increased the The NBU executed a massive banking sector clean- central bank's autonomy, making it – for the first me up, which has consolidated the banking sector, in Ukraine's history – truly polically independent. restored it to a viable state and largely removed the Overall, in the course of just a few years the NBU has oligarchic and corrupt banking pracces that were been transformed into a modern and highly capable typical of the pre-2014 era. As menoned above, the central bank. number of banks in the country dropped by about half, while the country's largest bank, Privatbank, was Early 2019: current situaon naonalised. The unintended consequence of the clean-up and Privatbank naonalisaon was a sharp Thanks to the reforms and macroeconomic increase in the share of state-owned banks in the stabilisaon conducted by the successive post- system, which increases risks to the financial stability Maidan governments, Ukraine has achieved

²⁶ Several capital and exchange rate controls were introduced though, that were being slowly lied up unl the start of a systemac liberalisaon of capital flows in early 2019. ²⁷ hps://www.bloomberg.com/news/arcles/2018-06-13/how-2018-s-currency-champion-is-dodging-the-emerging-market-rout [05-04-2019] ²⁸ hps://bank.gov.ua/control/en/publish/arcle?art_id=24761917 [05-04-2019] Chapter 2 | 43

macroeconomic stability and has regained economic Despite its sharp moderaon aer 2014, the size of growth, which it did not have during the laer part of GDP redistribuon by general government sll Yanukovych era. The final number for GDP growth in remains somewhat high for a country at Ukraine's 2018 is expected to come at somewhere close to 3.5 level of economic development. Government per cent, though growth is likely to drop somewhat in expenditures are esmated to have constuted 2019 amid elecon turmoil. about 43 per cent of GDP in 2018,³⁰ while research shows 37 per cent of GDP to be the most The share of fixed asset investment in GDP, a key appropriate level for the country.³¹ determinant of growth in Ukraine's capital-starved economic environment, is gradually climbing Aer the moderaon of the pension expenditure upwards, from its trough of 13.5 per cent in 2015 to level and the decrease in the rate of labour taxaon, 16.6 per cent in Q3 2018 (on a trailing 12-month the structure of both government revenues and basis). Levels above 20 per cent are considered expenditures in Ukraine is broadly comparable to sufficient to sustain high economic growth, while other European countries. The efficiency of both levels above 25 per cent indicate an economic boom. spending and revenue collecon remains rather low, though. Thanks to the efforts of the Naonal Bank, inflaon has dropped to single-digits, though it is sll above Tax administraon, in parcular, is a big problem. The the NBU's target of 5 per cent per annum. This forces majority of complaints – in fact, more than half of all the Naonal Bank to keep interest rates high, though complaints – received by Ukraine's Business the gradual decrease in the inflaon rate suggests Ombudsman Council³² concern the State Fiscal that this policy will ulmately be successful. Service. Data from the World Bank's Doing Business ranking shows that in the “Paying Taxes” category Due to the naonalisaon of Privatbank and the Ukraine scores badly in terms of me required by the clean-up of the banking sector, the share of state- medium-sized businesses to prepare, file and pay all owned banks in the sector on such metrics as net taxes – 327.5 hours per year, significantly higher than assets, net liabilies and the number of personnel is the average for European and Central Asian regions above 50 per cent. This creates big risks going (214.8 hours per year) and more than double the forward, as historically state-owned banks were a number for OECD High Income countries (159.4), constant source of non-transparent quasi-fiscal implying significantly less efficient processes within financing of bloated government sector expenditures. the Ukrainian tax authority. The high level of government debt, as well as its Weak property rights protecon and poor tax significant dollarisaon, – legacies of flawed pre- administraon have bred a rather large shadow 2014 policies – remains a big problem and a major economy in Ukraine. The Ministry of Economic source of risk for macroeconomic stability. In 2019- Development and Trade esmated³³ the shadow GDP 21 this is amplified by the “peak debt" period of high to be about 32 per cent of the official GDP based on repayments on the government's foreign debt, which the calculaon by several different methods. The constute more than US$ 10 billion (3.8 per cent of most reliable of these methods, which is based on a nominal GDP forecast by the IMF for that period).²⁹ direct comparison between spending reported by the Coupled with the need to finance the budget deficit, populaon in the household survey and official retail foreign currency denominated domesc bonds and turnover numbers, shows shadow GDP to be higher, government guaranteed debt, the “peak debt" at 48 per cent of the official GDP number. The payments are a significant challenge for Ukraine. shadow economy seems to have increased

²⁹ IMF World Economic Outlook Database October 2018 ³⁰ hps://ces.org.ua/budget-2019 [05-04-2019] ³¹ hps://ces.org.ua/en/021115 [05-04-2019] ³² An organisaon created in Ukraine to help protect companies from unfair treatment by officials. ³³ hp://www.me.gov.ua/Documents/List?lang=uk-UA&id=e384c5a7-6533-4ab6-b56f-50e5243eb15a&tag=TendentsiiTinovoiEkonomiki [05-04-2019] Chapter 2 | 44

significantly in 2014 in response to the economic government and parliament (and actually try to crisis (a similar thing also happened in Ukraine during implement some of their destrucve proposals), this the deep recession in 2008-09) and has been falling could stop or even reverse the reforms in Ukraine since then, dropping lower than the levels seen in and lead to a new economic crisis in the short-to- Yanukovych mes by 2017-18. This trend is medium term. somewhat encouraging, as shadow businesses create The second risk stems from the “peak debt" period of an uneven playing field for businesses that operate high payments on external government debt, which fully legally, and the shadow economy is especially started in 2018 and will connue at least unl 2020, problemac for those domesc producers that have aer which the burden of these payments will reduce to compete with untaxed smuggled imports. gradually. Throughout this period Ukraine's With its high dependency on external financing, macroeconomic and financial stability will be vulnerability to exchange-rate volality and an open extremely dependent on foreign financing, both economy with predominantly commodity-based official and market-based, with the IMF programme (hence exposed to the volality of commodity prices) serving as an anchor and a condion for the exports, Ukraine is quite vulnerable to external availability of such financing. Thus, a freeze in the factors, such as slowdowns in global or EU economic implementaon of the IMF programme could have growth, a new financial crisis and so on. As of early extremely detrimental effects on the country's 2019 the risks of such events happening seem to be economy, opening way to debt default and a new rising, with a slowdown evident in EU economic data full-blown economic crisis. Moreover, high and financial markets having been in a slump dependence on external financing makes Ukraine's throughout late 2018. If these trends connue and macroeconomic environment riskier and more worsen, this will undoubtedly have an impact on the suscepble to negave external factors. economic situaon in Ukraine. Acute external crises These polical and financial factors create risks for could potenally lead to a new recession and investors in Ukraine, thus suppressing investment domesc economic crisis, which in turn will affect the and economic growth. Nevertheless, they are polical 's reforms. temporary, as the elecon period will pass in 2019 and the debt financing burden will start alleviang Nevertheless, looking beyond short-term external aer 2021. Thus, if both risks are successfully risks and into the medium-term perspecve, it is tackled, they will become much less acute by 2022, mainly the process of reform and the endogenous which will in turn lower the investment risks, drive factors affecng it that will determine how quickly investment up and speed up economic growth. Since Ukraine will develop and whether it will be able to GDP growth in 2018 is already projected (as of early catch up with its Eastern European peers. 2019) to be about 3.5 per cent, it is likely that the Currently, there are at least two big endogenous risks alleviaon of major risks would raise the rate above 4 faced by the economy. per cent per annum, which would be high enough for Ukraine to start catching up with its EU neighbours One of these is the twin elecons in 2019 and risks and other peer countries. to the funconality of the polical system and sustainability of the course of modernisaon and To be realised, this scenario requires that the 2019 European integraon. If the elecon results are so elecons produce a funconal parliamentary majority polarised that they produce an enrely dysfunconal and sufficiently competent government to maintain parliament and system of government, this will have the polical course towards reforms, modernisaon an adverse effect on the country's ability to even and European integraon. It would also require that connue with current reforms, while any kind of the IMF programme is maintained at least unl 2021, broadening of the development agenda will likely be and possibly beyond. If both of these condions are out of queson. At the same me, many polical met, Ukraine has a reasonable chance of achieving forces campaign on a populist agenda that is high (above 4 per cent per annum) rates of growth by incompable with modernising Ukraine. If these 2021 and finally starng to catch up with the other forces manage to take sufficient control of the European countries. Chapter 2 | 45

Macroeconomic policies: goals and priories impede investment. It is only by coupling the correct macroeconomic and fiscal policies with structural The main goal of macroeconomic policies in Ukraine reforms (which are outlined in other chapters of this for the foreseeable future can be summarised as publicaon) that Ukraine can genuinely start growing follows: to achieve and maintain high enough long- fast. term economic growth to catch up with and possibly 1. Connuing fiscal consolidaon and achieving a overtake other Eastern European countries, in balanced budget, which will allow the country to parcular EU member countries, in terms of per lower its government debt burden as share of GDP. capita GDP. The necessary long-term growth rate can The recently introduced medium-term budget be roughly esmated at 4 per cent per annum or planning framework can become a helpful tool in higher.³⁴ managing this process; introducing stricter fiscal rules Aaining and maintaining sufficient investment is the liming budget deficits and spending would also be key condion for this goal to be achieved. As quite useful. It is important to note that (as outlined menoned previously, the share of fixed asset below) fiscal consolidaon should be executed by investment in GDP at 20 per cent can be considered downsizing the share of general government to be the minimum threshold for a high growth rate, expenditures in GDP; by no means should the burden while generang an economic boom would require of government revenues on the economy be the rate of investment to be upwards of 25 per cent increased. of GDP. Since the financial resources available to the 2. Downsizing the share of GDP redistributed government are quite limited and prone to be through the general government sector and keeping misused due to high levels of corrupon, the vast it structurally lower, to make the economic majority of new investment will have to come from environment more growth-friendly. Research³⁵ shows private sector sources, both domesc and foreign. the level of general government expenditure at 37 To aract large-scale private sector investment, per cent of GDP to be opmal for Ukraine, while it is Ukraine will need to conduct structural and esmated to have amounted to 43 per cent of GDP instuonal reforms (in parcular, strengthen the in 2018.³⁶ protecon of property rights, privase state-owned To be compable with the goal of fiscal enterprises – see Chapters 5 and 6 – and launch the consolidaon, the general strategy for such land market) and pursue growth-friendly downsizing should be based on decreasing macroeconomic policies, mainly concentrated on government expenditure as share of GDP. At the maintaining macroeconomic stability and lowering same me, the share of government revenues in GDP the state burden on the private sector. Structural should be kept stable or decreased at a slower pace, reforms and the maintenance of macroeconomic which doesn't preclude using the addional revenues stability are interconnected: maintaining long-term from improved tax administraon and other revenue stability is impossible without long-term growth, enhancing measures to decrease the rates of the which, in turn, is unachievable without reforms. most distoronary direct taxes. Based on the above, the key priories for On the expenditure side, a certain amount of fiscal macroeconomic and fiscal policies in Ukraine are space will be created naturally by the contracon of outlined below. It is important to note though, that the energy subsidies system, as people grow out of by themselves these won't be enough to aract being eligible for subsidies due to incomes generally enough investment to aain high growth rates, as growing faster than prices and tariffs in a normal weak property rights and other structural factors economic environment.³⁷ The pension reform that

³⁵ hps://ces.org.ua/en/021115 [05-04-2019] ³⁶ hps://ces.org.ua/budget-2019 [05-04-2019] ³⁷ For example in 2017-18 the mean wage increased by 68 per cent on an annual basis, the mean pension by 46 per cent on the same basis, while the average annual CPI (which includes regulated ulity tariffs covered by subsidies as its component) has only grown by 27 per cent. Consequently, despite growing ulity tariffs (including a 23 per cent increase in household gas prices in November 2018 and electricity prices growing by about 55 per cent in 2017-18) the subsidies bill has decreased from 2.3 per cent of GDP in 2017 to an esmated 2 per cent of GDP in 2018. Chapter 2 | 46

was introduced in 2017 will similarly help decrease or higher in Ukraine than the direct tax burden on keep down spending, due to its gradual ghtening of capital income. For the laer, switching from profits the eligibility requirements for minimum length of to dividends taxaon (a proposal developed in service ongoing unl 2028. Finally, a whole range of Ukraine under the name of exit capital tax) is efficiency-enhancing reform opons are available in preferable to simply cung rates, as it can potenally nearly all areas of government spending, such as smulate investment while being less costly, with beer targeng and verificaon of social assistance, revenues picking up as amassed dividends are paid opmisaon of the school network, reform of higher out. educaon financing, healthcare financing reform and If necessary, a limited increase in the rates of so on, provide opportunies for savings that can consumpon taxes, in parcular VAT, can be used to generate addional fiscal space. partly finance the decrease in direct tax rates. While 3. Preserving the Naonal Bank's independence and doing this, aenon needs to be paid to leng it focus on its goals of inflaon targeng and distribuonal consequences, as relying mainly on maintaining financial stability. As shown in the first consumpon taxes makes the tax system regressive part of this chapter, modern Ukrainian economic and can create higher income inequality.³⁸ A good history is a textbook example of how weakness and way to migate this, while making the tax system polical dependency of the central bank leads to more growth friendly, is to gradually introduce higher massive corrupon and chronic macroeconomic taxaon of capital assets, starng with land; but instability. An independent and professional Naonal soluons sll have to be developed in that area. Bank is one of biggest achievements of post- Another problem with increasing the VAT rate is tax revoluonary reforms in Ukraine. Undermining this evasion, as any kind of tax rate increase would also achievement and compromising the NBU's increase the differenal in tax burdens between independence would very quickly lead to a loss of those who pay the tax (or, rather, dufully forward it macroeconomic stability and a new crisis. This would to the state, in the case of businesses that mostly act be exacerbated by the loss of access to external as agents on consumpon taxes) and those who financing: given the track record of economic don't, which is a big challenge for Ukraine's business mismanagement by Ukrainian polical elites, neither environment. The best approach would be to couple official nor private creditors would be willing to any kind of compensatory VAT rate increases with finance any government that removes the central measures to combat VAT fraud and tax evasion. bank's independence. Tax administraon improvements, customs reform Gradual privasaon of the state-owned banks is and other measures to combat tax fraud and evasion also quite important for the long-term health and are a big potenal source of addional revenue to stability of the banking system, as well as the broader compensate for cung direct tax rates, as well as a economy. great way to improve the business climate. Given limited resources and polical capital, using tax gap 4. Connuing to implement the IMF programme in analysis to target the areas with the largest revenue order to maintain access to external financing losses is the right way to approach this exercise, as it throughout the “peak debt" period of 2019-21. would allow to maximise the effect of broadening the Without the IMF programme being reasonably on tax base. track, ruinous default would be almost unavoidable for Ukraine in current condions.

5. Reforming the tax system by gradually cung rates of direct taxes, as fiscal space emerges. Labour taxes are the most logical point to start with, as the direct tax burden on labour income is significantly

³⁸ It is notable that, based on official data, income inequality in Ukraine is quite low, with the GINI Index calculated by the World Bank standing at 25 in 2016, which is one of the lowest in Europe and comparable to Scandinavian countries. Properly accounng for shadow incomes would probably show higher levels of income inequality though. Chapter 3 Chapter 3 | 48 Chapter 3 Rule of law

Luba Beardsley a command economy (with naonally or collecvely owned means of producon) and a polical regime Inherited legacy controlled by the communist party.

The collapse of the Soviet Union in 1991 found The main legal characteriscs of a socialist state are Ukraine ill-prepared to manage its transformaon to the abolion of property rights; limited personal a democrac state and market economy. The socialist freedoms of cizens; and the intrusive role of the legacy (Box 1) was one of the main reasons why lile state in lives of its cizens, hence a robust public and systemic rule of law (RoL) reform occurred in Ukraine small private law sector. Socialist legal instuons prior to the Revoluon of Dignity (2014). lack independence. Courts are controlled by the communist party (through the appointment system During the 1990s two disnct but interrelated and policisaon by the party membership) and/or processes determined Ukraine's development: the by the execuve branch which is fully in charge of pursuit of sovereignty and defining the outline of the court administraon. The public prosecuon is new Ukrainian state. Both processes were influenced perceived as a provider of jusce. Addional by power conflicts between the Parliament and funcons stemming from this role makes the office execuve branches, hegemonised by the Presidency.¹ the most powerful instuon in the socialist law The judiciary, fresh from gaining new freedom and sector. struggling with self-identy, took a back seat. To reflect the results of the power struggle and to allow for further progress towards an independent Ukraine, The powers of the public prosecuon were sll a “mini” Constuon was enacted in 1995, followed defined broadly, so it could connue serving as a by a fully-fledged Constuon in 1996. The laer useful tool to the execuve.² The Constuonal provided the basis for: Court was given exclusive authority for constuonal jurisdicon. This was considered, by many, to be one • separaon of powers (the judiciary was composed of the biggest achievements of the Constuon. of the Constuonal Court and courts of general Indeed, since its creaon (1997), the Constuonal and specialised jurisdicon) Court has come to play a pivotal role in adjudicang • transion to a market economy (through protecon on the disputes of other two branches. This, of property rights) however, resulted in it being policised and • protecon of human rights and freedoms. discredited.

Ukraine joined the Council of Europe (CoE) in 1995 Box 1. Socialist legal systems and became a member of the European Convenon for the Protecon of Human Rights in 1997. By doing A socialist legal system builds on a posivist legal so Ukraine made a commitment to the CoE's doctrine. This doctrine does not imply ethical common standards and polices, subscribed to the jusficaon for the content of the law and requires jurisdicon of the European Court of Human Rights, blind loyalty to the law on books. The law is and became eligible for CoE assistance, all of which developed to suit the state and its polical elite. To was important in carrying out RoL reform. allow for selecve applicaon, it reserves broad Judiciary discreonary powers for the officials responsible for its enforcement. The main purpose of a socialist legal In 2004, in the context of the Orange Revoluon, the system is to protect “state socialism” that is based on Parliament enacted constuonal amendments that

¹ Wolczuk (2013); R. Kuibida (Ed) (2016). ² Ibid. Chapter 3 | 49

changed the power equilibrium in its favour.³In Box 2. Capturing jusce October 2010, the Constuonal Court ruled the 2004 polical changes unconstuonal. The ruling The 2011 reform introduced strict meframes for was highly controversial for a few reasons, among case processing. The meframes were unrealisc as them, the unexpected resignaons of four they did not consider elements such as quality and Constuonal Court judges.⁴ Without doubt this overall workload of judges. If the meframes had ruling – as well as many other follow-on been applied consistently, praccally all judges were Constuonal Court decisions – was instrumental in desned to fail. Court presidents connued cemenng President Yanukovych's⁵ grip on power monitoring and evaluang judges' performance. They and capturing the jusce sector. also controlled the iniaon of judges' disciplinary proceedings. The reform introduced an “automated As for the rest of the jusce sector, most of the random assignment” of cases. However, addional transformaon from socialist-style instuons policies were introduced to give court presidents occurred in “Potemkin Village” style – pro forma only, wide flexibility in overriding the system. with lile impact on the ground. Both the courts and prosecuon remained ill-equipped to carry out their The court presidents were selected by the Judicial responsibilies and/or resist the increasing pressure Council which was assembled from the President's of other branches as well as interest groups which loyalists. Although the Judicial Council's authority were connually taking control over state resources was not in compliance with the Constuon, the and capturing state instuons. Constuonal Court chose to ignore that. The selecon of court presidents was de facto agreed It was the legacy of the socialist legal culture based among the Judicial Council, Councils of Judges and on a posivist principle that “law is law” that sucked the Office of the President. The combinaon of the judges and prosecutors right into the centre of those concentraon of authority in the hands of the court interest groups in order to give their operaons the presidents, unrealisc performance expectaons, appearance of legimacy. As a result, the courts and vast discreon in interpreng and enforcing rules and the prosecuon became a synonym of servitude to undue influence over key appointments were central the powerful, inefficiency, corrupon and rent- to the capturing of the judiciary by the President. seeking.

In 2011 the law “On the Courts and Judges” was Public prosecuon prepared by the Office of the President and enacted by the Parliament. On one hand the law embraced Reforms of the public prosecuon were driven by several progressive principles such as compeve Ukraine's internaonal obligaons to make it merit-based selecon of judges, mandatory conform with the requirements of human rights declaraon of income and integraon of the court protecon and CoE standards. From 2001 to 2013 administraon into judicial structure. On the other the public prosecuon lost, de jure, its control over hand, it reduced the jurisdicon of the Supreme court decision-making, judges' disciplinary Court (SC), considered the only “unsubordinated” (to proceedings as well as its influence on some parts of the President) court in the country.⁶ It also designed criminal proceedings. In pracce, prosecutors the selecon and performance incenves and connued exercising most of their original powers.⁷ intrinsic movaon structures for judges and judicial Property registraon bureaucracy in a way which made them even more suscepble to bribery and undue influence (Box 2). Private ownership was recognised by the 1996

³ The law No 2222-IV “On the Amendment to the Constuon”. With this amendment, the President lost the authority to appoint and dismiss the Prime Minister and most members of the Cabinet. ⁴ For details see Council of Europe/The Venice Commission (2010). ⁵ President Yanukovych was in office from 25 February 2010 to 22 February 2014. ⁶ The Superior Council of Jusce (SCJ) was led by the Chief Judge and , a close ally of Yulia Tymoshenko. ⁷ R. Kuibida (Ed) (2016). Chapter 3 | 50

Constuon and elaborated on in the 2001 Land respecve reforms at the level of policymaking. Code and in the 2003 Civil Code.⁸ The follow-on 2004 However, they did not accomplish the establishment Law “On State Registraon of Property Rights to Real of an “umbilical cord” between the cadastre and Estate and their Encumbrances” established mandatory ownership registries operaons that were needed to registraon of property rights in the State Registry of have a funconing land management system. Property Rights (Property Registry). Enforcement of judgments The Property Registry was separated from the The non-enforcement of court judgements has been cadastre and placed under the Ministry of Jusce an enduring feature of Ukrainian RoL. In 2011, (MoJ). In 2011, the Cabinet of Ministers (CoM) according to esmates by the Ombudsman of Human adopted a new system of registraon of property Rights, in Ukraine, about 60 per cent of court rights⁹ based on a “single window” concept. decisions were not enforced. In 2014, this esmate Subsequently, the MoJ launched a reform of the increased to 70 per cent.¹² As of May 20, 2016 there property and business registries with the objecve of were UAH 560 billion (around €20 billion) worth of improving the business environment. More unenforced court rulings in Ukraine. specifically, the reform aimed to improve registries' efficiency through streamlining and automang the In May 2012, in response to the pressure stemming registraon process. The later phase of the reform from the European Court of Human Rights decision, was implemented in the context of a few other Ukraine took steps to address the problem by parallel reforms: the reform targeng access to changing the execuon process.¹³ The changes, informaon as well as administrave decentralisaon however, were not effecve enough to address the and e-governance reforms. underlying causes of the problems, which included: a lack of polical will; commitment and capacity among In 2013, to allow for the instuonal unificaon and state actors to address restricons on the forced sale consolidaon of informaon about immovable of debtor assets (mainly the prohibion of forced properes, the Property Registry absorbed several sales of property of state enterprises and the other registers. Registraons of properes were property of the state, and sales of enterprises in performed by state registrars and notaries overseen energy and related sectors); and budgetary shoralls by the MoJ.¹⁰ The cadastre reform was launched at in the system of social benefits.¹⁴ the same me under the lead of the State Land Agency although with a different objecve: strengthening property rights and land What was done administraon. In 2011, Parliament enacted the law “On State Land Cadastre”. In 2013, an e-cadastre Reforms map¹¹ was introduced as a publicly accessible The Maidan Revoluon (February 2014) unravelled database of land plots. the strong bond between the execuve and court Despite their rivalry over the scope of branches, which further compromised the (already responsibilies, the MoJ and the State Land Agency frayed) public trust in the jusce sector's ability and were able to cooperate and coordinate their will to protect public interests. This explains why the

⁸ In 2001, in response to the absence of a reliable legal and instuonal infrastructure the sale of agricultural land was banned. Since 2001, the moratorium has been extended on annual basis. See also Chapter 6 on land reform. ⁹ Resoluon No. 703 “On Approving the Procedure for State Registraon of Rights to Real Estate and Their Encumbrances” and “The Procedure on Issuance of Extracts from the State Registry of Corporeal Rights to Real Estate”. ¹⁰ State registrars were responsible for “inial” registraon while notaries registered rights which arose/changed/were terminated based on the deeds cerfied by such notaries. Notaries were not authorised to maintain registraon files and/or issue ownership cerficates. ¹¹ The law “On State Land Cadastre”, from 1 January 2013. The cadastre contains informaon on the size and designated use of land plots, their owners, encumbrances, as well as other features of land plots. ¹² Esmates of the State Enforcement Agency. These data should be treated with cauon. ¹³ A pilot decision was issued in 2009 in the case of Yuriy Nikolayevich Ivanov vs. Ukraine regarding unpaid social benefit. By the beginning of 2012 the European Court of Human Rights (ECHR) issued 432 similar judgments; in total 1,400 cases were decided against Ukraine based on the original pilot decision. The 2011 and 2012 laws No 9127 and No 4901-VI “On Guarantees of the State Concerning the Execuon of Court Decisions.” ¹⁴ The 2007 assessment of the Department for Enforcement of Judgments of the ECHR at the Commiee of Ministers. Chapter 3 | 51

first post-revoluon steps of the Parliament were training for judges. aimed at the thorough veng of judges and The problem was that, technically, sing judges prosecutors and the disabling of discredited jusce could not be removed unless the constuon was organisaons.¹⁵ changed first.¹⁹ In February 2014, the Parliament approved two In June 2016, the Parliament enacted the Law “On documents allowing a return to the constuonal the Amendment of the Constuon (Regarding Jusce)”, structure of 1996.¹⁶ President Poroshenko¹⁷ also set the Law “On the Amendment of the Law on Court and up a Jusce Reform Council charged with navigang Judges” and some other laws to kick off the next, so RoL reform. The first fruits of this effort – a far, most significant phase of the RoL reform. The comprehensive Jusce Sector Strategy 2015-20 2016 legislave changes opened the Constuonal emerged in 2015.¹⁸ The bar, in terms of expectaons, Court to individual complaints. They also was set high: the reposioning of the culture towards strengthened the independence of the courts and RoL by creang a jusce system whose goal was to judges.²⁰ The self-governing instuons – the establish the trust and support of the Ukrainian Superior Council of Jusce (SCJ) and the High people. In March 2015, a constuonal commission Qualificaon Commission of Jusce (HQCJ) were was established to advise the President on empowered with addional authority over court constuonal reform. A polical consensus also management while the opportunies for legislave emerged that further constuonal reform should and execuve branches of the government to address safeguards for the independence of the influence their decision-making were reduced. For judiciary and human rights. instance, the President's role in appoinng judges The main challenge of RoL reform was strong was limited to a ceremonial funcon and he was opposion from the inner circles of the instuons stripped of the power to create and/or close the that needed to be reformed (the judges and courts. Parliament's power to appoint and dismiss prosecutors). Donors, parcularly the EU, led the judges and consent to their detenon or arrest was reform and it was carried out with the acve shied to the SCJ. involvement of civil society. The court system was consolidated at both the Judiciary central and sub-naonal levels. At the central level, the SC absorbed the three high specialised courts In February 2015, the Parliament passed the Law “On which allowed the number of judges to be halved. At Assuring the Right to a Fair Trial” to open the courts to the regional and local levels, the number of courts younger legal professionals, which was seen as a was cut from 764 to 380.²¹ The purpose of the precondion for much-needed cultural change within consolidaon was to migate the impacts of the new the judiciary. However, according to experts, while organisaon of courts (switch to a three-level court the new legislaon rightly set beer qualificaon system), the historic reliance on the rich network of criteria for selecng judges, the “old judges” delayed small ineffecve courts and the (perceived) shortage the process and eventually managed to limit the law's of judges. Almost 3,000 judges (one third) appointed implementaon to the establishment of addional prior to the 2016 amendments decided to resign.

¹⁵ The law “On Restoring Trust in the Judiciary”, April 2014 and the law “On Cleaning the Government”, September 2014. ¹⁶ The law “On Reinstung Certain Provisions of the Ukraine Constuon” and the resoluon “On the Text of Ukraine Constuon – in its Versions from June 28,1996 as amended by the Laws from December 8, 2004” (No.2222-IV. From 1 February 2011 No.2952-VI and from 19 September 2013 No.2013 No586-VII. ¹⁷ President Poroshenko assumed office on 7 June 2014. ¹⁸ The strategy 2015-20 is based on the following pillars: (I) increasing judicial independence; (II) streamlining judicial governance system and appointment of judges; (III) boosng judges’ competence; (IV) increasing the transparency and accountability of the judiciary; and (V) increasing the efficiency of jusce (in all jurisdicons). ¹⁹ Giuardullo (2018). ²⁰ This included: abolion of the five-year probaonary period for judges; introducon of a transparent compeve selecon process with tough professional and integrity requirements and involvement of civil society representaves; and a blanket re-evaluaon of professional and integrity qualies of all sing judges. For the first me selecon was open to non-judges. ²¹ Stascs of State Court Administraon and the Office of the President. Chapter 3 | 52

While the court consolidaon was key to determining August 2018, the evaluaon was completed with the overall size of the workforce, the human about 84 per cent of judges meeng the criteria to resources reforms focused on workforce quality hold office. through the selecon of incoming judges of the SC In October 2017, the Parliament enacted three and other courts, and the evaluaon of sing judges. Procedural codes (Administrave, Civil and The process of selecon and evaluaon was Commercial)²³ to accommodate the reform progress redesigned to reflect advice from the CoE's Venice made so far. In June 2018, aer intense negoaon Commission and good pracce across the EU. Both with donors led by the EU and Internaonal procedures were equipped with several addional Monetary Fund (IMF) the Law “On a High An- safeguards, including the direct involvement of civil corrupon Court” was passed.²⁴ The selecon of society. judges for this court was completed in March 2019. It The Public Integrity Council (PIC) was created in was carried out by the HQCJ but also involves a response to popular demand for “veng the group of internaonal experts nominated by donors compromised judges of the courts”. The PIC's role is aiding Ukraine's fight against corrupon (a public to buffer the selecon and evaluaon of judges. The council of internaonal experts). The judges were PIC is composed of representaves of non- appointed by the President in May 2019. The court governmental organisaons (NGOs) and public became operaonal in April 2019. personalies with polical imparality and proven In summary, in a period of three years (2016-18) integrity credenals. According to the law, the PIC Ukraine has: assists the HQCJ in determining the compliance of judges and judges-to-be with professional ethical and • developed policies and a basic legal framework for integrity requirements. To do this job, the PIC carries the jusce system and all procedural codes (except out its own independent “invesgaon” which is for the Criminal Procedural Code) summarised in a formal opinion addressed to the • reorganised the first and second instance courts HQCJ. The HQCJ can disregard the PIC's explicitly • established the new Supreme Court and the High “negave” opinion only by a decision of a qualified An-corrupon Court and is in the process of majority of its members. So far, the PIC has only creang the Court of Intellectual Property) parcipated in the selecon of the SC judges. In protest at the approach of the HQCJ, the PIC refused • launched and/or parally carried out about 12,000 to take a part in the evaluaon of sing judges²² human resources (HR) proceedings (selecon, (Box 3). evaluaon, transfer of judges and/or judges to be).

The new Supreme Court became operaonal in All the above reforms are technically and polically December 2017 with 115 freshly appointed judges extremely difficult. They have rarely, if ever, been (as of 30 March 2019 it had 118 judges). The implemented simultaneously and/or in such a short selecon of an addional 79 judges was finalised in period of me. The most contenous reforms were: May 2019). A similar process, involving the High the first round of the selecon of the SC judges (Box Court of Intellectual Property, was carried out at the 3) and the establishment of the an-corrupon same me for 21 specialised judges. The HQCJ has courts. In both cases, the core challenges have been preselected 700 judges for 600 judicial posions in a lack of polical commitment to the reforms which local courts (to fill the most crical capacity gaps). translated in numerous aempts to subvert the The process for a blanket evaluaon of around 1,486 reforms' original intent and how to balance judges (out of about 5,500) of the first and second safeguards of judicial independence (self-governance) instance courts was launched in October 2017. As of and accountability in the context of a compromised

²² Prior to its withdrawal the PIC collected informaon about 1,082 judges; prepared/submied to the HQCJ 83 negave opinions and 67 opinions on judges. In March 2019 the PIC began parcipang in qualificaon evaluaon of judges. Since then, the PIC has assessed 1,700 judges and submied around 350 opinions to the HQCJ. (Source: Reanimaon Package of the Reforms). ²³ The law No. 6232. “On Amendment of the Commercial Procedure Code of Ukraine, Civil Procedure Code of Ukraine, Code of Administrave Procedure of Ukraine and Other Legislave Acts “. ²⁴ The law No. 7440. “On An-corrupon Court”. Chapter 3 | 53

judicial corporate culture and weak “so discreonary) allowed this to happen. infrastructure”. But this was not the end of the story. The PIC was supposed to play the same role in the evaluaon of Box 3.The fight for integrity: 5,700 sing judges. Shortly aer the evaluaons selecon and evaluaon of SC judges began, in March 2018, the PIC pulled out of the process: this was caused by a lack of funding, On November 11, 2017 the frustraon stemming from its previous experience appointed 113 judges to the Supreme Court (SC). His (PIC's opinions were not taken on board by the ceremonial decision concluded a rather lengthy, HQCJ), lack of transparency (a funcon of the high contenous selecon process carried out by the High level of discreon wielded by the HQCJ) , lack of Qualificaon Commission of Jusce (HQCJ) and clarity of the process and unrealisc deadlines that finalised by the High Council of Jusce. were beyond the capacity of both instuons (see also footnote 23). However, this did not stop the The process started in September 2016 for 120 evaluaon process from going ahead as the PIC's posions. Out of 1,436 inial applicants 846 parcipaon is not mandatory in law. qualified to compete; 613 took the first round of examinaons in theorecal knowledge; 520 took the The dispute between the PIC and HQCJ ended up in test in praccal skills; 381 were admied for the court itself. In September 2018 the SC upheld evaluaon of personal qualies and predisposions three out of the PIC's six demands. But the HQCJ and integrity qualificaon; 320 were put on the list appealed the discussion to the Grand Chamber of the for final evaluaon/rang and finally, 120 were SC. In October 2018, the HQCJ amended its proposed for appointment. 113 of the candidates regulaons regarding the methodology applied to the were appointed to the court. calculaon of scores. So far, the HQCJ has no plans to give up its broad discreonary powers, address its The process was extremely compeve on two members' conflicts of interest or an approach to the levels. In addion to the contest between judges-to- burden of proof regarding indicaons of judges' illicit be, a fierce compeon took place between the enrichment or misbehaviour (shiing it from the PIC HQCJ and the Public Integrity Council (PIC) over the to applicants, where it should be). goal of the selecon and the process and methods that lead to achieving this goal. While the HQCJ So, who are the winners and losers in this situaon? armed itself with formal (internaonal) standards Certainly, winners include the judges who were or oen interpreted to accommodate interests of will be (re)appointed for a life-term without the judges, the PIC carried moral authority. It referred to scruny of the PIC or having to prove that their the state of Ukraine's court system (culture of lifestyle is proporonal to their means. The life of the servitude to other branches and interest groups, HQCJ would also be easier without having to deal incompetence and wide spread corrupon) and with the PIC's demands, which to be fair are Maidan's promise to overhaul the court system somemes excessive. As for the losers, without starng with “cleaning it of the compromised judges”. doubt the biggest losers are the Ukrainian people.

Eventually, 25 new SC judges (22 per cent) were appointed despite being vetoed and 60 (53 per cent) Public prosecuon objected to by the PIC. A lack of clarity on the In October 2014, the new law “On Public Prosecuon” selecon rules (for example, the standards and was passed to connue in the effort of bringing the methods by which the applicants' competence, instuon's funcons, operaon and pracce into integrity and ethics are assessed) and the regulatory conformity with EU pracces and CoE standards and and hence interpretaon [of the rules] monopoly of to adjust its use of resources to contemporary the HQCJ coupled with very high level of discreon business needs.²⁵ The adopon of the law was of its members (80 per cent of decision-making was followed (in 2015), by an aempt to implement a

²⁵ The law came into force in July 2015. Chapter 3 | 54

comprehensive organisaonal reform based on Subsequently, in July 2015, two high level recommendaons by the above instuons. The prosecutors – the first deputy of the Invesgaon reform centred on “right-sizing” an overly robust Department of the Office of the Prosecutor General instuon and creang a self-governing system to Volodymyr Shapakin and Deputy Chief Prosecutor of guarantee a sufficient level of prosecutorial Kyiv Region Oleksander Korniyets (both with es to independence. It involved: the sing Prosecutor General) were detained and charged with the crime of accepng a bribe of UAH • establishing a reform management unit 3,150,000. A search of their properes discovered • streamlining business operaons US$ 400,000 in cash and a large amount of jewellery, • consolidang sub-naonal offices including 65 diamonds (hence the nickname). • reducing personnel The operaon was overseen by the two Depues of • merit-based compeve hiring of new prosecutors, the Prosecutor General who happened to lead the chief prosecutors and their depues. reform process in the sector of public prosecuon. The reform was implemented only parally with Since the case, they have both le the public rather mixed results. Leading reasons for this prosecuon. David Sakvarelidze was first transferred outcome were insufficient polical will, wavering to Odesa and later he was dismissed by the commitment to the reform and weak leadership. Five Prosecutor General, literally a few hours before he prosecutors general (two in acng capacity) have led himself was dismissed by the Parliament. Vitaly Kasko the office since 2014. The 2015 organisaonal resigned in February 2016 out of frustraon caused reforms were conceived and led by deputy by the decision of the prosecutor general to diminish prosecutor general who not only did not enjoy the his responsibilies followed by a string of aacks by support of the prosecutor general but had to deal the “old establishment” within the prosecutorial with his and his loyalists' acve opposion to the service which included his criminal invesgaon. reform (Box 4). But back to the diamond prosecutors. Their case was brought to the court in at the end of 2015-16 and it has not yet been completed. Recently, Novoye Box 4. Diamond prosecutors Vremya (New Time) published an arcle about the daughter of Mr Korniyets who studies in the UK. The “Everything started with the inspecon by newspaper asked a simple queson: how he [Mr Prosecutor's office of the Chysty Grunt and LLC Korniyets] with a salary of UAH 200,000 (US$ 7,600) Hydro Eco Resource Enterprises”, one of the a year, pays more than £120,000 (US$ 158,000) for witnesses told Kyiv's district court at the hearing his daughter's schooling? In response, the Office of regarding the case known as “Diamond prosecutors”. the Prosecutor General – on the grounds that New “In April 2015, it became clear to us [the owners of Time had disclosed confidenal informaon about the above companies] that we had exhausted all legal the ongoing invesgaon – asked the Kyiv district opons to fight off the consequences stemming from court to allow prosecutors to access all editorial the inspecon that could ruin both businesses. We materials related to the arcle. New Time claimed found the way to approach the office of prosecutor that the arcle relied on data from a Brish criminal and we learned that US$ 200,000 could solve our agency. The court, to dismay of many human rights problems. The money was agreed to be paid in three acvists and supporters, decided in favour of the tranches. First US$ 50,000 was paid for removing prosecuon. This decision, however, has since been security service forces from our premises; then, US$ changed on appeal in favour of New Time. 100,000 was paid for the criminal charges being dropped and the documents taken from us returned, and finally, US$ 50,000 was paid on top of the In May 2016, the President appointed the new previous payments.” prosecutor general – ²⁶ an experienced polician who, unfortunately, did not meet the legal

²⁶ Yuriy Lutsenko is former leader of the Bloc of party and a former leader of its facon in parliament. He is also a former minister of internal affairs. Chapter 3 | 55

prerequisite for this posion (he did not have a law “knowingly unfair” decisions, many stakeholders have degree). In order to appoint him, the Parliament, at stated that this provision is abused by prosecutors the request of the President amended (in a fast-track against judges in order to influence their decision- one-day legislave process) the law on public making. prosecuon. The way the appointment was carried According to a 2016 survey of judges, 5.5 per cent of out sent two important messages to an already all judges (and 6.6 per cent of trial court judges) scepcal public: in Ukraine, polical loyalty is above indicated that they had been threatened by the required qualificaons, and polical interests are prosecuon for refusing to make the “necessary above the rule of law. decision”; almost 3 per cent pointed to the fact that The appointment of the prosecutor general was allegaons made against them or proceedings followed by constuonal amendments (June 2016) launched had been done so under Arcle 375; a which addressed the status, authority and similar number of respondents indicated that in their independence of the public prosecuon: the public case other criminal code provisions had been applied. prosecuon became a part of the jusce sector,²⁷ the Indeed, even in 2017 the acquial rate at criminal authority of the public prosecuon was reduced to courts was extremely low (around 1 per cent). oversight of pre-trial invesgaons²⁸ and prosecuon of criminal cases and represenng the interest of the The new prosecutor general joined the service as a state before courts in all criminal and other cases as polician, and he remained a polician, causing defined by law. The risks of policisaon were difficulty with the reputaon of the public addressed through an extended non-renewable term prosecuon as an autonomous and imparal for the prosecutor general²⁹ and by abolishing instuon. He reset the goals of the public Parliament's power to cast a no-confidence vote in prosecuon to: freeing itself of corrupon and the prosecutor general. abuses of power; establishing a General Inspecon However, the constuonal principles, so far, have Office; and speeding up stolen asset recovery. He not trickled down to the level of laws and sub-laws, also changed the reform focus from structural and thus have had lile tangible effect on the way the systemic changes to capacity-building acvies. Lile public prosecuon operates. The public prosecuon explanaon was given as to how these objecves fit is perceived by many as connuing to have an into achieving the ulmate goal, which is to unhealthily close relaonship to execuve powers transform the Ukrainian public prosecuon into a and it also connues dominang judiciary using modern European procuracy. various “informal” avenues (Box 5). The Reform Management Unit and General Inspecon Office are now operaonal, but the GIO has been cricised for its preoccupaon with “annual Box 5. Undue pressure from prosecutors on judges³⁰ integrity checks” of prosecutors which are seen as a rather formalisc exercise. The self-governing The GRECO report draws aenon to the use by instuons (the Conference and Council of prosecutors of certain criminal offences – in Prosecutors and the Qualificaon and Disciplinary parcular, Arcle 375 of the criminal code “Delivery Commission of Prosecutors) were also put in place. of a knowingly unfair sentence, judgment, ruling or There is, however, lile evidence that would suggest order by a judge”– as a mean of pressure against any improvement in day-to-day operaons of the judges. Even though the leer of the law is limited to Ukrainian public prosecuon. The GRECO 2017

²⁷ Historically, the public prosecuon had a separate chapter in the constuon. Incorporang the public prosecuon into the jusce sector is indicave of the status of the instuons with regard to the court system. ²⁸ The powers of pre-trial invesgaon were transferred to the Naonal An-Corrupon Bureau of Ukraine (NABU) and State Bureau of Invesgaon by the law on public prosecuon. ²⁹ The Prosecutor General is appointed and/or dismissed by the President with the approval of Parliament. ³⁰ GRECO (2017) Chapter 3 | 56

Report³¹ idenfies the persistence of a general of incoming criminal cases prepared by prosecutors percepon that the prosecutors' office is policised was one of the lowest in the EU (0.3 per 100,000 of and corrupt and that misconduct by prosecutors the populaon) and it was decreasing. mostly goes unpunished.³² Furthermore, in Ukraine, the prosecutors have very Meanwhile, the prosecutor general has made several few staff to assist them with their tasks – 0.4 per aempts to circumvent obligaons to complete 100,000 of the populaon, which means 0.4 support structural changes, to reduce the public prosecuon's staff per 23.8 prosecutors. The explanaon is that power or staff,³³ or replace old pracces (for example, many support staff enjoy the formal status of a salary calculaons) with new ones. He also picked a prosecutor in order to receive a higher salary. very public “fight” with the Naonal An-corrupon The average gross salary of prosecutors in relaon to Bureau, in which he aempted to curb its authority. the naonal average salary was within the bracket All that, in the context of his habit of commenng on 1.7-4.4 (in relaon to the naonal gross salary) while polics which do not relate to public prosecuon in the case of judges it was 3.1-4. The median for further reinforces the percepon of his polical both was prey much the same. However, the formal affiliaon and biases. salary structure bears a lile significance as a big part of prosecutors' renumeraon comes from a complex Box 6. Ukraine's public prosecuon service: system of bonuses. the case for reform³⁴ As for the budget, in 2016, the allocaon for courts represented 64 per cent of the judicial budget In 2016, Ukraine, with 23.8 prosecutors per 100,000 (budget allocated to courts, the public prosecuon of the populaon had one of the most robust service and legal aid). The public prosecuon prosecutorial systems in the EU. The average and allocaon was 34 per cent. Compared to EU median number or prosecutor in EU was 11.7 and 11 countries the court allocaon was within normal respecvely. Ukraine also belonged to a marginal limits while the allocaon for the public prosecuon group of European countries with more prosecutors service was extraordinarily high. than judges. In 2016 the number of judges in Ukraine per 100,000 of the populaon was 14.8, which in In summary, the public prosecuon service emerges contrast to prosecutors, compared negavely to the from this short analysis as: too big and too expensive EU average or median (average 21.5 and median for the work it does. 17.8).

The number of prosecutors was also high relave to There is lile doubt that the reform of the public the funcons they perform. Ukrainian prosecutors prosecuon is of the utmost importance and hence it executed 10 out of 14 prosecutorial funcons, which should be one of the country's top priories. But is not unusual across Europe. The coefficient for the such a reform will not be possible without a strong scope of work for Ukraine prosecutors was 2.38 leadership that is genuinely commied to the (23.8/10). The EU average and median was 1.7 and 1 necessary reforms (adjusng organisaonal (the lower number the beer producvity). For structures, business operaons and capacies of comparison, Russia's performance was worse than prosecuon to its funcons). Based on previous Ukraine's at 4.2 (25.2/6); Lithuania scored 1.9 experience, one of the key risks to this reform is (24.4/13); and Latvia 1.7 (22.9/13). Ukraine's number strong opposion from inside the public prosecuon

³¹ Council of Europe’s Group of States Against Corrupon (GRECO), Fourth Evaluaon Round Report, Corrupon prevenon in respect of members of parliament, judges and prosecutors, 2017. ³² The authories disagree and stress that during the period January 2016 to March 2017, seven prosecutors were found to be criminally liable. Moreover, 89 indictments against prosecutors are pending in court. ³³ According to law, and in compliance with the reform process, the number of prosecutors naonwide was not supposed to exceed 15,000 by the end of 2015 (down from 18,000) and should have been down to 10,000 by January 2018. The relevant provisions of the law were amended in December 2018. ³⁴ CEPEJ (2016, 2018). Chapter 3 | 57

service itself. Both risks should be accepted and on the market for legal services,³⁹ efficiency⁴⁰ and carefully managed (Box 6). sustainability concerns.⁴¹

Legal aid Property registraon

Ukraine's commitment to human rights and freedoms In 2015 the Parliament passed a law⁴² aimed at gave a boost to the creaon of legal aid under the demonopolisaon and decentralisaon of state MoJ.³⁵ The law “On Free Legal Aid”³⁶ came into force registraons.⁴³ This reform was also driven by in 2011. It provided for legal counselling and efficiency concerns and business interests. The representaon for both criminal and non-criminal registraon funcons related to real estate were cases subject to “generous”³⁷ eligibility criteria. transferred from the state (MoJ) to notaries with Ukraine opted for a mixed legal aid approach, naonwide geographical jurisdicon. The law also combining the state-run system (employed managers replaced the 2013 property register with a new one and providers) with the market-based services of and legislated for the data transfer between these private aorneys. The public prosecuon connues two registries. The reform was implemented in aiding the most disadvantaged segments of tandem with the similar changes to the business populaon as outlined by the law. Legal aid reform registries. started with 27 regional and 100 local legal centres. By 2016, Ukraine found itself in the middle of many In 2016 legal aid schemes expanded to legal “corporate raiding” scandals through abuses of the empowerment of local communies through property and business registraons, which pointed to enhancing individual and business access to legal the alarming vulnerabilies of the system in terms of informaon and educaon. By 2018, through 550 its ability to protect property rights of end users of contact points some 1,600 in-house lawyers and both registries. In response, at the end of 2016 the 5,000 subcontracted aorneys served about 0.5 “An-raiding law” was passed with several measures million Ukrainians.³⁸ aimed at improving the efficiency and effecveness of registraons and reducing the risk of abuse.⁴⁴ The legal aid reform, if measured by the scope of Since, the MoJ and CoM have taken numerous service provided before and aer its compleon is acons (legislave and non-legislave) to (re)address one of the most successful reforms in Ukraine. The the problem. The reoccurrence of “raiding” and other queson is whether the programme has grown too abuses indicates that not all underlying causes of the fast, in the wrong direcon (legal empowerment as problems – parcularly the insufficient legal and defined by Ukrainian authories may not necessarily instuonal safeguards of protecon of property meet the internaonally recognised criteria of legal rights – have been sasfactorily addressed. aid) and/or without due consideraon of its impact

³⁵ Under socialist regimes the public prosecuon service was the main provider of free legal assistance. ³⁶ The law “On Free Legal Aid” No. 51 Art. 577. ³⁷ In some instances, legal aid has a form of entlement granted, for example to veterans, regardless of their actual needs and income. ³⁸ Presentaon of the Director of Legal Aid Centre published on hps://www.legalaid.gov.ua/en/. (Date accessed 30 January 2019). ³⁹ In 2016 the MoJ increased the price for services of private aorneys contracted under legal aid. The only reason that would jusfy such a decision would be that the MoJ was not able to retain the services of enough aorneys. This, however, was not the case. Given the scope of services and the number of lawyers subcontracted by the MoJ (about 4,000 registered) this has impacted (price increase) on the legal service market. ⁴⁰ Ukraine did not consider some other forms financing of legal aid such as: pro bono service; exempon from court fees; and covering the costs of experts. ⁴¹ Legal aid receives substanal assistance from donors. According to CEPEJ 2016 central European countries spend about €1 per inhabitant on legal aid. Ukraine spent €5. ⁴² The law “On Amendment of the Law on State Registraon of Property Rights to Real Estate and their Encumbrances” and some other laws. The law took effect on 1 January 2016, with a transion period unl 30 April 2016. ⁴³ Registraon of businesses was delegated to local self-government and state administraons, notaries and enes, accredited by the MoJ. ⁴⁴ The law No. 1666-VIII “On Amendments to Certain Legislave Acts of Ukraine on Improving the State Registraon of Rights to Real Estate and Protecon of Ownership Rights”. Measures introduced by the law include increased verificaon, legalisaon of and access to relevant documents, including court decisions criminalising certain forms of behaviour of registrars and owners/owners to be; abolion of the principle of extraterritoriality; mandatory noficaon of owners when acons are taken regarding their property; and establishing a permanent commission in the MOJ to review complaints and decide on appropriate acons. Chapter 3 | 58

According to the Support to Registries Report⁴⁵ the the geographical coverage of registries, increase underlying problem of Ukrainian property registraon transparency of informaon and improve the quality is the absence and/or insufficient flow of mely and of registraon infrastructure. More specifically, reliable informaon about the properes and their Ukraine needs to abolish assessments of property owners. For example. Ukraine has not yet mapped value (requested by notaries at the beginning of the land plots. According to the UNITER Project registraon process), introduce “bona fide” Corrupon Survey, in July-October 2015, around the protecon⁴⁸ and create an effecve, decentralised, me the property registries were decentralised, if easy-to-access complaint system.⁴⁹ measured by actual experience, notaries and Enforcement of court judgments property registries were the 9th and 10th most corrupt public instuons in the country (by The Maidan Revoluon mobilised social capital to comparison, courts and prosecutors took 16th and pursue the reform of non-enforcement of court 17th place). judgments. The reform was launched by creang a legal framework⁵⁰ (part of the 2016 reform package). A quick enquiry into EU countries' pracces shows The strategy was to complement the already exisng that for historic and praccal reasons most EU State Enforcement Service (SES) with about 4,500 countries maintain a land inventory (cadastre) and professional staff with a system of private enforcers registraon of relevant informaon about ownership (bailiffs) operang on market principles. The inial under strict state control, mainly because the state plan was to license about 3,000 bailiffs by the end of bears direct responsibility for the integrity of those 2020. It was believed that the coexistence of these systems' outcomes and is liable for registries' two groups would lead to healthy compeon, which mistakes. Therefore, they are rarely privased.⁴⁶ If in turn improves the enforcement of court decisions they are privased (for example, Denmark), addional and debt collecon. safeguards – legal, procedural and instuonal – are introduced to limit the opportunies for abuse. The However, there was very lile clarity in terms of state normally executes its responsibilies through a details of the strategy. The SES was given a broad central (administrave or judicial) office with a monopoly to collect debt from the biggest and most network of regional branches. In short, EU countries influenal debtors; the state, state enterprises and are very careful not to address the efficiency deficits municipalies and in socially sensive cases. The (for example speed and cost) of their property compeveness of bailiffs was further undermined registries at the cost of security of ownership rights. by the requirement to accept only cases whose value This can be also documented for example by the did not exceed their insurance premium. The MoJ performance of Germany, France and Denmark on remains in control of the fee schedule for the SES. the World Bank's Doing Business Property The compensaon of the bailiffs is set at a fixed Registraon Indicator.⁴⁷ amount (in case of enforcement of a non-monetary decision), a percentage of the amount to be enforced, According to the 2019 Doing Business report, to make or the value of the property. registraons “safer” Ukraine needs to improve

⁴⁵ European Commission/ENPI Support to Jusce Sector Reform in Ukraine EuropeAid/134175/L/ACT/UA/No2013/328-160, Support to Registers Reform, 2016. ⁴⁶ In Denmark, the registraon funcon was delegated to notaries only aer securing full compleon, automaon and integraon among all relevant registries and databases. In addion, the notary profession has been in existence in Denmark for very long me; it is a strong instuon with a mature self-governing system able to safeguard the integrity of its members. The profession was also corporased meaning it operates in bigger firms which allows for cross-checking of data as well as implementaon of strategies reducing the risk of abuse. Needless to say, Denmark belongs to the group of countries with a high level of rule of law and the lowest level of corrupon in the world. ⁴⁷ World Bank (2019). In 2019 Germany’s scores on the number of procedures, me and costs of property registraon was 6, 52, 6.7 and on the quality of land administraon 22. French scores were: 8, 64, 7.3, 24.5 and Denmark’s scores were 3.4, 0.6 and 24.5 respecvely. Ukraine’s scores were: 7, 23, 1.9 and 15.5 on the quality of registraon. ⁴⁸ “Bona fide” protecon (protecon of “good-faith pares”) is an integral part of the property rights registraon system across the EU. ⁴⁹ Ukraine has a centralised complaint system for business and property registries introduced to address the raiding related problems. The system is insufficient to deal with clients’ day-to-day problems in such a highly decentralised system. ⁵⁰ The laws “On the authories and officials performing enforcement of court rulings and mandatory resoluon of other authories” and “On enforcement procedures”. Chapter 3 | 59

At the beginning of 2017, the MoJ began designing a his commitment. Table 1 compares performance of licensing process and establishing a private bailiffs' services provided by SES and private bailiffs. professional organisaon. Due to the novelty and Table 1 complexity of the system and a certain level of confusion and unpredictability of the process, the Performance of state and private bailiffs total number of private bailiffs is very low (136), well A bird's eye view below the MoJ's own target of 800 by the end of 2018. As of now, this organisaon has lile capacity Since 2014, Ukraine has launched more reforms than to oversee and protect this newly emerging during the preceding twenty-five years.⁵² There are profession. The MoJ connues to regulate the market also signs that the reforms are yielding posive for bailiffs' services using typical command-control results. For instance, according to the World Bank's approaches. It also rounely and arbitrarily Doing Business report's measure of the ease of doing intervenes in selecon and disciplinary proceedings business, the property registraon reforms that took and the (re)distribuon of cases between SEO and place during 2011-15 led to Ukraine jumping from private bailiffs. 149th in 2013, to 70th place in 2015. Currently, Ukraine ranks 63rd among 190 countries. The 2016 The MoJ claims it connues to be commied to and legislave reforms that introduced the concept of supporve of enforcement reform⁵¹ as conceived in private enforcement improved Ukraine's rang in the 2016. However, unl recently, the situaon on the area of civil jusce under the RoL Index.⁵³ The 2017 ground, parcularly the MoJ's atude towards reforms of procedural codes⁵⁴ led to Ukraine's bailiffs, contradicted this claim. A few months ago, improved 2019 rang on the Contract Enforcement the MoJ (in cooperaon with the EU-funded Pravo Index according to the Doing Business report and the Project) enacted a roadmap for the reform of forced Property Rights Index (part of the Economic Freedom enforcement which, in addion to strengthening the Index).⁵⁵ private enforcement system and streamlining business operaons, intends to address the As we have said before, lack of trust by the public in preferenal treatment of certain categories of courts and the public prosecuon has been a chronic debtors (for example through enforcement moratoria problem in Ukraine. Between 2015 and 2018, the of by-laws or court decisions). However, “too lile, trust of the general public in the judiciary increased too late” applies to this otherwise advisable step as, from 5 to 16 per cent and in the case of the SC to 25 due to the approaching general elecon, the Minister per cent. The approval rate of the general public for of Jusce cannot guarantee the implementaon of specific judicial reforms ranks between 42-80 per

Table 1 2017 1st half of 2018 SES Bailiffs SES Bailiffs Received 2,224,517 cases 3,424 cases 1,295,773 cases 11,841 cases Value in UAH 333,122,846,875 716,199,864 181,926,553,736 5,725,660,753 Completed 2,450,329 cases 269 cases 1,156,039 cases 2,159 cases Value in UAH 258,463,712,704 57,638,974 86,935,520,095 915,208,192 Executed 823,135 cases (38.2%) 223 cases (82.9%) 441,191 cases (38.2%) 1,217 cases (56.4%) Collected 12,665,422,139 UAH 50,710,676 UAH 12,665,139 UAH 352,074,009 UAH

⁵¹ See for example the latest CMU Acon Plan for 2019; hps://www.kmu.gov.ua/ua/npas/pro-ritetnih-dij-uryadu-na-2019-rik. ⁵² T. De Waal and B. Jarabik (March 2018). ⁵³ The World Jusce Project. ⁵⁴ The code introduced a simplified procedure for small claims and pre-trial conferences as part of the case management techniques used in all commercial courts. ⁵⁵ Kim et al (2019): Rule of Law Cluster, Property Rights Sub-Index. The Economic Freedom Index is composed of four clusters of indexes: rule of law (property rights; government integrity and judicial effecveness); government size; regulatory efficiency; and open markets. Chapter 3 | 60

cent. The approval rang of legal professionals for itself. In this context, contract enforcement (high specific reform intervenons ranks between 52 and costs and lengthy process); suscepbility of the 70 per cent.⁵⁶ judiciary to undue influence; lack of public confidence in court effecveness; weak criminal Despite these and other achievements, the overall penales for corrupon; and the depth of corrupon picture of the RoL in Ukraine is unclear at best. The are singled out as the most crical of Ukraine's 2018 RoL Index⁵⁷ ranked Ukraine 8th (out of 13 problems. Both RoL indexes show a lot of ups and countries) in the European and Central Asia Region downs in the reform results which supports the view (ECA) and 77th (out of 110 countries) in the world. of many experts and donors that RoL reform in Ukraine is performing relavely well on the sub- Ukraine is underperforming, and more importantly, indicators: “fundamental rights” (3rd in the ECA); that the results of reforms may not be sustainable “open government” (4th in the ECA); and “civil and could be reversed. jusce” (6th in the ECA). Ukraine is rather under- performing in following areas: “regulatory The public's views on RoL reform and its enforcement” (13th in the ECA); “order and security” achievements are also more nuanced than presented (11th in the ECA) and “absence of corrupon” (10th above. For instance, 42 per cent of respondents to in the ECA). According to the RoL Index, the “Achilles the same survey with court experience had to use heels” of Ukraine RoL are: corrupon in the their relaonships, acquaintances and other means to legislature; lack of respect for due process (judicial as influence a desirable result – which is higher than in well as administrave); and a “second fiddle” 2017, when it was “only” 33 per cent. Some 53 per relaonship of courts with other government cent of legal professionals sought an intervenon of a branches. The laer translates into, on one hand, disciplinary body against a judge; almost half of their undue pressure on courts; and on the other hand, a complaints related to delays in court proceedings or lack of judicial oversight regarding these branches. other procedural violaons. Also, other surveys show High cost and unaffordability of jusce is emerging as more modest gains in court confidence. According to Ukraine's new challenge. The World Bank's Doing the Ukrainian Instute of Sociology the public's Business report echoes this claim. For example, confidence in courts grew between 2014 and 2018 according to the 2019 Contract Enforcement Index it from 5.3 to 7.9 per cent only. costs businesses 46 per cent of the claim value to Table 2 collect debt while the ECA and OECD average are 23.3 and 21.2 per cent respecvely. Ukraine, Economic Freedom Index, rule of law cluster The 2019 Economic Freedom Index, RoL Cluster Indicators (Table 2) points to the fact that “corrupon Score Rank in the Ukrainian public sector (including jusce Rule (out (out of 189 of law of 100) countries) Trend sector)” and “judicial inefficiencies”, are to be blamed Property for the country's poor results. Ukraine's rang is 43.9 113 Increase by 2.9 rights 147th (among 189) in terms of economic freedom. Government The good news is that Ukraine's rang has increased 29.6 128 Increase by 0.6 integrity slightly thanks to improvements, among others, in Judicial property rights. The bad news is that Ukraine is 21.6 135 Increase by 2.1 effecveness ranked 44th among 44 countries in the Europe region, and its overall score is below the regional and Total 99.5 Increase by 5.6 world averages.

The 2019 report stresses that Ukraine needs to improve both its legal framework and the rule of law

⁵⁶ Council of Europe/CEPEJ (2018). USAID funded the new Jusce Project Survey 2018. Note the approval is about the reform measures as such and not approval of the specific results. ⁵⁷ 2018 RoL Index (under the World Jusce Project) is composed of eight clusters of indexes with 44 sub-indicators. The clusters are: constraints to powers; absence of corrupon; open government; fundamental rights; order and security; regulatory order; civil jusce; and criminal jusce. Chapter 3 | 61

Why not more? with policies and laws; then it turned to implementaon, starng with the structural and So, why, despite all the effort, has Ukraine not systemic instuonal and procedural reforms in the achieved more progress in establishing the rule of priority sub-sectors – the courts and prosecuon law? To answer that queson, we need first to services – the pillar legal instuons. Indeed, both discuss the premise on which the queson is based: instuons are organised in centralised systems and that we know what has been achieved and that some changes, parcularly structural and systemic Ukraine could and should achieve more. In other reforms, are beer done centrally. The downside of words, we need to discuss the expectaons and the the approach is that it takes too long for the changes monitoring and evaluaon of RoL reform progress. to trickle down and translate into tangible results (services) that occur predominantly at the boom. RoL reforms penetrate the very foundaon of society Not only that, experience suggests that oen, these – its culture, values, formal and informal rules, reforms cause a temporary slow-down of systems instuons and power structures. Therefore, they are before the first results become evident. difficult and lengthy. In the words of Gordon Brown,⁵⁸ “In establishing the rule of law, the first five centuries are In addion, this type of reform involves a lot of always the hardest”. As such, to be successful, RoL complex interrelated tasks which must be priorised reforms need to create a broad coalion of and implemented in a specific order so that they, on parcipants and supporters, which is a difficult task. one hand, do not to interrupt day-to-day operaons, It is even more difficult to sustain this coalion and on the other, generate a new cumulave output. throughout the lengthy reform process. And this is expected to be done by instuons with less than opmal capacity and corporate culture. So, “Anger always comes from frustrated expectaons”.⁵⁹ usually, the results of such reforms are uncertain and The best answer to the risk of losing support is difficult to predict. seng up and managing expectaons for support (of reforms). Expectaon management in its essence is a The focus on the instuons (as opposed to services form of truthful disclosure regarding decisions, risks and users) also means that those in the instuons (including failures) and preconcepons.⁶⁰ This brings are the first beneficiary of the reforms (for example us to the issue of the monitoring and evaluaon of judges or prosecutors are beer educated, they have reform results. In Ukraine, the expectaons of results beer working condions and higher salaries). It is of RoL reform were set very high – too high to be somehow assumed that because of new condions, credible, parcularly for local frustrated and judges and prosecutors will provide a beer service. impaent stakeholders who have already This, however, may not be the case, if, for instance, experienced a lot of unfulfilled promises. Several these beneficiaries are corrupt, or the prevalent monitoring and evaluaon systems were set up by instuonal corporate culture is not conducive to the the government, professional organisaons and civil expected behavioural change. For instance, a corrupt society to measure reform results. Yet, reliable judge excelling in law (due to great training) is informaon about the RoL reform acvies is scarce unlikely to stop taking bribes if all around him sll do and insufficient to inform and influence stakeholders' so. Or, even a substanve increase of salary may not expectaons. stop a prosecutor from taking bribes because the corrupt network they are a part of does not let them Another challenge is that the Ukrainian people do “off the hook”. not trust the government and legal instuons, and they are eager to see tangible results of the reform. This chapter began by talking about cultural change – And they want them today! But Ukrainian RoL reform a goal that the 2015-20 strategy aspires to achieve. was designed as a typical comprehensive instuonal The strategy is correct in that, in order to generate reform with aspiraonal goals and a predominantly desirable results, Ukraine's RoL reform must cause an prescripve top-down approach. The reform began irreversible cultural shi not only among prosecutors

⁵⁸ The First Five Centuries, Global Trends 2030; Jul 24, 2012. ⁵⁹ Elliot Larson, psychologist hp://sourcesofinsight.com/expectaon-management. ⁶⁰ R. Malveau and T. Mowbray (2003). Chapter 3 | 62

and judges but in the whole of society – because the that period that “stuck” and were felt by ordinary culture of legal instuons reflects the society they people were those that did not challenge the exisng exist in. The strategy is incorrect that this can be power structure, such as the reforms of legal aid and achieved in five years. We are, aer all, only in the property registraon. These reforms however, beginning of the fih year of implementaon of the perhaps because of a narrow window of opportunity, post-Maidan RoL reform. were prepared hasly and implemented in a “learning by doing” style without full appreciaon of their risks Yet, there is something that can be done, besides and impacts. And they pay a price for that. Could reseng and managing expectaons, to speed up Ukraine have achieved more back then? There is no this process. Ukraine should consider combining the answer to this queson. current approach to the RoL reform with the so- called “problem driven” approach: a “boom-up” As for the me aer the Revoluon of Dignity, the method that would focus on a parcular problem list of the RoL reforms prepared and parally idenfied at lower levels (where the public has the implemented by Ukraine is truly unprecedented. most contact with the system) solvable without (or Ukraine made a strategic choice to focus reform alongside) bigger systemic changes using low-cost, efforts on the judiciary. The choice is fully jusfied by locally created soluons. Because, using this the role the judiciary plays in the legal system, the approach, soluons tend to emerge “as a puzzle, over impact of dysfunconal courts on the economy and me, given the accumulaon of many individual society and popular preference. The sequence of the pieces”⁶¹ its applicaon requires a de-concentraon reform (legislaon/instuons/human resources) is of the decision-making and unghtening “the hands” also strategically sound. of sub-naonal instuons. But as said before, the reform is extremely The current transformaon of the SC (the reform centralised and lacks focus on the users, tangible which through smaller organisaonal changes results and services that are necessary for sustaining focused on the needs of court clients and efficiency popular support and momentum. Also, the key reform gains within an exisng framework) and the legal aid policies were mostly conceived externally (to the reform (the large-scale innovave organisaonal sector) by local polical elites and technocrats with reform which leverages services through external the help of donors but with lile coordinaon and relaonships with private lawyers and municipalies) cooperaon with judges and other crical players. set a precedent for the above approach. The legal aid Excluding these players from the bargaining table reform also proves that this approach generates more was a deliberate choice made on the basis of judges' services and more sasfied users which, without a and/or prosecutors' collecve lack of moral credibility doubt, is a must for Ukrainian legal instuons if they and their prevalent “an-reform” atude. want to gain the trust of society and for the reforms Today, we know that about 80-90 per cent⁶² of if they are to connue. judges appointed before 2014, will likely remain on Finally, it is the me to answer the original queson: the bench and will parcipate in the new judicial self- why not more? As already discussed, prior to the governing structures, in which capacity they assume Revoluon of Dignity the Ukrainian context was not the role of policymakers. In other words, power conducive to the structural and systemic reforms that distribuon in the policy arena of the jusce sector would lay down the foundaon of RoL. Several has changed significantly compared to the situaon aempts were made – usually under pressure from in 2016. Several signals sent by jusce instuons the internaonal community – to address the most (for example the unwillingness of HQCJ to give up pressing issues (such as the broad scope of powers of excessive discreonary powers; the Constuonal the public prosecuon service). However, these Court's decision which declares the concept of iniaves never had much influence on the day-to- “illegal enrichment” unconstuonal; or the refusal of day lives of ordinary people. The only reforms from members of the SCJ to recuse themselves from the

⁶¹ L. Pricke, M. Woolcock, M. Andrews (2013). ⁶² The esmate is based on the results of the re-evaluaon of judges as of April 1, 2019 (R. Kuybida, M. Sereda, 2019) and HQCJ stascs for the first round of 2017 selecon of the SC judges. It should be treated with cauon. Chapter 3 | 63

appointment process they parcipate in as one of the Box 7. Reforming court fees competors) indicate that “the going gets tougher”. In pursuit of the economic self-sustainability of the Overall, not enough me has passed for the reform court system, between 2012 and 2016, Ukraine to generate significant outputs and outcomes in the increased court fees twice; most recently in 2016 by form of faster court proceedings, beer judgments or 142 per cent. As a result, in 2017, 57 per cent of reduced corrupon, for example. Actually, only very courts' costs were paid for by court users (EU few reforms have been completed. The evaluaon of average cost recovery is 18 per cent and median 12 judges' qualificaons is an example of a rushed per cent). The current naonal policy is the full reform with quesonable results. As of now, using recovery of court expenses. While paying fees for various processes, about 2,459 judges have been court services is common pracce, full recovery of assessed of which 156 (6 per cent) were court costs through the court fee is not. There is only recommended for dismissal but only 15 (0.6 per cent) one country in Europe which recovers 117 per cent were actually dismissed. As for wrien knowledge of the court budget through court fees – Austria. tests – 4,158 judges have undertaken tests since However, Austria was able to apply a self-financing 2016. The success rate of applicants has been 98 per model because 80 per cent of cases in courts are cent.⁶³ By comparison, the success rate of Slovak non-ligious (for example registraons of property judges aer knowledge tesng is below 30 per cent. rights) disposed in extremely streamlined process by This explains, at least to some extent, why Ukraine's non-judges and high levels of court automaon. rangs connue to be stubbornly poor. But given the The number of non-ligious cases in Ukraine's courts me and local context – for example power is negligible. In the Ukrainian context, (a high level of imbalances (that induce addional uncertainty distrust in courts because of their inefficiencies and regarding ability to implement the reform); an extremely high level of corrupon) the increase in absorpon capacity of Ukrainian instuons and the court fees should be reflected in a commensurate severity of the challenges faced – the real queson increase in the quality of service the users receive. is: “Shouldn't Ukraine do less?” to be able to make Nothing suggests that the quality of the service of sure that each piece of the mosaic falls in its place Ukraine courts has jusfied the radical increases in and all loose ends are ed up. In development, oen court fees. More importantly, any raising of court “less is more”. fees should take into consideraon its impact on However, there are a few reforms of which we may court users. say: “More could have been done”. The list of There are also indicaons that the increase in fees neglected reforms includes the areas of: legislave was applied selecvely to disputes of the state, draing, the public prosecuon service and ligaons involving taxes and criminal prosecuons enforcement of judgments. The reason for delays in which can hardly be seen as “a self-financing” model the implementaon of all three reforms is a lack of in the sense of absence of financial injecons from polical will and courage, commitment and the state budget. leadership. Also, Ukraine has not paid enough aenon to a new challenge that emerged from the ruins of socialist legacy where “jusce was for free”: an economic barrier to jusce. The RoL Index, the CEPEJ⁶⁴ reports and some local surveys and measurements points to the high costs/unaffordability of jusce as the new Ukraine RoL challenge (Box 7).

⁶³ Center of Policy and Legal Reforms: Qualificaon Assessment of Judges, Summary of Interim Results. ⁶⁴ Council of Europe European Commission for the efficiency of jusce (CEPEJ). ⁶⁵ This secon is not a comprehensive analysis of Ukraine’s An-corrupon Reforms. In synch with Chapter 1 “Polical economy of reforms, governance, polical system, sources of corrupon” it focuses on three elements of an-corrupon approach: scope for corrupon; transparency and accountability. Chapter 3 | 64

What was done⁶⁵ Box 8. An-corrupon reform: progress and challenges An-corrupon policy According to the OECD, Ukraine's main Corrupon was one of the catalysts for the Ukraine's accomplishments since 2015 are the formaon of the Revoluon of Dignity. In 2014, capitalising on the legislave, policy and instuonal foundaons for momentum sparked by the Revoluon, Ukraine fighng and prevenng corrupon and pung in enacted a Naonal An-corrupon Strategy 2014- place various transparency iniaves. GRECO echoes 17⁶⁶ and moved toward creaon of integrity the OECD's conclusion and points to Ukraine's poor instuons.⁶⁷ In 2018 the Naonal Agency for results in reducing impunity for corrupon. Both Prevenon of Corrupon (NACP) prepared a new organisaons agree that the most pressing challenge strategy which, however, has not been adopted by is how to preserve and strengthen the new the parliament.⁶⁸ instuonal framework and boost an-corrupon Ukraine's an-corrupon strategy mirrors the an- efforts. They idenfy two crical risks to the an- corrupon programmes of the Organisaon for corrupon reforms: weakening support from some Economic Cooperaon and Development (OECD) top officials/instuons and Ukrainian elite; and a and the Council of Europe's Group of States Against lack of measurable outcomes parcularly in terms of Corrupon (GRECO) carried out in Ukraine since reduced percepon of and/or actual corrupon. 2004 and 2006, respecvely.⁶⁹ The goals of the In its 2018 report “Are Ukraine's An-Corrupon strategy are ambious.⁷⁰ The approach to corrupon Reforms working?” Chatham House states that some is determined by meeng internaonal obligaons of Ukraine's an-corrupons reforms are slow. But and standards. The strategy assumes that the this is not atypical as a transion of this kind oen aggregate level of corrupon can be reduced by takes around 50 years. Ukraine's biggest an- creang a legal and instuonal framework; corrupon accomplishment so far, according to the providing incenves to outweigh gains from corrupt report, has been restricng the opportunies for pracces; and reducing space for corrupon by corrupon. The success stories include: the cleaning streamlining administrave processes. The up of Naogaz and reforms in administrave implementaon of the strategy has focused mainly services, banking, police patrols, procurement and on creang a formal instuonal and legal taxaon. Chatham House also stresses that punive framework. The progress has been lagging and measures alone have limited impact on the level of results achieved in terms of reducing corrupon in corrupon, hence they should be considered in the public life have been rather modest.⁷¹ (Box 8)

⁶⁶ The Law “On the Principles of State An-Corrupon Policy in Ukraine (the An-Corrupon Strategy for 2014-2017)”. ⁶⁷ The integrity network included the Naonal Agency for Corrupon Prevenon; the Naonal An-corrupon Bureau of Ukraine; the Specialised An-corrupon Prosecutor’s Office; and the Agency for Recovering and Management of Assets. In 2016, Ukraine decided to create a specialised an-corrupon court which became part of the network. ⁶⁸ In the opinion of Viktor Chumak, deputy chairman of the Commiee on Prevenon and Combang Corrupon: “This is not a strategy. It’s just a chaoc set of acvies, wishes, someone’s visions. Strategy is an image. It should answer the queson what we will do in order to come to something”. hps://opinionua.com/en/2018/06/06/let-the-corrupon-wait-the-strategy-needs-to-be-finalized/ See also hps://opinionua.com/ en/2018/06/06/let-the-corrupon-wait-the-strategy-needs-to-be-finalized/ and hps://ukraineoffice.blogacv.eu/2018/07/16/fighng- corrupon-by-touch-or-why-ukraine-sll-does-not-have-an-ancorrupon-strategy-for-2018-2020/. ⁶⁹ Ukraine joined the Organizaon for Economic Cooperaon and Development An-corrupon Network (OECD ACN) for Central and Eastern Europe (the Istanbul An-corrupon Program) in 2003; became a member of the CoE’s Group of States Against Corrupon (GRECO) in 2006, rafied the UN Convenon Against Corrupon in 2009 and joined the Open Governance Iniave in 2011. ⁷⁰ The an-corrupon strategy 2014-17 pledged to “reduce the level of corrupon, increase public confidence in the government and increase the level of foreign investment in the state’s economy.” Examples of specific reforms included in the strategy are: financing of polical pares; regulang lobbying; addressing conflicts of interest; improving the quality and integrity of civil servants, judges and prosecutors; reducing their immunies; adjusng the renumeraon system; introducing monitoring of lifestyle of public officials; strengthening whistleblowers’ protecon; and liability/accountability mechanisms. ⁷¹ In 2018, Ukraine was ranked 120th most corrupt country in the Transparency Internaonal corrupon percepon index (scoring 32 out of 100 points), a five-point improvement since 2015. Throughout the enre period, Ukraine was lagging behind both ECA (30 countries) as well as the EU average score. A more detailed assessment of Ukraine’s implementaon progress can be found at hps://-ukraine.org/en/project/control-over-public-procurement/. Chapter 3 | 65

context of an overall strategy for reducing the space Experience and research show that an-corrupon for corrupon to occur. In the future Ukraine should reforms as described above (though effecve in the focus more on the prevenon of corrupon. The most developed and prosperous founding countries overall approach should be based on increasing of OECD) do not work well in countries such as compeveness in the economy and polics, Ukraine where development lags and rule of law is reducing opportunies to exercise discreon and applied selecvely according to individual status. This increasing accountability for corrupon.⁷² is because they do not tackle the underlying causes of corrupon, which relate to Ukraine's overall Vox Ukraine agrees with Chatham House's emphasis socioeconomic development,⁷⁵ including prevailing on good results in the arena of public procurement, social norms (for example, higher tolerance of corrupt deregulaon and banking sector clean-up.⁷³ behaviour), power structures (for example, persistent The “Reanimaon Package of Reforms” (RPR)⁷⁴ holds power imbalances), and a lack of commitment of the that Ukraine has underperformed in both instuon ruling elite to forego their privileges.⁷⁶ building and reducing opportunies for corrupon. It The relaonship between corrupon and agrees with the OECD and GRECO that the first development runs deep. There is evidence that priority should be to salvage the progress made so development, by redistribung power and changing far. This should include enabling the criminal an- norms in the policy arena, explains as much as half of corrupon instuons to do their job and “fixing” the the variaon in the control of corrupon. This makes NACP. RPR's proposal for future reforms includes development the key factor that maers in reducing strengthening all integrity instuons, addressing corrupon. The fact that development addresses polical corrupon, strengthening enforcement of “only” 50 per cent of corrupon means that even right and access to informaon and carrying out countries at lower levels of development (such as structural reforms to reduce opportunies for Ukraine) can be successful in implemenng an- corrupon. corrupon reforms provided they choose an appropriate strategy.⁷⁷ Three things undermine the effecveness of the Ukraine ranks 88th among 189 countries on the strategy: Human Development Index which measures overall • detachment of the an-corrupon reform from development.⁷⁸ The comparison of Ukraine's Ukraine's overall developmental process development status with the absence of corrupon • lack of commitment from Ukraine's ruling elite to (measured by the Governance Indicator of Absence an-corrupon reform of Corrupon) shows that Ukraine (along with for • weak instuonal capacity to produce and example, Russia and Azerbaijan) greatly implement a more effecve strategy and policies. underperforms on control of corrupon given its level of development.⁷⁹ This signals, on one hand, An-corrupon, development and reducing that the current an-corrupon reform strategy (with opportunies for corrupon. focus on the formal instuonal system) may not be

⁷² OECD Fourth Ukraine Evaluaon Report and GRECO Fourth Ukraine Evaluaon Report. ⁷³ Vox Ukraine “Three Years of Reforms”, hps://voxukraine.org/longreads/three-years-of-reforms/index-en.html. ⁷⁴ The largest coalion of leading non-governmental organisaons and experts from all over Ukraine who have pooled their efforts to facilitate and implement reforms. ⁷⁵ Development is muldimensional; it encompasses the need and the means by which to provide beer lives for people. It includes not only economic growth but also human development—providing for health, nutrion, educaon and a clean environment. By UN, World Bank and IMF classificaons, Ukraine is lower-middle-income developing country. ⁷⁶ World Bank (2017). ⁷⁷ Ibid. ⁷⁸ The Human Development Index (HDI) is a stasc composite index of life expectancy, educaon and per capita income indicators, which are used to rank countries into four ers of human development. It involves three main cluster indicators: Long and healthy lives; Access to knowledge and Decent standards of living. In 2017, on the HDI, Ukraine ranked 88th among 189 countries with a score of 0.751. In 1990 Ukraine’s score was 0.7. hp://hdr.undp.org/en/content/human-development-index-hdi ⁷⁹ World Bank (2017) pp. 79 Figure S1.1. Chapter 3 | 66

the best fit for Ukraine. On the other hand, it points Instuonal capacity to produce and implement the to the existence of a window of opportunity for a an-corrupon strategy. different an-corrupon reform in Ukraine. The NACP is responsible for the prevenon of Commitment of Ukraine's elite to fighng corrupon. corrupon, including designing relevant strategies and policies.⁸³ Since its creaon NACP has been Disengagement of Ukraine's ruling elite from the subject to heavy cricism on the grounds of lacking an-corrupon reform has to do with the fact that operaonal capacity, transparency, independence new an-corrupon rules undermine their interests. and integrity. Indeed, since 2016 when it was Ukraine's reality is that oligarchs can sll comfortably established, NACP has failed on many crically generate rents in informal ways through their polical important tasks, producing an effecve an- connecons. Judges can sll accumulate unexplained corrupon strategy among them. NACP's failures are wealth without being dismissed. And polical pares a funcon of several factors including: inadequate sll depend on revenue raised informally (from policies (for example, it was obvious that that the e- oligarchs and interest groups) and/or by breaking the asset declaraon system involving millions of law. Therefore, neither group would support and/or individuals was too ambious for a completely new enforce rules that significantly change the status quo. instuon); large porolio of different But there is also evidence that an-corrupon responsibilies; less than opmal instuonal policies can be effecve only when their enforcement architecture (for example, collecve decision- is aligned with the interests of the ruling elite. Simply making); weak capacies and confusing leadership put, the buy-in of the ruling elite is necessary for the (for example, rotang mechanism of several leaders). an-corrupon strategy to be successful and that To address this challenge, the instuonal concept of involves the exchange of commitment of the elite for NACP has to be reviewed and the instuon their personal benefits.⁸⁰ “rebooted”. What can be done? Doubtless the state has important role to play in confronng corrupon Transparency and access to informaon which calls for formal rules and instuons. Hence building a state system capable of fulfilling state Ukraine's quest for greater transparency started in responsibilies must be a part of an an-corrupon 2011 with passing the law “On Access to Public reform. However, Chatham House⁸¹ and the World Informaon”. As of now, Ukraine has achieved an Bank⁸² make a convincing argument that in the unparalleled level of transparency by introducing the context of Ukraine, building instuons is not e-asset disclosure, e-procurement, opening of the enough and that Ukraine should focus on reducing public registries with property rights informaon opportunies for corrupon by implemenng (land cadastre, immovable property rights, vehicle problem- and/or sector-focused reforms that and business registraons), and making a number of contribute most to its overall development. In other datasets publicly available in open data format words, Ukraine's new an-corrupon strategy needs (data.gov.ua comprises more than 300 data sets). to be more aligned with the country's overall development programme and should aack In 2014, Ukraine introduced a concept of “ulmate corrupon at crical points where an-corrupon is beneficiary owners” forcing businesses to reveal who both feasible and has a high impact on development. owns, controls and benefits from their companies. A It must also accommodate the interests of the ruling year later the same measure was applied to the elite. broadcasng companies to migate the negave

⁸⁰ Ibid. ⁸¹ J. Lough and V. Dubrovskiy (2018). ⁸² Oen, when policies and technical soluons fail to achieve their intended outcomes, instuonal failure takes the blame, and the soluon usually proposed is to “improve” instuons. ⁸³ NACP's explicit responsibilies include overseeing formaon and implementaon of an-corrupon policies; monitoring the lifestyle of public officials; regulang conflicts of interest; protecng whistleblowers; and prevenng polical corrupon. Chapter 3 | 67

effect of the concentraon of their ownership in the rules and the absence of criminal liability.⁸⁵ The ODB hands of four oligarchs (Kolomoisky, Pinchuk, Firtash measure also points to Ukraine's uneven and Akhmetov). In 2017, Ukraine was the first performance across different areas/sectors as well as country to join a cross-country database of to the rather weak management of data. beneficiary owners. In 2015, the Parliament enacted The ability of Ukraine's cizens to use online tools the Law “On Open Use of Public Funds” to prevent and social media and thus make the best of corrupt pracces in the public sector. Some posive e-services provided by the government and/or steps were later taken regarding taxaon and exercise social accountability is key to the customs, for example, the electronic register for VAT effecveness of open data policies. However, reimbursement. In 2018, the Law “On Transparency of according to the 2017 Index of Public integrity Extracve Industries” was adopted. indicator Ukraine (sub-indicator e-cizenship) the use In 2018, the Open Data Barometer (ODB) included of online tools by Ukrainian cizens is low.⁸⁶ Ukraine among 30 leading open data countries. With Accountability and impunity a score of 47 (out of 100) Ukraine ranked 18th in the group. ODB praised Ukraine for “tremendous” Strengthening instuonal accountability is one of progress it made between 2015 and 2018 during the most efficient ways to combat corrupon.⁸⁷ A which me its score increased by 25 points. Ukraine funconal accountability system involves a complex received 60 (out of 100) points on “Readiness”, 52 and interrelated vercal (accountability of the points on “Implementaon” and 28 on “Impact” of its parliament to the people), horizontal (accountability policies.⁸⁴ among the branches of the government) and diagonal (media and NGOs) accountability mechanisms. The ODB evaluaon points to the strength but also Ukraine's main challenge is a lack of basic to further opportunies for Ukraine's commitment to understanding of the situaon (both de jure and de transparency and openness. Ukraine is performing facto) in this area and the absence of a systemic well in making data available and accessible. approach to building and/or strengthening However, Ukraine sll faces a challenge to make accountability systems. It is a common trend (and these data aconable, which can be evidenced, for Ukraine is not different) that it takes a long me for example, by a low number of convicons stemming de jure accountability to translate into a funconal de from e-asset disclosure or minimal impact of the facto system, and that accountability systems evolve regime of ulmate beneficiary owners, mainly due to differently.⁸⁸ the ineffecve penales for non-compliance with

⁸⁴ The leading open data countries are evaluated by three cluster indicators: “Readiness”; “Implementaon” and “Impact” of their open data policies and acons against 31 sub-indicators. For the “Readiness” indicator, Ukraine scored the highest score (72) on the sub-indicator “Government acons” and the lowest score (52) on “Government policies” and “Enterprises and businesses”. Regarding the “Implementaon” indicator, Ukraine's highest score was on “Public contract” (85 per cent) and “Legislaon” (80 per cent) and the lowest on “Land ownership data” (5 per cent) and “Naonal environment stascs” (25 per cent). In terms of data management, Ukraine achieved the highest score on “Existence” and “Availability” of data (100 and 96 per cent respecvely) and the lowest score on “Provision of idenfiers for key elements in the datasets” and “Licensing data” (4 per cent) and on “Availability of machine-readable and reusable data” (12 per cent). As for the impact, the best score was received on “Economic” and the worst on “Social impact” – 45 and 5 per cent respecvely. ⁸⁵ For details regarding e-procurement see Chapter 1 on page 10. ⁸⁶ Index of Public Integrity, on the e-cizenship indicator Ukraine’s performance is among the worst in the region of 14 countries. Only the Kyrgyz Republic and Tajikistan score worse. hps://integrity-index.org ⁸⁷ Klitgaard, (1988), p. 75: Corrupon = Monopoly + Discreon - Accountability. ⁸⁸ Staffan et al. (2017) On the grounds of experience from 173 countries from 1900 to 2017 the paper concludes that: de facto vercal accountability can evolve before other types of accountability; horizontal accountability is conngent on progress in vercal and diagonal accountability; without fully free and fair elecons, autonomous opposion pares and a developed civil society and media, no country in the world has achieved effecve government oversight through independent high courts, vigorous parliaments or other instuons. This suggests that efforts to improve freedom and fairness of elecons and the situaon of opposion pares can have posive repercussions for other areas of accountability as well. The judiciary and legislature have stronger incenves to oversee the acons of the execuve if members of parliament are held accountable through free elecons and funconing polical pares, and if, at the same me, the media scrunises the work of judges and legislators, and civil society organisaons push for implemenng the checks and balances between instuons. The best an-corrupon tools are those which do not rely on the government alone, rather they cut across state and society. Chapter 3 | 68

Lack of progress in enforcement of criminal accused and 44 suspects – indicate improvements in accountability is primary a funcon of the lagging the ability of the enforcement system to bring reform of accountability measures, including the perpetrators of corrupon to jusce. The NABU system of criminal jusce (invesgaon, stascs also suggest that out of 176 cases pending apprehension and prosecuon of embezzlers, bribe- in the courts (as of the end of 2018) in 46 cases (26 payers, bribe-takers and those laundering the per cent) the courts have not scheduled/carried out a proceeds of corrupon). hearing; only 36 cases have been decided, out of which in 25 cases the court upheld the A lack of progress in reducing impunity for corrupon NABU's/SAPO's convicon. In three “serious cases” has been recognised as a downfall of Ukraine's an- the court hearing has not been scheduled – with me corrupon reform. It took quite a long me for lapses of 25, 24, and 21 months. (NABU Ukraine to bring its framework for criminalisaon of hps://nabu.gov.ua/en/reports) corrupon in line with internaonal standards (achieved in 2014). A few issues remained to be addressed (mainly clearer definion of the corrupon NABU and the Specialised An-corrupon crimes and a statute of limitaons)⁸⁹ when in Prosecutor's Office (SAPO) invesgate and prosecute February 2019 the Ukrainian Constuonal Court high level corrupon. Courts are the weakest link in declared the arcles of the Criminal Code that the chain of integrity instuons involved in criminal provided for liability for illegal enrichment to be proceedings as the judges – generalists who carry out unconstuonal. All donors and internaonal this jurisdicon – have few incenves to proceed on instuons as well as a group of local experts corrupon cases. This is just one of the reasons why expressed the view that this decision was both a specialised an-corrupon court (homogenisaon unconstuonal and in violaon of internaonal and concentrated adjudicaon and, possibly, harsher standards, poinng to the example of similar legal punishment) is needed for Ukraine. But even a frameworks in other countries. Regardless, the complete chain of integrity instuons may not be decision is irreversible. Since February 2019, 65 enough to cut through the vicious circle of corrupon criminal proceedings regarding illicit enrichment were if underlying causes of corrupon are not addressed. fully or parally closed. Even if a new law could revive its criminalisaon, one of the key RoL What to do next? principles – that the law must not have a retroacve effect – will prevent it from bringing the perpetrators Ukraine should consider the following approaches to to jusce. The overall impact of the decision remains RoL reforms/acvies. to be seen. Reform policies and reform management

Challenges to be addressed: Box 9. NABU's stascs • RoL reform is a long-term complicated endeavour According to NABU stascs since 2016, the office involving mulple levels of instuons, iniated 635 invesgaons; 176 cases were sent to beneficiaries and other stakeholders, and its the courts; the cases involved 153 suspects and 292 objecve extends beyond one polical cycle. The accused out of which 28 were indicted. The value of success of the reform requires consistent damage caused by these cases is UAH 220 billion, implementaon over me (regardless of changing out of which so far only UAH 452 million was circumstances) which in turn, relies on credible recovered. Stascs for the second half of 2018 – commitment by all actors to play their respecve 577 invesgaons, 32 submissions to the courts, 61 roles. In addion, the reform is not possible

⁸⁹ The statute of limitaon for corrupon offences is mostly three or five years; for administrave offences, two years. The OECD recommendaon has been to expand a statute of limitaon for all corrupon offences to at least five years and provide for suspension of the statute of limitaons during the period an official enjoyed immunity from criminal prosecuon. See also EU 3DCFTA, an-corrupon policies in Georgia, Moldova and Ukraine, 2017, hp://www.3dcas.eu/ Chapter 3 | 69

without effecve leadership, coordinaon and Jusce sector cooperaon between all actors.⁹⁰ Overall, the jusce reform should build on the • The 2015 strategy is the umbrella RoL policy progress that has been achieved so far through document. The credibility of the policies have been structural changes. To do so, however, may require a less than opmal due to a lack of reliable major stocktaking analysis and broad consultaons underlying research, understanding and with stakeholders (including the ruling elite) to build a communicaon of the underlying causes of consensus as to what does or does not work and problems, over-ambious goals, weak strategic hence should be corrected. focus and priorisaon of reform intervenons, ineffecve leadership, as well as fragmented Economic barriers to jusce oversight of implementaon and consequently Challenges to be addressed: poor cooperaon and coordinaon among the key players.⁹¹ Monitoring and evaluaon of • Growing economic barriers to jusce due to the implementaon has been incomplete, and rapid increase of court fees (a result of the inconsistent (in terms of me and accuracy of misplaced policy of court fiscal self-sufficiency), informaon). costs associated with legal services, parcularly representaon in courts and costs associated with Recommendaons: the enforcement of judgments.⁹³ • A new RoL strategy is due in 2020. Ukraine should Recommendaons: use this as an opportunity to address the above challenges. The new strategy should be prepared in • Evaluate the impact of all policy decision/laws and a parcipatory process, it should be informed by sub-laws on the price and/or costs accruing to the solid empirical research; it should be prepared users of courts (cizens and businesses) and using a credible methodology that would allow receivers of legal services (provided by aorneys, consideraon of most, if not all, relevant factors notaries and other legal professionals) or the state. (include polical economy analysis for example); • Remove the legal constructs that impose the implementaon structure should be unnecessary and/or unreasonable burdens on consolidated and have sufficient capacies to users/clients of the jusce sector and or allow for perform the key funcons, including the effecve rent-seeking behaviour. monitoring and evaluaon system. • Make sure that the evaluaon of above impact is a • The strategy should clarify the role of civil society part of policy/decision-making. and make sure that their representaves have access to sufficient informaon and capacity to Judiciary perform their respecve funcons. Challenges to be addressed: • Legislave reform could become a part of the RoL reform.⁹² In any case, these two reforms should be • The modernisaon of the selecon and evaluaon closely coordinated and the new strategy could of judges is the most important reform provide a plaorm for this union. implemented since the Maidan Revoluon. The

⁹⁰ World Bank (2017). The World Development Report 2017 defines commitment as backing consistent policies over me to ensure promises are delivered; coordinaon as shaping expectaons to enable complementary acon; and cooperaon as providing its due contribuon and liming opportunisc behaviour to prevent free-riding. ⁹¹ The RoL reforms have been coordinated by the Office of the President (the constuonal reform, court reform, the regulaon of market for legal services by aorneys and the codificaon were overseen by the Office of the President; the reforms implemented by the Ministry of Jusce (for example, the reforms of civil judgment enforcement, registraons (including land and business registraons) legal aid and penitenary reform were overseen by the Cabinet of Ministers and the reform of public prosecuon lacked any oversight. ⁹² World Bank WDR (2017): “Law and the legislave process are powerful instruments for balancing powers and the reshaping of the policy arena. Law can be used as a commitment and as a coordinaon device to promote accountability and foster equitable bargaining space. Law can play a role in shaping incenves to comply with agreements [societal]; it orders desirable behaviour and reshapes preferences and coordinates expectaons.” ⁹³ Regarding court fees see Box 7. Regarding the cost of legal representaon and enforcement of court decisions see “A bird's eye view” secon and DB 2019 Report on Contract Enforcement Indicators. Chapter 3 | 70

results of the reform are mixed. It had a promising discreonary powers. Make sure that the PIC's start: around one third of sing judges has le the capacity matches the scope of its responsibilies. judiciary following announcement of the reform. Make sure that the interpretaon and applicaon But then, up to 96 per cent of sing judges who of the principles of “burden of proof” and underwent re-evaluaon have been so far re- “reasonable doubt” are applied consistently across appointed and only one per cent of them were all selecons in the same way they were applied to proposed for dismissal.⁹⁴ The vast majority of newly the selecon of judges for the an-corrupon selected judges are judges from pre-Maidan court. mes.⁹⁵ The court corporate culture does not seem • Develop a human resources (HR) strategy. The HR to have changed much and the evidence points to strategy should arculate staffing needs and connuing lack of judicial independence and immediate- and mid-term staffing goals. One of the corrupon in the courts. The court accountability goals should be improving the integrity of system is ill prepared to migate the fallout of a personnel and the strategy should provide a less than fully successful aempt to vet judges who roadmap of how to achieve this. do not meet the necessary requirements to sit on a judicial bench. • Create a performance monitoring and evaluaon system. The new system should extend to • The follow-on reforms will increasingly refocus individual performance and should focus on ethics. from structural to capacity building efforts. It should include monitoring of judges' ethics by Inadequate understanding of the performance of civil society and regular user sasfacon surveys. courts in the post-Maidan reform context results in ill-informed policies in such areas of court • Review and strengthen accountability systems in management as: due process;⁹⁶ court fees the sector, for example, conduct an in-depth sector schedule;⁹⁷ the concept of court/judge corrupon diagnosc, strengthen complaint performance; and the role of civil society in mechanisms and improve the effecveness of monitoring the judiciary. disciplinary systems. • Review and revise, as necessary, the law on court Recommendaons: fees. • Stop and/or slow down the re-evaluaon and • Review and revise the policies regarding the role of appointment of judges. civil society in the selecon and evaluaon of • Review and revise the relevant policies and judges. Make sure that the rules (laid down in laws regulaons from the point of view of their but also regulaons of HQCJ) are developed in funconality – the ability to deliver desirable close consultaon and based on consensus with results. The review should also reflect on the civil society. lessons learned from previous processes; advice of Public prosecuon internaonal experts and donors⁹⁸ and proposals of the PIC and broader stakeholders such as business Challenges to be addressed: community and professional organizaon. • Lack of coordinaon between reform of the public • Review the regulaon on the PIC. Make the PIC's prosecuon and the rest of the RoL reforms. parcipaon in the process of judicial evaluaon • Insufficient progress on structural and systemic mandatory and significantly reduce the HQCJ's reforms.

⁹⁴ R. Kuybida, M. Sereda, (2019) ⁹⁵ For instance, according to HQCJ stascs, 74 out of 113 candidates appointed to the SC in November 2017 were sing judges. ⁹⁶ The 2018 Rule of Law Indicator; the New Jusce Project Survey 2018 and the 2018 edion of CEPEJ Evaluaon of Judicial Systems Report all point to the fact that a due process is a major issue in the Ukraine courts. The CEPEJ Report shows that Jusce expenses (costs related to the court process for example reimbursement of experts, witnesses) were as low as 0.01 per cent – far below what other countries spent on their courts. ⁹⁷ The same sources also idenfy unaffordability/high costs as an emerging concern for Rule of Law. According to the 2016 CEPEJ Evaluaon Report, between 2010 and 2016 Ukraine increase court fees twice – in 2012 by 1,273 per cent and in 2017 by 142 per cent. ⁹⁸ For example, G. Stawa et al.(2018) hps://www.pravojusce.eu/storage/app/uploads/public/5c0/fcd/a31/5c0fcda3162ea473697034.pdf Chapter 3 | 71

Recommendaons: Recommendaons:

• Make sure that the efficiency review which was • Consider merging land and property rights (according to informaon from the prosecutor registraon under one state agency. general) launched at the beginning of 2019, in • Speed up mapping of land plots. cooperaon with the EC, is completed and made • Improve interconnecvity among registers. publicly available. • Introduce addional safeguards for securing • Conduct an in-depth corrupon survey in public property rights (for example a two-step process for prosecuon to allow for beer understanding of contract draing; cross checking the quality of the problems and more effecve targeng of informaon entered into the system and so on). reforms. • Build a decentralised complaint mechanism for • Based on the above review, but also on experience both registries. from the 2015 reform aempts and the judicial • Curb the pracce of property value assessment at reform, develop a reform plan for a rapid and the beginning of the registraon process. comprehensive reform of public prosecuon. • The direcon and the content of the reform should Enforcement of civil judgments be informed by objecve analysis of the status quo Challenges to be addressed: (including the above efficiency review), previous advice and the recommendaons of the EU, • A lack of overall commitment and polical will to CoE/the Venice Commission (and or other donors) the reform. and public consultaons with stakeholders and • A lack of fair compeon due to the excessive donors. Future reform efforts should include the monopoly of state executors; deteriorang revision of selecon and appointment procedures commitment of the MoJ to the reform of private for the prosecutor general as well as the rest of the executors resulng in the slow pace of this reform; prosecutors.⁹⁹ abuse of regulatory power by the MoJ; weak • Review and revise the map of prosecutorial offices capacity of the professional bailiff's organisaon; so it corresponds with the recently created court high costs and lengthy judgement enforcement map. process by state executors.

Property rights protecon Recommendaons:

Property registraon • Review and revise the Reform roadmap adopted by the MOJ; carry out necessary research and Challenges to be addressed: consultaons with all stakeholders to gain their • Insufficient security of property rights due to support. subopmal flow of mely and accurate informaon • Consider revising the distribuon of responsibilies among state registries and databases; incomplete between state and private executors;¹⁰⁰ if this is mapping of land plots; inadequate instuonal set- not feasible, reduce the monopoly of state ups and supervision of registers; weak capacity of executors. notaries; lack of transparency of and access to • Review the fee schedule of state executors and informaon; weak legal safeguards. reduce the fee.

⁹⁹ Council of Europe/GRECO (2017). According to CoE: “It is important that the method of selecon and appointment of the prosecutor general is such as to gain the confidence of the public and the respect of the judiciary and the legal profession.” To achieve this, “Professional, non-polical experse should be involved in the selecon process.” for example by seeking advice on the professional qualificaons of candidates from relevant sources such as representaves of the legal community (including prosecutors), the prosecutorial self-governing bodies, or at the level of parliament, through preparatory work by a parliamentary commiee. ¹⁰⁰ The current division of responsibilies between the public and private enforcement system guarantees “special treatment” for the state and its enes, municipalies and some of the most vulnerable segments of populaon (for example, children). The MoJ/CoM should consider whether state enforcement should be employed only in the areas where the market fails to operate for example because of low demand for services or because such provision does not generate enough profit. The need for subsidised services for vulnerable individuals can be addressed through expanding legal aid to the execuon of judgments. Chapter 3 | 72

• Assess the reasons for the slow pace of the reform References with regard to private executors; review and revise the MoJ's policies and regulaons regarding private Council of Europe/CEPEJ (2016), European Judicial executors to reduce opportunies for inappropriate Systems: efficiency and quality of jusce, Strasbourg. intervenons by the MoJ. Council of Europe/CEPEJ (2018), European Judicial An-corrupon Systems: efficiency and quality of jusce, Strasbourg.

Challenges to be addressed: Council of Europe/GRECO (2017), Corrupon prevenon in respect of members of parliament, • Lack of country-specific in-depth understanding of judges and prosecutors, Strasbourg. corrupon; ineffecve strategy and lack of results in its implementaon; wavering commitment of the Council of Europe/The Venice Commission (2010), ruling elite to the an-corrupon effort; weak Opinion on the Constuonal Situaon in Ukraine in instuons, parcularly, NACP; lagging impact of Review of the Judgement of Ukraine's Constuonal relavely high level of transparency and broad Court, Strasbourg. access to informaon; weak accountability across T. De Waal and B. Jarabik (March 2018), Ukraine the government and impunity. Reform Monitor, Carnegie Europe, Brussels Recommendaons: C. Giuardullo (2018), Four Years Aer: The “Long • Conduct a comprehensive an-corrupon March” of Jusce-Sector Reforms in Ukraine, Istuto assessment followed by an in-depth priority Affari Internazionali, Rome. sectors/problems corrupon assessment. The GRECO (2017), Fourth Evaluaon Round, Fourth sectors/problems should be aligned with Ukraine's Evaluaon Report of Ukraine, Corrupon prevenon developmental strategy and priorised based on in respect of members of parliament, judges and the impact on development. The assessment prosecutors hps://rm.coe.int/grecoeval4rep-2016- should also seek to make available data sets easier 9-fourth-evaluaon-round-corrupon-prevenon-in- to use and parcularly to encourage Ukrainian /1680737207. cizens to use online tools. • Based on the above, implement two-three H. Gramckow (2012), “Esmang Staffing Needs in problem/(sub)sector reforms. the Jusce Sector.” Jusce and Development • Produce a mid- and long-term an-corrupon Working Paper Series No. 19, World Bank, strategy that reflects on the results of the most Washington, DC. hp://www- recent research on corrupon and Ukraine-specific wds.worldbank.org/external/default/WDSContentSe context. The strategy should build on the above rver/WDSP/IB/2012/09/27/000333037_201 assessments. 20927024656/Rendered/PDF/729280NWP0Box30 ecto r0J0D0WP01902012.pdf • Restructure NACP. Restructuring should be based on the comprehensive funconal and efficiency A. Kim, T. Miller and R. Roberts (2019), Index of reviews. Economic Freedom, The Heritage Foundaon, • Provide maximum support for the rest of the Washington, D.C. integrity instuons. R. E. Klitgaard (1988), Controlling corrupon. University of California Press, Berkeley, California.

R. Kuibida (Ed) (2016), Key Legal Reforms 2014- 2015: How Have the European Standards Been Implemented? Center for Policy and Legal Reforms, Kyiv. Chapter 3 | 73

J. Lough and V. Dubrovskiy (2018) Are Ukraine's An- 2019 Index for Economic Freedom; corrupon Reforms Working? hps://www.heritage.org/index/ranking

R. Malveau and T. Mowbray (2003) Soware Council of Europe/Commiee of Ministers (2007) Architects Bootcamp Supervision of the execuon of judgments of the hp://sourcesofinsight.com/expectaon- European Court of Human Rights, first Annual management/. Report. See: hps://rm.coe.int/CoERMPublicCommonSearchServi OECD (2017), An-corrupon reforms in Ukraine, ces/DisplayDCTMContent?documentId=090000168 fourth round of monitoring of the Istanbul An- 0592ac3. (May 12, 2019) Corrupon Acon Plan hp://www.oecd.org/corrupon/acn/OECD-ACN- Reanimaon Package of Reforms, hps://rpr.org.ua 4th-Round-Report-Ukraine-ENG.pdf R. Kuybida, M. Sereda (2019) Qualificaon L. Pricke, M. Woolcock and M. Andrews (2013) assessment of judges: summary of interim results (as Looking Like a state: techniques of persistent failure in of April 1, 2019) state capability for implementaon, The Journal of Development Studies, Vol. 49 pp.1-18.

I. Staffan, Lindberg, A. Lührmann, V. Mechkova, (2017) From de-jure to de-facto: Mapping Dimensions and Sequences of Accountability Background Paper for the World Development Report 2017

G. Stawa, W. Van Benthem, R. Moliene (2018), Selecon and Evaluaon of Judges in Ukraine hps://www.pravojusce.eu/storage/app/uploads/p ublic/5c0/fcd/a31/5c0fcda3162ea473697034.pdf

UN Human Development Report (2018) hp://hdr.undp.org/en/2018-update

K. Wolczuk (2013), The Moulding of Ukraine: The Constuonal Polics of State Formaon, Central European University Press, Budapest.

World Bank (2017), World Development Report, Governance and the Rule of Law, Washington, D.C.: hp://www.worldbank.org/en/publicaon/wdr2017

World Bank (2019), Doing Business Report, Washington, D.C; hp://www.doingbusiness.org/en/reports/global- reports/doing-business-2019

World Jusce Project (2018a), Global Insights on Access to Jusce, Washington, D.C.

World Jusce Project (2018b), Rule of Law Index 2017-18, Washington, D.C. Chapter 4 Chapter 4 | 75 Chapter 4 Energy policy

Karel Hirman Table 1 Price comparison for heat in city district heang Legacy systems (€/gigacalories, August 2015)

Between Ukraine's independence in 1991 and the Country Revoluon of Dignity (Maidan Revoluon) in 2014, Lithuania 96.3 no fundamental systemic changes took place in the Estonia 77.8 Ukrainian energy sector. This stands in stark contrast to the transformaon experienced by the Romania 75.0 neighbouring Visegrad Group (V4) countries¹ over Poland 55.6 the same period. The Ukrainian energy sector, Ukraine 24.1 including its consumpon sub-sector, entered 2014 under more or less the same condions seen in V4 Source: Ministry of Regional Development, Construcon countries at the beginning of the 1990s. The country and Housing of Ukraine. See footnote 8. lacked the basic precondions for a well-funconing energy sector – there were no basic legislave rules, Result of privasaon: monopolies independent regulaon for gas, electricity and heat and out-of-date producon and distribuon had not been established and lack of transparency was a problem. The only reform process, which parally occurred in Ukraine, was the privasaon of some parts of the Hence Ukraine began its fundamental reforms and energy sector. However, it was unavailable to and implementaon of the Associaon Agreement with unaracve for foreign investors as a result of its the EU² from the bedrock of structures created non-transparent organisaon and corrupon. during pre-1991 socialist mes. Making maers worse sll, both the energy producon and The privasaon process in V4 countries was also, consumpon sectors entered the post-Maidan period and connues to be, very problemac. In both the with enormous historical debt, as no significant Slovak Republic and the Czech Republic, the energy financial resources had been invested into their sector was privased with the presence of reputable modernisaon and improvement of efficiency since European investors. Despite the fact that in the the dissoluon of the USSR.³ The results of this lack Slovak Republic the acvies of some of the of investment and reform were arficially low energy investors were wound down over me and many of prices for consumers, maintained by the government them eventually sold their shares, their acvity made to compensate for poor quality energy supplies, as a posive contribuon to energy sector reform and well as their inefficient use by consumers. helped connecon with the European market. On the other hand, the extent of energy sector privasaon in Poland was smaller and Warsaw concentrated more on the creaon of state energy holdings. However, in all the countries, independent regulators and a basic legal framework were already in place at the beginning of 2000.⁴

¹ The Visegrád Group comprises the Czech Republic, Hungary, Poland and the Slovak Republic. For a detailed comparison, see: Instuonal Reform of Ukraine's Energy Sector in the Light of Visegrád Group Experience. September 15, 2016, Kyiv, Ukraine to the Project of The Internaonal Visegrád Fund. ² The Associaon Agreement with the EU was signed on 1 November 2014. ³ According to data from Regionalnoi gazovoi kompanii (a group of gas distribuon companies), the financial requirements just for the exchange of emergency secons of the gas distribuon pipeline for the upcoming five years amount to UAH 19.3 billion according to technical assessment of the Ministry of Energy and coal industry in Ukraine no. 640 from 24 October 2011.) The distribuon companies would need an addional UAH 5.3 billion annually in tariffs for renovaon of gas pipelines, however, revenues currently amount to only UAH 0.8 billion (as of 2016). ⁴ See footnote 1. Chapter 4 | 76

The almost total exclusion of well-known foreign towns and cies; yet, a significant part of them was investors⁵ from the privasaon in Ukraine led to the “rented” to various private companies. The result was accumulaon of all the privased assets in the hands a halt of long-term investment and modernisaon of Ukrainian companies, or in Russian entrepreneurial programmes in heat producon and also in structures, which were subsequently labelled as distribuon networks.⁸ “oligarchic”. It was primarily a queson of the regional Low gas prices did not smulate domesc extracon, distribuon of electricity and gas. In addion, there which had been stagnang or even dropping for a was also privasaon of a substanal poron of long me. The main argument against the thermal power staons (TPS) and some of the coal inevitability of gas price increases centres on the low mines providing fuel for them.⁶ cost of domesc gas extracon. In 2015, informaon This privasaon did not lead to an increase in published by Naogaz showed that in order to be compeon and effecveness of energy producon profitable, prices from domesc extracon would and its distribuon, nor did it lead to the connecon have to be around UAH 5,430/thousand cubic of the Ukrainian energy market with European metres (tcm) – approximately US$ 200, while crics markets. On the contrary, the monopolisc market state it is roughly half that level. According to the structure was strengthened. Electricity producon 2014 annual report of Naogaz, the cheapest gas is was divided between the state corporaons convenonal gas extracted from old deposits, which Energoatom (nuclear power plants) and Ukrhydro, costs around US$ 25-30/tcm. Gas extracon from (hydroelectric power staons) and DTEK, a company geologically composite layers with new boreholes owned by the Ukrainian tycoon Rinat Akhmetov, ranges from US$ 180 to 280/tcm. The logical having control over more than 70 per cent of conclusion is that if average costs for gas extracon electricity producon in coal-fired TPS. in Ukraine really are so low (about UAH 2,500-2,800 /tcm, approximately 100 US$/tcm), as opponents of Privasaon did not improve the technical level and the need for consumer price increases claim, there efficiency of power staons. The majority of TPS would have been a gas extracon boom a long me were commissioned in the 1960s and lack even basic ago, because its sale would have been very polluon control. Under EU regulaons, most of profitable. these plants, if not all, would not be permied to operate due to unacceptable levels of dust, SO₂ and NOx emissions. Even without a carbon tax, these Former Ukrainian Prime Minister plants are increasingly becoming obsolete assets.⁷ Pavlo Lazarenko's corrupon “gas” case

A similar situaon emerged in the gas industry, in The most famous proven corrupon case in which sale and extracon was marked by the Ukrainian polics so far was the sentencing of the dominance of the vercally integrated state holding, former Prime Minister Pavlo Lazarenko in the USA. Naogaz. Within regional gas distribuon, Lazarenko held several governmental posts, including dominance was achieved by a controversial that of prime minister, in the second half of the Ukrainian-Russian Dmytro Firtash. As for thermal 1990s. In February 1999, he was arrested at John F. energy, an overwhelming proporon of municipal Kennedy airport in New York. In August 2006, a US heang power staons remained in the hands of

⁵ One of the few posive examples of the parcipaon of a renowned western investor in the privasaon process was the purchase of two regional distribuon companies (oblenergos) by the American company AES corporaon. AES, in 2001, bought from the state, for US$ 70 million, a majority of over two-thirds of the shares in Kyivoblenergo and Rivneoblenergo. At the beginning of 2013, they sold their shares to the Russian- Ukrainian company VS Energy. The official jusficaon was the sale of all energy assets which AES had acquired in the countries of the former USSR. See for example: hps://www.aes.com/investors/press-releases/press-release-details/2013/AES-Agrees-to-Sell-Its-Ukraine-Assets/default.aspx or hps://www..com/content/050b37ae-0fcc-359b-b3c0-7423388899c0. Accessed: 29 March 2019. ⁶ See for example: hps://www.obozrevatel.com/author-column/privazatsiya-ukrainskoi-energeki-proshloe-nastoyaschee-i-buduscheeeyu-ch.1. htm; hps://www.obozrevatel.com/author-column/privazatsiya-ukrainskoi-energeki-proshloe-nastoyaschee-i-buduscheeeyu-ch.2.htm. Accessed: 22 December 2018. ⁷ hps://energypost.eu/ukraines-power-sector-is-set-for-a-major-transion/ . Accessed: 21 December 2018. ⁸ Teplova energeka u ZKCH: stan ta perspekvi. Ministry of Regional Development, Construcon and Housing of Ukraine. March 25, 2016. Chapter 4 | 77

court sentenced Lazarenko to nine years in prison In 1996, UEIL transferred some US$ 140 million from not only for breaking immigraon laws, but also for those accounts to Somolli Enterprises, a Cypriot the abuse of posion, blackmail and money company registered on October 8, 1992, was laundering connected with the gas industry in controlled by Yulia Tymoshenko and others. Ms Ukraine. Almost half a billion dollars were confiscated Tymoshenko and affiliated individuals in turn used from his accounts in the USA. In his absence, he was Somolli Enterprises and other business enes under also tried in Switzerland. their control as vehicles for payments to Mr Lazarenko of least US$ 162 million in 1996 and Moreover, his name recently surfaced in the leaked 1997.” secret documents, known as the Panama Papers, in a long-running corrupon case involving the alleged Martha Boersch, the former lead prosecutor on the the of Ukraine's natural gas resources for himself money-laundering case, in 2016, during a lecture in and his polical allies.⁹ Kyiv explained the connecons of the enre process. With regard to Yulia Tymoshenko, the former Also involved in the case is the former prime minister prosecutor explained that she deemed Tymoshenko Yulia Tymoshenko, who, during Lazarenko's reign, to be a vicm of Lazarenko. In accordance with US founded the company United Energy System of laws, Lazarenko's proceedings towards Tymoshenko Ukraine (UESU). UESU became the largest importer are considered to be money recovery: if a of natural gas to Ukraine with an annual turnover businessman does not pay, they will complicate the reaching US$ 10 billion. life of their company. According to Mrs Boersch, Ms This is how corrupon within this company was Tymoshenko was not the subject of an invesgaon described by a US court:¹⁰ since Lazarenko was in control of all the bank accounts. Ms Tymoshenko was involved in the enre “When Lazarenko, in 1995 and 1996 as the first vice case, however there was no invesgaon against her prime minister, was in charge of the energy sector of due to the fact that she was not present in US the Ukrainian economy and presided over a re- territory at that me.¹¹ organisaon of the natural gas import and distribuon system, he used that posion to award highly lucrave energy contracts to certain Ineffecve consumpon and low prices companies. In parcular, Mr Lazarenko conferred upon UESU, a corporaon controlled by Lazarenko's The same way as there was no reform to the associate Yulia Tymoshenko and others, the exclusive extracon, producon and transmission of energy, right to distribute natural gas to the Dnepropetrovsk there was no modernisaon on the side of region of Ukraine. In order to exercise that right, consumpon either. Industry, the public sector as UESU entered into contracts, Gazprom supplied well as households became very inefficient. Energy natural gas to UESU from late 1995 through to 1997. demand of Ukrainian businesses became many mes During the relevant me period, UESU was 85 per higher in comparison to EU countries. The reason for cent owned by United Energy Internaonal Ltd. this is not only the industry's structure with a great (UEIL), an enty created on October 17, 1995, at the share of energecally demanding producon direcon of Lazarenko's associate Yulia Tymoshenko. (metallurgy, chemistry, heavy engineering), but also UESU transferred the tle to the natural gas it had huge levels of inefficiency. These key sectors of the purchased from Gazprom to UEIL. Payments from Ukrainian economy consume far more energy than Ukrainian consumers who used that natural gas were their European or world competors.¹² in turn collected in bank accounts registered to UEIL.

⁹ hps://nymes.com/2016/07/07/business/internaonal/a-ukrainian-kleptocrat-wants-his-money-and-us-asylum.htm or hps://lb.ua/news/ 2019/01/20/417603_grabli_imeni_lazarenko.html or hps://www.occrp.org/en/panamapapers/kyiv-post-owner-in-late-1990s-scandal/. Accessed: 26 January 2019. ¹⁰ hps://casetext.com/case/us-v-all-assets-held-at-bank-julius-baer-company. Accessed: 26 January 2019. ¹¹ hps://petrimazepa.com/news/rol-moshenko-v-dele-lazarenko. Accessed: 22 December 2018. ¹² hps://www.eia.gov/workingpapers/pdf/internaonal_energy_Intensity.pdf. Accessed: 21 December 2018. Chapter 4 | 78

Similarly, energy (heat) consumpon in Ukrainian What has been done? apartment blocks is many mes higher than in V4 countries. Again, this is not the result of more In 2014, Ukraine began thorough structural energy difficult climac condions. And neither is it caused reforms, some 20 years aer its V4 neighbours. by the wide ulisaon of district heang systems as Notably, the reform process was unfolding under the the same system dominates in the towns of V4 shadow of armed conflict with Russia, a burden countries. It is caused by a lower quality of apartment neither of the Balc or V4 states had to contend blocks and district heang systems in Ukraine, as with. Even the countries of former Yugoslavia unlike the V4 countries, there had been no complex (Slovenia or Croaa) began only their structural modernisaon performed.¹³ As a result of low gas reforms in the second half of the 1990's aer prices and revenues, the state budget was repeatedly reaching ceasefire. used to cover revenue losses, instead of supporng Therefore, it was unrealisc to expect that reforms energy efficiency programmes for households. Unlike would progress quickly and Ukraine would be the V4 countries, Ukrainian housing sector legislaon catching up with the V4 countries. Ukraine had only did not create the condions for effecve one advantage up its sleeve: by taking a look at its administraon of privased housing funds by the European neighbours, Ukraine knew exactly what to owners themselves, by means of associaons of expect, a reform “recipe” had already been developed apartment owners. Residenal fund administraon and verified in pracce. Ukraine, in theory, had the remained under control of “residenal benefit of selecng what would work best in its administraons”, the so-called “zhek”. The result is context and avoiding the mistakes of its neighbours. that many Ukrainians (owners of apartments) live in However, the reality did not quite pan out that way. luxury renovated (inside) private apartments, but the exterior of the apartment building, their common Greatest achievements areas and infrastructure are in a dismal state. The basic “road map” for the reform process (not only Consequences: loss of Crimea and Donbass in energy) is laid down by the Associaon Agreement with EU. From 2014 to 2018 the Ukrainian This blend of out-of-date producon and distribuon parliament succeeded in passing a few fundamental infrastructure together with inefficient energy laws which implemented European legislaon (the consumpon led to the fact that energy prices were aquis communautaire). Basic condions for a held arficially low by all Ukrainian governments. funconal energy market were thus created. They are Governments before 2014, by means of price mainly: suppression, tried to compensate for the consumers' decreasing compeve ability and quality of life. This • Gas market and electricity market laws. however led to a further fall of compeveness in • Law on the creaon of the independent energy Ukrainian industry and living standards of Ukrainians, regulator (Naonal Energy and Ulies Regulatory compared to their neighbours from V4, dropped Commission – NEURC). significantly. • Package of laws for communal energy and living. There have been no changes in the structure of the • Laws supporng the use of renewable energy energy sector in Ukraine over the last 20 years of sources. independence. Lile to no effort was made to • Law on the creaon of an Energy Efficiency Fund modernise the energy sector, as the economy was in for the modernisaon of apartments. deep decline and there was no polical move to • Laws on the support of domesc hydrocarbon strategically develop alternave sources of energy. exploitaon. This declining energy sector also became a security threat under growing pressure from Russia. Also essenal was progress to diversify the import of strategically important materials – gas and nuclear fuel. Aer the technical and commercial opening of

¹³ See footnote 1. Chapter 4 | 79

reverse gas supplies from Europe through gas Progress occurred also in the transparency of pipeline connecons with Poland, Hungary but hydrocarbon exploitaon licence allocaon, which mainly the Slovak Republic in 2014 and 2015, had been a huge source of corrupon since Ukraine was able, for the first me since its independence. By the end of 2018, the state geology independence, to face up to the “gas pressure” from service Derzhgeonadra started electronic aucons Moscow. Also, as a consequence of the arbitraon through the state public procurement system process between Naogaz and Gazprom, direct ProZorro.¹⁴ import from Russia was completely stopped. Aer 2015, the issues of energy efficiency and According to Naogaz's commercial director Yuriy support for the use of renewable energy sources Vitrenko, gas purchases from the EU were, during the became a priority in legislave and policy formulaon last few years, US$ 1.3 billion cheaper than buying processes, including in the new energy strategy from Gazprom would have been, under the contract covering the period unl 2035. signed in 2009. Key gas prices Energoatom also started, for the first me, a regular purchase of nuclear fuel from the Swedish plant of The most polically and socially sensive topic of the the Japanese-American company Wesnghaus enre four-year period was the level of energy prices Electric. Its share was gradually approaching as much for household consumpon, mainly gas. The adopon as one half of Energoatom's needs. Together with the and implementaon of the law on the gas market successful process to extend the technical lifeme of brought about crucial market liberalisaon for nuclear reactors, under the supervision of industry and business. Out of a total yearly gas internaonal organisaons, nuclear energy, with its consumpon of about 30 billion m3 (bcm), industry rising share of electricity producon (above 50 per and business consume approximately one-third. Tens cent), is becoming a solid pillar of Ukrainian energy of suppliers operate in this market and it is security. completely liberalised in terms of prices. However, the market for households which, directly or by For the state holding Naogaz, as well as for the means of central heang, uses about 18 bcm of gas Ukrainian state budget, victory in the arbitraon (the remaining roughly 2 bcm are used by public and process with Gazprom in Stockholm at the end of church instuons), remains fully price-regulated. 2017 and beginning of 2018 was crucial. From two lawsuits regarding the purchase contract and gas 's government took the first step in transit contract, Naogaz should receive over US$ increasing gas prices. Volodymyr Groysman's 2.5 billion from the Russian giant. However, Gazprom government made two gas price increases for has refused to pay for now and it is trying to contest households: in April 2016 and October 2018. On 1 the arbitraon result in Swedish courts. November 2018, the gas price for inhabitants (including VAT) reached UAH 8,550/tcm. This Underrated and almost unnoced is the huge success corresponds to a 23.5 per cent rise compared to the of Ukrainian transmission operators (TsO) of gas and price from April 2016 (UAH 6,879/tcm).¹⁵ The price electricity networks – Ukrtransgaz (UTG) and increase in autumn 2018 was the result of lengthy Ukrenergo. During the armed conflict with Russia, by negoaons with the Internaonal Monetary Fund technical “cung” from networks in the occupied (IMF).¹⁶ areas of Crimea and Donbass, TsO managed to provide connuous gas and electricity transmission The IMF insisted, in its loan programme, that gas not only in Ukraine but also with gas transit to prices for households should be at so-called import Europe. parity (the gas price on the Ukrainian border with

¹⁴ See hp://www.me.gov.ua/News/Detail?lang=uk-UA&id=e8a9b601-f01e-4d-bc6b-b4772a216420&tle=PershiLodozvoliNaKoristuvannia NadramiZiavilisiaVSistemiProzorro-prodazhi. Accessed: 20 December 2018. ¹⁵ See hps://gas.kr.ua/arxiv-czin.html. Accessed: 20 December 2018. ¹⁶ President Petro Poroshenko declared as early as January 2018 that the Ukrainian government was ready to increase gas prices for households according to IMF rules. See also: hps://www.rbc.ua/rus/news/kredit-doveriya-ukraina-dogovarivaetsya-novoy-1540238726.html Accessed: 20 December 2018. Chapter 4 | 80

EU), from which the price for Ukrainian industry is According to Prime Minister Groysman, the state derived. According to data from the Ukrainian spends UAH 55 billion on subsidies for 6.9 million Ministry of Economic Development the trade price of households.²⁰ imported gas in November 2018 climbed to as much Principal failures as UAH 9,471.9/tcm (US$ 339.2/tcm),¹⁷ so import parity was not even reached aer the increase in Generally the biggest failure is a slow, insufficient and November. However, according to Eurostat data, oen also unequal implementaon (secondary Ukraine (together with Georgia and Turkey) had the legislaon and execuve regulaons) of basic laws. lowest gas price for households in the first half of Ukrainian authories oen take the necessary steps 2018, at approximately 0.02 €/kWh (including taxes). only under pressure from foreign partners (EU, USA, In Poland, the Slovak Republic and Hungary, the price G7). Also, while legislaon progresses according to was twice as high and the average price in EU was the European aquis, Ukraine is unable to define its reaching 0.06 €/kWh.¹⁸ own interests. This is why it struggles to explain its specific needs to its European partners, including the The significant increase in the gas price for necessity of transion periods. The result is oen households, despite huge popular cricism from the mutual disappointment and misunderstanding. opposion and a considerable part of media, sharply limits the viability of long-term corrupon schemes According to a report by the Ukraine Center of based on price arbitraon between the market for European Policy as of 1 November 2018 (four years industry and inhabitants. since signing the Associaon Agreement with the EU) Ukraine has aligned its naonal legislaon to EU Although the price for households sll has not fully rules (full implementaon of the acquis) on average reached the price level for industry, Naogaz has by 24 per cent. From the sector viewpoint, energy become profitable. While back in 2015 it made a was one of the worse ones, with only 6 per cent clear loss due to the low gas price for households, it progress.²¹ This was only thanks to progress in the made a clear profit (UAH 26.5 billion) in 2016. In gas industry, where exactly a third of required 2017, Naogaz paid over UAH 100 billion in taxes legislave measures was taken. However, in all and dividends to the state budget. In 2018 and 2019, remaining areas (electricity, energy regulator, oil, an even higher payment is expected, as the exploraon and the development of hydrocarbon government wants to transfer as much as 90 per cent exploitaon, energy efficiency and nuclear energy) of Naogaz profits into the budget in the form of the total implementaon of the acquis is zero.²² dividends.¹⁹ Interrupted unbundling Up to 2015, Naogaz had received more than US$ and the uncertain future of transit 13 billion in subsidies from the state budget.16 The company, together with the enre country, found Despite the progress in gas industry reform, by the itself on the brink of bankruptcy, when its fiscal end of 2018, there was no significant progress in the deficit reached 5.7 per cent of GDP, which exceeded unbundling of Naogaz – that is, separaon of the the state budget deficit (4.6 per cent of GDP). It is network operator UTG from the parent company crucial that aer the increase in prices, the total Naogaz (the biggest gas trader in Ukraine). The profit transfer of Naogaz into the state budget is Ukrainian government had already approved the higher than state energy subsidies for inhabitants. unbundling plan in mid-2016 according to the

¹⁷ See hp://www.me.gov.ua/Documents/Detail?lang=uk-UA&id=07f7339b-48b0-45f7-bbab-178600b18&tle=SeredniaMitnaVarst ImportnogoPrirodnogoGazu-SchoSklalasiaUProtsesiYogoMitnogoOformlenniaPidChasVvezenniaNaTeritoriiuUkraini-z01-11-2018-Po-30-11-2018-. Accessed: 20 December 2018. ¹⁸ See hps://ec.europa.eu/eurostat/stascs-explained/index.php/Natural_gas_price_stascs. Accessed: 19 December 2018. ¹⁹ See hps://economics.unian.net/energecs/2329274-naogaz-za-god-uplal-v-gosbyudjet-bolee-100-miliardov-nalogov-i-dividendov.html and hps://economics.unian.net/energecs/10308249-naogaz-planiruet-zaplat-v-byudzhet-poch-130-milliardov-nalogov-v-2019-godu.html. Accessed: 19 December 2018. ²⁰ See hps://en.interfax.com.ua/news/economic/540883.html. Accessed: 19 December.2018. ²¹ See hps://www.eurointegraon.com.ua/arcles/report-2018. Accessed: 19 December 2018. ²² See previous note. Chapter 4 | 81

ownership method, which supposes the transfer of 2020, Ukraine will lose the transit poron completely assets from UTG into the newly created company or will retain only negligible volumes. Revenues from MGU. However, since then, apart from the creaon the transit for Naogaz-UTG are US$ 2-3 billion of MGU itself, and the creaon of its supervisory annually. The Ukrainian Ministry of Finance has board, there has been no significant progress. calculated the losses from gas transit for Ukraine to amount to over 2.5-3 per cent of GDP.²⁵ Interviews with both supervisory board chairs – Naogaz (Brish cizen Clare Sposwoode) and Inadequate metering MGU (Austrian Walter Boltz), published in December and non-transparent gas consumpon standards 2018 on the website rbc.ua, reveal that significant Following the gas price increase in April 2016, differences remain between the two supervisory subsidies for inhabitants became a very sensive boards regarding the process and meaning of polical as well as fiscal queson. As a considerable unbundling.²³ Unbundling plans, which were number of consumers do not yet have gas meters presented by Naogaz top management with the (some 24 per cent of households, mainly in support of the supervisory board, were strongly apartment buildings), in 2017 the government set cricised at the beginning of December 2018 also by new standards for these households.²⁶ These apply to Janez Kopač, head of the Energy Community household subsidies as well. However, the standards Secretariat. This internaonal organisaon was were considerably lower than in the past and created by the EU for energy sector cooperaon with significantly below those of the surrounding post- neighbouring countries and has the power, together Soviet countries (see Table 2): with the Ukrainian regulator (NEURC), to cerfy the unbundled operator.²⁴ Table 2 Gas consumpon standards (in m³) per person The result of the arbitraon with Gazprom has had a notable effect on the unbundling process. Moreover Gas in 2018, Naogaz filed further arbitraon acons Gas cooker cooker (without Gas which are also supposed to be connected with the (with central cooker expected changes in transit aer the terminaon of Household central and water with its current contract with Gazprom in 2019. New legal type heang) heang) water acon might also greatly affect unbundling plans, Ukraine 9.8 18.3 23.6 transfer of assets and transit execuon to MGU. (before 10/2014) Ukraine Towards the end of 2018 there was no clarity as to (9/2017-12/2018) 3.3 5.4 10.5 the operator of the Ukrainian transit system aer Ukraine (2019) January 2020. This uncertainty has affected non-heang/ 5.8/8.8 8.3/13.7 20/25 negoaons with Gazprom about the new transit heang season (planned)²⁷ contract, organised by the vice-president of European Commission Maroš Šefčovič, and Kazakhstan 15.0 18.5 25.0 complicates negoaons about the creaon of a Belarus 8.0 13.0 23.0 consorum of Ukrainian transmission operators (TsO) Moldova 10.0 20.0 38.0 and European operators. Concurrently, Gazprom Russia connues to build new gas pipelines (“Nord Stream (Briansk region) 11.8 17.7 30.0 2” and “Turkish Stream”), which bypass Ukraine via the Balc and Black sea while supplying gas to the Source: Ministry of Energy and Coal Industry, Regional EU. This is why there is a growing likelihood that aer Gas Company, Interfax.ua.

²³ See hps://www.rbc.ua/rus/news/kler-sposvud-anbandlinga-naogaza-potentsialnye-1543963673.html and hps://www.rbc.ua/news/ glava-nabsoveta-mgu-valter-bolts-skoree-vsego-1544117626.html. Accessed: 22 December 2019. ²⁴ See hps://www.rbc.ua/rus/news/realnyy-anbandling-sootvetstvuet-planu-dedlaynam-1543857560.html. Accessed: 22 December 2018. ²⁵ See hps://economics.unian.net/energecs/10275990-v-minfine-ocenili-poteri-ukrainy-ot-zapuska-severnogo-potoka-2.html. Accessed: 22 December 2018. ²⁶ See hps://interfax.com.ua/news/economics/553418.html. Accessed: 22 December 2018. ²⁷ The government suddenly cancelled increasing of standards of consumpon due to the pre-elecon situaon and campaign in January 2019. Chapter 4 | 82

As a consequence of poor administraon, according Despite this price methodology, coal mining in to data from the Ministry of Energy and Coal Ukraine has been on a downward trend in recent Industry, at least 383 million m3 of gas worth UAH years and imports have been rising. Disturbances in 2,681 billion were consumed but not charged for.²⁸ Donbass bear a fair share of responsibility for this. Since spring 2014, the central government in Kyiv Gas consumpon measurement constutes another has lost control over coal mines. Those were the only challenge – about a quarter of households have gas ones exploing anthracite, which was widely used in meters that are 15 to 20 years old, providing TPS. The final terminaon of supplies happened only unreliable measurements of gas use. This means that aer Kyiv's decision to introduce an embargo on altogether about half of Ukrainian households do not goods transported from the separast area of have an exact gas consumpon measurement. This is Donbass in March 2017. the origin of mul-billion financial losses for Naogaz, distribuon companies as well as the state As a result, the total coal import in 2018 is esmated budget.²⁹ to rise by 11 per cent to approximately 5.6 million tonnes, a significant burden for the Ukrainian trade Unreformed electricity and coal market balance and foreign exchange reserves. Providing Even though the Ukrainian parliament passed the law over 80 per cent of supplies, Russia is the biggest on the electricity market in April 2017, its supplier. implementaon has been lengthy and complicated. Table 3 Wholesale electricity supply should begin in 2019. Ukrainian internaonal business with coal and The electricity sector in the last few years has quite anthracite (in US$ billion) considerably “outperformed” the gas industry in lack Import Export Deficit of transparency and scandals. The price regulaon of domesc coal which is used in TPS, determined by 2011 2.761 0.775 1.986 the regulator (NEURC), has become a post-Maidan 2012 2.637 0.609 2.028 symbol of non-transparency. The “Roerdam+” price 2013 1.973 0.737 1.236 formula based on the coal index API2 at the stock 2014 1.773 0.521 1.252 exchange in Roerdam plus coal transport costs from 2015 1.632 0.054 1.578 the Dutch port to Ukraine, was strongly cricised immediately aer its introducon in March 2016. 2016 1.467 0.045 1.422 This regulatory method was also invesgated by a 2017 2.744 0.105 2.639 special an-corrupon police unit, NABU (Naonal 2018 (Jan-Sept) 2.192 0.008 2.184 An-Corrupon Bureau of Ukraine), in 2017. At the beginning of October 2018, its head Artem Sytnyk Source: State Fiscal Service, declared in the Ukrainian parliament that by using www.interfax.ua/reform.energy Roerdam+ (according to the preliminary results of It is very likely that a significant part of the anthracite the invesgaon) illegimate costs totalling as much supplied through Russia since March 2017 has come as UAH 15 billion were included in the regulated from Donbass, supplies which previously went electricity price. Nevertheless, use and correctness of directly to Ukrainian TPS. the methodology were confirmed also by the regulator's new management in autumn 2018 Coal exploitaon in mines which have remained because the principle of this method is the same as under Kyiv's control was decreasing though. During for gas price regulaon (German gas hub NCG plus the first nine months of 2018, exploitaon fell by a costs to Ukrainian border)³⁰ – an further five per cent compared to the same period in import parity basis. the previous year. The government therefore decided

²⁸ See note 26. ²⁹ Personal discussions of the author with representaves of Ukrainian state authories and gas companies. ³⁰ See hps://economics.unian.net/energecs/10285140-pereplata-po-formule-roerdam-sostavlyaet-15-milliardov-griven-sytnik.html. Accessed: 23 December 2018. Chapter 4 | 83

to support domesc coal producon by a decree on price difference is the contract price for electricity priority electricity take-off from TPS, which will export to Moldova, obtained by the company DTEK. convert from using imported anthracite into using According to informaon from the Moldovan domesc types of coal. Ministry of Economy, in the period from 1 April 2017 to 31 March 2018, DTEK was supposed to sell Like the already menoned price regulaon based on electricity for the price of US$ 50.2/MWh. During Roerdam+, this plan has provoked considerable that period, though, the price on the Ukrainian cricism. Crics claim that TPS, whose almost wholesale market oscillated between 50 and 80 monopoly owner is DTEK group owned by Rinat US$/MWh. The export price for TPS was supposed, Akhmetov, will receive addional revenues on top of that, to be cross-subsidised through the amounng to over UAH 4 billion annually at the domesc wholesale market.³⁴ The inappropriate tariff expense of other electricity producers and favourism of coal TPS at the expense of nuclear consumers.³¹ power plants was repeatedly sharply cricised also by The situaon has also been complicated by the the Energoatom boss Yuriy Nedashkovskiy.³⁵ government's unwillingness to implement a comprehensive restructuring plan for coal mines, What to do next? which had been prepared in summer 2016. According to the plan, the state was supposed to keep eight Reform policies and reform management profitable mines. A further 14 mines, which have a good potenal but need restructuring in order to The fundamental short- and also long-term priority of become profitable, were supposed to be privased. energy policy should be to improve energy efficiency And finally, 11 hopelessly loss-making mines were along the whole chain from the exploitaon, supposed to be closed. The whole plan was going to producon and energy distribuon to all cost UAH 25.2 billion by 2020, UAH 10.5 billion of consumpon sectors. It parcularly applies to which was to have been funded by the state budget. communal energy, from the producon and “Realisaon of this plan will ensure coal mining of 9.2 distribuon of heat to residenal and public million tonnes in 2020,” claimed the Ministry of buildings. District heang systems have to undergo a Energy and Coal Industry of Ukraine.³² radical modernisaon and opmisaon, which will require long-term development strategies from Non-transparent support mechanisms for thermal towns, as well as parcipaon from well-known energy, unreformed coal mining and very slow investors. The enre sector should gradually become electricity market reform led to the wholesale price a target for support through the newly created of electricity in Ukraine exceeding the price on the Energy Efficiency Fund, which must focus on neighbouring European markets. At the turn of 2017 households first. A radical modernisaon of the and 2018, for example, the price at the stock market apartment fund with a noceable decrease in energy in Prague, which belongs to the referenal price consumpon is also needed to make the further making bases for common market (market coupling) gradual liberalisaon of energy prices socially with the electricity of Czech Republic, the Slovak bearable (see Table 4): Republic, Hungary and Romania, oscillated between 40-45 US$/MWh.³³ An illustrave example of the

³¹ Danilevich Marina: Vne vsiakoy konkurencii: kak Minenergo pomogayet DTEK Akhmetova zarabotat na ukraincakh. hps://daily.rbc.ua/rus/ show/vsyakoy-konkurentsii-minenergo-pomogaet-kompanii-1539639261.html. Accessed: 28 December 2018. ³² See hps://economics.unian.net/energecs/1493926-minenergouglya-hochet-reformirovat-gosshahtyi-za-25-milliardov.html. Accessed: 28 December 2018. ³³ See hps://www.kurzy.cz/komodity/index.asp?A=5&idk=142&od=01.09.2017&do=19.12.2018&curr=USD. Accessed: 29 December 2018. ³⁴ See hp://argumentua.com/sta/my-zaplam-vsego-kak-akhmetov-eksporruet-elektroenergiyu-za-nash-s-vami-schet and hps://economics.unian.net/energecs/1861139-eksport-v-ubyitok-kto-oplat-lgotnyie-postavki-elektroenergii-v-moldovu.html. Accessed: 29 December 2018. ³⁵ See hps://m.znaj.ua/ru/polics/177950-nkrekp-energoatom-vimagaye-na-atomne-palivo-tarif-roerdam-50 and hps://www.epravda.com.ua/rus/news/2018/09/24/640868/. Accessed: 29 December 2018. Chapter 4 | 84

Table 4 Esmated costs and savings for energy efficiency programme for households

Investments Potenal gas Saving of gas on US$ 1 billion (US$ billion) savings (bcm) investments (million m³) Modernisaon of apartment buildings 17.0 2.3 135.0 Modernisaon 28.0 4.7 168.0 of individual houses Modernisaon 4.0 1.7 425.0 of individual boilers Modernisaon of public buildings 2.0 0.3 150.0 Modernisaon of producon 6.0 2.4 400.0 and distribuon of heat

Total 57.0 11.4

Source: Ministry of Regional Development, Construcon (fixed and variable costs) with the aim of liberalising and Housing (see footnote 7). the gas market for households.

A simple step would contribute to making the Implementaon of the electricity market with the unavoidable price increases more socially bearable: a aim of integraon into ENTSO-E transfer to monthly prepayments for the supplies of In the short-term, it is necessary to carry out the plan all energies (including heat) and communal services, to introduce an electricity market. First of all, it as is standard in V4 countries. This would prevent the means to fully launch the wholesale market in 2019. annual “financial shock” for households at the In the long-term, the fundamental part of the reform beginning of heang season. Energy companies “road map” should become the plan to connect would at the same me receive a balanced year-long Ukrainian electricity grid with the European system cash flow to cover investment projects and the state and full membership in ENTSO-E. Realisaon of this budget would avoid enormous pressure on subsidies plan will require a radical modernisaon of TPS in the winter season. (including ecological measures) and an end to the Unbundling Naogaz and keeping the gas transit lifeme extension of the safe operaon of nuclear reactors. These measures will subsequently have an A short-term priority for 2019-21 should be influence on another unavoidable restructuring of preserving the transit of Siberian gas through coal mining. In addion, the involvement of Ukraine Ukraine. An unavoidable precondion is the in the European market will affect the further unbundling of Naogaz and the creaon of a development of “green energy”, including the transfer transparent and independent TsO based on UTG- to aucons. MGU. This would, with the support of the European Commission, create a consorum with European TsOs and sign a long-term contract for gas transit with Gazprom. The creaon of the TsO is also a precondion for increasing domesc producon and another gas industry reform, including the introducon of two-component standard regulaon

³⁶ ENTSO-E, the European Network of Transmission System Operators for Electricity, represents 43 electricity transmission system operators (TsOs) from 36 countries across Europe. ENTSO-E was established and given legal mandates by the EU’s Third Legislave Package for the Internal Energy Market in 2009, which aims at further liberalising the gas and electricity markets in the EU. hps://www.entsoe.eu/about/inside-entsoe/objecves/ [Accessed 1 April 2019] Chapter 4 | 85

Strengthening of the regulator's (NEURC) posion and demonopolisaon

A permanent necessary condion for the sustainable and transparent development of energy markets is a professional and independent regulator. Strengthening of its posion has to go hand in hand with increasing the transparency of its decisions. This is a vital precondion for the successful introducon of regulaon based on the regulated asset base method. However, in order to deepen the liberalisaon of Ukrainian energy sector, an- monopoly bureau intervenon and final legal soluons for disputable privasaon cases will be needed. Chapter 5 Chapter 5 | 87 Chapter 5 Business environment

Alexander Skurla small entrepreneurs, capitalism without big naonal . Like in Poland. I spoke about it many Legacy mes. This model would be unacceptable for Ukraine. Such model would be unacceptable for Aer gaining independence in 1991 Ukraine Ukraine even from the point of view of the structure inherited a fully regulated socialist economy. The of the Ukrainian economy, as its base is created by Soviet system was based on total control of industrial giants.” everything that could be controlled. For businesses this meant a lot of bureaucrac permits to be signed Leonid Danilovich Kuchma: “Aer Maidan 2005-06. and stamped at different state instuons. Officially President's remarks.” the new and independent Ukraine declared its readiness to develop a modern market-based The oligarchic system in Ukraine has a direct economy. But what kind of modernisaon was it? connecon to state support and incenves of fully In 1991 Leonid Kravchuk, a former high-ranking regulated economy based on corrupon. Pavlo official of the Communist Party of Ukraine, became Lazarenko, Prime Minister during Kuchma's the first President of independent Ukraine aer the presidency, allowed the penetraon of corrupon crash of the Soviet Union. At this me private deep into Ukrainian government and society. It was entrepreneurship appeared but Kravchuk did not in the interest of oligarchs to retain the Soviet-style implement deep market-oriented economic reforms bureaucracy that maintains high barriers to entry into which resulted in negave economic consequences: the market for other players and thus protects hyperinflaon, increase of the state deficit, strikes by oligarchic posions in the market and guarantees miners and early elecons. large long-term monopolisc or oligopolisc profits. That was the reason why real deregulaon of the Leonid Kuchma started his decade-long presidency in economy did not happen. 1994. It would be difficult to esmate the enrety of his influence in terms of the country's business Oligarchic systems usually do not welcome foreign climate, but main themes can be menoned. Under capital that brings in compeon and transparency, his presidency, in 1998 a simplified taxaon system therefore improvements to the investment climate of was introduced aiming to support small and medium- the country at that me were not a priority. Tax rates sized business and to curb the “shadow” economy. At were high. The standard rate of profit tax was 30 per the same me the roots of the later oligarchic and cent. Maximum rate of physical enes' income tax proteconist economy can be found during his should have been decreased from 40 per cent to 30 presidency. Parts of state industries were handed to per cent based on the agreement with the IMF in connected persons through non-transparent aucons 1997, but it was not done. At the same me tax at cheap prices and created the basis for the preferences were widespread, like VAT exempons oligarchic system that prevails in some form in the for imported goods, import dues exempons for present day. specific domesc industries, VAT exempons for newly built housing, profit tax incenves for special economic zones (either an unlimited 20 per cent tax Leonid Kuchma on oligarchs discount or three-year 100 per cent tax holiday followed by three-year 50 per cent tax incenve). “There is no capitalism without capitalists, without According to the IMF, in 2003 tax preferences naonal bourgeoisie including big tycoons. But reached 3.5 per cent of GDP. during all 15 years of our independence there were aempts to create capitalism of small merchants, Chapter 5 | 88

Significant incenves rate (US$ 1=8 UAH) creang the illusion of stability for certain sectors under Kuchma while rapidly increasing state debt; state aid to support projects of socio-economic development in On 14 July 1999 Parliament adopted the Law “On fact was a “shadow” mechanism to legalise state implementaon of economic experiment on expenditure. One example of this is the special- enterprises of metallurgic complex of Ukraine” that purpose administrave state structure the Currency- temporarily provided generous incenves to Credit Council, through which the Naonal Agency metallurgic companies unl 1 January 2002: profit on European Integraon distributed credits on tax was reduced from 30 per cent to 9 per cent, projects for socio-economic development amounng ecological tax was reduced by 70 per cent, debts to around US$ 4 billion. Projects were financed prior to 1 July 1999 were paid by the state. against state guarantees and almost nothing was paid At the same me only 10 per cent of resources back. Providing tax incenves to specific domesc gained by those state incenves were directed into sectors was also popular during that period. In 2011 capital investments. Due to incenves, metallurgic alone loss of income of the state budget due to tax companies lowered the value of their products for incenves reached UAH 58.8 billion or 4.5 per cent export to foreign markets to such a level that major of GDP. More than 15 sectors were benefing from importers (European Union, Canada, Russia, Mexico tax incenves in that period, some sectors received and China) started an-dumping proceedings incenves for 10 years. towards Ukrainian metallurgic producon.¹ Fraud and prosecuon In 2004 the Orange Revoluon won in Ukraine when from high places under Yanukovych in repeated second round of presidenal elecons Oleksandr Klimenko became Minister of Income and Viktor Yushchenko became President. In May 2005 Assembly of Ukraine in 2012. He introduced an Prime Minister Yulia Tymoshenko cancelled special illegal scheme known as “tax squares” or “fiscal holes” tax and customs regimes within special economic based on tax fraud when businessmen could register zones and priority development zones. It was a move arficial costs in order to lower taxes, but have to pay towards stopping the deformaon of state economic cash bribery to the Ministry. policy, giving priority to only selected businessmen. The law “On basic principles on creaon and Another of Klimenko's schemes was based on illegal funconing of special economic zones” had been VAT returns. According to MP Viktor Chumak, cash adopted by Verkhovna Rada in October 1992. The briberies from businessmen have been carried to a first special economic zone (SEZ) was established in cellar of a state building. With part of that money Crimea in 1995. Since 1998, 11 SEZ were created, Klimenko was building leisure complex including a each SEZ by a separate law. So it took more than 12 zoo with gers and bears. Later on the Ministry years for the country to stop the evasion of billions of announced that Klimenko and his team, in 2013 hryvnia from the state budget through tax, customs alone, stole up to UAH 16 billion. and currency incenves for certain businesses. By The State Military Prosecuon finished invesgang 2003 some 11 SEZ and 66 priority development Klimenko on 14 March 2018 and included 52 zones covered 10 per cent of Ukraine's territory. subordinate state servants of the former Ministry of The period of Viktor Yanukovych's presidency (2010- Income and Assembly of Ukraine in the criminal 14) known as mes of “Family” became infamous for invesgaon. The invesgaon concluded that the the destrucon of the business environment, state lost UAH 104 billion as a result of Klimenko's pressure of state controlling bodies upon business schemes as of 2014. and corrupon. The priority of economic policy was directed towards heavily subsidised hryvnia exchange

¹ VoxUkraine: hps://petrimazepa.com/privilegesandpreferences.html ² IMF Country Report No. 03/173, June 2003 Chapter 5 | 89

What has been done? of operaons and list of indicators of posive tax history of taxpayer. Based on the informaon from Real economic changes started in Ukraine only aer business associaons, the system of VAT refund 2014, when a democrac government took over blocking is sll not ideal and there is room for further aer the victory of the Maidan Revoluon. The improvement. government of that me iniated serious The big success of the government in increasing deregulaon processes in order to get rid of the total transparency in public procurement was the state control of businesses inherited from the Soviet implementaon of the electronic public procurement past, to aract external investment and to boost system, ProZorro. This procurement system became economic growth. In 2016 the system of state compulsory for all state and communal organs, control and surveillance was significantly liberalised instuons and companies on 1 August 2016. by adopng dra Laws No. 2418a, 2531a, 3153 YouControl analysed eight product categories with saving companies up to UAH 500 million annually. In regard to price tendencies on public procurement 2017 a specific state control system was adopted for markets and discovered that the savings compared to controlling compliance with safety and quality market value of the acquired goods increased from standards within the food sector, implemenng UAH 5 million in 2013 to UAH 144 million in 2017. relevant EU regulaons and direcves. In 2018 other The analysis concludes that at present the state and important dra laws were adopted by the Verkhovna communal buyers save on average 10.8 per cent in Rada that could further improve the business climate respect to retail market prices.³ Contracts signed of Ukraine, especially the dra laws: “On through public procurement in 2017 reached UAH implementaon of “single window” ...”, “Code on 500 billion. ProZorro is a big step forward in creang bankruptcy procedures”, “On Limited liability equal and transparent access for companies to public companies”, “On the creaon and operaon of the procurement, but needs to be improved further as credit register of Naonal Bank of Ukraine” and “On dishonest businessmen are trying to find ways to win currency and currency operaons”. Improvements in in an unfair compeon. In autumn 2016 the the business environment were confirmed by monitoring portal DoZorro was established in order recognised internaonal rankings. Ukraine jumped to monitor feedback from parcipants and to be able five places in a year to 71st place in the to discover breaches of ProZorro plaorm. internaonally recognised Doing Business 2019 report; in Doing Business 2012 Ukraine had been in Some success has been achieved by stopping of 152nd place. some bad legislave iniaves that have appeared in Parliament. Especially dangerous was the dra law Since 1 April 2017 the Cabinet of Ministers has “Buy Ukrainian, pay to Ukrainians” which was implemented a single electronic register of adopted at the first reading on 7 December 2017. applicaons on VAT refunds The dra law proposed the introducon of “local (hp://minfin.gov.ua/reestr). The new register aims to content” that would add at least 20 per cent to public get rid of the previous corrupt system based on two procurement evaluaon of domesc parcipants of non-public registers, guaranteeing an automac procurement tender compared to foreign refund of VAT to all applicants based on parcipants. The formula to be calculated is chronological order on a daily basis. Now businesses complicated and requires parcipants to submit 23 can check the progress of their VAT refund online. If addional documents. This dra law contradicts the there is an agreement on a refund sum within 30 Associaon Agreement between the EU and Ukraine days (in special cases 60 days), the VAT refund should and the WTO Agreement on government be transferred the next day. procurement. The Cabinet of Ministers obliged the State Fiscal An aracve business climate should result in making Service in 2018 to determine risk criteria, which were credit cheaper. We all know that finance is as adopted on 5 November 2018, as well as risk criteria

³ hps://youcontrol.com.ua/news/efekt-prozorro-derzhzamovnyky-pochaly-ekonomyty-ponad-10/?utm_source=press Chapter 5 | 90

important for business as is blood for humans. Time manifested as a total regulaon of business acvies. differences between selling the product and receiving Aer the Maidan Revoluon in 2014 the government payment require flexible financing; acquiring new of Ukraine began systemic work on deregulaon. technologies that keeps companies compeve oen Aer analysing the actual regulaons and needs of depends on the ability to get proper financing. In business environment the Decree No. 615-p of the Ukraine the price of money is sll rather high and Cabinet of Ministers “On acon plan of deregulaon that hampers economic growth. In order to lower of economic acvies” was adopted on 23 August interest rates on commercial credit the Naonal Bank 2016 comprising 112 measures on deregulaon in of Ukraine is concentrang on curbing inflaon different sectors, later on 7 deregulaon measures (2016: 12.4 per cent, 2017: 13.7 per cent, 2018: 9.8 have been cancelled by the Decree´s amendments. per cent) and therefore its basic rate is sll kept at 18 The main achievements of deregulaon of the per cent. Other than high inflaon there are also risks business environment in Ukraine between 2014-18 to the business environment that keep high-margin are the following: credit in place. There are also other available instruments to reduce inflaon and make credit more • number of licences reduced by 39 per cent (from affordable: such as improving the business climate 54 to 33) and increasing compeon in various sectors. • number of permit documents reduced by 45 per The and Verkhovna Rada cent (from 143 to 79) reacted to the signals coming from business • number of planned and unplanned inspecons of environment and made some important steps in state control in 2016 was reduced by 66 per cent suppressing dishonest acvies of law enforcement compared to 2014 (from 600 thousand to 205 agencies and raider aacks with the aim to improve thousand) business climate of the country. First “an-raider” law • more than 90 per cent of obligatory cerficaons was adopted by Verkhovna Rada in November 2016 have been scrapped (without cerficaon agrarians and two “Mask Show Stop” laws in November 2017 can save about 7 billion UAH annually) and September 2018. The Law No. 2213-VIII (Mask • posion of Ukraine in the World Bank's Doing Show Stop-1) implements compulsory video and Business rang has improved by 41 posions (from audio recording of court hearings and invesgaon 112th to 71th). searches; compulsory access of lawyers to invesgaon searching process; ban on take-away of There were some other victories in simplifying the original documents and servers from a company licensing process aer 2014: licensing bodies are being searched; increase in competences of the forbidden to require the licensee to provide Cabinet of Ministers to control law enforcement documents that are issued by another state or agencies etc. The Law No. 2548-VIII (Mask Show communal body; the licensee can submit required Stop-2) implements a mechanism that forces documents to licensing body electronically; terms of prosecutors and invesgators to personally licence validity have been amended to have no end compensate losses caused by their dishonest date. invesgaon of a criminal case; possibility to submit The Cabinet of Ministers of Ukraine, within its a claim to a court if an invesgator repeatedly opens legislave remit, has been execung regular criminal case on the same maer; possibility to claim “deregulaon sessions” with the aim of geng rid of inacvity of the invesgave organs. sll excessive state regulaon, cancelling archaic and Deregulaon and effecve regulaon: out-dated legislave acts inherited from the Soviet past, and implemenng effecve regulatory norms. In Deregulaon is the cheapest and fairest way to 2018 alone the Cabinet of Ministers, during these improve the business environment in Ukraine. sessions, for example: Distribuon of state subsidies is less fair and more expensive. Ukraine was a socialist economy for many • Scrapped the obligaon for small winemakers to years with a deep-seated suspicion that in pracce arrange for manufacturing cerficates. Chapter 5 | 91

• Stopped state price regulaon of numerous goods New regulaon in the European Union and services. • Simplified the system of issuing special permit for One of the characteriscs of a strong state is to react extracng mineral resources. quickly to changing condions in the world. In that respect the example of new EU regulaon can be a • Removed obligaon to use seals by companies in good illustraon of effecve state regulaon in its specific sectors. dynamic development while fulfilling its main tasks. • Changed the methodology of the State Land Taking into account the deterioraon of the Cadastre in order to state all the reasons for environment, accumulaon of waste in the world´s rejecng claims on entering remarks in the oceans and seas, the European Commission is cadastre. prepared to adopt stricter regulaons in that area. Analysis of the regulatory impact on business, to Every year in the EU the following are consumed: control necessity of new or exisng regulaons, and 580 billion plasc cigaree filters, 46 billion plasc evaluaon of effecveness of regulatory acts were boles, 2.5 billion plasc boxes for food, 16 billion introduced by the Cabinet of Ministers in 2004. plasc caps, 36.4 billion of plasc scks. More than Analysis of the regulatory impact on small business 70 per cent of plasc waste ends up either in landfill (so called M-test) has been implemented by amended or in nature. There are about 268 thousand tonnes of methodology on execuon of regulatory impact plascs or 5.2 billion individual plasc items in the analysis since 15 March 2016 as an instrument to world's oceans and seas. According to Pavel Poc, protect small businesses from excessive regulaon. member of the Commiee on Environment of the The M-test should first consult the small business, European Parliament: “Air, soil and water are today then analyse data and calculate the costs to the small contaminated by invisible fragments of plascs that business connected with implementaon of a we eat, drink and breathe with unknown effects on parcular regulatory act and be able to stop our health.” implementaon of harmful regulatory acts or to implement correcve measures. The M-test can be On 19 December 2018 the Council of the EU and the used only if a parcular regulaon tackles more than European Parliament reached provisional agreement 10 per cent of small businesses compared to the total on a direcve that should drascally curb single-use number of companies influenced by the regulaon. plascs through a ban on the most problemac single-use plascs by 2021 and through necessary This posive tendency was confirmed by the State systemic changes. Targets are set to reduce the Regulatory Service which esmates the quality of consumpon of plascs, manufacturers should dra regulatory acts prepared by regulatory organs. contribute to costs connected with plasc handling, In 2017, it rejected 34 per cent of dra regulatory there are new requirements for marking of products, acts because of non-compliance with legislave new requirements on educaon, new targets for methodology. In 2018 this number was only 19 per waste collecon: member states are obliged, by cent, meaning that the quality of dra regulatory acts 2025, to collect separately for recycling 77 per cent improved in 2018 by almost 23 per cent. In 2018 it of single-use plascs in the market, and 90 per cent prevented the implementaon of dra regulatory of single-use plascs in the market by 2029. On 12 acts that would have created addional costs to February 2019, Brish think tank the Instute for business amounng to UAH 43.5 billion. Public Policy Research published a report⁴ warning For good business environment effecve regulaon that intervenons of human beings into environment is needed, especially where human health, are so big that economic instability could be a direct environmental preservaon, protecon of fair result. compeon, consumer protecon, quality of products and safety of the country are concerned.

⁴ hps://www.ippr.org/research/publicaons/age-of-environmental-breakdown Chapter 5 | 92

Reform of state control and surveillance: Reforms in state surveillance and control should go much further. According to integrated automated The start of real business deregulaon took place on system of state supervision there are now 39 state 10 September 2014 when the Cabinet of Ministers controlling bodies (including the State Fiscal Service) adopted the Decree “On opmisaon of system of acve at the central level, 418 at the territorial level central organs of execuve power” and 12 state and 101 on the local level.⁵ This is sll too many. control bodies were either cancelled or merged. On 3 Ukraine needs to conduct a proper analysis of all November 2016 the system of state surveillance and supervisory bodies, their funcons and efficiency and control was substanally liberalised by adopng the scrap those where there is duplicaon, breach of dra Laws No. 2418a, 2531a and 3153. The main market economy principles or conflict of interest (for amendments were the following: example managerial and control funcons are mixed). • regularity and duraon of state inspecons were That process should lead to a reducon in the reduced number of controlling bodies and improved • entrepreneurs gained new rights not to grant treatment of businesses. access to inspectors under certain condions Implementaon of a risk-oriented approach and • principles of creaon and operaon of an standardisaon of inspecon protocols in state integrated automated system of state control and supervision is an important step forward as the surveillance were adopted degree of risk associated with an economic acvity • complex planned inspecons were adopted determines the regularity of planned inspecons. The • producon, provision of services or carrying out of process was iniated by the Cabinet of Ministers in works can be stopped only by court decision August 2013, by adopng the first methodology to determine the criteria for risk evaluaon of different • increased administrave responsibilies of types of economic acvies and to unify formulas inspectors of state surveillance and control bodies issued on results of inspecons. In May 2018 the • inspectors and entrepreneurs are allowed to record new methodology to determine risk criteria was on video or audio the progress of a planned or adopted. Unl now out of 85 spheres of state unplanned inspecon surveillance and control the State Regulatory Service • transparent procedure of inspecons based on has approved 76 dra decrees on confirmaon of check-list implemented criteria of risk evaluaon based on the new • State Regulatory Service was given the right to methodology and the Cabinet of Ministers has control the state control bodies already approved risk criteria in 53 spheres of state • 6 areas of economic acvies le that are not surveillance and control. covered by the law on state control and In 2019 the Ukrainian government stopped surveillance prolonging the moratorium on planned state • implemented moratorium on planned controls ll inspecons. State controls should be conducted 31 December 2018. connuously, concentrang on high-risk business enes, but the character of state inspecons should On 18 May 2017 dra Law No. 0906 was adopted change from punive to consultave in order not to implemenng state control for food products, create unjusfied pressure on business. Therefore a feedstuff, by-products of animal origin, health and special kind of paral moratorium on planned state wellbeing of animals. At the end of 2018 the Cabinet inspecons has been implemented in previous of Ministers adopted the strategy for reform of state periods in order to allow me to reform the state surveillance and control that confirms further supervision system. In 2015-16 state inspecons of reducon of number of state controlling bodies and State Fiscal Service and State Financial Inspecon declares the need to change the behaviour of state and their territorial organs were only allowed to inspectors from repressive into consultave, inspect businesses with turnover of less than UAH especially for start-up businesses. 20 million with the approval of the Cabinet of

⁵ hps://inspecons.gov.ua Chapter 5 | 93

Ministers. At the end of 2016 this moratorium was breaches, replacing them with warnings and allows extended unl the end of 2017, but 14 state fines only for repeated less important breaches. controlling bodies were excluded. On 7 December hps://www.romania-insider.com/depues- 2017 the moratorium on state planned inspecons prevension-law/ was again and for the last me extended ll the end Liberalisaon of currency regulaon of 2018, but 22 inspectorates were excluded. Currency deregulaon is an important part of the There is sll space for reducing number of planned general deregulaon process creang beer and unplanned inspecons using a risk-oriented condions for aracng investors into Ukraine as approach. The State Fiscal Service (SFS) is not willing well as for encouraging more businesses to export to act according to the basic law of state surveillance goods and services abroad. The independent posion and control in the sphere of economic acvies, nor of the Naonal Bank of Ukraine and its monetary is it ready to publish its planned controls within the policy is clear and acknowledged. And it is obvious complex plan of inspecons that is prepared and that a steady hard currency inflow is crucial for the published annually by the State Regulatory Service of country's macroeconomic stability. Nevertheless, Ukraine. SFS refused to publish the list of its planned overly strict regulatory policy on currency creates a inspecons of businesses in 2017, arguing that 10 big burden for conducng business acvies and calendar days' noce before the inspecon is held is could expel domesc business enes abroad. sufficient. Thanks to the amendment of the Tax Code Therefore concentraon on the simplificaon of in 2016 SFS was obliged to publish the list of planned foreign currency regulaons in essenal. The inspecons first me for 2018. While in 2016 SFS negave foreign trade deficit is growing rapidly: in intended to conduct around 10,000 planned 2018 it reached almost US$ 8.9 billion. Fortunately, inspecons of legal and physical enes, in 2018 it some measures towards currency liberalisaon have was reduced to 8,621 planned inspecons and in the already been taken. plan for 2019 SFS names only 6,947 planned inspecons, working with more than 50 risk criteria. The Naonal Bank of Ukraine (NBU) has decreased the limits for compulsory sales of foreign currency Table 1 incomes on 9 June 2016 from 75 per cent to 65 per Number of state planned inspecons in the sphere cent of the total hard currency income. On 4 April of economic acvies (except for SFS) 2017 this limit dropped to 50 per cent and starng from 1 March 2019 should have dropped to 30 per Number of planned state inspecons cent. Exporng companies need to keep hard 2016 21.664 currency to buy either raw materials or technologies 2017 48.268 abroad or to invest abroad in order to support their 2018 108.758 exports. In June 2016 the NBU allowed the 2019 110.497 repatriaon of dividends to foreign investors for the period of 2014-15, liming it to the equivalent of Source: hps://regulaon.gov.ua, US$ 1 million a month or 10 per cent of the total hps://inspecons.gov.ua dividend. In May 2017 NBU allowed the transfer of Good example of state control from Romania dividends for the period of 2014-16, liming it to US$ 5 million a month and for the period unl 2013 On 29 November 2017 the Romanian Parliament curbing it to US$ 2 million a month. Based on its adopted the so-called “Prevenon Law”, based on Decision No.19 from 1 March 2018 NBU allowed the which state inspectors should first issue warnings repatriaon of dividends amounng to a maximum of instead of applying direct fines to business enes US$ 7 million a month; allowed to pay back foreign for less serious breaches of regulaons. Such credits in advance restricng this to US$ 2 million a companies are given a grace period by the state month and extended a list of business transacons inspecng authority in order to comply with the state that were not subject to duty of compulsory 50 per regulaon requirements. The law scraps the inial cent sales of hard currency. fines in the case of several hundred regulaon Chapter 5 | 94

On 21 June 2018 the Verkhovna Rada adopted a defining mutual relaons of Business Ombudsman new and progressive law “On currency and currency with state bodies, local self-governing enes and operaons” and created space for the central bank to companies and to strengthen its posion, the proceed further in currency liberalisaon. The law Ministry of Economic Development and Trade entered into force on 7 February 2019. Liberalised prepared a dra law “On the Business Ombudsman currency condions would support investors and Council” and registered it on 5 May 2016. Almost foreign trade companies, and as a consequence three years have passed, but the dra law has sll should stabilise the macroeconomic situaon of the not been fully approved by the Verkhovna Rada. country. Derzgeonadra and Derzgeocadaster started pilot projects of e-aucons to sell mineral resources, Why not more? geological research and extracon rights as well as agrarian land lease rights. This iniave should be Improvement of business and investment climate welcomed, and it would be desirable to transfer should be one of the highest priories in Ukraine's those pilot projects into regular usage. Ukraine's economic policy. The state should create and Cabinet of Ministers adopted on 26 July 2018 the guarantee a transparent, simple and aracve “Methodology of sales of electronic special business climate as the main prerequisite for permissions on mineral resources” for the period acvang domesc and foreign investments and from 1 September 2018 only unl 1 September reaching sufficient and sustainable economic growth. 2019. Switching to online aucons, on 25 October When taking into consideraon the fact that only 2018 the Derzgeonadra unexpectedly sold an oil and during two recent years (2014 and 2015) Ukraine's gas exploraon permit for 4.3 mes the expected GDP declined by 16.4 per cent, and later on it grew price. It is thought that previously permits were sold at around 2-3 per cent annually, it becomes clear that in backdoor deals, oen to companies unqualified to the present growth rate is not enough. I It has to be develop the fields. On 18 October 2018 the first much stronger and sustainable in order to improve electronic aucon of a state agrarian land lease was living standards of cizens. Reforms in Ukraine are organised by Derzgeocadaster and performed well going in the right direcon, but it would be when the average lease price reached 34.3 per cent reasonable to increase pace of the reforms. There are of nominal-monetary land evaluaon. E-aucons of some objecve reasons for that. First, there is sll state and communal agrarian land should be resistance from those who would lose if progressive adopted for regular usage through amendments to changes happened, so they are benefing from the the Land Code. “status quo”. Secondly, the current coalion has slim majority and low vong discipline in the Verkhovna Impact of concentraon Rada. And thirdly, quality of execuve power of Another crucial reason for improving the business central and municipal levels could be further environment is to create condions for healthy improved while pushing on administrave reform. compeon. Compeon built on a simple and fair Some reforms went half way business environment where all businesses have equal rights and obligaons is the biggest driver of The Business Ombudsman Council was established in compeveness, innovaon development as well as Ukraine in December 2014 based on a memorandum consumer sasfacon and curbing inflaon. If of understanding of Ukrainian An-corrupon business regulaon is simple and transparent, more Iniaves from 12 May 2014. Since its launch the companies are willing to enter the market. If the Business Ombudsman Council has received 5,055 regulaons are excessive, oligarchs oen use them to complaints, 67 per cent of which have been closed by expel competors; in principle only companies with accepng recommendaons of the Ombudsman. The “proper polical es” are able to enter or stay in such financial effect of the ombudsman's acvity for the markets. business community working in Ukraine reached almost UAH 13.5 billion by 2019. With the aim of The An-monopoly Commiee of Ukraine, created by law in 1993, should protect economic Chapter 5 | 95

compeon in terms of conducng inspecons of shipments are down by 25 per cent due to the businesses, state and municipal organs, finding out inability of Ukrzaliznytsa to sele the issue. The market posion of businesses including monopoly company has 100 of its own locomoves and many posion, allowing or prohibing agreed acvies wagons, but Ukrzaliznytsa did not allow it to use and concentraon of companies and so on. In 2018 them. The company has planned to send 300,000 the An-monopoly Commiee decided “DTEK tonnes of ore concentrates to Eastern Europe a Holding” does not possess a monopoly because its month, but they only one third of this amount- market share in electricity generaon is 26 per cent, about 100,000 tonnes due to lack of means of while the state company “Energoatom” generates 57 transportaon. per cent of electricity. Equal condions should be compulsory The World Bank's 2018 analysis on the influence of The government has to guarantee equal condions so-called “godfather capitalism” on economic for doing business. When there are equal condions development in Ukraine showed the following entrepreneurs are movated to do business. This rule results: 2 per cent of “polically connected” is twice as important for Ukraine, as the economy has companies in Ukraine control more than 20 per cent signs of oligarchic structures in many sectors and of goods turnover and more than 25 per cent of total therefore the temptaon to have different rules in assets in the country. The biggest concentraon of each marketplace could be present. State execuve polically connected companies works in extracon power should strictly reject any aempt to introduce industry, energy sector and transportaon where different rules for different groups of businesses. they control more than 40 per cent of turnover and Strategically it is important to have equal access of more than 50 per cent of assets. companies to state-owned or communal-owned Monopolies, for example in railway transportaon, assets including land and mineral resources, to are having a harmful effect on the business climate reduce significantly all exempons in Ukrainian of the country. Implemenng corporate governance legislaon, to avoid too vigorous concentraon of in Ukrzaliznytsa is fine, but the real soluon should market share in one person's hands. be to liberalise the sector and to let competors in. When we look at the Ukrainian legislaon, there are Liberalisaon should be the way of improving the a lot of progressive rules that are quickly curbed with quality of services and reducing prices, not vice- numerous exempons. For example, if a company versa while curbing compeon. Instead, Verkhovna wants to get special permission to extract mineral Rada on 18 October 2018 voted down a dra law resources, the company has to win the obligatory “On railway transport in Ukraine” that wanted to aucon. However, there are 12 exempons that allow private trains to carry freight on state-owned allow them not to go through the aucon. Another tracks in 2019 in a pilot programme. Ukrzaliznytsia's example: if an agrarian would like to lease a piece of representaves alleged that private freight trains state-owned or communal-owned agrarian land, the could endanger the financial stability of the company. agrarian has to win the aucon, but there are 20 Thanks to the efforts of the State Regulatory Service exempons where the aucon is not obligatory. Or if of Ukraine and major business associaons, a company is going to build a commercial or Ukrzaliznytsa has only increased tariffs for cargo residenal building, it has to pay a so-called transportaon by 15 per cent since 31 October “infrastructure development fee” of up to 10 per cent 2017, otherwise cargo tariffs would have been or up to 4 per cent of the building's value, but there increased by 22.5 per cent. In 2019 Ukrzaliznytsa are 13 exempons to this rule (including three new plans to increase cargo tariffs by another 14.2 per excepons valid since 2019). A thorough review of all cent. economic legislaon, exisng and proposed, is A foreign investor's view of state monopolies strongly recommended in order to root out and reject statements with double-standards and ambiguous ArcelorMial Ukraine reported an unpleasant meaning. It will pay off mulple mes in terms of situaon with regards to relaons to the state economic development. railroad carrier Ukrzaliznytsa. ArcelorMial's Chapter 5 | 96

Progressive changes, but only for some stability. Entrepreneurs prefer to concentrate on doing business as their core acvity instead of On 3 November 2016 a progressive dra law “On studying changes in the regulatory legislaon. Too cancellaon of administrave barriers for export of many changes, somemes contradicng each other, services” was adopted by the Verkhovna Rada, do not inspire trust among investors. On the bringing some much-needed simplificaons: foreign contrary, numerous changes could deter investors. trade contract for services providers (except for transporng services) could be reached in electronic Turning the reforms around form, through exchange of electronic messages or by In 2014 the Verkhovna Rada of Ukraine increased the subming invoices including electronically. If royalty on gas extracon for private companies from administrave barriers regarding export of services 28 per cent to 55 per cent (extracted from deposits exist, do they not exist in relaon to export of goods up to 5,000 metres) and from 15 per cent to 28 per or import of services? cent (from deposits over 5,000 metres), and later on On 1 March 2018 the Verkhovna Rada adopted a in March 2015 also for state-owned companies from dra law that removed some administrave barriers 20 per cent to 70 per cent. The purpose of this for the gas and oil sector. Most important increase was the replenishment of the state budget. improvements are: improved procedure to get land, On 24 December 2015 by Law No. 909 the royalty the principle of servitude is allowed to be used, on gas extracon was decreased to 29 per cent (from obligaon to get act of mining permission is deposits up to 5,000 metres) and to 14 per cent cancelled, right to use land aer agreement with (deposits over 5,000 metres). In 2017 the royalty on owner before geng decision on change of targeted crude oil extracon was lowered from 45 per cent to purpose of usage etc. The queson is: do other areas 29 per cent (deposits up to 5000 metres) and from of geological research and extracon of mineral 21 per cent to 14 per cent (deposits over 5000 resources, apart from oil and gas, not need metres). Dra Law No.6776-d aer being adopted simplificaon of administrave barriers? On 23 has lowered the royalty for gas extracon since 1 November 2018 a law was adopted including an January 2018 for new drills from 29 per cent to 12 amendment iniated by MP Oleksij Muchak: per cent (up to 5,000 metres) and from 14 per cent to cancellaon of “infrastructure fee for development of 6 per cent (over 5,000 metres). Also the law has urban units” for construcons of agriculture and food lowered the royalty for gas condensate extracon processing industry. What about other buildings and since 1 January 2019 from 45 per cent to 29 per cent construcons? (deposits up 5,000 metres) and from 29 per cent to 14 per cent (deposits over 5,000 metres). And later Too many changes on an increase of the royalty on crude oil and gas The VIII convocaon of the Verkhovna Rada is condensate by 2 per cent was adopted by Verkhovna registering a tremendous number of new dra laws: Rada from 1 January 2019: from 29 per cent to 31 already by 13 September 2017 their amount per cent (deposits up to 5,000 metres) and from 14 exceeded 10,000. It is much more when compared to per cent to 16 per cent (deposits over 5,000 metres). previous convocaons of the Verkhovna Rada and is Shadow economy and corrupon metaphorically called in public a “legislave tsunami”. For comparison: Parliament of the VII convocaon Ukraine's shadow economy connues to gradually registered 7,400 dra laws, Parliament of IV decline, hing 32 per cent of GDP in 2018, down convocaon registered 7,600 dra laws. The Tax from 43 per cent in 2014, based on informaon from Code of Ukraine has been amended 124 mes since the Ministry of Economic Development and Trade. 2011. The Land Code has been changed 117 mes The Finance Ministry says the lion's share of the since 2003. informal economy is driven by a desire to avoid paying taxes. According to the State Stascs Reforms are about changing an old system, but too Service, 31 per cent of Ukrainian workers (8 million many changes are bad. Business is eager to welcome out of 26 million) are paid parally or fully in cash. posive changes, but at the same me business likes Chapter 5 | 97

Corrupon and distrust of the courts are the top two amendments of 23 November 2018 the posion of obstacles to invesng in Ukraine according to a present intermediaries becomes monopolisc as new survey conducted by the Dragon Capital, the AEPs have to obtain consent from four exisng AEPs European Business Associaon and the Center for and the value of real estate will be determined by the Economic Strategy. For the third year running State Property Fund, not by the Cabinet of Ministers. corrupon ranks first among investors' problems. That means a fee on real estate transacons has Other investor worries are: hryvnia exchange rate effecvely been introduced which goes to the four instability, monopolisaon of power by oligarchs and private companies: PP “Informaon Consulng conflicts of interests between policians and Center ASBOU”, TOV “VIP Department”, TOV “Akcent business. In fih place was the military conflict with online”, TOV “For procurement”. Misusing their Russia. Even if the state system of control and monopolisc intermediary posion, at the end of surveillance has been changed for more transparent 2018 AEPs significantly increased prices for and business-friendly, the system is sll subject to evaluators. corrupon, therefore has to be reformed further. Raider aacks Let's consider the forest sector. The State Agency of Raider aacks or hosle takeovers are a problem that Forest Resources of Ukraine (Derzhlisagenstvo) is in sll persists in Ukraine and constute significant charge of around 285 state forest enes working on obstacles for businessmen to invest and develop 7.6 million hectares (ha) of Ukrainian forests. their businesses. According to data from the Ministry Derzhlisagenstvo has a conflict of interest as it of Jusce there were up to 3,000 hosle takeovers in manages state forest enterprises dealing in economic Ukraine in 2015 and 90 per cent were, unfortunately, acvies in state forests and at the same me successful. Again according to the Ministry of Jusce controls forests through the State Forest Protecon of Ukraine, in 2017 there were 4,794 complaints of Service. Derzhlisagenstvo should guarantee equal raider aacks received by the An-Raider Units at access to cut wood as raw material for wood- the Oblast State Administraons, in 2018 the processing companies. According to an invesgaon number of complaints dropped to 3,718 and in 2019 report from Brish NGO Earth Sight, illegal mber (unl the middle of April) 564 complaints had been from Ukraine is fuelling European markets: despite received. There are couple of reasons why this the moratorium posted in Ukraine on log exports, unpleasant situaon sll persists. export of wood from Ukraine to the European Union grew by 75 per cent in the last four years breaking €1 First, broad liberalisaon of the registraon of billion in 2017, 40 per cent of which was illegal. companies and real estate has been implemented. Registraon responsibilies were transferred to Intermediaries thanks to polical es notaries, municipalies and authorised subjects. The dra law “On state budget 2019” was adopted Starng from 1 January 2013 notaries are authorised by the Verkhovna Rada on 23 November 2018, and to register ownership rights and other rights and only later on it became clear that amendments responsibilies. Since 1 April 2015 notaries have between the first and second readings brought some been able to register lease agreements on agrarian surprisingly unfair amendments aiming to serve the land plots even without notary confirmaon of such interests of some MPs. Amendments No. 151 and lease agreements. There are 5,606 private notaries 152 strengthened the posion of so called and 773 state notary offices at present. A raider “authorised electronic places” (AEPs) in the area of aack without collaboraon with a state registrar is real estate evaluaon that are in fact intermediaries praccally impossible. Argument in favour of transfer between seller/buyer of real estate and the database of state registraon rights to private and municipal of the State Property Fund. registrars with the aim of speeding up the registraon process is quesonable, especially when Even if the obligaon to check prices of real estate in it jeopardises proper protecon of private ownership the database of the State Property Fund (SPF) has and related rights. Besides that, the system of two been introduced since July 2018, only with those state registers: The State Land Cadastre and the Chapter 5 | 98

State Register of Real Estate Rights and its Burdens is changing the behavioural paerns and mentality oen misused by raiders. inherited from the Soviet era. Today there are no easy soluons with quick wins. Secondly, persons and subjects parcipang in raider aacks are not properly prosecuted and punished, It would be advisable to go further in reducing the including registrars. The majority of vicms of such number of licences and permits needed for aacks are simply trying to, with huge support from conducng business acvies and to implement professional lawyers; rebuff an aack with minimal more frequently declarave instead or perming losses. Raiders' vicms have neither the addional principle to start a business. “On financial resources nor the free me to pursue licensing of economic acvies” declares that ligaon unl the raiders and all their collaborators licensing implies the highest level of state regulaon are finally punished. Under such circumstances, when and should be implemented only in cases when other raiders see lack of punishment and passivity, they tools of state regulaon are not sufficient. For tend to connue their crime. example, conducng a business as tour operator, processing of household waste, storage of household Thirdly, structures that the government created in waste or serving as intermediary for finding a job order to fight against raider aacks should be abroad could be regulated on lower and less strict assessed for effecveness. Since 1 January 2016 the regulatory level, not by licenses. Commission on State Registraon Claims Review under the Ministry of Jusce started to operate. A favourable business climate requires Ukraine to From its establishment unl 11 March 2019 the further reduce the number of control bodies that are Commission has met 249 mes, therefore successful allowed to conduct state supervision of economic rate of claims from raiders' vicms could and should acvies, to remove duplicaons of competences be examined. In 2007 the Inter-Governmental and to change the character of their work from Commission on Protecon of Investors Rights and repressive into consultave and helpful in Fight against Hosle Takeovers and Raiders Aacks accordance with a valid strategy of reform of state on Companies was established. surveillance and control. Business requires the replacement of the different state organs invesgang breaches of financial security legislaon What to do next? (Naonal Police of Ukraine, SBU, State Service of It is highly recommended to pay more aenon to Financial Monitoring of Ukraine, Prosecutor General's proper communicaon with the public, expert Office, Naonal An-corrupon Bureau of Ukraine, environment, NGOs, business associaons, state State Auding Service of Ukraine and Accounng instuons and self-governing bodies in order to Chamber of Ukraine) with one professional explain reasons why Ukraine badly needs to connue organisaon that would have sole responsibility for the process of business climate improvement and to dealing with economic crimes. It would be crucial to make that process deeper and more complex, concentrate on the adopon of the dra Law “On guaranteeing equal condions of doing business for Naonal Bureau of Financial Security of Ukraine” that all. This communicaon should also explain the risks resolves this task. of halng the reforms, undertaking half-baked Analysis of regulatory impact should be obligatory for reforms or allowing reform reversals to happen. all new regulatory acts including those being Without proper reforms Ukraine will simply not be prepared by the Verkhovna Rada of Ukraine and by able to leave the posion of the poorest country in self-governing territorial bodies. In addion, it would Europe, as it ranks now in the IMF rang (occupying be necessary to connue increasing the quality of 134th place in the world with GDP per capita of US$ dra regulatory acts including analysis of regulatory 2690). Public communicaon could help push for the impact. adopon of progressive laws in the Parliament. But reforms are not only about adopng or amending Electronic public procurement system ProZorro legislaon. They should also be about people and should be improved further. On 23 November 2018 Chapter 5 | 99

Mps did not support progressive dra law that tried done by an amendment for agriculture and food to improve exisng regulaon on ProZorro. Therefore industry buildings. it would be appropriate if the Parliament supports In order to streamline customs formalies and that dra law “On public procurement” implemenng accelerate movement of goods through the border EU Direcves 2014/24 and 2014/25 and the EU- for honest exporters and importers, and therefore Ukraine Associaon Agreement with the following increase their compeveness and fulfil the main improvements: simplificaon of requirements requirements of the EU-Ukraine Associaon for procurements below a threshold, return of Agreement, it would be desirable to implement the parcipants' fee on receipt of a sasfactory status of “authorised economic operator” through the complaint, possibility of fixing formal mistakes within adopon of the dra Law “On amending Customs 24 hours, and a new instrument to determine if a Code of Ukraine regarding some queson of price is too low. implementaon of Chapter 5 of Title IV of Beer protecon of private property rights including Associaon agreement between Ukraine and EU” intellectual property rights is of utmost importance registered at the Verkhovna Rada on 29 December for a good business environment. Ukraine has to 2017 and its respecve sub laws. strongly suppress any aempt at raider aacks as the To foster investments, especially in infrastructure, it safety of the business environment is crucial. would be essenal to adopt at its second reading the Comprehensive reform in the area of property rights dra Law “On concessions” that should replace the protecon is needed including improvement of present one adopted in 1999. The new law acvity of the Commission on State Registraon implements addional guarantees for investors, Claims Review under the Ministry of Jusce of simplifies obtaining a land plot for public-private Ukraine and unificaon of the State Land Cadastre partnership projects and other updates. with the State Register of Real Estate Rights and its Burdens in order to avoid duplicaon and Based on the need to reform state regulaon of significantly curb the space for corrupon and financial services markets it is advisable to abolish dishonest acvies of state registrars. the Naonal Financial Service and to split its powers between the Naonal Bank of Ukraine and the It would be advisable for the Cabinet of Ministers to Naonal Commission on Securies and Stock Market adopt missing unified protocols and criteria to by adopng the dra Law No. 2413a in the determine risk while evaluang entrepreneurial Verkhovna Rada at its second reading. acvies regarding state control and surveillance according to the new methodology adopted by the The management system of state forest enterprises Cabinet of Ministers' Decree of 10 May 2018. By 18 should be improved significantly. There is an urgent January 2019 only four unified protocols and 37 risk need to implement obligatory electronic accounng criteria out of total 85 spheres of state control and of wood from point of cung to its processing or surveillance were adopted by the Cabinet of final consumpon for all permanent forest users. Ministers. Adopon of the missing documents would Equal access to state wood for all wood processing enable to implement risk approach in conducng manufacturers through electronic aucons should be state control and surveillance. guaranteed and implemented. The State Forest Protecon Service should be detached from The same simplificaons as were adopted for export Derzhlisagenstvo and from state forest enterprises in of services could be adopted for the export and order to secure its independence: the Decree of the import of all services and goods. By the same logic it Cabinet of Ministers No. 976 from 16 September would be essenal to adopt the same deregulaon 2009 should be amended accordingly. Amending the measures as were adopted for the oil and gas sector Code of Ukraine on Administrave Offence and the for geological research and extracon of all mineral Criminal Code of Ukraine could help resolve the issue resources. It would be appropriate to scrap the of connued illegal logging by increasing the infrastructure fee on development of urban units for responsibility of the offenders. all buildings and construcons, as it was recently Chapter 6 Chapter 6 | 101 Chapter 6 Land reform

Alexander Skurla Parliament have gone in favour of extending the land moratorium, confirming the “status quo”. Ukraine Legacy possesses around 27.8 million ha of black soil (67.7 per cent of all agrarian land in Ukraine), the highest Land reform began in Ukraine 28 years ago, when the amount in Europe and fourth highest in the world Verkhovna Rada of, at that me, the Ukrainian Soviet (Ukraine has 8.7 per cent of the world´s black soil Socialist Republic, adopted on 18 December 1990 reserves). Ukraine's biggest asset has effecvely been the Decree “On land reform”. Since 1995 land reform frozen for more than 18 years. That hinders was carried by way of privasaon: 6.9 million economic growth. cizens of Ukraine received the right to privase 27 million hectares (ha) of formerly collecve agrarian Since 2005, benefing mostly from the land land as compensaon for working for soviet moratorium due to cheap lease fees as well as from agricultural enterprises “kolkhoz” and “sovchoz” that beer financing opportunies, agroholdings (agrarian no longer existed. But the remuneraon did not enterprises above 10 thousand ha) began to develop translate into full ownership of agrarian land due to quickly. The biggest boom of agroholdings was from the introducon of a moratorium on sales/purchases 2005 to 2010 when they increased fourfold the of agrarian land on 1 January 2002, inially intended amount of culvated agrarian land. Later on, the to last three years. amount of agrarian land culvated by agroholdings connued to increase, from 1.7 million ha (8 per cent At the beginning the moratorium was targeng only of all land culvated by agrarian enterprises) in 2007 private agrarian land plot owners, but later on was to 6.25 million ha (29 per cent of all land culvated extended to all land of agricultural producon with by agrarian enterprises) in 2017. the aim of regulang of the implementaon of rights of both cizens and legal bodies to agrarian land The State Land Cadastre was adopted by the plots. Since its adopon the moratorium has been Verkhovna Rada in July 2011. By 1 January 2013 a prolonged 10 mes. The land moratorium bans not single informaon system of the State Land Cadastre only sales/purchases of agrarian land, but also any should have been created, transferring all data on change of usage of private agrarian land and land registraon and administrave-territorial inseron of private agrarian land plot into equity froners from the previous state land register. In capital of companies. January 2013 an electronic State Land Cadastre was introduced under the state agency “Derzcomzem”. The current agrarian land moratorium resembles the Land documentaon that was mostly kept on paper Soviet “Decree on Land” adopted by II. All-Russian in local district departments of land resources, were Soviets meeng on land on 26 October 1917 and to be digised. In the first month of the signed by Vladimir Ulianov-Lenin. The first Arcle transformaon alone 10,962 informaon errors were states: “Private property on land is cancelled forever, detected. Since 1 January 2013 unified state register land cannot be sold, bought, leased or submied as on real estate rights and its burdens has been collateral or taken by any other way.” created, where rights to a land plot can be registered Liing the moratorium on sales/purchases of agrarian only aer previous registraon at the State Land land should have been a key tool in the dismantling Cadastre. of communist structures. Unfortunately, this has not Former Prime Minister Arseniy Yatsenyuk announced yet happened. The issue of the land sale moratorium in 2016 an idea to sell one million ha of state-owned became polically very sensive. Ukrainian populists agrarian land at open aucon in order to fight “black” have been trying to persuade the public for years leasing of state-owned agrarian land. This aempt to that it is very dangerous to li the moratorium on scrap the agrarian land moratorium did not result in a agrarian land sales/purchases, pretending to act in concrete legislave proposion. public interest. Numerous votes of the Ukrainian Chapter 6 | 102

What has been done? Recently there has been some progress in the fulfilment of the State Land Cadastre menoned: in In 2018 the process of transfer of state-owned 2015 there were only 15.75 million land plots agrarian land to “unified territorial units” was started registered at the cadastre, by October 2018 this by the iniave of the Cabinet of Ministers. That is number had increased by 23 per cent and reached an important supporve step towards the opening of 19.3 million land plots. The situaon with registraon an agrarian land market, as local self-governing units in the cadastre is much beer with private agrarian want to manage local land by themselves. Almost 1.5 land thanks to the privasaon of up to 27 million ha million ha of state-owned land covering territories of of state-owned agrarian land by cizens. Private land so called “unified territorial communies” were owners had to pay costs linked to the preparaon of passed to 647 “united territorial communies” in land plot documentaon. Registraon of state- 2018. This governmental decision has had a posive owned agrarian land used to lag behind, mostly due mulplicaon effect: as well as improving land to lack of budgetary resources for that purpose. management in the regions it also movates further Fulfilment of the State Land Cadastre is oen establishment of “unified territorial communies”. menoned as a precondion for land market Looking at Germany's experience can also give us a opening. But from a technical point of view it should view on the importance of involving local decision- not have strong negave influence on land market makers in land reform. In late 1967, the opening as only registered land plots could be Constuonal Court of Germany announced that a sold/purchased anyway. fair regulatory system regarding management of land A working group headed by the Ministry of Agrarian requires much stronger consideraon of interests of Policy and Food of Ukraine has been working on the local stakeholders compared to usage of other means preparaon of dra law “On agrarian land circulaon” of producon. and another “On land consolidaon” since the One of the posive achievements of beginning of 2017. Numerous meengs with Derzgeocadaster in 2018 was the implementaon of agrarians, their business associaons, farmers, a pilot project of electronic aucons to sell lease representaves of land owners and banks were held rights on state-owned agrarian land. Excellent results in that period, at the level of the Cabinet of were achieved on e-aucon of 18 October 2018 Ministers. By the summer of 2017 both dra Laws when lease rights on 10 land plots amounng to 210 were ready, containing safeguards on liing the ha were for sale. Whilst starng price was moratorium. Having analysed percepon of open determined at 8.3 per cent of nominal-monetary land market by different stakeholders, taking into land evaluaon, the average lease price reached was account the very long period that the land 34.3 per cent of nominal-monetary land evaluaon. moratorium has been in force, considering high The highest lease price of that e-aucon was 70.73 polical sensivity of the issue, trying to minimise a per cent (UAH 12,138/around €400) of nominal- potenal cricism of Ukrainian populists on liing monetary land evaluaon of the plot in queson. the land moratorium and taking into account the current structure of the Parliament in order to break Ukraine became the 5th country in the world to long lasng resistance towards liing the land transfer its land cadastre into Blockchain technology. moratorium, the working group came to the On 3 October 2017 Derzgeocadaster successfully conclusion that at that period of me a prudent completed transfer of the State Land Cadastre into model of land market opening would have the best Blockchain technology, implemenng the Decree of chance of being adopted and would sasfy the Cabinet of Ministers adopted on 21 June 2017. majority of stakeholders. Were there a stronger Blockchain technology enables safe synchronisaon public support for liing the land moratorium and of the cadastre's data while at the same me saving less polical manipulaon on that issue, the working them in different electronic bases. Any aempt of group would probably agree on a more liberal model external intervenon should therefore be eliminated. of moratorium liing. The new technology also enables the public to control the cadastre online. Chapter 6 | 103

The main safeguards of the dra law “On agrarian 1 January 2020. Also the atude of the public land circulaon” agreed by the working group were: towards liing of the moratorium is changing in a posive direcon. In the poll organised by the USAID • Agrarian land could only be owned by Ukrainian project at the end of 2015 on 2,041 respondents cizens, Ukrainian municipalies, the state of (cizens of Ukraine in 108 towns in all regions of Ukraine and Ukrainian legal bodies, at least in the Ukraine) 63 per cent were against liing of the land transion period. moratorium and 18 per cent were in favour. In • There should be a maximum amount of agrarian October 2018, based on a GfK¹ Ukraine poll, 44.7 land that could be owned by a single enty. per cent of respondents were against liing of the • State and communal agrarian land could only be land moratorium and 19.9 per cent of respondents sold through e-aucons. were in favour. On the queson of whether they • The maximum size of an aucon lot in ha should be would like to have a right to dispose freely of their determined. agrarian land, 21.6 per cent of respondents were for • Warranty fee should be implemented for aucon and 40.3 per cent were against. The same GfK parcipants based on a certain percentage of Ukraine poll of October 2018 made several normave-monetary evaluaon of auconed land interesng findings: 78 per cent of respondents who plot. are agrarian land plots owners are renng out their land plots; 52.1 per cent of them agree that because • The minimum price for purchase/sales of agrarian of the moratorium they lose part of their lease land should be on the level of normave-monetary income; 50.8 per cent of renng agrarian land plot evaluaon of the land plot in transion period. owners agree that because of the moratorium • There should be a state tax on reselling of agrarian agroholdings are able to control more and more land, amounng to a certain percentage of agrarian land while the number of farm enterprises normave-monetary evaluaon of land plot, if the diminishes. owner sells it during a certain period aer land ownership is registered. On 21 June 2018 the Cizens Coalion for Liing of the Land Moratorium was created by 20 • Actual lease agreements should be guaranteed to organisaons, including SAGSUR, and a agrarians leasing land plots in case the owner of a memorandum against the moratorium was signed. land plot changes. Today the Coalion comprises 42 organisaons • The amount of leased agrarian land by one agrarian represenng close to 1,500 agrarian companies, cannot exceed a certain percentage of the total entrepreneurs, banks, associaons, MPs, NGOs agrarian land of “raion”/“united territorial unit”. including the Ukrainian Club of Agrarian Business, the Ukrainian Agrarian Confederaon, the Seed • There should be a smulus for young farmers Associaon of Ukraine and the “Ukrsadprom” parcipang in e-aucons. Associaon. Not all agrarians are against opening of agrarian land market. Some of them, including some • The price of sold/purchased agrarian land should agroholdings are drivers in promoon of open land be monitored. market, especially those that would like to secure Thanks to expert communicaon campaigns in the future investments while differenang their media and at various events, supporters of the business to perennial or permanent crops, niche agrarian land moratorium within the Verkhovna Rada crops, animal breeding or food-processing. are losing power. There are fewer and fewer MPs In 2018 some important legislave changes were who vote for the extension of the moratorium: in adopted by the Verkhovna Rada. On 10 July 2018 a 2015 there were 309 MPs who voted in favour of dra law was adopted to sele the issue of collecve extending the moratorium, in 2016 there were 297 ownership of agrarian land: where ownership of land votes, in 2017 only 236 and in 2018 only 231 votes. ulised for field roads, yards, forest lines has been Last me the moratorium was extended unl transferred to communal ownership of municipalies.

¹ The biggest market research organisaon in Germany and the 4th biggest market research organisaon in the world. Chapter 6 | 104

It was a posive step forward as every piece of land 193 per cent (unl 2016). has to have a real owner. But at the same me the During 2018 a country-wide normave-monetary dra law introduced the possibility of concluding evaluaon of agrarian land took place on 35 million sublease agreements without the consent of ha, by order of the Cabinet of Ministers of 7 February landlords, to rent field roads without aucons. 2018. The previous exercise of this type took place in Agrarians who own/use more than 75 per cent of the 1995. Up to two million ha of agrarian land were tract in case of land plots crossing get priority lease without normave-monetary evaluaon. Since 2019 rights regarding other agrarian land plots in that tract it is no longer necessary to draw up technical over other users. Privileged agrarians can exchange documentaon on normave-monetary evaluaon land plots in queson. on single land plots. Now it should be possible to On 10 July 2018 the Verkhovna Rada adopted the calculate online the country-wide normave- dra law “On smulang the creaon and operaon monetary value of agrarian land plots registered in of family farms” that tries to transform 4.1 million the State Land Cadastre (hps://ngo.land.gov.ua). On “specific village units” operang on 6.5 million ha of 16 November 2018 Ministry of Agrarian Policy and agrarian land into entrepreneurs – physical enes Food issued Decree No. 552 based on which the with the opportunity to register under a simplified country-wide normave-monetary evaluaon of tax system (payer of single tax of 4th group)² using agrarian land entered into force on 1 January 2019. state incenves to partly cover social security for a certain period. Why not more? Ukraine's own standard for organic producon, circulaon and labelling was adopted by the Moratorium on sales/purchases of agrarian land Verkhovna Rada on 10 July 2018. Organic operators The term “moratorium” was first introduced in the in Ukraine should have the right to choose which Roman Empire in order to freeze repayment of debts organic standard to use. Due to stronger organic by persons close to the ruling class, but was usually demand in developed countries, higher added value issued for a maximum period of 5 years. In Ukraine and respecvely higher prices on organic products on the moratorium has halted transacons with agrarian the world market Ukraine is in an excellent posion land, the biggest asset of the country, for more than to develop this opportunity. As organic producon is 18 years. There should be some reasons for halng a more long-term investment that requires a the full extent ownership of agrarian land for such a minimum of three years just for the land to be long period of me. cerfied as organic and then a focus on proper culvaon techniques according to strict organic The inability of policians to stop the moratorium on standards, the opening up of the land market could sales/purchases of agrarian land while adopng the foster development of that sector. Ukrainian Law “On agrarian land circulaon” is the biggest agrarians are gradually increasing the amount of land failure of land reform in Ukraine. The Cabinet of available for organic producon: in 2017 the amount Ministers (CoM) was obliged by the Verkhovna Rada of organic land increased by 10 per cent and reached to prepare and register dra Law “On agrarian land 420,000 ha; export of organic products also went up circulaon” by 1 March 2016. Due to the fact that by 10 per cent reaching 330,000 tonnes. But the gap CoM did not fulfil this task, the Verkhovna Rada between Ukraine and developed countries sll extended the deadline unl 1 July 2017. With the remains: while in Ukraine there are 426 organic latest amendment to the Land Code of 20 December operators, in France there are about 55,000 of them 2018 the Verkhovna Rada gave the CoM a new culvang around 1.5 million ha. In Poland there are deadline to work out and register the dra Law, by 1 about 25,000 organic operators and around 500 March 2019. organic processing enterprises. In Bulgaria the There is resistance to liing the land moratorium amount of land under organic producon has from different kinds of agrarian companies including increased by 310 per cent in 5 years, in Croaa by agroholdings, agrarian enterprises and farm

² A type of simplified taxaon applicable to the Ukrainian agricultural sector. Chapter 6 | 105

enterprises that benefit from cheap leasing of Country Lease fee agrarian land. In principle, agricultural land owners Austria 348 have only two basic possibilies: either to work in Netherlands 791 agribusiness by themselves or to rent the land plots to others. Only around 20 per cent of all land owners Source: Eurostat: hps://ec.europa.eu/eurostat, are actually working on their land. Because of the Derzgeocadaster moratorium banks are not willing to accept agrarian According to the “Strategy on improvement of land as collateral for issuing credit. Almost 1.4 million management mechanism in the sphere of usage and ha of privased land plots are neither rented nor protecon of state-owned agrarian land” adopted in culvated by owners.³ Such a situaon is 2017 state-owned agrarian land amounted to 10.4 advantageous for agribusiness as the majority of land million ha (at present less due to transfer of state owners are therefore forced to lease their land. land to communal ownership of “unified territorial According to data of Derzgeocadaster the average communies”), out of which 3.2 million ha are in lease fee for private agrarian land in 2017 amounted regular usage by state enterprises and organisaons, to UAH 1,369 (€43) per ha. 2.5 million ha are reserved (not transferred to There is significant burden from a past period when ownership or usage) and the remaining 4.7 million ha some agrarians were able to rent state and communal should have been leased. State land in regular usage agrarian land for long periods and for cheap prices. by state enterprises and organisaons is used Almost 50 per cent of rent agreements on renng ineffecvely, also through agreements of common state-owned agrarian land were concluded for up to culvaon and unregistered rights of land usage that 49 years, 27,000 agreements on renng state-owned could lead to a “shadow” economy. There could be a land were signed for a lease fee of between 1-3 per similar situaon in the case of state-owned land in cent of the normave-monetary land evaluaon reserves as the inventory of state land was not which means average lease fee on such state-owned completed. For agribusinesses involved in such agricultural land reached UAH 940 (€30).⁴ Lease fees schemes, the connuaon of the land moratorium for state and communal-owned agrarian land have suits their needs. been growing in recent years, if transacons go Some agrarians, especially smaller farmers, do not through compulsory land aucons. In 2017, 1,837 support the liing of the land moratorium because lease agreements have been finalised on leasing they are uncertain as to whether state officials would state- and communal-owned agrarian land through be able to provide them with cheap credit once they land aucons covering only 0.4 per cent of all state- decide to buy agrarian land, using either state aid (in owned agrarian land (42.5 thousand ha) for an the form of credit interest rates payments) or state average rent fee of 14.73 per cent of the normave- guarantees for issued credits. monetary evaluaon of land. In first half of 2018 the The atude of private agrarian land owners on the average rent fee increased to 18.75 per cent. abolion of the land moratorium is sll rather passive Table 1 or weak, even if improving. This could be explained Average lease fee on agrarian land per ha in some by their fragmentaon, weak polical backing and countries (in € per annum) in 2016 hesitaon due to perceived corrupon in the court system and connuing “raider” aacks in the agrarian Country Lease fee sector. It is not surprising that cizens do not want to Ukraine 41 be involved in an unstable and non-transparent Czech Rep. 96 situaon despite the fact that their ownership rights are being abused. Hungary 151 France 202 Opening up the agrarian land market was one of the top priories of the Memorandum of Economic and Bulgaria 225 Financial Policies, part of “Ukraine: Leer of intent to

³ Decree of Cabinet of Ministers No. 413 from 7 June 2017 ⁴ German-Ukrainian agro-polical dialogue, “Agrarian sector of Ukraine and Germany: facts and comments” Chapter 6 | 106

IMF” signed on 2 March 2017 between Ukraine and procedure, despite the fact that taxpayers' money IMF: “Liberalising the land market, including the sale finances the post of a judge of the Constuonal of agricultural land, remains essenal to boost Court significantly. Ukraine's growth potenal…Parliamentary approval Negave impacts of the current moratorium and of the law on agricultural land circulaon is expected possible advantages of liing it by end-May 2017, allowing for the current More than 1.4 million owners of privased land plots moratorium on the sale of agricultural land to expire (20 per cent) according to data of Derzgeocadaster by the end of 2017, thus allowing for the sale of have already died since the moratorium was state-owned and private land to start immediately introduced, and did not succeed in obtaining full thereaer.” Later on IMF officials temporarily skipped ownership rights on their land. Currently the average the issue of liing the agrarian land moratorium from age of land plot owners is around 60 years, 25 per their actual reform package agenda promising to cent of them are over 70 years old and 65 per cent of come back to it at a later date. them are rered. Ten years from now only 50 per Finally some populist policians are either against the cent of original land plot owners are likely to sll be opening up of the land market or pretending to alive. support it while requiring many new legislave Comparing Ukraine with other countries we can see prerequisites to be fulfilled before it happens, despite what Ukraine is losing every year that the the fact that many of them have already been sing moratorium is in force, taking into account also the for some me in the Verkhovna Rada, the organ that difference in crop yields. It is understandable that adopts legislaon. The number of progressive crop yields are influenced by many different factors members of parliament supporng agrarian land other than the preservaon of the land moratorium, opening is growing (69 MPs went to the like climate condions, soil quality, machinery Constuonal Court in September 2018 to claim availability and quality, adherence to crop rotaon nonconformity of the land moratorium to the principles and so on. Basic calculaons by the Constuon of Ukraine; on 17 January 2019, 81 MPs Ministry of Agrarian Policy and Food of Ukraine made voted for dra Decree No. 9355-P calling for in 2017, based on a comparison of Ukrainian crop cancellaon of the dra law “On prolongaon of the yields with those of countries with an open agrarian land moratorium”), but their number is at present sll land market, show that Ukraine loses approximately not sufficient for the dra law “On agrarian land US$ 3.3 billion annually due to the persistence of the circulaon” to be adopted, which would result in the land moratorium. land moratorium being cancelled. If we take into consideraon, for example, wheat as Ukrainian reality the third most important Ukrainian export On 1 November 2018 the Constuonal Court of agroproduct: the average wheat harvest in Ukraine in Ukraine decided not to open a constuonal 2017-18 was 4 tonnes/ha (early wheat yields procedure in the maer of 69 members of parliament diminished to 3.8 tonnes/ha) and in 2018 harvest of who claimed nonconformity of the agrarian land wheat declined to 3.73 tonnes/ha, whilst in Germany moratorium to the Constuon of Ukraine. The in 2017 the average wheat harvest was almost 8 Constuon of Ukraine, in arcles 14 and 22, tonnes/ha; in the United Kingdom average winter guarantees private property on land and bans wheat yields reached 10.55 tonnes/ha; and in limitaon of exisng rights and freedoms while Romania for that period the average wheat harvest adopng new laws or amending them. reached 4.84 tonnes/ha. The record winter wheat yield of 16.7 tonnes/ha was reached in New Zealand. Oleksij Mushak, MP of the Verkhovna Rada commented that the decision of the Constuonal Potatoes offer another example of Ukraine's Court of Ukraine was disgraceful, given that the agricultural yields being understood in comparison: maer that concerns almost seven million cizens of while in Germany potato yields reached 45 Ukraine was not considered by the court to be a tonnes/ha in 2017, in Ukraine yields were less than sufficient reason for iniang a constuonal half that. A similar situaon could be seen in milk Chapter 6 | 107

producon: while in Germany in 2017 it reached Source: OECD data: more than 7 tonnes/cow/year,⁵ in Ukraine it was only hps://data.oecd.org/agrooutput/crop-producon.htm 4.7 tonnes/cow/year. Besides that, the number of The World Bank esmates that a free market for cale in Ukraine has decreased by 60.5 per cent farmland would generate at least US$ 1 billion a year since the introducon of the land moratorium. As of in rural investments. As Ukrainian agrarian land is 1 May 2019 there were only 3.73 million head of “frozen” by legislaon, necessary resources in terms cale and only 1.93 million head of cows according of technology and proper agro-management are to data from the State Stascs Service of Ukraine. limited, especially for smaller agrarian companies. As cale breeding for milk or meat producon means Commercial banks working in Ukraine do not accept long-term investment, the above-menoned land under the moratorium as collateral for issuing development in Ukraine is direct evidence that credits, and this is one of the reasons why banks are preservaon of the land moratorium negavely usually not keen to finance farmers with culvaon influences long-term investments in agriculture, below 500 ha. Farmers do not feel stability towards including cale breeding. the future under the land moratorium, therefore their To get the full picture it would be necessary to ability and willingness to invest is limited. Lease consider, in addion to the quanty of yields, also agreements do not give sufficient stability for quality of crops/animal products and climate investment projects. The table below shows the condions. For example the hard wheat content of connuous orientaon of Ukrainian agrarian exports proteins should be at least 10-14 per cent, humidity towards commodity products under the land at maximum of 14.5 per cent. The superior black soil moratorium, but the data confirm ability of Ukrainian quality and reasonable climate condions in Ukraine producers to reorient exports to new markets. should allow to for higher yields of quality crops. To Investments into food processing should benefit from understand beer the current stage of agriculture the cancellaon of the moratorium. development in Ukraine it is reasonable to see the Table 3 picture in comparison to another countries. The table below gives us an addional perspecve on the Export of ready-made food products from Ukraine present situaon and future prospects for agricultural (IV chapter of Ukrainian classificaon of goods of producon in Ukraine. foreign economic acvies)

Table 2 Export Percentage Year in US$ billion of total exports Crop producon of wheat, maize, soya beans in 2013 3.56 5.6% tonnes per hectare, in 2017 2014 3.10 5.7% Country Wheat Maize Soya-beans 2015 2.47 6.5% Ukraine 4.1 5.4 1.9 2016 2.45 6.7% Kazakhstan 1.2 2.3 2.1 2017 2.83 6.5% Russia 3.1 4.4 1.5 2018 3.02 6.4% USA 3.1 11.1 3.3 Source: www.ukrstat.gov.ua Turkey 2.8 8.9 4.3 Ethiopia 2.8 3.9 2.0 Agrarian development requires stability and 2.8 30.0 1.0 knowledge. If there is no stability there is also no drive for knowledge. A connuous increase of Canada 3.3 10.0 2.6 professional agri-technical knowledge is needed. Chile 5.3 11.2 1.0 Agrarians should be prepared to face climate change: China 5.4 6.1 2.1 during the last 20 years the average air temperature Switzerland 6.0 8.4 2.5 has risen in Ukraine by 0.8 °C, and in summer me New Zealand 10.0 10.9

⁵ Data from the Ukrainian Club of Agrarian Business. Chapter 6 | 108

even by 1.3 °C.⁶ Source: Eurostat: www.ec.europa.eu/eurostat,Ministry of Agrarian Policy and Food of Ukraine Also thanks to the land moratorium, the concentraon of agrarian land in the hands of A lesson from Lan America agroholdings has increased in recent years. Even aer Governments of Lan American countries pursuing the “agroholding boom” of 2005-10, their number agrarian reforms opened land markets for domesc and culvated land size connue to grow. In 2017 and foreign investors, but underesmated the there were 93 agro-holdings in Ukraine (culvang complexies of that transformaon that oen had land over 10 thousand ha), up from 80 in 2012.⁷ The unexpected consequences. volume of agrarian land under culvaon by agroholdings increased in the last six years from 5.6 High land concentraon was the result: the highest million ha to 6.25 million ha in 2018. Agroholdings concentraon is in Paraguay (0.94 Gini coefficient), concentrate mostly on one-year crops with rather followed by Brazil (0.86), Uruguay (0.84) and Panama limited added value. (0.84).⁹ According to data from the Brazilian Instute of Geography and Stascs, up to 43 per cent of Without a doubt, agroholdings are playing an Brazilian agricultural land is in the hands of important role in Ukraine, creang an important part lafundists (single owners of over 500 ha). Such land in export proceedings and thus guaranteeing the concentraon creates another extreme: orientaon macroeconomic stability of the country. A model of on monoculture commodity export, pushing up coexistence of agrarian companies of different sizes domesc food prices. could be a good soluon for Ukraine, preserving the principle of equal condions for doing business. On 22 May 2018 the European Court of Human There should be space for enough players in the Rights (ECHR) decided in the case of two Ukrainian agrarian market that would guarantee fair cizens “Zelenchuk and Cjucjura against Ukraine” compeon, beer food quality and lower prices for that an absolute ban on sales/purchases of agrarian consumers. There should also be the opportunity for land in Ukraine equates to a breach of human rights four million households acve in culvaon and on private property which are protected by the breeding to turn into physical enes – European Convenon on Human Rights. The ECHR entrepreneurs or family farms. also stressed the necessity to keep a jusfied balance between the state's interests and private property Table 4 rights of the claimants and recommended that Average size of agrarian enterprise in different Ukraine adopt more balanced land legislaon in a countries in ha reasonable length of me. Average size Number ECHR decisions are legally binding for Ukrainian Country of enterprise of enterprises courts within three months of the ECHR's ruling. That Ukraine 417⁸ 47.730 means that since 22 August 2018 Ukrainian agrarian Romania 3.6 3.629.700 land owners could turn to the Ukrainian courts based Poland 10.1 1.429.000 on that parcular ECHR decision. A representave of Austria 19.4 140.400 the Ministry of Jusce of Ukraine predicts that the Ireland 32.4 137.500 ECHR can start awarding financial rewards from €2,000 to €75,000 to each claimant based on the Finland 41.5 54.400 evaluaon of each parcular claim, which could Germany 60.5 276.000 create a serious burden on the state budget. Slovakia 80.7 23.600 Another unpleasant possible consequence of the England 90 101.000 moratorium is deterioraon of the quality of

⁶ Balabuch V.O., Ukrainian Hydrometeorology Instute of Naonal Academy of Science: “Change of climate condions in Ukraine and its influence on agricultural producon.” ⁷ Data of Ukrainian Club of Agrarian Business ⁸ Legal bodies only. ⁹ Internaonal Land Coalion: “The concentraon of land ownership in Lan America: An approach to current problems”. Chapter 6 | 109

Ukrainian soil. According to data of the Ministry of land management, development of farm enterprises Agrarian Policy and Food of Ukraine and the Instute including family farms, fostering local investments of Soil Protecon of Ukraine the amount of humus, and strict protecon of private property should be the most precious part of soil, has diminished in among the priories. Creaon of aracve Ukraine during the last 20 years by 0.22 per cent condions for living in rural areas is listed as one of which represents significant deterioraon; to the 15 priories of state agrarian policy in the dra increase 0.1 per cent of humus under natural Law “On basic principles of state agrarian policy and condions takes 25-30 years. Moreover, many state policy on rural development” registered in the agrarians in southern and eastern parts of Ukraine Verkhovna Rada on 4 October 2018. use only sunflower and wheat in rotaon, skipping On 12 February 2015 the Verkhovna Rada of Ukraine other plants. Sunflower are oen grown in the same amended the Land Code of Ukraine inserng a place every three years, while the recommended minimum lease term of seven years for the interval is every 6-7 years. Much of the arable land is culvaon of agrarian land while conducng farming affected by water erosion (13.3 million ha) and wind or “special village units” acvies. This change erosion (6 million ha). Rate of ploughing of arable weakened the posion of state, communal and land in Ukraine is very high, reaching 90.3 per cent in private agrarian land owners with regards to disposal Cherson region and around 85-87 per cent in the of ownership and the level of lease fees. On the Cherkassy, Kirovograd, Vinnitsa, Zaporizhzhya, other hand, the amendment improved posion of Dnipropetrovsk and regions, despite the lessees, mostly agrarian companies. fact that agronomic principles recommend no more than 60 per cent. It can be assumed that a real owner would be more likely to care for his own land (as he What to do next? cares for his house, car or factory) and treat it not only to maintain ferlity but also to increase it, in The Cabinet of Ministers of Ukraine should register order to preserve the land for the next generaons. at the Verkhovna Rada of Ukraine the dra law “On agrarian land circulaon” that has been prepared by Other aspects of land reform the expert working group headed by the Ministry of According to the “Concepon on development of Agrarian Policy and Food of Ukraine. farm enterprises and agricultural cooperaon for the The adopon at the second reading by the period of 2018-20”, adopted by the Cabinet of Verkhovna Rada of the dra law No. 8121 “On Ministers on 13 September 2017 the number of farm amending Land Code” and other laws regarding enterprises in Ukraine (culvang less than 100 ha) acng against “raiders” should significantly curb during the last 10 years declined by more than 20 per legislave bolenecks being used by “raiders”. cent. The Concepon introduced state aid to farm enterprises amounng to UAH 1 billion annually. To Within the state banking sector it would be stop diminishing and to start developing farmers is reasonable to open a state aid programme to cover not so much about state aid, it is more about the interest rates (up to the current base rate of the state guaranteeing property and leasing rights, central bank) of long-term credits (up to 15 years) to providing equal rights for agrarians, improving small and medium-sized Ukrainian farmers for business environment and vigorously blocking any agrarian land acquision. aempts of “raider” aacks. Derzgeocadaster should conduct an immediate and The number of rural inhabitants in Ukraine is complex inventory of all state-owned agrarian land to declining due to urbanisaon and emigraon. At the work out illegimate usage or holding of state- beginning of 2018 only 30.7 per cent of inhabitants owned land, missing or incorrect registraon of state- of Ukraine (13,015 million) lived in rural areas; a drop owned land plots at the State Land Cadastre. of 23.3 per cent over the last 27 years. The state As Derzgeocadaster sll disposes of the major part of should address this tendency through more balanced state-owned agrarian land, it should offload its development of rural territories where proper local responsibility for conducng surveillance and control Chapter 6 | 110

on agrarian land to another state instuon in order to avoid a conflict of interest.

It would be reasonable to implement obligatory electronic aucons for the sale of lease rights of all state-owned and communal-owned agrarian land by amending the Land Code of Ukraine and respecve laws.

The current seven-year minimum term of leasing agrarian land should be cancelled by amending the Land Code of Ukraine.

It is essenal to amend the Law “On land management” and Law “On topographic-geodec and cartographic acvity” in order to cancel the obligatory cerficaon of engineers-surveyors and engineers-land managers as it could create space for corrupve and restricve acvies in the cerficaon process.

In order to support soil protecon and sustainable agrarian land usage it is essenal to work out and adopt the dra Law “On economic smulaon of sustainable agrarian land usage”.

As the Constuon of Ukraine requires to pay taxes according to laws and normave-monetary evaluaon of agrarian land value has a direct connecon to taxes (single tax of IV group; land tax; state tax on exchange, and donaon), the Decree No.552 of the Ministry of Agrarian Policy and Food from 16 November 2018 “On confirmaon of technical documentaon of all-naonal (all-Ukrainian) normave-monetary evaluaon of agrarian land” should be confirmed by law.

State aid for agriculture should be limited to each agricultural company up to a threshold of maximum number of hectares culvated. State aid itself should be distributed based on the hectares culvated up to the adopted edge. Public servants who have never been engaged in farming should not decide on so- called “priority areas” where state aid on agriculture is eligible.

It would be reasonable to implement recommendaons of the United Naons Food and Agriculture Organisaon (FAO) as well as of the United Naons Economic Commission for Europe (UNECE) on proper state management of land resources. Chapter 7 Chapter 7 | 112 Chapter 7 Privasaon and SOE reform

Andriy Boytsun some 80 per cent were privased in this manner, leaving strategic investors out of the equaon. Legacy These incumbent posions had been built earlier, in As a post-Soviet country, Ukraine had a very difficult 1989-92, when management and employees were legacy. First of all, all major assets had been owned allowed to lease their state-owned enterprises (SOEs) by the state, hence private ownership was absent. on a long-term basis. That lease was then used as the Second, the country had a command-and-control basis for preferenal privasaon and as a economy, so there was no market. Consequently, mechanism to reduce the aracveness of the SOE Ukraine had no legal framework to govern private to external investors. The instuons running this property or market transacons, as well as no process were the Ministry of Privasaon (as a instuons to support and enforce this. In other policymaker) and the State Property Fund (as the words, in the early 1990s, the country had none of implementer of the policy).⁵ the infrastructure of a market economy whatsoever. In 1994, two changes took place. First, mass privasaon through vouchers (privasaon Privasaon cerficates) was launched by a presidenal decree. Second, the law was changed to shi the Privasaon was one of the three elements of the policymaking powers to the State Property Fund. “transion” recipe.¹ The idea was to hand over Technically, during the voucher privasaons, some formerly state-owned assets to individuals so that a 50,000 SOEs were privased in 1995-98. However, class of private owners would be created. As the the actual change of ownership (transfer of more internaonal experience has demonstrated, the than 70 per cent of ownership into private hands) method of privasaon maers a great deal here.² only took place in a third of these companies and the In Ukraine, the privasaon process was ill-designed state remained a very significant owner.⁶ and distorted by parliament during the In addion, the voucher procedure was rather implementaon phase.³ As a result, strategic cumbersome. As a consequence, out of the 46 million investors rarely became owners of high-quality people who received the vouchers, only 19 million assets, while the shares of most cizens lingered in became owners of shares. Moreover, most vouchers trust funds. Such privasaon had cemented the would end up in the hands of intermediaries or posion of “red directors”, provided polically incumbent management, which created a basis for connected individuals access to the state assets and the consolidaon of ownership in respecve SOEs. – in this manner – has laid the foundaon of the This was relavely straighorward, as – aer the in Ukraine. serious economic decline – cizens were oen The privasaon of state assets⁴ started with the tempted to sell their privasaon vouchers for cash. privasaon law adopted in March of 1992. In 1992- Formally, the vouchers could not be sold, but the 94, the privasaon was oen based on the intermediaries – the trust funds – quickly devised a preferred share allocaon mechanism, when the mechanism of exchanging the vouchers for a share in employees (effecvely, the incumbent management) the trust fund. As of the end of 1996, these funds bought out the company on preferenal terms. Out were able to concentrate about 20 million vouchers. of nearly 12,000 companies privased in 1992-94, The “red directors”, that is, former top execuves of

¹ The other two are price liberalisaon and macroeconomic stabilisaon. ² Havrylyshyn and McGegan (2000). ³ VoxUkraine (2016). ⁴ For the purpose of this paper, we ignore the privasaon of cizens’ own housing, which had also been the property of the state. ⁵ The Ministry of Privasaon was disbanded in 1994, as we discuss below. ⁶ VoxUkraine (2016). Chapter 7 | 113

the privased companies, have been able to privasaon tripled from 13.6 per cent in 1992 to concentrate their SOEs' shares in their hands, oen 36.7 per cent in 2016. In fact, the number of by using intermediaries to purchase shares from opponents exceeded the number of supporters in employees and/or dilung minority shares via 2016 (see Figure 1). addional share issues. For example, Vyacheslav For large SOEs, the situaon was even worse: as Boguslayev has been the CEO of since Figure 2 shows, some 25.1 per cent of Ukrainians 1988. The first 27 per cent of Motor Sich shares were exhibited a posive atude towards privasaon of purchased in 1994 by 25,000 employees of the large enterprises in 1992, but this support halved to plant.⁷ It was fully privased by the year 2000, sll 13.8 per cent in 2016. At the same me, the negave formally owned by the employees. In 2017, the atude increased from only 31.6 per cent in 1992 to Security Service of Ukraine suspected Vyacheslav an astonishing 62.3 per cent in 2017.¹⁰ Boguslayev of the illegal sale of 56 per cent of the enterprise's shares to a Chinese investor.⁸ Figure 1

As a result, the mass privasaons of the 1990s have What is your atude to privasaon of small SOEs? helped to create a class of oligarchs rather than 60% private owners and le a percepon of unfairness. 50% The crony privasaons of large SOEs in the 2000s are likely to have further discredited the privasaon 40% process in Ukraine. In 2004, as the second term of 30% President Kuchma was ending,⁹ a very large steelmaker, Kryvorizhstal, was sold at an arficially 20% low price of some US$ 800 million in an opaque aucon to a consorum of Ukraine's largest oligarch, 10% Rinat Akhmetov and the president's son-in-law, 0% Viktor Pinchuk. This privasaon was reversed aer 1992 1994 1996 1998 2000 2002 2004 2005 2006 2008 2010 2012 2014 2016 the 2004 Orange Revoluon and the company was Rather negave Rather posive re-privased in 2005 at a price of US$ 4.8 billion, which was 5.7 mes as much as the 2004 selling Figure 2 price. The winning buyer was Mial Steel, one the What is your atude to privasaon of large SOEs? world's largest steelmakers. Nonetheless, this 80% remains perhaps Ukraine's only exemplary 70% privasaon of a large SOE. 60% In 2011, another naonal giant, the naonal telecom 50% operator Ukrtelecom was sold for US$1.3 billion in a quesonable privasaon aucon to unknown 40% buyers (a company named ESU owned by a 30% subsidiary of EPIC Invest, an Austrian-based 20% investment company) and later ended up in the hands of Rinat Akhmetov. 10%

0% As a result, popular support for privasaon of small 1992 1994 1996 1998 2000 2002 2004 2005 2006 2008 2010 2012 2014 2016 enterprises has declined steadily from 56.2 per cent Rather negave Rather posive in 1992 to 32.2 per cent in 2016. Those against Source: Parashchevin (2016)

⁷ Forbes Ukraine (2018). ⁸ SBU pidozriuye Boguslayeva v nezakonnomu prodazhi 56% Motor Sichi [in Ukrainian; English translaon: SBU suspects Boguslayev in illegally selling 56 per cent of Motor Sich]. Ukrayinska Pravda, 11/09/2017. Available online at: hps://www.epravda.com.ua/news/2017/09/11/628916/. ⁹ According to the Ukrainian Constuon, the president can serve a maximum of two terms. ¹⁰ Parashchevin (2016). Chapter 7 | 114

The most dramac change has been in the popular Figure 3 support for privasaon of land (see Figure 3). What is your atude to privasaon of land?

Although a vast majority of 63.5 per cent had 70% supported this reform in 1992 (with 13.9 per cent against), the tables have turned to produce almost a 60% mirror image in 2016, with some 58.9 per cent of 50% Ukrainians opposing and only 16.7 per cent supporng land privasaon. Not surprisingly, the 40% support for a land market also plummeted from 38.5 30% per cent in 1994 to 23.1 per cent in 2016, with the percentage of opponents growing from 44.4 per cent 20% to 63.1 per cent respecvely (see Figure 4).¹¹ 10%

A common explanaon is that the opaque sales of 0% SOEs to insiders, red directors and polically 1992 1994 1996 1998 2000 2002 2004 2005 2006 2008 2010 2012 2014 2016 Rather negave Rather posive connected individuals in the early 1990s have created an image of privasaon as something very Figure 4 unfair and have seriously undermined public trust in In your opinion, can the sale and purchase of land be it. Anecdotal evidence also shows that the general allowed? public will oen aribute the fortunes of Ukrainian 70% oligarchs to these privasaons. 60% Note that there was a very strong upsurge in popular support for privasaon of both large and small SOEs 50% aer the Revoluon of Dignity in 2014 (Figures 1 and 40% 2), which can likely be aributed to the greater trust that the public had in reforms in general and, in 30% parcular, in fair and transparent privasaon. It is 20% notable that this upsurge cannot be aributed to targeted communicaon: there was no massive 10% communicaon of the benefits of transparent 0% privasaon at the me. It is likely to be the result of 1992 1994 1996 1998 2000 2002 2004 2005 2006 2008 2010 2012 2014 2016 a greater general awareness and appete for Yes No structural reforms. However, general trust in reforms Source: Parashchevin (2016) has waned since 2014, which may explain the further decline in the support for privasaon that made it At first sight, there seems to be a paradox: on one less aracve to policians. hand, cizens are strongly against corrupon and perceive SOEs to be a major source of corrupon.¹² On the other hand, they are very likely to perceive the privasaon process itself as another, possibly even larger, source of corrupon, leading them to oppose the idea of privasaon at all. Cizens would welcome transparent and fair privasaon and the government needs successful cases of privasaon to demonstrate that this is possible.

¹¹ No data are available for 1992, 2002 and 2004. ¹² In a survey by the Centre for Economic Strategy, 84 per cent of respondents agreed with the following statement: “Policians steal money from state-owned enterprises, and then use this money to finance elecons. As a result, honest policians have lile chance of winning the elecons.” 74 per cent agreed with the statement: “Private enterprises invest much more in new technologies, expand producon, and create more jobs than state-owned enterprises.” 74 per cent agreed with the statement: “Under state ownership, enterprises are oen plundered, which the private owner will not allow.” Available online at: hps://ces.org.ua/en/wp-content/uploads/2017/11/report_crical_thinking_ENG-for-web.pdf. Chapter 7 | 115

State-owned enterprises (SOEs) Most of Ukraine's really large and important assets have stayed in the hands of the state. These include Interesngly, the design of the privasaon the naonal oil and gas champion Naogaz of Ukraine, framework and corporate governance in SOEs seems the naonal railway operator Ukrzaliznytsia, the to have been appropriate in 1992. Originally, the electricity transmission system operator Ukrenergo, State Property Fund was established – as the name the naonal postal operator , the nuclear suggests – for the purpose of managing state power generator Energoatom and the hydropower property – that is, running the assets owned by the generator Ukrhydroenergo. The privasaon of these state – including SOEs, non-corporased SOEs is prohibited by law. infrastructure and real estate. The fund would sell However, the state's porolio also includes these assets when instructed by the policymaker and, numerous other large and smaller SOEs that cannot otherwise, manage them. be privased by law. Examples include Artemsil, a A Ministry of Privasaon¹³ was established along large salt-mining company, or Konyarstvo Ukrayiny, a with the State Property Fund, with the former horse breeding company that owns about 40,000 responsible for policymaking and the laer for policy hectares of land. implementaon. However, this design was quickly The list of such SOEs is extensive and includes about “reformed” in 1994, when parliament significantly 1,400 companies. Nevertheless, the state has been enlarged the powers of the State Property Fund, reluctant to approach corporate governance issues in including the policymaking funcons. The Ministry of these SOEs, leng them funcon prey much in the Privasaon was abolished at the proposal of the same fashion as they did under the Soviet rule. then privasaon minister . Oen, they were similar to extensions of line Due to the asset management funcon of the fund, it ministries, bureaucrac monsters poorly adapted to quickly ran into conflict with line ministries that held the new workings of the market and shielded from SOEs in the respecve industries and saw market forces by the state. themselves as responsible for managing these SOEs. At the end of 2008, as the “gas war” between Russia The line ministries and incumbent management and Ukraine was approaching, the author of this protected their posion by asking the parliament to chapter organised a public discussion of corporate include their SOEs on the list of SOEs whose governance at Naogaz of Ukraine.¹⁶ Nearly all privasaon is forbidden by law. Ukraine's major economic and gas experts of the As a result, despite the privasaons described me took part in the gathering. Yet, the idea of beer above, the state has remained the country's largest corporate governance for a state-owned company owner of SOEs. In 2018, the State Property Fund seemed too novel, strange, and, perhaps, naïve to reported that 3,530 companies were owned state by most of them in 2008. Most of those present said the state at the central level of government.¹⁴ In that it “would not fly in our country”. In fact, it seems 2017, the total assets of the top 100 SOEs were that the idea itself was quite clear to those in power, UAH 1.5 trillion, which is 15 per cent of the assets of but they were simply unwilling to relinquish their all Ukrainian enterprises. The revenue of the top 100 control. At the same me, the quality of the expert SOEs in 2017 was UAH 584 billion, which was 8 per community was too low, and its influence too weak, cent of the revenue of all Ukrainian enterprises. Note to affect the decision of the incumbents. that these numbers do not account for the thousands Although we were discussing just one SOE, it was the of enterprises owned by regional and local largest and the most visible one, especially in light of governments, for which no stascs are available.¹⁵ the rapidly growing gas dispute with Russia. What

¹³ The full name was “The Ministry of the Ukrainian SSR for the De-stasaon of Ownership and the De-monopolisaon of Producon”. See the scope of its funcons at hps://zakon.rada.gov.ua/laws/show/147-91-%D0%BF. ¹⁴ See hp://www.spfu.gov.ua/ua/content/spf-stateproperty-Subiek-gospodaruvannya.htm. ¹⁵ The An-monopoly Commiee of Ukraine has recently esmated that Ukraine had around 11,000 regional and local SOEs, but this appears to be an informal esmate. ¹⁶ Boytsun (2008). Chapter 7 | 116

about other SOEs, then? It appears that, in Ukraine, Against the poor record of privasaon, public no expert cared to understand the importance of opinion has increasingly favoured state ownership. good corporate governance in companies that had However, there was lile or no sense of ownership remained state-owned, despite the fact that they on the part of the cizens. State property was were very large (as demonstrated by the size of their perceived as nobody's property rather than the assets), abundant (as shown by the numbers above), property of the people of Ukraine. Consequently, poorly run (as shown by the low profitability of the there was no demand for accountability from state's porolio and the large number of loss-making Ukraine's SOEs: The public did not know their SOEs),¹⁷ and constuted one of the greatest – if not financial results (not even if they were profitable or the greatest – sources of corrupon (see Box 1). loss-making), not to menon their strategies or even the reason why the state chose to own them.

Box 1: Corrupon in Ukrainian SOEs In parcular, state-owned banks (SOBs) were heavily misused for financing SOEs, diverng funding to The scale of this problem is evidenced by the private companies affiliated with polical patrons or stascs of the Naonal An-corrupon Bureau outright stealing. Ukraine has had to spend US$ 15.5 (NABU). The Bureau has invesgated over 100 billion to prop up its state-owned banks since 2008. criminal proceedings against corrupon in state- In parcular, US$ 5.8 billion was injected into the owned enterprises (SOEs). According to NABU's capitalisaon of PrivatBank, US$ 3.5 billion in preliminary esmates, the total losses incurred by Oschadbank, US$ 2.8 billion in Ukreximbank, US$ 1.6 these SOEs exceed UAH 20 billion (about US$ 800 billion in Rodovid Bank, US$ 1.4 billion in Ukrgasbank million at the date of the NABU report). This makes and US$ 0.5 billion in Bank Kyiv.²⁰ SOEs not only a source of corrupon, but the largest The amount of money lost by other SOEs is largely source of corrupon.¹⁸ impossible to esmate. Much of the loss is hidden in However, the advancement of these cases is the loans given by SOBs and regularly restructured to hampered by the courts. Among the NABU's five avoid insolvency of both SOEs and SOBs. The largest cases, four are related to the management of government has also provided connued state aid to SOEs: the State Food and Grain Corporaon of Ukraine, some SOEs. The most recent example is the provision Zaporizhzhya Civil Project, UkrGasVydobuvannya and of US$ 18 million to state-owned coal mines to repay Chervony Zemlerob. salary arrears.

According to Artem Sytnyk, Head of the NABU, the However, in many cases, the magnitude of state aid is damages from corrupon in SOEs are greater than very difficult to esmate, as it has come in the form the amounts of loans received from the IMF.¹⁹ of tax breaks, preferenal tariffs for monopolies, or market entry barriers for potenal compeon. Among the invesgaons that have already been Suffice it to say that Naogaz alone had lost US$ 9.7 submied to the courts are the cases related to billion in 2013-15. Aer a successful turnaround and UkrGasVydobuvannya (UAH 3 billion), Ukrzaliznytsia corporate governance reform, it made a profit of US$ (almost UAH 0.5 billion), the Ukrainian Seaport 2.3 billion in 2016-17. Authority (UAH 247 million in potenal losses) and Oschadbank (US$ 20 million, or around UAH 500 million at the date of the NABU report).

¹⁷ See VoxUkraine (2018). ¹⁸ Naonal An-corrupon Bureau (2018). ¹⁹ Zbytky vid koruptsiyi u derzhavnykh pidpryyemstvakh bilshi, nizh tranship MVF, – Sytnyk. [in Ukrainian; English translaon: Losses from corrupon in state-owned enterprises are larger than IMF tranches, says Sytnyk], Espreso TV, 08/02/2019. Available online at: hps://espreso.tv/news/2019/02/08/zbytky_vid_korupciyi_u_derzhavnykh_pidpryyemstvakh_bilshi_nizh_transhi_mvf_sytnyk. ²⁰ Boytsun et al. (2017). Chapter 7 | 117

Consequences In addion, access to finance for the private sector has been very problemac, leading to slow Limping privasaon, mismanagement and development of small and medium-sized businesses. corrupon in SOEs are among the major reasons why Poor liquidity,²⁶ which could be resolved by bank Ukraine has experienced slow, fragile and very loans, is menoned as a problem by 49 per cent of volale economic development. In parcular, the Ukrainian businesspeople. By way of example, the country has had a miserable record of aracng average interest rate on loans is 16.4 per cent in foreign direct investment (FDI), which was the engine Ukraine, while it is 2.5 per cent in Slovakia.²⁷ of economic growth in post-Communist countries, Figure 6 such as Poland or Slovakia.²¹ Corrupon percepon in Poland, Slovak Republic Figure 5 and Ukraine Cumulave FDI inflow per capita in Poland, Slovak 70 Republic and Ukraine, US$ million. 60 10000

9000 50

8000 40 7000

6000 30

5000 20 4000 10 3000

2000 0 CPI score (0 to 100 best) 1000

0 Ukraine Poland Slovakia 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Poland Slovak Republic Ukraine Source: Transparency Internaonal. Available online at: hps://www.transparency.org/cpi2018. Source: Boytsun and Yablonovsky (2018a) According to the State Stascs Commiee, there This has given risen to state capture and grand were 1.5 million registered private entrepreneurs corrupon.²² Ukraine is ranked 99th among 140 (almost all micro-businesses) and 338,000 countries on favourism²³ in decisions by enterprises (including 278,000 micro-businesses) in government officials. The country is ranked 130th out of 180 countries on Corrupon Percepon Ukraine in 2017. There were only 399 large Index²⁴ (see Figure 6). As a result of state capture and enterprises (0.02 per cent of all business enes), but corrupon, Ukraine oen has monopolised or they employed 24 per cent of workers and produced uncompeve markets, with higher prices and lower 35 per cent of the revenue. Despite the relavely quality of products and services. Foreign investors large proporon of small and medium businesses, rate monopolisaon²⁵ as the fourth biggest obstacle they are sll not very acve, say, compared to the aer corrupon, distrust for the judiciary and an unstable financial system.

²¹ Boytsun and Yablonovsky (2018a). ²² Boytsun and Yablonovsky (2018b). ²³ World Economic Forum (2017). ²⁴ Transparency Internaonal (2018). ²⁵ European Business Associaon (2018). ²⁶ Kuziakiv (2018). ²⁷ Trading Economics: Ukraine lending interest rates. Available online at: hps://tradingeconomics.com/ukraine/lending-interest-rate-percent-wb-data.html; hps://tradingeconomics.com/slovakia/bank-lending-rate, last accessed on 1 March 2019. Chapter 7 | 118

German Mielstand.²⁸ Ukrainian SMEs are focused the poor internaonal presence³¹ of Ukrainian mainly on local markets and are oen engaged in products and services and in low growth numbers simple trade, while the German Mielstand (see Figure 7). businesses oen grow to become naonal and then Figure 7 global champions in specific market niches.²⁹ GDP per capita in Poland, Slovak Republic and Worse, this is largely responsible for the Ukraine, US$. dysfunconal and polluted polical system. Because 20000 control over the SOEs created vast opportunies for 18000 gra and gave immense power, the polical system 16000 has aracted the type of polician that was looking 14000 for exactly such opportunies. This also distorted the 12000 system itself. Specifically, Ukraine ended up with a 10000 system of diluted accountability, which manifests 8000 itself in at least two respects. 6000

First, parliamentary elecons are based on the so- 4000 called mixed system and that mix is very unfortunate. 2000

Half of the parliament (225 seats) is elected by 0 majoritarian rules, while the other half is elected by 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Poland Slovak Republic Ukraine proporonal rules. As a result, it is enrely unclear who the parliament members are accountable to. It is Source: Boytsun and Yablonovsky (2018a) also unclear how the parliament coalion is formed. Second, the division of powers and responsibilies Second, the economic structure of Ukraine is skewed between the president and the prime minister is into natural resources and basic products rather than unclear. This further dilutes accountability and value-adding high-tech industries or services, embeds compeon between these two instuons possibly because there is lile incenve for SOEs to in the very polical configuraon. innovate and to take risks (see Chapter 2 on page 35).³² Besides making the economy poorer, this also As a result, in such a system, it is easy to block any increases its dependence on the world economic reform effort, as this only requires that one or two of cycles and global commodity prices, which can be the stakeholders should block it. On the contrary, it is especially volale because Ukraine is not a global difficult to get any reforms done as this requires the geopolical player and is a price taker in global agreement of all stakeholders. markets. Any fall in global prices for wheat or metals creates pressure on local currency, resulng in a The economic consequences of this setup are very negave trade balance and declining GDP. real. First, because the SOEs are inefficient and uncompeve – and a very large share of the Finally, the net fiscal result from state-owned assets naonal economy is made up of them – the enre is very modest. According to our calculaons, the economy has been uncompeve. Specifically, annual return on SOEs' total assets was negave in Ukraine ranks 81st among 137 countries in the 2014-15. Although it became posive in 2016, it Global Compeveness Index.³⁰ This is reflected in reached only 2 per cent, which is a very low number

²⁸ Mielstand commonly refers to small and medium-sized enterprises in German-speaking countries, especially in Germany, Austria and Switzerland. Most definions define the Mielstand as a stascal category and most commonly suggest that Mielstand firms are small and medium-sized enterprises with annual revenues up to €50 million and a maximum of 499 employees. ²⁹ Zholkver, Nikita (2009), Maly i sredny biznes ostayetsya fundamentom nemetskoy ekonomiki [in Russian; English translaon: Small and medium-sized businesses remain the foundaon of the German economy], in Deutsche Welle, 17/04/2009. Available online at: hps://www.dw.com/ru/малый-и-средний-бизнес-остается-фундаментом-немецкой-экономики/a-4184020 ³⁰ World Economic Forum (2019). ³¹ Trading Economics: Ukraine exports. Available online at: hps://tradingeconomics.com/ukraine/exports, last accessed on 1 March 2019. ³² The Ukrainian exports in 2017 made up 48 per cent of GDP, of which 26 per cent was services and 74 per cent goods. The main goods exported were ferrous metals (20 per cent of merchandise exports) and grain (15 per cent of merchandise exports). To compare, Poland, which is also an open economy, is mainly exporng machinery (24 per cent of merchandise exports) and transport equipment (14 per cent of merchandise exports). Chapter 7 | 119

compared to the bank deposit rate of 18 per cent governance reform. The company boasted an that Ukrainian banks were offering that year. It is independent supervisory board, composed of three even lower than the inflaon rate of 12.4 per cent in world-class internaonal members, with profound 2017, de facto making the return on assets negave. experience in the oil and gas industry and two Ukrainian state representaves: the former Minister of Energy and the First Deputy Minister of the What has been done Economy.

SOE reform The Naogaz reform has also spurred acon at the naonal level. Aer lengthy debates in late 2015, the Background parliament adopted a new law on corporate Aer the Revoluon of Dignity, presidenal elecons governance in SOEs. The law introduced three and parliamentary elecons in 2014, there was a fundamental changes in SOEs, even when such massive demand for reform in nearly all areas; and enterprises were not corporased: (I) it increased privasaon and SOE reform was no excepon. disclosure requirements, (II) it made auding of SOEs Nonetheless, like in many other countries, this turned mandatory and (III) it required that major SOEs out to be one of the most difficult areas of reform establish supervisory boards, with a majority of due to very tangible vested interests. independent directors. The last element is crucial in severing the link between policians and SOEs. At the end of 2014, the Ukrainian state was the However, the president vetoed the law, asking for it largest owner of enterprises and other assets in the to exclude military companies from its coverage. At country. The top 100 state-owned enterprises the second aempt, the amended law was signed by generated a total loss of UAH 117 billion in 2014 and the president (Law 1405-VIII, dd. 02/06/2016),³³ UAH 53 billion in 2015. The total assets of these thus becoming effecve. SOEs were some UAH 870 billion, with about 70 per cent of the total assets concentrated in the energy For the Groysman Cabinet, appointed in April 2016, sector (such as Naogaz, Ukrenergo or Energoatom) it now became a maer of pung this law into and 15 per cent in infrastructure (such as pracce, which required developing and adopng Ukrzaliznytsia, Ukrposhta, airports and sea ports). The secondary legislaon. This work progressed as the top 100 SOEs accounted for about 90 per cent of the prime minister declared privasaon and SOE reform total assets of all SOEs. According to the Ministry of as one of the cabinet's top five priories in 2017. As Economy, in 2014, Ukraine had 3,350 registered a result, the secondary legislaon was approved, with SOEs, out of which 1,833 were operang SOEs, with the cabinet resoluons governing the nominaon of a total workforce of more than one million supervisory board members in SOEs being the most employees. important part.

Corporate governance reform in Ukrainian SOEs As a quick soluon, the cabinet had aempted to showed a promising start at Naogaz in 2014. reform the SOE Nominaon Commiee, which had Although it generated very visible performance been established by the previous government. improvements, it was slowed down considerably in Because the reform was restricted to a changed 2016. In other SOEs, it came to a halt (for example, composion of the Commiee, this turned out to no supervisory boards were established in other large yield lile fruit. The new composion of the companies) in 2016. Commiee included almost half of the Cabinet of Ministers (nine deputy prime ministers or ministers) Biggest achievements and an equal number of non-government representaves (including the heads of regional Although the Naogaz case was the only case in offices of the IMF, the EBRD, the World Bank and the 2014-16, it was a success story of corporate IFC).

³³ Law of Ukraine on Amendments to Certain Legislave Acts of Ukraine on the Management of State and Municipal Property, No. 1405-VIII, dd. 02/06/2016. Available online at: hps://zakon5.rada.gov.ua/laws/show/1405-viii. Chapter 7 | 120

The very first meeng of the Commiee resulted in a rubber stamp: board members had to vote according robust difference of opinion between the ministers to the vong instrucons they were receiving from and the non-government representaves, bringing its the body that appointed them and they were not work to a halt for a year. In parcular, the pre- allowed to receive any remuneraon. selecon of board candidates by line ministries with Aer three years of pressure from the internaonal the shortlist presented to the Commiee lacked financial instuons (IFIs), the parliament has finally transparency and professionalism. In addion, the adopted the law on corporate governance in state- administrave capacity of the Commiee whose owned banks. The cabinet quickly adopted most of work was supported by the Ministry of the Economy the secondary legislaon required to establish such was weak. Finally, the Commiee itself was too large boards, much in the same vein as it did for SOEs. At (18 members) to allow a structured and organised the me of wring, the execuve search companies discussion. were selected, the Nominaon Commiee for SOBs It appeared that a more profound change was was established, and the selecon process was on, necessary; the cabinet approved the nominaon with the aim to appoint it the new supervisory board procedures in March 2017 and fundamentally members by 10 May 2019. reformaed the working of the Commiee in March Biggest failures 2018. This included: Although the above achievements are real, they took • raising it to the level of the Cabinet of Ministers an enormous amount of me, some four years aer • transparent pre-selecon of board candidates the parliamentary coalion was formed at the end of assisted by a respected internaonal execuve 2014. If the SOE reform were only a technical search company problem, these results could have been achieved in a • a strong Commiee secretariat year or so. However, vested interests benefing from state ownership in Ukraine are so powerful and so • a new composion of four government intertwined with the policians and state representaves and four internaonal observers bureaucracy that they can be most effecve at (heads of regional offices of the IMF, the EBRD and building up resistance. the IFC, as well as the Business Ombudsman). As a result, although independent supervisory boards The new nominaon process started very well. As a have been established in several major SOEs and the result, the government has been able to establish nominaon process works well today, these boards independent supervisory boards in four very large lack fully-fledged powers to be completely and important SOEs – Ukrzaliznytsia, Ukrenergo, independent of the policians and thus to fend off Ukrposhta and Ukrainian Sea Port Authority – fairly polical meddling and gra. Consultants and the quickly and was compleng the establishment of a EBRD had developed a dra law to give these supervisory board in Airport at the me of powers to the supervisory boards – most wring. importantly, the power to appoint the CEO and Finally, the state owns four large banks: Oschadbank, approve the annual budget (financial plan) – as early Ukreximbank, Privatbank and Ukrgasbank. Unl as 2015 as part of the corporate governance of recently, the law did not only not mandate, but Naogaz. However, the proposal met with very fierce effecvely prohibited independent supervisory resistance from vested interests who successfully boards in Oschadbank and Ukreximbank. Their boards opposed it at all stages: through the government had been composed of purely polical appointees bureaucracy and in the parliament. Ulmately, the (five appointed by the president, five by the law was watered down and finally blocked in the parliament and five by the cabinet). Supposedly the parliament's an-corrupon commiee. most important governance body of the state-owned This experience is not unique to Ukraine. The bank, the board has been lile more than a parliament declared the intenon to base its Chapter 7 | 121

corporate governance reform on OECD standards,³⁴ The core of the maer is in the public policy when it included this in the Coalion Agreement.³⁵ objecves that the state is trying to achieve through However, besides the problem of vested interests its SOEs, typically via implicit or explicit public opposing the change, another problem is that service obligaons imposed on the SOEs. For incumbent policians feel responsible for the SOEs example, Ukrposhta is obliged to deliver pensions in that they oversee. They fear relinquishing control to rural areas, but it claims that performing that independent “strangers”, when ulmately it may be funcon causes the company to lose UAH 1 billion them who end up bearing polical responsibility for annually. The soluon to this issue lies in the explicit the SOEs. and separate accounng for the cost of the public service obligaon, for which the state pays if it In the Ukrainian polical context of distrust, in their imposes it. eyes, it may not be a replacement of old-school polical controls with controls based on OECD If the costs of the public service obligaons are standards, but rather losing control to someone else. accounted for separately, then profit becomes the All in all, as the internaonal corporate governance best criterion for evaluang the performance of an pracce demonstrates, many OECD countries SOE. Otherwise, there is no level playing field themselves sll fall short of OECD standards, with between SOEs and their private counterparts. At the Nordic countries being the best example. mes, the state could misuse SOEs to achieve public policy objecves; at other mes, it could help them Another problem was the failure to adopt an explicit out when they run into trouble. Ulmately, and binding state ownership policy, explaining the compeon is distorted and the overall raonale for the state owning each of its largest compeveness of the economy suffers. SOEs. This task sounded very abstract at the onset of the reform in 2014, but became very concrete as the Yet another problem was the failure to counter corporate governance changes unfolded. Like in resistance on the part of conservave forces that many other countries, the state found it difficult to have been trying to hold back reform. Resisng a formulate explicitly why it chose to own individual reform is, in a way, easier than implemenng it: to SOEs. In 2017, the cabinet approved an overarching complete a reform, you need all the crical elements state ownership policy, but it is more of a useful to be present; to stall it, you only need to obstruct guide than a strictly enforceable instrument. one or a few crical elements. In addion, the pain of the losers from the reform is very real; the joy of the Having such a policy would make a lot of difference, winners is oen less tangible. as it would create clarity for cizens, as well as the supervisory board and management of the respecve One example of such resistance is the adopon of SOEs on what objecves they should be achieving the legal requirement for supervisory board and, consequently, how their performance will be members to submit e-declaraons and disclose all judged. For example, if the raonale for owning their holdings, in the same manner as civil servants Naogaz is to achieve energy independence of the and policians have had to do according to the 2014 country, then the company will have to invest billions an-corrupon law.³⁶ This requirement for board of dollars in the gas producon infrastructure and members was never proposed as part of the reform energy saving. If the raonale is to maximise financial or debated publicly. It was introduced in a sneaky profits, then the company will invest nothing in gas manner (popular in the Ukrainian law-making producon, but will encourage massive use of gas pracce) and only came to light when changes to the and import as much gas as possible. These are very an-corrupon law were adopted in 2017. As a different behaviours depending on the ownership result, this effecvely discouraged a great deal of policy. applicants for the supervisory board posions. Based

³⁴ For the sake of brevity, we refer to the OECD Principles of Corporate Governance and the OECD Guidelines on Corporate Governance of SOEs collecvely as OECD standards. ³⁵ Verkhovna Rada of Ukraine (2014). ³⁶ Law of Ukraine on Prevenng Corrupon, No. 1700-VII, dd. 14/10/2014, as amended on 31/08/2018. Available online at: hps://zakon.rada.gov.ua/laws/show/1700-18 Chapter 7 | 122

on the pure number of applicaons observed in the years. It was revived in 2018 under connued nominaon process, some 25 per cent of the pressure from the IFIs and the law eventually became candidates approached by the execuve search effecve at the end of the year. consultants declined to apply for a supervisory board Why not more posion in Ukrainian SOEs because of these requirements. More importantly, these were usually The answer to this queson boils down to four the best candidates. things:

Another way of resisng was to decrease the • poor understanding of the benefits of the reform proposed remuneraon of board members to • weak polical will unaracve levels. The board remuneraon in • strong resistance from vested interests Ukraine's two largest SOEs, Naogaz and Ukrzaliznytsia, was very aracve (up to US$ 240,000 • informal rules. a year). However, any smaller state-owned The poor understanding of the benefits of the companies would end up with a ceiling that reform was, perhaps, the least problemac element. prevented them from aracng world-class To be sure, it took quite some me to communicate professionals. For example, the naonal postal the essence of the modern corporate governance operator Ukrposhta, employing about 73,000 people, system that was proposed. Since the proposed had a ceiling of some US$ 48,000 a year. The same changes were quite radical, relave to the old and went for Ukrenergo, the naonal transmission system obsolete system, it naturally entailed the fear that operator for electricity. things could go wrong. However, it helped that the The upshot was that many qualified candidates “recipes” were known: reformers were not would be put off by either limited board powers, reinvenng the wheel, but proposing to implement a unclear company objecves, the cumbersome set of mechanisms that had proved to work well in requirement to declare the candidate's and their developed economies. family's holdings, internaonally uncompeve For convenience, the reformers referred to the OECD remuneraon levels or a combinaon of these standards of corporate governance. This had at least condions. In addion, in 2017, aer lengthy talks at three advantages. Firstly, this framework was the top level, almost the enre supervisory board of understandable to outsiders and the standards were Naogaz stepped down cing the lack of progress in very concrete when applied in pracce. Secondly, it corporate governance reform as the reason for their was a convenient external reference point that made decision. it easy to formalise commitment: for example, it could be used for formulang a covenant in a loan Finally, resistance has been strongest on the front of agreement. Thirdly, having that reference as a state-owned banks. Although consultants had guideline minimised the possibility for vested draed the law and secondary legislaon that were interests to “imitate” a reform and bend it in their necessary to enable independent supervisory boards favour. in such banks as far back as February 2016 and the reform was strongly supported by the IFIs, it was held That is, the benefits of the reform were amenable to back at every step. The parliament's an-corrupon explanaon. The problem was, however, that while commiee was used to kill the dra law in April the benefits would accrue to the common cizens, 2016. the SOEs themselves and the reformist policians, the “costs” would have to be borne by the incumbent Regaining momentum with the new cabinet was very policians and cronies who were already benefing difficult. Unlike with SOEs, the cabinet was not the from the SOEs. Some people, usually referred to as only party involved in the governance of state-owned the vested interests, were profiteering from these banks and nominang their boards: the president and SOEs through intermediary companies that were parliament were also involved. Aer the new cabinet purchasing inputs at inflated prices, selling outputs at was appointed in 2016, the topic became less urgent lower than market prices, or simply siphoning off and disappeared from the priority list for almost two their assets. Chapter 7 | 123

These vested interests were controlled by, or ed to, the law by introducing the requirement that a policians who were in charge of SOE appointments majority of the supervisory boards should be and could influence the legislaon related to composed of independent members and removing corporate governance in SOEs. Obviously, they the vong instrucons. However, the board powers objected the reform: they could not admit to stealing, to appoint the CEO and to approve the financial plan they had nothing to gain from the reform and they were postponed “unl a more suitable me”.³⁷ had everything to lose. Consequently, resistance Although the government was able to achieve from vested interests came not through vocal supervisory boards composed of a majority of arguments, but through latent sabotage of the independent members and a good nominaon proposed legal changes and clandesne bureaucrac process aerwards, the boards were not fully inera. Therefore, the reform processes described effecve. As menoned, in the Naogaz case, the earlier moved very slowly at best and would stop or board eventually stepped down. Vested interests tend even reverse at worst. to drag their feet on the reform as long as possible so At mes, it was clear that a reform iniave would that the paence of the supervisory board members not progress without a compromise. The type of and the reform-minded forces wears out. compromise maered a great deal. Very oen, Just aer the Revoluon of Dignity in 2014-15, compromise on the part of the vested interests reform momentum was very strong (recall the consisted of blocking an essenal element of the increased popular support for privasaon in 2014, reform iniave, thus invalidang the enre shown in Figures 1-2). Bolder reforms had a very iniave. Another problem was that an aempt to good chance and some of them took off quickly, such achieve yet another compromise was made at every as the corporate governance reform of Naogaz. Part step, gradually dilung the reform iniave. of the success is that the old system lacked an For example, the experts working on the Naogaz understanding of the corporate governance reform in corporate governance reform in 2014-15 proposed the beginning and did not realise how costly to them comprehensive changes to the legislaon on that reform would turn out to be. corporate governance of SOEs, including However, the costs became apparent very quickly. independent, polically insulated and fully Stealing from public tenders and making deals with empowered supervisory boards. However, at the end Gazprom became impossible. Realising that it was of 2015, the Ministry of the Economy – the agency possible not only to avoid punishment and tasked with draing a law on this issue – proposed its prosecuon, but also to fight back, the old system own, weak version of the law, dismissing the bolder gradually adapted. This is largely why the corporate dra. The ministry yielded to a compromise: to have governance reforms in other SOEs were not as a law that introduced the requirement for the largest successful. SOEs to have a supervisory board, but to delay However, the costs became apparent very quickly. crical changes. Stealing from public tenders and making deals with The ministry's original version included the Gazprom became impossible. Realising that it was requirement to have only one or two independent possible not only to avoid punishment and board members (depending on the type of company) prosecuon, but also to fight back, the old system and retained the requirement for state nominees on gradually adapted. This is largely why the corporate the board to vote according to vong instrucons. It governance reforms in other SOEs were not as did not propose to give the supervisory board the successful. power to appoint the CEO and approve the financial Finally, one cannot underesmate the role of the plan, which would stay with the state as shareholder. informal rules deeply rooted in the fabric of society. Before the second reading, the reformist groups and Extensive research has shown that informal acve parliament members were able to strengthen instuons are very slow to change.³⁸ Even when

³⁷ See the history of changes to Dra Law No. 3062 (later adopted as Law No. 1405-VIII, dd. 02/06/2016), available on-line at: hp://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=56416. ³⁸ Williamson (2000). Chapter 7 | 124

new laws (formal rules) are enacted, the to the State Property Fund (SPF) for further enforceability of these rules runs into the informal privasaon. rules governing society. In parcular, researchers The privasaon record in 2014-17 was miserable. In have shown that like-for-like transplantaon of legal each of the first three years, the government was rules may not work because they need to be adapted only able to collect around one per cent of the to local societal condions.³⁹ In parcular, in the privasaon proceeds planned. In 2017, that number transion countries, the increased difficulty of was about 20 per cent, but that was only possible change in post-Soviet economies, when compared due to sales of minority shares in five oblenergos, with central European countries, is aributed to the regional electricity distribuon companies, to the much longer communist rule.⁴⁰ And in the context of incumbent majority shareholder Rinat Akhmetov, corporate governance, different informal rules appear Ukraine's wealthiest oligarch. to have a significant effect on the corporate governance choices made by companies.⁴¹ Biggest achievements

Thus, the pace of corporate governance reform in Like with SOE corporate governance reform, the Ukraine has also been moderated by “old thinking” at biggest achievement of privasaon is the new the level of businesses and SOEs. For example, not privasaon law that became effecve in March only policians but also business owners find it 2018. The cabinet promptly followed up on the law difficult to grasp that the independent supervisory by adopng new secondary legislaon to make the board members should act in the interest of the law operaonal. This has laid the foundaon for new company rather than the interest of the party that privasaon pracces. appointed them; that the owner may not intervene in the inner working of the supervisory board; and the The law had been a very long fight. In 2015, the board may not interfere with day-to-day maers of previous cabinet submied three modest legal company management. In other words, when old changes to the privasaon law effecve at that pracces are found to be acceptable, it is much more me. It took the parliament 18 vong aempts to difficult to push for new ones. finally approve those changes. However, since they were essenally cosmec and the will to privase against the resistance by the vested interests was not Privasaon there, this had no effect on the privasaon results.

Background At that me, a group of reformers and IFIs started working on the new privasaon law. Although the Over the nine years preceding the Revoluon of law was formally submied by the SPF, most of the Dignity, no single major SOE in Ukraine was job was done by the Ministry of Economy and the privased. The only excepon was the privasaon government's advisers. It took some two years to of Ukrtelekom in 2011. However, during the two and have the law discussed between the SPF and the half years aer the Revoluon, almost nothing has cabinet. The head of the SPF was replaced twice been done on this front either. during this process. As before, the state would set quite ambious The cabinet finalised the dra law in June 2017. privasaon plans, which were never implemented, Because the law was so important, the cabinet sent it despite the vast apparatus involved in running state for the discussion at the Naonal Reform Council in property (the State Property Fund alone employs September 2017 rather than sending it straight to over 2,000 people). In addion, most SOEs were held the parliament. At the Council meeng, the President by line ministries, with large numbers of ministry challenged some of the unpopular, but key provisions personnel engaged in SOE management. Such of the dra law. First, the dra proposed mandatory ministries were very unwilling to transfer these SOE use of English law in the sale and purchase

³⁹ Berkowitz et al. (2003). ⁴⁰ Berglöf and Bolton (2002). ⁴¹ Boytsun et al. (2010). Chapter 7 | 125

agreement if the bidder insisted on it, a provision that The group has made a number of important decisions exposed Ukraine's poor legal framework and since its incepon and stopped a few bad deals, judiciary. Second, it was polically unacceptable that including the poorly prepared privasaon of a the law allowed for the starng price of smaller minority stake in Odesaoblenergo. Perhaps, the most assets to be zero, even if the balance-sheet values important outcome of the work of the group was the were negave. hiring of investment advisers to prepare large SOEs for privasaon. This process, too, was far from Aer explanaons and debates following the Council smooth. meeng, the law was finalised and submied to the parliament. It took four months to be passed by the For , a large power generang company, a parliament and another six weeks to have it signed by consorum led by the Polish office of EY was the president to make it effecve. retained. The SPF signed the contract with the advisers in the summer of 2017, but it took more As a result of the new law and secondary legislaon, than half a year to pass inter-ministerial approvals privasaon of smaller assets and companies – the before the Cabinet of Ministers approved it in so-called small-scale privasaon – was launched January 2018. almost immediately. As at 18 April 2019 (eight months aer the first aucon on the Prozorro.Sale As the new privasaon law made the hiring of plaorm), 744 successful aucons had taken place, advisers mandatory, the SPF held a first series of generang revenue of UAH 926 million.⁴² On adviser selecon compeons in June-August 2018. average, the selling price was about two-thirds higher Advisers for six SOEs – Portside Plant (OPZ), than the starng price, showing strong compeon United Ore Mining Company, Elektrovazhmash, during the aucons. This was enrely due to the new President Hotel, Indar and Coal Mine Krasnolymanska – legal provisions which eliminated any manual were selected and the SPF signed the contracts with intervenon in the privasaon aucons. the selected advisers in early September.

The achievements of large-scale privasaon have The procedure requires that the contracts with the been more modest, as the fundamental problem here advisers should be approved by the Cabinet of was the dysfunconal State Property Fund, the Ministers. At this stage, the ill-willed parcipants to manual decision-making involved in any large the compeons – those who entered the privasaon deal and the me required to prepare a compeon and lost – sued the SPF for allegedly large SOE for privasaon. A proper reform of the incorrect evaluaon of the results, and the results of SPF involves legal changes to the constuon and five compeons (all except President Hotel) were the law. In the interim, mechanisms to supervise the blocked in the court in October. Based on two work of the SPF and help the cabinet to steer it have plainffs' claims, the court prohibited the SPF, as well involved various working groups. Ulmately, the as the Ministry of the Economy, the Ministry of Privasaon Working Group established by a 2015 Finance and the Ministry of Jusce, from undertaking resoluon of the Yatsenyuk government was any acons related to the preparaon of the reformaed in February 2018. cabinet's decision on these contracts and from proposing such a decision for the consideraon of The working group has proved to be quite effecve, the cabinet.⁴³ despite the limited legal powers that it had. Its effecveness relied on the presence of the IFIs – Biggest failures represented mostly by their country and regional The biggest problem with privasaon is that it had heads in Ukraine – and a set of reform-minded not been at the top of the reform agenda from the Ukrainian members. onset of the post-Maidan government in 2014.

⁴² These stascs include the sales by both the SPF and the local authories. 44 per cent of the revenues were generated by SPF sales and 56 per cent by local authories. See Prozorro.Sale data at hps://bi.prozorro.sale/#!/analysisSSP, last accessed on 18 April 2019. ⁴³ It is quite common in Ukraine to parcipate in a public tender or compeon purely for the sake of being able to block that tender/compeon in court. The reason that the results were blocked for five (not all six) compeons is that neither of the plainffs parcipated in the sixth compeon (President Hotel), meaning that they cannot claim any damage from that compeon. Chapter 7 | 126

Speaking of specific failed reform efforts, four things needed to be amended (or a new law on the SPF had are worth menoning. to be passed), which appeared to be an unsurmountable obstacle. First, the Yatsenyuk Cabinet named Odesa Portside Plant (OPZ) as the flagship case of new privasaon. Thirdly, the legal changes that were proposed in The company had been well run by the then 2015 to revamp privasaon were very modest. In management and appeared to be very aracve to 2015, the previous cabinet submied three specific investors, including foreign investors. However, legal changes to the privasaon law effecve at that mired in corrupon schemes that were divided me. The parliament approved those changes aer among vested interests, the privasaon of OPZ 18 vong aempts. However, since they were quite failed miserably. During the first aempt in 2016, superficial, they had essenally no impact on the OPZ was (probably deliberately) overvalued so that privasaon progress, especially when no polician the starng price of around US$ 800 million did not was willing to push strongly for privasaon. aract any bidders. Fourth, public assets offered for privasaon were During the second aempt, at the end of 2016, the meagre. In fact, the “triage” of SOEs proposed to price was reduced to some US$ 500 million, but privase only 8 per cent of the total asset value of another serious problem became apparent. OPZ Ukrainian SOEs.⁴⁴ The most aracve and valuable owed a toxic debt of about US$ 300 million to SOEs, such as Ukrzalinytsia, Ukrposhta, Ukrenergo, Dmytro Firtash, a controversial oligarch who was an Energoatom, sea ports, airports and the like were to indicted criminal according to the US Department of remain state owned. In other words, if privasaon Jusce. No serious buyer was willing to pay that toxic was to be a soluon to major problems, such as debt to an indicted criminal, so there were no bidders corrupon of lack of foreign direct investment, then for the second aucon, either. As a result, instead of it was only solving 8 per cent of those problems – becoming a stellar case of privasaon, OPZ became and even then only if these modest privasaon a symbol of failure. targets were hit.

Secondly, the State Property Fund (SPF) has Why not more? remained unreformed. Aer the Maidan revoluon in As in case of the corporate governance reform, let us 2014, Ukraine has seen the head of the SPF replaced walk through the four elements that, in this author's four mes, but this has not affected the fund's view, explain the modest progress of privasaon: performance. One problem is that the SPF is tasked poor understanding of the benefits of privasaon, with both designing the privasaon policy and weak polical will, strong resistance from vested implemenng it. As a result, the SPF has been subject interests and informal rules. to serious polical pressure. Another problem is that, historically, it has had no capacity for effecng large, Contrary to what it may seem, the understanding of complex merger and acquision deals, or even the benefits of privasaon was poor. Privasaon retaining high-calibre professional advisers to assist was commonly seen as a way of replenishing the in such deals. state budget, and the only metric used to measure its success was the revenue from privasaon. At best, Even today, when the new privasaon law is place, policymakers would see it as a way of dumping the the SPF's organisaonal structure does not reflect ballast of SOEs from the state's shoulders and as a the privasaon logic of that law. Finally, in order to way of aracng foreign direct investment. avoid criminal responsibility, the SPF's officials have a greater incenve not to privase rather than to Strikingly, in 2014, privasaon was not seen as a privase. To reform the SPF properly, the way of fighng corrupon or as a tool for improving constuon and the Law on the State Property Fund the compeveness of the naonal economy.

⁴⁴ Triage is a medical term of French origin that refers to the process of “sorng” of paents, that is, determining the priority of paents’ treatments based on the severity of their condion. The term was introduced during the Napoleonic Wars and was used further during World War I by French doctors treang the balefield wounded at the aid staons behind the front. In the context of Ukrainian privasaon and SOE corporate governance reform, it refers to the sorng of SOEs into groups, including SOEs to remain state owned, SOEs to be privased and SOEs to be liquidated. Chapter 7 | 127

Although it was possible to explain these benefits in is only a second-best soluon compared to 2016-17 and the experience of other countries was privasaon (see above), policymakers should favour available, there was no pre-exisng momentum to privasaon over corporate governance carry this forward. improvements whenever possible.

In addion, vested interests were very strong and In parcular, the following needs to be done: informal rules have hampered improvements to • The government needs to complete one large formal rules, as described earlier in the secon on privasaon in order to demonstrate success and corporate governance in SOEs. movate further reform. For that purpose, it should Finally, there was the issue of polical will. Here, aim to have to have a pipeline of several there are perhaps three key differences that explain privasaon targets to avoid depending on one the varying the progress of the corporate governance case (such as with OPZ in 2016). These SOEs reform in SOEs and privasaon: should be selected on the basis of the following criteria: • At the onset of the reforms, there was no flagship case of successful privasaon to demonstrate • allowed for privasaon by law success and movate further reform, whereas the • aracve to foreign investors today Naogaz case clearly spurred corporate governance • operang in non-regulated industries reform in SOEs at the naonal level. • burdened with a minimum of toxic • In contrast to corporate governance reforms in characteriscs. SOEs (where the new law in 2016 laid the foundaon for governance reforms in SOEs) there The best candidates for this pipeline are: United Ore was no fundamental change in the law on Mining Company, Elektrovazhmash, and Turboatom. privasaon or the State Property Fund. (Note that • The list of SOEs whose privasaon is forbidden this and the previous point are similar in the case of by law needs to be reduced to nearly zero. In fact, the corporate governance reform of state-owned the best soluon would be to abolish that list banks, which had been put off unl late 2018). altogether and create a new one, using the • Corporate governance reform is less painful for following three criteria: incumbents and vested interests than privasaon. • State ownership is an excepon. This means that They hope that governance changes are temporary. state ownership for each potenal candidate While privasaon, in most cases, ensures a company would have to be firmly jusfied on an definite severance of the link between the individual basis before it would be included on polician and the company, corporate governance the new list. improvements may be reversed or imitated de facto preserving the status quo. (Indeed, the experience • The share of assets offered for privasaon with the establishment and further degradaon of should be at least 50 per cent of the state's the SPF in the 1990s supports this view.) In fact, porolio. This implies that major privasaon vested interests have oen tried to substute targets would include Ukrposhta, the cargo corporate governance reform in SOEs, although business and real estate of Ukrzaliznytsia, important per se, as a soer medicine instead of UkrGasVydobuvannya and other SOEs of similar privasaon. magnitude. • All state-owned banks, including Oschadbank, What needs to be done next Ukreximbank, Privatbank and Ukrgasbank, should be fully privased. Privasaon • Instuonally, three important changes are Privasaon should be a top priority of the reform, as required (all require changes to law): state-owned assets form the basis of polical • A major overhaul of the instuons in charge of meddling and gra. As corporate governance reform privasaon is needed. If the government is to Chapter 7 | 128

be responsible for privasaon results, then it transportaon, gas and so on). SOEs that have must control the privasaon agency. This is not subsidiaries must be allowed to sell their non-core the case with the SPF today. Instead, it should assets in order to operate efficiently. create a Ministry of Privasaon that would • Finally, the government should launch a massive exist for several years unl major public assets awareness campaign and seriously improve are privased. communicaon of the importance of fair and • Clear deadlines (for example, two months) should transparent privasaon for fighng corrupon be set for the transfer of SOEs from the and improving the compeveness of the privasaon list to the Ministry of Privasaon. Ukrainian economy. This will make this reform If the respecve line ministry does not perform more popular and thus more aracve to the preparatory procedures for an SOE, it should policians. automacally be transferred to the Ministry of Privasaon and that Ministry will be responsible SOE reform for compleng those preparatory procedures. • The new privasaon law disnguishes between In respect of the corporate governance of SOEs, the large and small SOEs, each group prescribed a following is required: disnct privasaon procedure. The organisaonal structure of the new ministry • The corporate governance reforms that have been must reflect that disncon and include disnct started at Ukrenergo, Ukrzaliznytsia and Ukrposhta organisaonal units to accomplish these tasks. should be pursued further. They should result in a fully-fledged ecosystem around the newly Small privasaon essenally requires filling up established supervisory boards – such as internal the pipeline of SOEs to be privased, with the audit, compliance and risk management – and, rest of the work done by electronic aucons such ulmately, lead to visible performance as those on the Prozorro.Sale plaorm. improvements, such as beer quality of services Consequently, the focus needs to be on the and beer financial results. transfer of SOEs from line ministries to the privasaon agency and the liquidaon of • It is necessary to ensure that corporate governance inacve and bankrupt SOEs, with acve support rules for SOEs are in compliance with OECD from lawyers. standards of corporate governance. This requires approving legislave changes, which: Large privasaon requires major preparaon of the large SOEs for sale, ranging from vendor due • create a level playing field for SOEs and private diligence to massive restructuring. That work can companies take between several months and a couple of • clarify the ownership rights to subsidiaries of years and needs to be performed by a small team SOEs to make sure that their daughter companies of highly qualified investment bankers and have full control and are fully accountable for lawyers, assisted by world-class advisers hired via them compeve procedures. • ensure that the CEO is appointed by the This is not the case with the SPF today. If this supervisory board, not by the line ministry cannot be repaired quickly, the government • ensure that SOEs' financial plans are approved by should abolish the SPF altogether or narrow their supervisory boards, not by the Cabinet of down its funcons, perhaps liming them to Ministers lease of state real estate and infrastructure and • solve the issue of dividends paid by subsidiaries valuaon. of SOEs according to standard corporate • Privasaon should include parts of large pracces organisaons in the infrastructure or their main • forbid polical intervenon in the businesses of assets (for example, in railways, road SOEs. Chapter 7 | 129

• It is necessary to establish a Naonal Wealth Fund References which will manage state-owned enterprises/assets in such a way as to maximise their value. The fund's Berglöf, Erik and Bolton, Patrick (2002). The great acvies must be depolicised: in parcular, the divide and beyond: Financial architecture in nominang commiee selecng supervisory board transion, Journal of Economic Perspecves, 16 (1): members should consist of professionals with a pp. 77–100. high internaonal reputaon and experience in the Boytsun, Andriy (2008), Korporatyvne upravlinnya ta global financial markets. The supervisory board will ekonomichna efektyvnist NAK Naogaz Ukrayiny [in appoint the management of the fund and the fund Ukrainian; English translaon: Corporate governance will be accountable to parliament. and economic performance at NAK Naogaz of • As in the case of privasaon, it will help a great Ukraine], in Dzerkalo tyzhnia [Mirror Weekly], No. 41 // deal to raise public awareness through improved 1–8 November 2008. Available online at: communicaon of the wide-ranging benefits of hps://dt.ua/ECONOMICS/korporavne_upravlinnya beer corporate governance in SOEs and SOBs, _ta_ekonomichna_efekvnist__nak_naogaz_ukrayini including minimised opportunies for corrupon, .html beer enterprise performance and higher taxes Boytsun, Andriy, Deloof, Marc, and Mahyssens, Paul collected by and dividends paid to the state, which (2010), Social norms, social cohesion, and corporate can be used to finance public policy aims. governance, Corporate Governance: An Internaonal This is certainly a great deal of work that requires Review, 19 (1), pp. 41–60. polical will, strong conceptual understanding, Boytsun, Andriy et al. (2017), Shcho robyty derzhavi commitment, endurance, and communicaon. zi svoyimy bankamy [in Ukrainian; English translaon: However, this will make Ukraine a much beer, more What the state should do with its banks], Kyiv: Centre prosperous, and democrac country. for Economic Strategy. Available online at: hps://ces.org.ua/wp- content/uploads/2017/12/What-to-do-with-the- state-banks.pdf

Boytsun, Andriy et al. (2017), Shcho robyty derzhavi zi svoyimy bankamy [in Ukrainian; English translaon: What the state should do with its banks], Kyiv: Centre for Economic Strategy. Available online at: hps://ces.org.ua/wp- content/uploads/2017/12/What-to-do-with-the- state-banks.pdf

Boytsun, Andriy and Yablonovsky, Dmytro (2018a), 13 rokiv brekhni ta imitatsiyi: chy ye shche v Ukrayiny shansy na spravzhnyu pryvatyzatsiyu [in Ukrainian; English translaon: 13 years of lies and imitaon: Does Ukraine sll have a chance for real privasaon], Ukrayinska Pravda, 28/08/2018. Available online at: hps://www.epravda.com.ua/publicaons/2018/08/ 28/639804/ Chapter 7 | 130

Boytsun, Andriy and Yablonovsky, Dmytro (2018b), Transparency Internaonal (2018), Corrupon Yak Ukrayini prodaty naybilshe “dzherelo koruptsii” Percepon Index 2017. Available online at: hps://- [in Ukrainian; English translaon: How Ukraine can sell ukraine.org/en/research/cpi-2017/ the biggest “source of corrupon”], Ukrayinska Pravda, Verkhovna Rada of Ukraine (2014), Agreement on 28/08/2018. Available online at: the Coalion of Parliamentary Facons "European hps://www.epravda.com.ua/publicaons/2018/11/ Ukraine", Document n0001001-15, dd. 27/11/2014. 27/642962/ Available online at: European Business Associaon (2018), Third Annual hps://zakon.rada.gov.ua/laws/show/n0001001-15 Foreign Investor Survey. Available online at: Vox Ukraine (2016), Bad decisions: How to build the hps://eba.com.ua/wp- poorest country in Europe – Seven failed economic content/uploads/2018/09/2018_InvestorSurveyRes policies by Ukrainian decision makers, available ults_Presentaon.pdf online at: hps://voxukraine.org/longreads/poor- Forbes Ukraine (2013), Chelovek s motorom: biznes- country/index_en.html#rec7934929 istoriya Vyacheslava Boguslayeva [in Russian; English VoxUkraine (2018), Chy ye derzhavni pidpryyemstva translaon: The man with an engine: Business story of mensh prybutkovymy za pryvatni? [in Ukrainian; Vyacheslav Boguslayev], No. 8, August 2013. Available English translaon: Are state-owned enterprises less online at: profitable than private enterprises?]. Available online hp://forbes.net.ua/magazine/forbes/1355845- at: hps://voxukraine.org/uk/chi-ye-derzhavni- chelovek-s-motorom-biznes-istoriya-vyacheslava- pidpriyemstva-mensh-pributkovimi-za-privatni/ boguslaeva Williamson, Oliver E. (2000), The new instuonal Havrylyshyn, Oleh and McGegan, Donal (1999), economics: Taking stock, looking ahead, Journal of Privazaon in transion countries: A sampling of Economic Literature, 38 (3), pp. 595-613. the literature, IMF Working Paper WP/99/6, IMF: Washington, DC. World Economic Forum (2017), Global Compeveness Report 2015-2016. Data for Ukraine Kuziakiv, Oksana (2018), Ekonomichni ochikuvannia available online at: ukrayinskoho biznesu naperedodni vyboriv [in hp://reports.weforum.org/global-compeveness- Ukrainian; English translaon: Economic expectaons report-2015-2016/economies/#economy=UKR of Ukrainian businesses on the eve of the elecons], in Dzerkalo tyzhnia [Mirror Weekly], No. 50 // 28 World Economic Forum (2019), Global December – 11 January 2018. Available online at: Compeveness Index 2017-2018 edion. Data for hps://dt.ua/macrolevel/ekonomichni-ochikuvannya- Ukraine available online at: ukrayinskogo-biznesu-naperedodni-viboriv- hp://reports.weforum.org/global-compeveness- 298168_.html index-2017-2018/countryeconomy- profiles/#economy=UKR Naonal An-corrupon Bureau (2018), Report for the first six months of 2018, Kyiv, Ukraine. Available online at: hps://nabu.gov.ua/sites/default/files/reports/ zvit.pdf

Parashchevin, M. A. (2016), Rezultaty natsionalnykh shchorichnykh monitorynhovykh opytuvan 1992- 2016 rokiv [in Ukrainian; English translaon: Results of annual naonal monitoring polls in 1992-2016], Instute of Sociology of the Naonal Academy of Sciences of Ukraine, Kyiv, Ukraine. Chapter 8 Chapter 8 | 132 Chapter 8 Healthcare reform

Jerzy Miller Importantly, this difference has not been reduced over me. It should be noted that in addion to the The state of healthcare in Ukraine differs from that in effecveness of the healthcare system itself, life other European countries. This is confirmed by the expectancy is also influenced by the living and following basic comparave analysis of stascal working condions in the country. The low quality of data of selected countries: large and rich countries of the healthcare system should therefore not be Western Europe (Germany, Great Britain and France), considered the sole culprit of the unsasfactory countries of Central Europe, which started their health status of the Ukrainian populaon. systemic reforms in the early 1990s (Czech Republic, Hungary, Poland, Slovakia) and data for the enre Figure 2 European Union. The analysis is based on WHO data Infant mortality per 1,000 live births for 2000, 2010 and 2014 (the year of the Ukrainian 16 Spring).¹ The numbers used below are all drawn from this data source. 14

12 Figure 1

Disability – adjusted life expectancy 10

8 85.0

83.0 6

81.0 4 79.0

2 77.0

75.0 2000 2010 2014 73.0 UA 15.7 10.1 8.4 71.0 EU 5.9 4.1 3.6 69.0 DE 4.4 3.5 3.3 67.0 FR 4.4 3.5 3.3

65.0 GB 5.5 4.4 3.8 CZ 4.5 2.7 2.5 2000 2010 2014 HU 8.6 5.1 4.7 UA 67.5 69.8 70.8 PL 8.1 5.2 4.3 EU 77.1 79.7 80.7 SK 8.2 5.8 5.2 DE 78.0 80.1 80.9 FR 78.8 81.3 82.2 Source: WHO GB 77.8 80.2 81.0 The second comparison highlights a serious problem CZ 74.7 77.5 78.6 in the field of obstetrics and neonatology. Even HU 71.7 74.5 75.6 though Ukraine reduced the number of neonatal PL 73.7 76.3 77.3 deaths by almost 50 per cent between 2000 and SK 73.0 75.1 76.4 2014, the 2014 values are sll at the level of Hungary, Slovakia and Poland in 2000. This is a major Source: WHO challenge for the Ukrainian healthcare system, The above graph shows the evoluon of life pregnant women and maternity wards in hospitals. expectancy of Ukrainian residents over a 15-year Improvement of these services would have a period, from 2000 to 2014. Ukraine, unfortunately, significant posive impact on the average life deviates from the EU average by about 10 years. expectancy discussed above.

¹ hps://gateway.euro.who.int/en/hfa-explorer/ Chapter 8 | 133

Figure 3 Figure 4 Public expenditure on health as a proporon of GDP Public expenditure on health, PPS US$ per capita

10.0 4000

9.0 3500

8.0 3000

7.0 2500

6.0 2000

5.0 1500

4.0 1000

3.0 500

2.0 0

2000 2010 2014 2000 2010 2014 UA 2.9 4.4 3.6 UA 111 341 297 EU 6.0 7.3 7.3 EU 1403 2504 2719 DE 8.0 8.6 8.7 DE 2132 3396 3990 FR 7.8 8.7 9.0 FR 2028 3131 3526 GB 5.5 7.9 7.6 GB 1459 2731 2808 CZ 5.7 6.2 6.3 CZ 886 1616 1814 HU 5.0 5.1 4.9 HU 603 1102 1205 PL 3.9 4.9 4.5 PL 409 1024 1115 SK 4.9 5.8 5.8 SK 540 1389 1580

Source: WHO Source: WHO

Of course, the state of the healthcare system is Ukraine's expenditure on healthcare fares even inmately linked to budget expenditures. An worse when measured in PPP (purchasing power important indicator is the rao of public expenditure parity) in US$. It represents about 10 per cent of on healthcare to GDP. Ukraine has the lowest average expenditure in the European Union and over healthcare spending among the comparator 3.5 mes less than in Poland and Hungary, countries countries, Russia's acons and the polical situaon with the lowest budget expenditure on health. With in Crimea and Donbass have forced Ukraine to such low expenditure, it is not possible to provide the increase defence spending, which negavely affects required volume and quality of services. Limited healthcare expenditure. This is one more reason to access to services is one of the sources of corrupon opmise all expenses on medical services as soon as among medical professionals. possible. Chapter 8 | 134

Figure 5 Figure 6 Inpaent care: discharges per 100 persons Average length of stay, acute care hospitals only

26.0 13.0

24.0 12.0

22.0 11.0

20.0 10.0

18.0 9.0

16.0 8.0

14.0 7.0

12.0 6.0

2.0 5.0

2000 2010 2014 2000 2010 2014 UA 19.4 22.9 19.0 UA 12.7 10.6 10.0 EU 17.8 17.4 17.4 EU 7.6 6.6 6.4 DE 22.6 24.0 25.7 DE 10.1 8.1 7.6 FR 22.9 19.1 FR 5.5 5.8 5.8 GB 13.4 13.7 13.3 GB 7.7 6.1 6.0 CZ 20.0 20.5 20.9 CZ 7.9 7.0 6.6 HU 23.6 20.5 20.3 HU 7.1 5.8 5.7 PL 15.7 16.2 16.9 PL 7.9 7.3 6.6 SK 19.4 18.6 20.0 SK 8.4 6.6 7.0

Source: WHO Source: WHO

Despite such low expenditure on medical services in An even bigger problem in Ukraine is the length of Ukraine, the number of paents treated in hospitals hospital treatment. Although in the 15 years under (per 100 residents), which provide the most scruny here the length of treatment has been expensive medical services, is higher than the lowered by over 20 per cent, it is sll more than 50 average in the European Union. In the United per cent longer than the average length of hospital Kingdom 30 per cent fewer people use hospital stays in the European Union. Long-term treatment is services than in Ukraine. This pracce in Ukraine more expensive and is not always beer for the cannot be sustainably maintained because it results paent. In a country with such a low level of funding in indebtedness of the enre healthcare system. of treatments from the budget, shortening of hospital stays is an indispensable task. Chapter 8 | 135

Figure 7 healthcare services, especially by hospitals, which are Acute care hospital beds per 100,000 persons the most expensive units in the enre healthcare system.

800 In 2016, a survey³ performed on a sample of the populaon showed that the public considers the 700 healthcare reform to be the most important and most

600 urgent reform in Ukraine. The respondents indicated that illness in the family is currently the greatest 500 threat to the financial security of that family. Despite medical treatment being free of charge according to 400 the law currently in force, in reality individuals and families shoulder about 50 per cent of the cost, on 300 average.⁴ Given the relavely low average earnings,

200 pay for treatment is oen associated with the need to take a loan from a bank, which oen results in 2000 2010 2014 long-term indebtedness. Those with the lowest UA 714 761 613 income oen drop out of treatment, due to the EU 485 409 394 inability to obtain a bank loan. DE 681 615 621 FR 526 448 428 Principles on the financing of public healthcare GB 317 241 228 services are very ineffecve. Hospitals and clinics sll CZ 577 486 425 receive a subsidy from the state budget, just like in HU 621 447 429 the Soviet era. The mediator who decides where the PL 515 498 488 finance directed is the local authority. The amount of SK 639 536 491 the subsidy does not depend on the number of paents and the cost of treatment, rather on the Source: WHO organisaonal structure of health units and the number of employees. Such a payment method does Long-term hospital treatment me translates into a not incenvise improvements in the quality of large number of hospital beds, which in turn treatment, on the contrary, it creates perverse translates into increased hospital costs and incenves to overprescribe hospital treatment and investment in the construcon of addional hospitals prolong hospital stays. instead of the purchase of new medical equipment. Although the number of beds in Ukraine decreased The non-transparent allocaon of subsidies opens up by 15 per cent in the 15 years studied, there were avenues for corrupon, and that on many levels of sll over 50 per cent more beds than the EU average. decision-making, including both local and central The difference is even starker when Ukraine is level government bodies as well as in the hospitals compared to the United Kingdom; the former's and clinics themselves. hospital beds per 100,000 inhabitants exceed those of the laer's by about 70 per cent. Salaries of healthcare professionals, when compared to other professions that require high levels of The above analysis of selected indicators describing educaon and entail great amounts of responsibility the Ukrainian healthcare system indicates that for potenally irreversible effects (should mistakes despite having a very high number of doctors and occur), are very low. Low wages do not encourage hospital beds per 10,000 inhabitants, Ukraine's improving qualificaons and movaon. The result is average life expectancy is about 10 years lower than a low commitment to learning new technologies and the average in EU member states.² This demonstrates connuously upgrading professional qualificaons. a very inefficient use of resources by units of the

² Ibid. ³ Executed by the Rang Group polling company for the Ministry of Healthcare. The results of the survey have not been officially published. ⁴ WHO data. Chapter 8 | 136

What is the purpose of the reform? The second principle of the reform is equal access of healthcare units to public funding. The inhabitants, The healthcare reform aims to: with their choices, indicate their preference for the place of treatment. The selected healthcare unit in 1. Improve the sense of security among Ukrainian turn receives state funding for their treatment. Unl cizens now, other rules governing the distribuon of public 2. Raise the level of dignity of the medical profession money have been applied. The basis for the 3. Improve the quality of medical services allocaon of funding was the potenal treatment, not 4. Increase the efficiency of allocaon of resources the actual treatment; taking into consideraon the (taxpayers' money) organisaonal structure and the number of staff 5. Significantly reduce corrupon in healthcare at all rather than the volume and nature of services levels (civil servants, medical personnel, paents) delivered. This provided an incenve to reduce the Ukraine, like other European countries which have number of paents, because actual treatment would previously undergone healthcare reforms, aims to increase the costs incurred by healthcare units while achieve universal healthcare, ensuring the provision the amount of state subsidies remained the same. of the widest possible range of quality health services The reform introduces a different rule – each me funded by public finance. In brief, the goal is a system the paent's healthcare unit provides him treatment, based on social solidarity that guarantees the right to it receives more public money. This changes the use publicly funded healthcare services in case of movaon to heal – if the paents choose this unit life-threatening or life-altering disease. as a place of treatment, the unit will perform more services and therefore will receive more money. The reform rewards the best and most industrious. The reform principles The third principle of the reform is the equal The first principle of the reform is an equal right for treatment of public and private healthcare units. So all residents of Ukraine to use medical services in far, only public healthcare units have received public hospitals and clinics throughout the country, which financing and paents have been able to receive has concluded an agreement with the state on the treatment free of charge only in those units. Private provision of healthcare services funded by the state clinics were accessible only to richer Ukrainians as budget. This is a fundamental departure from the they required payment for treatment. Society divided rules that were in place previously, where the healthcare into private (beer paid and available only availability of free medical services had been limited for the rich) and public (worse, but, in theory, free to healthcare units operang closest to the paent's and available for most residents). The reform does place of residence. The reform has enabled the not disnguish between public and private paent to seek treatment at the best healthcare unit healthcare units, the only disncon is based on the (as judged by the paent), taking into account not quality of treatment. If the enty meets the only the closeness of this unit but also the quality of condions of the quality of treatment – medical staff its medical services. with appropriate training and experience, has the required medical equipment and the like – it has the In this way, residents feel that they can freely enjoy right to bid for a contract with the government for the constuonal right to treatment, and are not the treatment of Ukrainian cizens, financed from permanently administravely assigned to one medical the state budget. This approach increases unit with a monopolisc posion, which does not have compeon in the market of medical services to care about paent sasfacon simply because the through the parcipaon of private enes, usually paent must always use its service. In short, it can be possessing beer medical equipment and employing said that the reform destroys the monopoly in workers with beer skills and professional healthcare and introduces market freedom for the experience. This forces the public healthcare units to paent to choose the best service provider. improve the quality of their services through investment, maintenance of facilies and above all Chapter 8 | 137

connuous improvement of qualificaons of their to a single electronic document. Administrave medical personnel. dues are limited only to entering the paent idenficaon code. All other administrave data is The fourth principle is the widespread introducon supplied via the IT system, using registers of of electronic recording and exchange of medical residents, doctors and healthcare units. Also, informaon in the enre healthcare system. So far, secondary medical documents, such as prescripons, healthcare units have kept all medical, financial and referrals for diagnosc tests, referrals to specialist organisaonal documentaon in paper form. Because doctors and the like are automacally created by the of this, access to informaon was difficult, me- informaon system using electronic medical records. consuming and costly. Therefore, virtually no In addion, all documentaon created during the healthcare unit conducted internal analyses of the paent's visit to the doctor is archived in the paent quality and costs of medical services. Management record: a single register of all medical events from decisions were made arbitrarily. The same problem birth to death. In short, it can be said that the reform concerned decisions taken at the self-government restores the me doctors can spend on treang the level, that is the owners of healthcare units, and the paents, obliging them to produce only one central administraon, which should shape the state's document; a descripon of the disease and the health policy. The decisions were not jusfied by method of treatment. actual data regarding the funconing of the healthcare system, and the changes and investments The adopon of these basic reform principles introduced were not analysed in terms of their required a profound change in the law, the system of expected results. financing of medical services, public healthcare units, the work of the Ministry of Health, but above all a An even bigger problem was the exchange of medical change of mentality of all stakeholders in the records between healthcare units treang the same healthcare system. So a complex reform, involving paent. Theorecally, the paent would have to the whole of society as customers and close to one provide another doctor treang him with paper million people working in the healthcare system, medical documents describing the treatment takes a lot of me and requires constant control over prescribed by previous doctors. In pracce, the basic its implementaon, including adjusng course if source of informaon about the paent's health and necessary. Therefore, the Minister of Health adopted current treatment is the paent and not his medical a strategy for the gradual implementaon of the documentaon, which has a negave impact on the reform, dividing it into 6 steps: quality and cost of treatment. The reform radically changes the situaon. All medical documents are • Step 1: polical agreement on reform and its main created in digital form. The only paper document can rules be a copy of a digital document for a paent who • Step 2: changes to the law, implemented at the cannot use an electronic document. The others who level of Parliament, the decrees of the Cabinet create a document or use this document must do so Minister and the Minister of Health electronically. Thanks to this, creang a document, making it available and archiving it is cheap and fast, • Step 3: a detailed concept of the funconing of the and providing access to it to authorised persons is healthcare system aer the reform and of the possible anywhere, anyme. implementaon of the reform

The fih principle is to reduce the doctor's • Step 4: changes in the Ministry of Health, the bureaucrac dues to a minimum. Unl recently, expected cooperaon with other ministries and doctors spent a lot of their me filling in complex and central state bodies, and the creaon of new state oen repeve forms. Because of that they had less enes necessary for the implementaon of the me to talk to the paent or and treated fewer reform paents on a daily basis. The reform radically changes the scope of doctors' dues. It allows them to focus • Step 5: three-point implementaon of the reform in on treatment and minimises medical documentaon healthcare units at: Chapter 8 | 138

• family medicine At the same me, the Ministry of Health prepared a • ambulatory (outpaent) medicine set of the key legal acts necessary for iniang the implementaon of the reform. • staonary (inpaent) medicine In March 2017, the government submied to the • Step 6: review of the reform impact. parliament a dra law on the financing of medical Each of the three degrees of implementaon of the services “On State Financial Guarantees of Public reform in healthcare units includes: Healthcare,⁵ a basic law for the whole reform, which, in addion to the rules for the funding of medical • independence of the healthcare unit, services, specified the paent's rights, organisaon of • implementaon of an IT system that supports healthcare units and deadlines for implemenng the medical services next stages of reform. The parliament adopted this law in October 2017, but the president only signed it • implementaon of an IT system supporng the in December 2017, so the act only came into force management of a healthcare unit on 30 January 2018. The delay had a very negave • signing of a contract for the provision of medical impact on the implementaon of the reform. Interest services in the reform among the medical community dropped and some of its members expressed doubts over its • implementaon of medical services implementaon. Only very intensive communicaon by the Ministry of Health and constant meengs with • analysis of the effects of reform implementaon medical personnel in all provinces sustained the • possible correcons to the reform. acvity of local reform leaders.

Very intense legislave work of the Ministry of What has been done? Health in the last quarter of 2017 and the personal involvement of the prime minister in accelerang the In 2016, the reform of the healthcare system was work of the government helped to sck to the included in the government's list of priority reforms. calendar of reform implementaon in 2018. The four-year implementaon period of the reform was to run from 2017-20. The basis for the reform In addion to the legislave work, over 100 basic was the concept of changes in financing principles of business processes have been defined for healthcare the Ukrainian healthcare system, prepared by the units working according to the new principles of working group of the Ministry of Health under the paent service, cooperaon with other healthcare previous government in February 2016. The concept units and central organs of the healthcare system. assumed the central financing of healthcare services This task has shown that it is necessary to modify or from the state budget with the amount of financing create a dozen new central registers, such as, for to be determined by the quanty and quality of example, doctors registers, and introduce about 100 services provided. uniform diconaries to describe medical and organisaonal acvies of physicians and healthcare From August 2016 to March 2017 extensive units. Both processes, concerning diconaries and consultaons were carried out with employees of registers, will last unl at least 2020, as the next healthcare units in the regions, devoted to providing stages of the reform are implemented. informaon about the goals and ways of introducing changes in the healthcare system, as well as In the first quarter of 2018, the state enterprise “e- discussions about the preparaon of healthcare units Health” was created. It is responsible for the for independent decision-making. Thanks to these preparaon and operaon of the central database consultaons, the medical community felt supported and informaon systems necessary for the Ministry by the reform and the necessary organisaonal of Health and the Naonal Health Service of Ukraine changes in the healthcare units were accelerated. (NHSU), the central body ordering medical services

⁵ “Про державні фінансові гарантії медичного обслуговування населення”. Chapter 8 | 139

for the whole of society, supervising provision by all Ministry of Health and implemenng its health policy healthcare units and paying for delivered medical through three basic streams: services. In addion, “e-Health” controls the • ordering medical services for the next year in all commercial IT systems that support all units of the healthcare units that want to finance treatments healthcare system with passive or acve access to from the paents' state budget the central database. Without an “e-Health” licence, healthcare units cannot use the IT system. • supervising the provision of medical services

The reform in 2018 focused solely on family doctor • paying for medical services. services. The first step of the reform consisted of the separaon of the part dealing with family medicine NHSU has the right to access the central database of from the previous healthcare units and the creaon medical services and therefore has up-to-date of a new healthcare unit dealing with family medicine stascs of therapeuc needs in individual areas of only. It involved obtaining the status of an the country and the capabilies of healthcare units independent healthcare unit, which means the right that meet the quality of treatment (medical to self-management of financial resources obtained personnel, medical equipment and previous for medical services and independent decision- treatment outcomes), which allows it to idenfy making on organisaonal changes to opmise the areas of excess and areas of scarcity of medical use of resources for the treatment of paents. Of services. This analysis will form the basis for the course, the right to make decisions by yourself restructuring of exisng healthcare units and involves full responsibility for the consequences of implementaon of investment projects for the these decisions. construcon of new units.

By the end of 2018, despite opposion pressure, NHSU obliged healthcare units to exchange almost 100 per cent of the family healthcare units informaon on organisaonal and financial maers became independent. This is a surprisingly good only in digital form. As a result, it shepherded result given that only a year prior to that many of the healthcare services into the era of computerisaon. local authories opposed such a change. As a result, although employing only about 100 people, the NHSU can handle over 600 contracts The second step, which began in April 2018, with healthcare units, treang over 20 million people. concerned healthcare units obtaining declaraons of a choice of family doctor from Ukrainian cizens. This It should be emphasised that the creaon of NHSU, was a breakthrough – residents got the right to despite the complicated internal structure and a very choose the best, in their opinion, family doctor, important role in the reform (about 30 business located at a comfortable distance from their place of processes), was very fast; three months in total. residence. In pracce, the freedom of choice Thanks to this, NHSU had already finalised the benefied mostly urban residents who have access agreements for the provision of medical services of to a large number of family doctors within a small family doctors in June 2018. radius. In many rural areas there is only one family The fourth step was to finalise an agreement doctor and so the freedom of choice is rather between the healthcare unit and NHSU. This step cosmec in nature. was divided into three stages: June, August and By the end of 2018, over 23 million residents of December. As the number of independent healthcare Ukraine, or around 60 per cent, had chosen their units and the number of family doctor choice family doctor. This is a very posive sign of public declaraons increased, more and more medical units involvement in healthcare reform. reported willingness to finalise a service contract. In June 2018, 161 contracts were signed, which The third step was the establishment of the Naonal entered into force on 1 July 2018, including 149 with Health Service of Ukraine (NHSU), the central municipal healthcare units, seven with private execuve body of the state, subordinate to the healthcare units and five with individual Chapter 8 | 140

entrepreneurs (ФОП). In August 2018, 462 contracts bought medicines only from me to me, resulng in were signed, in force from 1 October 2018, including the absence of treatment effects and further 389 with municipal healthcare units, 40 with private development of the disease. healthcare units and 33 with ENP. In December of The programme consisted of three components: that year, 1,207 contracts were concluded to enter procurement of medicines by the Ministry of Health into force in January 2019, including 994 with by way of a tender, transfer of medicines to municipal healthcare units (that is, over 95 per cent pharmacies that had declared their willingness to of all municipal healthcare units of family medicine), parcipate in the programme, and reimbursement of 110 with private healthcare units and 103 with the medicines by local governments from the state ENP.⁶ budget fund. It can be concluded that the reform, in the sense of The Ministry of Health's analysis showed that prices organisaonal change and financing rules for family of medicines in Ukraine are significantly higher than doctor services, has been completed. Public money prices of idencal medicines in other European from the state budget goes to the doctors whom the countries. These discrepancies can be explained by Ukrainians are able to choose. The objecve of equal the collusion of producers and importers of treatment of public and private healthcare units was medicines with pharmacists and the likely achieved, thanks to which over 200 private enes distribuon of profit among the involved pares. finalised a contract, which sparked compeon Therefore, the Ministry of Health was forced to set between public and private enes in obtaining up an internaonal tender commission (guaranteeing doctor choice declaraons, and incenvised public resistance to corrupon), which, via a tender, ordered enes to improve the quality of treatment. the same medicines at a significantly lower price. The Another result is a truly free-for-paents medical resulng savings made it possible to order more service. In mid-2017, 20 per cent of paents had to drugs for a higher number of paents, which “line the doctor's pocket” to received treatment, in improved the availability of medicines in all regions of September 2018 it was only 7 per cent. Why? the country. Because by receiving money directly from paents, The introducon of drug reimbursement required the doctors break their contract with NHSU and thus pharmacies to decide whether they want the paent disqualify themselves from public funding. Salaries of to pay for the medicines sold (as before) or whether the best doctors and nurses increased by about 100 they wish to enter the “affordable medicines” per cent and in some cases even more. This is not the programme and receive money from the state. In the effect of increased spending from the state budget, first few months, a very low percentage of only a more opmal allocaon of resources. pharmacies decided to be paid by the state. This In parallel to the ongoing systemic reform of the shows how low the level of trust in the state was healthcare system, a number of changes were among the pharmacies. However, every month, the introduced to the weakest points of current number of pharmacies joining the programme grew, treatment pracces. From April 2017, new rules for so that by the end of 2017 over 6,000 pharmacies the pharmacological treatment of chronic diseases were parcipang, rising to over 9,000 by the end of were introduced under the “affordable medicines” 2018. programme. The programme focuses on the Money for drugs sold under the “affordable treatment of: cardiovascular diseases, which is the medicines” programme in 2017 and 2018 was cause of 65 per cent of deaths in Ukraine; type II received by the pharmacies from the state through diabetes affecng about one million people; and local authories with whom they signed appropriate bronchial asthma, which occurs in over 200,000 agreements. From April 2019, pharmacies will receive people. The reason for the introducon of the money directly from the NHSU as the central body of programme was irregular drug use by paents who, the state responsible for paying for medical services due to the high price of the drugs and lack of money, from the state budget, including medicines.

⁶ hps://gateway.euro.who.int/en/hfa-explorer Chapter 8 | 141

The two years since the launch of the reform brought alone. Since July 2018, parents and family doctors posive health and financial outcomes. As the price have a schedule of children's vaccinaons against of medicaon has been lowered by producers and tuberculosis, poliomyelis, diphtheria, pertussis, the state budget's possibilies for increasing the tetanus, measles, hepas B, haemophilic infecon, amount of spending on affordable medicines have rubella and mumps. expanded, the programme has grown significantly. In April 2017, the affordable medicines programme What remains to be done? included 153 drugs, including 23 free (17 medicines for cardiovascular diseases, three medicines for type 2019 is the year of presidenal (in March) and II diabetes and three medicines for bronchial asthma) parliamentary (in October) elecons in Ukraine. The and 130 parally paid. From August 2018, the electoral year is not parcularly propious for programme includes 261 drugs, including 59 free (45 implemenng difficult changes such as the reform of medicines for cardiovascular diseases, nine the healthcare system. That is why it is necessary to medicaons for type II diabetes, five medicines for prepare carefully for the next stages of the reform bronchial asthma) and 202 parally reimbursable and adjust its pace to the current context in order to drugs. It is esmated that aer two years of the avoid any potenal hindrances to doctors' work. On programme, almost all paents with the above the other hand, one should be mindful of potenal diseases regularly take the prescribed drugs while changes to the reform agenda as a result of the two prescripons have increased by 70 per cent. elecons in 2019, as well as of possible reform reversals or interrupons. The second weakness of the exisng treatment pracces was the high overall cost of laboratory tests In 2018, IT companies did not succeed in finalising and diagnoscs. The key consequence was that the the necessary IT systems for the servicing of family paents were forced to pay for these services. In doctor surgeries. Medical documentaon was thus many cases, the price of laboratory and diagnosc sll recorded on paper, which made it impossible to examinaons exceeded the financial capacity of the achieve the goal of reducing the physician's paent. The result was an intuive diagnosis by the administrave burden. In addion, the possibility of doctor, which negavely affected the speed and passing medical records to other doctors treang the accuracy of their treatment. same paent was not operaonalised. It is therefore necessary to implement the appropriate IT systems Therefore, as part of the reform of the family doctor as soon as possible in 2019. Without the pracce, a set of ten free basic tests was introduced implementaon of this component, the reform of for the most common diagnoses at the level of family outpaent treatment cannot be iniated. medicine. The NHSU doctor is reimbursed for these tests in annual payments for each paent who, NHSU pays for outpaent services in line with the through their declaraon, chose them as their family “fee for service” principle. This requires the doctor. This is the first step in regulang which tests classificaon of medical services (a diconary of are free for the paent and which are paid, in whole services) and the calculaon of the costs of all or in part. So far as the financial possibilies of the medical services (price list services). This task can be state budget are concerned, the diagnoscs funded performed only with the parcipaon of several well- by the NHSU will be expanded. managed outpaent treatment units, separately for all medical speciales. Such analyses require tesng The third weakness of the current treatment pracce for at least three months and should be performed in is the neglect of vaccinaon of both children and the first half of the year. adults. For several years, a large number of cases of tuberculosis has been registered and the long-term In 2019, prophylacc examinaons should also be failure to vaccinate children brought Ukraine to the conducted by family physicians and specialist verge of a measles epidemic in 2018. Over 50,000 doctors. This requires costly imaging diagnoscs, cases of measles were registered in western Ukraine which entails including addional expenses in the budget for 2020. Chapter 8 | 142

The hospital treatment reform should be launched in 2020. Given the challenges in the implementaon of this reform component, it is reasonable to expect progress only with regards to a few selected medical specialies and to re-engage on the remainder post elecons.

The tasks for the coming months are demanding. The pre-elecon atmosphere that creates a ferle ground for populism may be an obstacle, and in the event of a change in polical leadership, back-tracking on reform is possible. The second obstacle may be the lack of budget for the implementaon of the reform due to slow economic growth. Previous changes in the healthcare reform did not require large budget expenditures but without any money it is impossible to restructure such complex systems.

In conclusion, Ukraine has launched a much-awaited reform of its healthcare system, introduced incenve mechanisms for the opmisaon of the healthcare system from below, encouraged compeon among physicians and healthcare enes, public and private, as well as introducing reimbursements for a number of crical medicines. As a result, cizens have started to enjoy beer quality and accessibility of healthcare services. More importantly, the reform has restored the dignity of the paent who no longer has to bribe a doctor to receive the treatment they need, and the dignity of a doctor who does not have to coax money from the paent to provide them with treatment and earn a fair wage.

The reform gave the paent the right to choose the healthcare unit in which they would like to be treated and the doctor who will treat them. It diversified the revenues of healthcare units and the earnings of all medical workers, rewarding the beer and more diligent. The reform forced healthcare units to invest in the modernisaon of medical technologies and treatment condions because compeon removes obsolete and ineffecve ones from the market. Now reform, like any major change, requires paence, because the effects of reforming such a complex system as medical services are usually only seen aer many years. Chapter 9 Chapter 9 | 144 Chapter 9 Ukraine and the European Union

Katarína Mathernová agreements at a later point.⁵

This year we celebrate five years since the dramac This strong public desire and pressure ulmately February 2014 events at Maidan, a square in the pushed Yanukovych not only out of office, through a heart of Kyiv that gave its name to the popular revolt parliamentary vote on 22 February 2014,⁶ but made by ordinary Ukrainians who demonstrated for a him flee to Russia, leaving his opulent residence beer life, for the eliminaon of corrupon and purchased with his vast amassed wealth (which cronyism, and for a European future. The violent included a private zoo), as well as a country laden government crackdown to suppress the protest with large amounts of debt and on the brink of resulted in the deaths of roughly 100 demonstrators. economic collapse. In quick succession, thereaer, a new interim government and new hope were ushered It came aer weeks of non-violent demonstraons in in. sub-zero temperatures that had started late November 2013. These were triggered by the This chapter addresses two stories that have defined decision of the former President, Viktor Yanukovych, the relaonship between the EU and Ukraine and its to decline, cing Russian pressure (and sweetened by reforms over the last five years.⁷ One is the story of a financial support package and lower energy prices), instuons. The other is the story of bureaucrac an offer to Ukraine from the European Union to enter innovaon and support for reforms. into a close polical associaon and a free trade The polical and economic agreements with the EU agreement; in EU terms, the Associaon Agreement were signed by the new Ukrainian leadership: the and the Deep and Comprehensive Free Trade Area polical part of the Associaon Agreement by the (DCFTA).¹ The inialling of those agreements by two then new Prime Minister Arseniy Yatsenyuk on 21 other countries of the “Eastern Partnership”,² notably March 2014,⁸ and the economic part by the new the Republics of Georgia and Moldova, took place at President, Petro Poroshenko, on 27 June 2014. the summit in the Lithuanian capital Vilnius on 28-29 Ukraine joined the trade agreement, the DCFTA, on 1 November 2013. The Joint Declaraon of the January 2016. The Associaon Agreement formally summit, aended by the leaders of the EU and the came into force on 1 January 2017, having finally Eastern Partnership countries laconically: “[took] note garnered a unanimous approval from the 28 EU of the decision by the Ukrainian government to suspend member states, including overcoming a negave vote temporarily the process of preparaons for signature of against the agreement in a 2016 referendum in The the Associaon Agreement and Deep and Netherlands. (This chapter refers to all these above Comprehensive Free Trade Area between the EU and agreements as the EU-UA agreements). Ukraine.”³ The signing of the EU-UA agreements created a lot of The same Declaraon, however, recognised the expectaons on the side of the Ukrainian public, the strong desire of the Ukrainian populaon for a future Ukrainian government and the internaonal closely aligned with the European Union. Nong “the community. While they stopped short of opening the unprecedented public support for Ukraine's polical prospect of membership, they offered Ukraine (and associaon and economic integraon with the EU,”⁴ it the other two signatories, Georgia and Moldova) a expressly le the door open for Ukraine to sign these

¹ Official Journal of the European Union, OJ, L 161, Volume 57, 29.5.2014. ² Idem. ³ Joint Declaraon of the Eastern Partnership Summit, Vilnius, 28-29 November 2013, Eastern Partnership: the way ahead, Council of the European Union, 17130/13 (OR.cn), PRESSE 516. ⁴ Idem. ⁵ Idem. ⁶ About 73 per cent of MPs voted to oust Yanukovych from office, 328 of 447 members of the Verkhovna Rada. ⁷ This chapter does not address the important issue of military and security reform. ⁸ EU & Ukraine 17 April 2014 FACT SHEET of the European External Acon Service (17 April 2014) with the EU. Chapter 9 | 145

privileged relaonship with the explicit goal of the Ukrainian populaon. This uneasy situaon has integrang Ukraine's economy with that of the EU. In been further compounded by the toxic polical the post-Maidan euphoria, it seemed only natural to economy cocktail of the need to transform a country many that becoming “more European” and moving in a state of war. Fundamentally reforming a country closer to the EU would happen rapidly through the is always a lengthy and complicated process; with full implementaon of the complex and lengthy EU- over 13,000 casuales in the last five years and UA agreements. Signature of the agreements was spending over five per cent of GDP per annum on widely seen as a proxy for a commitment to a defence, the task becomes exponenally harder. fundamental transformaon of the country. These Many of the new Ukrainian officials that took over expectaons, however, have to date not been aer Maidan were new to governing and policy fulfilled, at least not to their full extent, despite an development and coordinaon. They lacked the extensive roster of reforms that have been adopted experience and experse necessary to prepare and and carried out by the governments of prime carry out the massive reform agenda. It ranged from ministers Arseniy Yatsenyuk and Volodymyr macroeconomic stabilisaon through the reform of Groysman that have been in power since Maidan. the legislave process, the judiciary, police and The queson to ask is why? prosecuon, to reforms of the health, pension and There are three interrelated reasons which will be social sectors, through the banking, industrial and covered this chapter. All are, in essence, of an agriculture sectors, to the investment and business instuonal nature. The first one relates to the climate. Yet, all these areas desperately needed overall weak instuonal environment in Ukraine and aenon and reform. Also, there were only several the strong and entrenched vested interests fighng dozens of reformers, too small a number for the scale against the take up of the reforms embedded in the of the tasks. In simple terms, Ukraine, its people and EU-UA agreements; the second one relates to the its instuons were expected to fire on all cylinders demanding nature of the EU-UA agreements while lacking the means to do so. themselves; and the third reason relates to the fact Jean Monnet, a founding father of what became the that by their design, the agreements do not address European Union famously said: “Nothing is possible the “fundamentals” of reforms. This chapter discusses without men; nothing is lasng without instuons.”⁹ these in turn. Ukrainian men and women brought down the corrupt regime of Yanukovych and thus gave a tremendous First story – instuons boost to democrac change in the country. But to sustain the changes, they needed to be embedded in Instuonal weakness instuons. And instuons consist of people that Elsewhere this book, notably in the chapter on the need experse in areas such as policy development polical economy, a clear case is made about the and design that were hitherto not pracced. Violent difficult starng point for reforms in Ukraine post democrasaons are oen followed by the dilemma Maidan. Unlike many other ex-communist countries of how to “turn revoluonaries into managers”. (notably the ones in central Europe that have joined Ukraine's blessing in the wake of Maidan was the the EU in the meanme), Ukraine did not only have experse that existed in the civil society which to grapple with the sll-massive economic inially substuted the lack of government capacity imbalances and legacies of decades of communism: in, for example, legislave draing or policy analysis inefficient industries, a bloated and ineffecve public and strategy development. The most notable among sector, dilapidated infrastructure and a widespread the think-tanks that helped develop many lack of public trust. It also suffered through two government reform strategies and acon plans has decades of the build-up of an oligarchic and rent- been the Reanimaon Package of Reforms (RPR), seeking system based on corrupon as an organising coordinang the work of 83 NGOs and 22 expert principle, with eroded public instuons and trust of groups. RPR calls itself the largest coalion of leading

⁹ New World Encyclopedia, Jean Monnet, hp://www.newworldencyclopedia.org/entry/Jean_Monnet, accessed on 5 April 2019 Chapter 9 | 146

non-governmental organisaons and experts that As Kataryna Wolczuk, wring extensively on Ukraine, facilitate the design and implementaon of reforms.¹⁰ puts it: “…instuons are used by insiders to extract Some members of civil society organisaons and also rents rather than to deliver public goods for society the private sector even joined the government. The as a whole. Where reforms threaten to curtail the most prominent example is Ivanna Klympush- flow of rents, they meet strong and persistent Tsintsadze, a former prominent member of civil resistance from state officials and much of the society who took the post of Deputy Prime Minister current polical elite.”¹⁴ As the World Bank pointed for European Integraon, responsible for out in its flagship publicaon on lessons from the coordinang the implementaon of the Associaon transion countries aer ten years; “As long as the Agreement. stock of rents was not depleted, these winners had a strong incenve to preserve their advantages . . . The EU-UA agreements, however, presented the [and] block reforms that threatened those Ukrainian administraon with a significant paradox. advantages.”¹⁵ The agreements laid out a broad reform agenda and expectaons.¹¹ However the government, and also The phenomenon of entrenched interests that fight the think-tank community, lacked the capacity to against reforms (and reformers) that would transform the many reform demands contained in the undermine their privileged posion and take away agreement's 15 chapters, 14 annexes and three the rents they can extract in a corrupt and oligarchic protocols into reality.¹² This chicken and egg problem regime is not new and is not isolated to Ukraine.¹⁶ To has plagued both the implementaon of the various degrees, similar processes were observed in commitments in the EU-UA agreements and also the most former Communist countries transioning from task of coordinang and monitoring their compliance a planned to a market economy. What made Ukraine from the very beginning. The situaon was further stand out is the extent and depth of the oligarchic complicated by many of the weak instuons being structures, state capture and entrenched interest captured or corrupted by vested interests, be it across the economy and public administraon that officials extracng rents from somemes mundane were built up and solidified aer the collapse of the administrave tasks or oligarchs controlling not only Soviet Union.¹⁷ It was, parcularly in the 20 years economic interests but oen also capturing the leading up to Maidan, that the oligarchs expanded policymaking and legislave processes. The vested their influence and wealth. In fact, they filled the interests fought against reforms and reformers, as relave power vacuum that existed in Ukraine while they were interested in maintaining the status quo its elites played their balancing act with its mul- and hence frustrang any further reform efforts.¹³ vector foreign policy.

¹⁰ Reanimaon Package of Reforms website, hps://rpr.org.ua/en/about-us/, accessed on 7 April 2019 ¹¹ According to an EU guide, “The DCFTA [is] one of EU’s most ambious bilateral agreements yet”, offering, inter alia, “an extensive harmonizaon of laws, norms and regulaons in various trade-related sectors.” hps://eeas.europa.eu/tradoc_150981. ¹² Idem. The agreement extends beyond the trade aspects to energy, environment, public procurement, compeon and state aid, intellectual property and financial, telecommunicaons, postal, courier and marime services. ¹³ A telling illustraon of this phenomenon is the difficulty in maintaining the invesgave powers of the new Naonal An-Corrupon Bureau of Ukraine (NABU), and the so far successful aempts to frustrate its findings being followed up by the courts. And also aacks on its personnel. Sources from media. ¹⁴ Kataryna Wolczuk, Chapter 3. European Integraon, p. 24, in The Struggle for Ukraine, Ash, T., Gunn, J., Lough, J., Lutsevych, O., Nixey, J., Sherr, J., and Wolczuk, K., Chatham House Report, London: The Royal Instute of Internaonal Affairs, October 2017. hps://www.chathamhouse.org/publicaon/struggle-for-ukraine. Accessed on 5 April 2019 ¹⁵ Transion, The First Ten Years: Analysis and Lessons for Eastern Europe and the Former Soviet Union, The World Bank, Washington, D.C., 2002, p. 107. ¹⁶ The World Bank called pre-Maidan Ukraine a “concentrated polical regime” nong that such regimes “exhibit consistently higher state capture . . . [and] oligarch and insiders capture the state. . . “. Idem. p. 105. ¹⁷ While harsh in his judgment on the overall reform results, Andrew Wilson points out clearly the economic power and state capture of the oligarchs: Survival of the richest: How oligarchs block reform in Ukraine, European Council on Foreign Relaons, ECFR Policy Brief, London, April 2016. Chapter 9 | 147

Box 1. The fight against corrupon taking away licenses from over 90 banks; and deregulang and opening economic sectors to In its 2017 flagship publicaon, the World compeon. On the transparency front, the most Development Report on Governance and the Law, the notable has been the extensive requirement to World Bank clearly states that the success of an- publish electronic asset declaraons of all public corrupon strategies depends on the level of officials and their families. development of each specific country. To successfully The crical importance of these preventave reforms fight corrupon, one needs to “recognise that cannot be overstated. Punishing fraud, corrupon corrupon is not a social 'malady' … but rather a built-in and the, breaking up the oligarchic structures in the feature of governance interacons.” It further notes country, and overcoming the exisng sense of that “the complete autonomy of state from private impunity is also crical for Ukraine's moral fabric. interests [is] relavely recent, [as] all sociees start This is parcularly true due to societal expectaons from being “owned” by a few individuals who control and impaence with not seeing those responsible for all resources.”¹⁸ gra and corrupon behind bars. The reality of deep In instuonally weak environments of the less instuonal change, however, is that it will take me developed or transion countries, it is, therefore, to developed the whole chain of enforcement invariably much more effecve to fight corrupon instuons (from invesgaon through prosecuon before it occurs, rather than punish corrupt to courts) and staff it with people able to take on the behaviour aer it has taken place. How? On one mighty and powerful. As the 2017 World hand, by systemacally reducing opportunies for Development Report notes: “If the most powerful corrupon and rent-seeking in the public and private groups in a country do not want the enforcement of sectors. On the other hand, by introducing as much formal rules, it is unlikely that the rule of law will transparency as possible into public life and the emerge through enforcement efforts from above.”¹⁹ provision of public services, among other things by The trouble is that people's paence in Ukraine is employing digital tools that are now widely available. running short. The simple reason is that for the state to be able to punish corrupt behaviour effecvely, it needs strong Complex agreements: Best pracce or best fit? instuons, from invesgave bodies through prosecuon to courts. The EU-UA agreements lay the groundwork for a complex and sophiscated contractual relaonship While the will of Ukraine's execuve powers to build between the EU and a third country,²⁰ resulng in a and make effecve enforcement instuons far-reaching polical associaon and economic operaonal has been ambivalent to date, the Cabinet integraon with the EU. The Associaon Agreement of Ministers has shown strong will and ability to provides for a shared commitment to a close and systemacally close opportunies for corrupon and lasng relaonship with the EU, based on common rent-seeking through a variety of reforms. Among the values; in parcular, full respect for democrac most notable is the reform of the gas tariffs and principles, rule of law, good governance, human restructuring of the state gas monopoly Naogaz; rights and fundamental freedoms. More recently, as eliminang the arbitrage among different fixed is the case with the Associaon Agreements signed exchange rates by allowing the Hryvnia float; as part of the Enlargement policy with the states of introducing an electronic public procurement system the Western Balkans²¹ and the European ProZorro; restructuring the banking system and Neighbourhood Policy²² with Ukraine, Georgia and

¹⁸ The World Bank, World Development Report 2017: Governance and the Law, Washington, USA, Spotlight 1 Corrupon, p.77. ¹⁹ Idem. p78. ²⁰ The legal base for the conclusion of associaon agreements is provided by Art. 217 TFEU, Treaty on the Funconing of the European Union, Consolidated Version of the Treaty on the Funconing of the European Union, Art. 217, 2008 O.J. C 115/47. ²¹ So called Stabilisaon and Associaon Agreements. ²² European Commission/European External Acon Service: Joint Communicaon to the European Parliament, the Council, the European Economic and Social Commiee and the Commiee of the Regions: Review of the European Neighbourhood Policy, Brussels, {SWD(2015) 500 final}, 18 November 2015. Chapter 9 | 148

Moldova, a Free Trade Agreement becomes part of declared an EU quick guide to the Associaon the overall package. In both cases, Enlargement and Agreement.²⁴ To go through the process of Neighbourhood countries that adopted associaon approximaon to EU legislaon is a tall order for any agreements entered also into DCFTAs. Entering into country, even one with much stronger administrave these agreements entails eliminang tariff and non- capacity than Ukraine had. The constraining impact tariff barriers to trade, liberalising trade in services of instuonal weakness has become apparent also and investment rules and extensively harmonising through the successive enlargements of the EU. One rules and regulaons. commentator noted that given Ukraine's instuonal realies, bureaucrac culture and capacity at the During the negoaons of the agreements, the EU me of entering into the EU-UA agreements, that was driven by the desire to offer Ukraine (and they presented “best pracce as opposed to best Georgia and Moldova) a strong and meaningful fit”.²⁵ This should not come as a surprising framework for a future relaonship without, in fact, observaon. It has taken the newer members of the providing a membership perspecve in the short run. EU a number of years to learn the codes that are For Ukraine, signing the EU-UA agreements became implicit in the way the EU negoates with third a potent polical symbol, especially in light of the countries (countries that are not members of the EU) Maidan events that were inially triggered by the and gets things done. failure of the previous President to sign the same agreements. Therein, however, lies another paradox. One of the by-products of the interplay between the The polical desire to associate with the EU does not weaknesses of the instuons tasked with put a country in a good negoang posion for implemenng the EU-UA agreements and the built in agreements that are complex and also technical in complexity of the demands of legal and instuonal nature, as the EU-UA agreements are.²³ When the act approximaon have been unrealisc or inflated of signature itself polically carries the day, polical expectaons, and somemes impaence, on the side economy analysis suggests that countries tend to of locals as well as the internaonal donors and accept the offer on the table, rather than negoate observers.²⁶ (The sense of impaence was magnified over concrete terms. by the memories of the stop-and-go reforms and disappointments with Ukraine on previous occasions, In exchange for greater access to the EU market, the in the early 2000s and in 2005-06, aer the Orange Associaon Agreement and, even more, the DCFTA, revoluon.) When complex reforms and their require Ukraine to adopt a big percentage of the vast progress are judged through the lenses of such body of the acquis communautaire, the set of EU laws expectaons, one tends to reach a more negave and regulaons developed over me that regulate assessment. Over the last five years, Ukraine has the single market and various other aspects of the been subject to a lot of cricism. Much of it was Union's common acvies. This process of adopon jusfied, while some resulted from an of the EU norms is called legal approximaon. In fact, underesmaon of the challenges faced by Ukraine “approximaon of Ukraine to EU legislaon, norms and and the me it takes to make such transformave standards, will be the method,”

²³ This applies also to adjustments that need to be made in the agreements overme to reflect the economic developments in Ukraine. For example, the quotas on agricultural products, in EU jargon “autonomous trade measures”. The quotas negoated prior to the 2014 signature of the EU-UA agreements proved too constraining as the Ukrainian economy started growing. Geng the quotas increased proved polically difficult both in the Council represenng EU Member States and in the European Parliament. The final quota increase agreed upon in September 2017, was lower than the inial proposal by the trade department of the European Commission. Commission Press Release, IP/17/3482 (29 Sept 2017). ²⁴ EU-Ukraine Associaon Agreement, Quick Guide to the Associaon Agreement, 25 September 2016, EEAS homepage/Ukraine/EU-Ukraine Associaon Agreement “Quick guide to the Associaon Agreement”. ²⁵ Kataryna Wolczuk, Chapter 3. European Integraon, p. 24, in The Struggle for Ukraine, Ash, T., Gunn, J., Lough, J., Lutsevych, O., Nixey, J., Sherr, J., and Wolczuk, K., Chatham House Report, London: Royal Instute of Internaonal Affairs, October 2017. hps://www.chathamhouse.org/publicaon/struggle-for-ukraine. Accessed on 5 April 2019 ²⁶ Andrew Wilson was among the chorus of observers calling on the West “to be more aware of priories, sequencing, and trade-offs, [as] not everything can be achieved at once.” Survival of the richest: How oligarch block reform in Ukraine, European Council on Foreign Relaons, ECFR Policy Brief, London, April 2016. Chapter 9 | 149

steps. Furthermore, there are no blueprints for such As one commentator put it: “Unl 2013, internaonal extensive legal and regulatory approximaon without assistance in general, and EU assistance in parcular, a concrete accession perspecve. was insufficiently geared towards addressing the fundamental problems facing Ukrainian state No acquis communautaire on fundamentals instuons.”²⁷ It is therefore no surprise that the The organising principle of EU agreements, whether implementaon of the EU-UA agreements picked up with the associated countries (Ukraine, Georgia and pace only relavely recently. First Ukraine needed to Moldova) or with countries negoang entry into the address the reform fundamentals and only then it EU (currently, the countries of the Western Balkans could build the administrave capacity needed to and Turkey), is the acquis communautaire discussed manage and steer the implementaon of the above. This is logical: the EU can only enter into agreements.²⁸ agreements that fall into its purview. The same For countries in transion, if the acquis organising principle is reflected also in the set-up of communautaire is the only normave framework, the individual departments of the European there is a gap, notably in the areas this chapter refers Commission, called Directorates-General (DGs). As to as “fundamentals”. Since the EU normave basis, the acquis communautaire evolved and expanded over for example, for the rule of law or public me, new Directorates-General were added to administraon or judicial instuons, consists only of address them (such as climate acon, home affairs or the main principles, one looks to internaonal digital issues). standards. If these exist (for example within the The area one does not find either in the acquis, or Council of Europe, OECD or SIGMA), they can be among the Commission departments, is followed. But frequently, the internaonal standards “fundamentals”. Fundamentals of the rule of law, the are not of sufficient depth and detail to offer buildings blocks of democrac instuons, basic concrete guidance to reformers in transion structures of the judiciary, market economy, and countries. What has oen happened in transion public administraon. Nor would one find provisions environments is that specific reforms were guided by demanding the polical elites to abide by high various consultants from different partner standards of integrity and decency in the internal organisaons. They tended to come with their own polical discourse. The reason is simple. Countries pracces, with limited understanding of the local that established the EU or joined later had mastered context and balance of power among various groups the fundamentals long before. The acquis in society and local behavioural codes. Oen, they communautaire they created together hence does not would bring their own agendas and biases. This put include many of the issues that countries further onus on weak local instuons to coordinate transioning from an autocrac communist state the advisers and arbitrate among the oen divergent, with planned economies need to address. while well meant, advice. Ukraine was no excepon. The next secon discusses how the EU addressed With the benefit of hindsight, one can say that five this weakness through some crical innovaons in years ago Ukraine was at a level of development and the way it has supported Ukraine's reforms and instuonal weakness, combined with the strength reformers, starng with the creaon of the Support of vested interests and oligarchic structures, where it Group for Ukraine. needed assistance precisely on the “fundamentals”. Without having addressed the basic underpinnings of Second story – bureaucrac innovaons a modern compeve market economy and a state based on the rule of law, it was difficult to turn its The previous secon discussed how the oversized aenon to the specific obligaons required by the dimensions of Ukraine's challenges aer Maidan and extensive agreements, notably the economic sectoral the scale of Ukraine's integraon ambions were parts of the Associaon Agreement and the DCFTA.

²⁷ Kataryna Wolczuk and Darius Žeroulis, Rebuilding Ukraine: An Assessment of EU Assistance, Chatham House Research Paper, London: The Royal Instute of Internaonal Affairs; Ukraine Forum, August 2018, p.10; hps://www.chathamhouse.org/publicaon/rebuilding-ukraine. ²⁸ Info on the current coordinaon mechanism, Roadmap, and so on. Chapter 9 | 150

neither matched by the capacity of Ukraine's state calls “bureaucrac innovaons:²⁹ first among them, instuons to design, develop, adopt and implement the creaon in April 2014 of the Support Group for reform measures in line with EU-UA agreements Ukraine (SGUA);³⁰ second, the reorientaon of more entered into force in 2014, nor by the nature of the tradional development assistance to comprehensive agreements themselves. This secon points out how instuon and capacity building, in line with the the necessary “fundamentals” of Ukraine's revised European Neighbourhood Policy;³¹ and third, transformaon were, instead, addressed through a using the EU convening power to develop and series of innovaons in the way the EU has delivered implement assistance programmes in a much closer its financial assistance and its support for a broad alignment with EU member states, the internaonal range of reforms. financial instuons (IFIs) and other bilateral partners, such as the US or Canada.³² Since Maidan, the European Union, together with its partners (notably the IMF and the US government) The combined impact of these innovaons in the way managed to wield considerable leverage and EU external aid is delivered helped to beer tailor EU influence over Ukraine's reform processes through a assistance to areas where it was most needed. It mix of tools at its disposal: from polical dialogue resulted in the support of several systemic reforms and oen public pressure, through the use of with transformave impact on the country. It is condionality in its financial assistance and the use of beyond the scope of this chapter to go into details the normave aspects of the EU-UA agreements, to about, or even list, all the reform results and the support of non-state actors, such as the vibrant achievements of the governments of Yatsenyuk and Ukrainian civil society and free media. The annual Groysman which, on several counts, defied the EU-UA summits (presided over by the Presidents of observer's expectaons. In April 2016, Andrew Ukraine, the European Council and the European Wilson of the European Council on Foreign Relaons Commission) and Associaon Councils (the highest (ECFR) called “the elevaon of Volodymyr Groysman … annual forum for dialogue stemming from the EU-UA the failure of Kyiv's reform process”,³³ referring to him agreements, chaired by the Prime Minister on the as “Ukraine's old guard”³⁴ who would not aract side of Ukraine, and High Representave and Vice reformists to work in his government. President Federica Mogherini and Commissioner While the reform dynamics indeed entered a new, Johannes Hahn on the side of the EU) proved to be post-euphoric phase in April 2016, when Groysman parcularly useful for both policy dialogue and for succeeded Yatsenyuk as Prime Minister, reforms did delivering polical messages. Not insignificant is also not stop. In fact, in several areas, they were the fact that the EU is Ukraine's largest partner and accelerated. Using his previous post as Speaker of the donor. Rada, Groysman and his team were able to Arguably, the biggest impact by the EU on reform form/reform alliances with the Rada in some developments in Ukraine over the last five years, important areas, such as health, educaon and however, has been the result of what this chapter pension reforms; decentralisaon; energy reforms in

²⁹ For a comprehensive analysis of the innovaons in EU assistance brought to bear in Ukraine, see Kataryna Wolczuk and Darius Žeruolis, Rebuilding Ukraine: An Assessment of EU Assistance; Chatham House Report. ³⁰ Set up in April 2014 as a taskforce (copying the model of the taskforce for Greece set up during the financial crisis in 2011 to support Greece in its reform efforts), by a decision of the then President of the European Commission, José Manuel Barroso. The Support Group for Ukraine was tasked with providing a focal point, structure, overview and guidance for the Commission’s work to support Ukraine. ³¹ A foreign policy instrument of the European Union towards the countries to the south (Middle East and North Africa) and east of the EU (Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine), aiming to strengthen stability, prosperity and security in Europe’s neighbourhood. Launched in 2003, the policy was reviewed in 2011, following the Arab Spring. Following further significant changes in those countries, it was revised again in 2015, through a European Commission/European External Acon Service Joint Communicaon to the European Parliament, the Council, the European Economic and Social Commiee and the Commiee of the Regions: Review of the European Neighbourhood Policy, Brussels, {SWD(2015) 500 final}, 18 November 2015. ³² See below the discussion of all three factors in turn. See also the three case studies – on decentralisaon, the reforms architecture and energy efficiency – that demonstrate the impact of these three factors in concrete reform sengs. ³³ Andrew Wilson (2016), Survival of the richest: How oligarchs block reform in Ukraine; ECFR Policy Brief, European Council on Foreign Relaons, London, 14th April 2016. ³⁴ Idem. Chapter 9 | 151

part and further macroeconomic stabilisaon; VAT the combined pressure of the internaonal reform and overall public finance management. An community and the domesc reform constuency, important leverage factor that enabled many reforms, including the strong Ukrainian civil society and especially in the fight against corrupon, has been media, Ukraine took a number of legislave and Ukraine's dire financial need fuelled by massive debt instuonal decisions, including seng up, in 2014, repayment obligaons. This has put the IMF, the an invesgave body – Naonal An-Corrupon World Bank, the EU and the US government in a Bureau (NABU); in 2015, a policy and prevenon strong posion to demand many reform concessions, body – the Naonal Agency on Prevenon of including in areas that are very sensive for the ruling Corrupon (NAPC); and more recently, in 2018, the elite, such as the verificaon of the electronic asset High An-corrupon Court. Of these, NABU has declaraons. been the most successful and, hence, also a frequent target of aacks from forces trying to frustrate Starng in April 2016, with the two-in-one step invesgaons into corrupt behaviour. increase in gas tariffs – pung the residenal tariffs at import parity level with commercial ones within The most recent example of this bale is the the first month in his office³⁵ Groysman eliminated disappoinng ruling in February 2019 by the one of the most notorious sources of corrupon that Constuonal Court of Ukraine, striking down as had plagued Ukraine for most of the two previous unconstuonal a provision of the Criminal Code on decades. The state monopoly Naogaz became illicit enrichment by public officials.³⁷ This ruling, in profitable for the first me. Instead of requiring fiscal effect, stopped further prosecuon of the 65 already transfers, Naogaz became the largest taxpayer in invesgated cases by NABU. The G7 and the World the country. This reform also offered a rare Bank immediately condemned the ruling, calling it “a opportunity for the expert community to quanfy the serious setback in the fight against corrupon in Ukraine decrease in corrupon, in the case of gas, a literal … [which] has weakened the impact of the whole an- siphoning off of state assets.³⁶ corrupon architecture, including the soon to be established High An-Corrupon Court…”³⁸ Eliminang the spaces for corrupt behaviour and rent-seeking took place similarly in several other This aack on the invesgave powers of NABU and areas over the five years (banking, public a decision that perpetuates the sense of impunity in procurement, VAT refunds, licensing to name a few), Ukraine is, unfortunately, not an isolated occurrence. under the purview of the execuve (also addressed in The polical economy of transion teaches us a clear Box 1 and in Chapter 3 of this publicaon). lesson – once oligarchs or policians (or even state officials) feel threatened by the connuaon of While on a number of fronts important reforms were reforms, they fight back and try to block them from legislated and also implemented, including in the area being adopted or, once adopted, from being of the fight against corrupon, it would be a mistake implemented.³⁹ This can, and does, also lead to to paint too rosy a picture. Even now, five years aer reform reversals, as the real “threat” of some reforms Maidan, the fight between the reformers trying to may become apparent only with me. But one result change the rules of the game, and the oligarchs with of the reforms aimed at curbing the space for a connued stronghold on a number of sectors of the corrupon is certain: the rents the oligarchs are able economy, connues. Seng up effecve instuons to extract from the economy now are smaller to invesgate, prosecute and adjudicate corrupon compared with pre-Maidan mes. While very far and gra, is the most visible baleground. Thanks to

³⁵ An IMF requirement. ³⁶ Chatham House report and Ukraine think-tank. ³⁷ The law was first introduced, in response to an IMF demand. ³⁸ Joint Statement of the G7 and the World Bank on Constuonal Court Decision on Illicit Enrichment, EEAS, Bruxelles, 7 March 2019, unique ID: 190307_12. ³⁹ As the World Bank explains, “policymakers and polical pares … may be able to raise significant revenues only in informal and deals-based ways because powerful groups prevent the implementaon of formal rules. As a result, the most feasible way for policymakers and polical pares to reward their supporters is to allow them to violate rules.” The World Bank, World Development Report 2017: Governance and the Law, Washington, USA, Spotlight 1 Corrupon, p.78. Chapter 9 | 152

from being dispossessed, “they are not as rich as they Seng up SGUA also facilitated the opening of were.”⁴⁰ A popular saying in Kyiv is that some of the channels for a faster communicaon/informaon oligarchs became “minigarchs”, both financially, and flow between officials, civil society, media and in terms of polical influence. A worrying trend that Western backers. When an-reform forces sought to has emerged instead, and is ascending, is the undermine certain reform laws, this would become dominaon of the media space by individuals, or public knowledge within hours. This helped to quickly groups of oligarchs. mobilise support for the reform laws which made the polical costs for local “veto-players” too high. Support Group for Ukraine (SGUA) While SGUA's capacity cannot be easily replicated, Ukraine is the only “third country”, that is not a some of the approaches developed by SGUA now member of the European Union, for which the serve as an inspiraon for programmes in other parts European Commission set up a special taskforce and of the Eastern Partnership. charged it with providing EU assistance and supporng its reform development and New approach to programming implementaon. SGUA is staffed by a combinaon of As previously stated, aer Maidan Ukraine was in a seconded officials from Commission's sectoral dire need of finding, or culvang, a sufficient Directorates-General and temporary expert staff. The number of qualified personnel and overall importance of this innovaon cannot be overstated. instuonal capacity across the government. SGUA's internal expert capacity for Ukraine is, as a Assisng in seng up instuons and nurturing result, far greater than for other countries in the them along is, however, not usually the approach European Neighbourhood, or elsewhere. This internal taken by the EU in its development assistance, which capacity has in turn allowed SGUA to test and typically engages on individual projects and/or experiment with new approaches in supporng technical assistance. Instuon building is usually le reforms in Ukraine. It has also allowed its staff to to other development players.⁴² spend far greater amount of me and energy corralling other partners (bilateral and internaonal) Thanks to the combined capacity and experse of and aligning their support with the EU. SGUA and the related staff of the EU delegaon in Kyiv, the EU was able to experiment with larger- Instuonal capacity is not built overnight, as we scale, more comprehensive support to systemic discussed in previous secons. The same, of course, reforms in areas such as: public administraon, public applies to SGUA. It took about two years, the transfer finance management, judiciary, energy efficiency, of the responsibility for the management of the EU's decentralisaon, governance and an-corrupon. bilateral support funds, and a change of leadership, Support for these reform efforts typically started by for it to reach its full potenal. Also, as the new kid on accompanying the authories and oen involving the the block, SGUA was inially viewed with some local civil society and think-tank community in the suspicion by other instuonal players. Overme, reform design phase. In the design stage, SGUA SGUA developed the kind of experse and would oen link up with other strategic partners, understanding of the reform dynamics in Ukraine the notably member states, other bilateral partners and EU had previously lacked. This, in turn, allowed its IFIs. Later, SGUA/the EU delegaon would assist in experts much greater access and influence on the building reform alliances, raising public awareness, local policymakers. Five years on from its creaon, supporng the draing, and making the case for any SGUA is widely respected among Brussels new legislaon, all the way through to instuons, EU member states and their agencies, implementaon. The close links between SGUA IFIs, other bilateral partners and, last but not least, the officials and their respecve sectoral “home” services Ukrainian administraon and other stakeholders.⁴¹ elsewhere in the Commission also facilitated the

⁴⁰ Andrew Wilson (2016), Survival of the richest: How oligarchs block reform in Ukraine; ECFR Policy Brief, European Council on Foreign Relaons, London, 14th April 2016. ⁴¹ For a detailed analysis of the funconing of SGUA, see Kataryna Wolczuk and Darius Žeruolis (2018), Rebuilding Ukraine: An Assessment of EU Assistance; Chatham House, London. ⁴² Idem. Chapter 9 | 153

mobilisaon of the necessary experse. implementaon was transferred to the Cabinet of Ministers. Oleksandr Saienko, Minister of the Cabinet Over the last three years, the EU has endowed these of Ministers, was appointed to coordinate the reform, systemic reforms with generous assistance packages. working, among other things, with reform leaders in Two case studies (aached as annexes) can be used several “pilot ministries”.⁴³ to illustrate this new approach in EU assistance. The first deals with the decentralisaon reform and the At the same me, the Ukraine Reforms Architecture second one with the energy efficiency became a strong complementary reform push factor. transformaon. Both reforms have received EU It consists of three different components. support in the order of about €100 million in grants. • The first are the Reform Support Teams (RSTs) of The case studies idenfy the main success factors young and well-educated Ukrainians who are that have led the government to achieve the reform embedded in eight ministries and public agencies, results it set for itself. They also illustrate well the whose leaders adopt the reform and sign up to importance of the three inter-related innovaons certain reform principles which are also reflected in discussed here. The systemic reforms in the case RSTs' dual role: to assist the Minister and the studies are transformave, with a posive long-term exisng staff in the ministries to design, develop impact on Ukraine. and implement relevant sectoral reforms and also The one EU-supported reform that stands out due to to support the implementaon of the new public its cross-cung nature is the Ukraine Reforms administraon reform strategy within their Architecture. It originated in the context of the EU ministry. public administraon reform and has been further • The second element is the Reforms Delivery Office developed jointly with the European Bank for aached directly to the Prime Minister and working Reconstrucon and Development (EBRD). The laer closely in coordinaon with Minister Saienko, who is also managing the related EU (and other donors') is also operaonally supported by dedicated new funding. staff in the Secretariat of the Cabinet of Ministers.

The development of the reform of public • The third element is the Strategic Advisory Group administraon post-Maidan is interesng. Inially, for Support of Ukrainian Reforms (SAGSUR) under discussions were already held under the Yatsenyuk the leadership of Ivan Miklos, former Deputy Prime government on the crical need to develop policy Minister and Minister of Finance of Slovakia, formulaon and implementaon capacity in the advising the Prime Minister of Ukraine (inially the administraon. At that me, the government pleaded President) on his key reform priories. For the first simply for topping up the very low salaries of public year, SAGSUR was co-led by Miklos's Polish officials. This posion was legimately resisted by the counterpart, Leszek Balcerowicz, also former EU, which insisted that any support given in the form Deputy Prime Minister and Minister of Finance. of budget support (budget transfer in exchange for Both were key architects of the economic fulfilling certain condions) could come only with a transformaons in their countries. serious reform effort to change the way public The interplay and combined impact of the public officials and instuons funcon. In 2017, such an administraon reform and the elements of the reform agreement was found with the new government. architecture have been a key driver of the Aer the successful preparaon of a reform strategy development and/or acceleraon of reform agendas under Deputy Prime Minister for European in the ministries that opted in.⁴⁴ Integraon, Ivanna Klympush-Tsintsadze, the reform

⁴³ The inial list of pilot ministries included: Ministry of Agrarian Policy, Ministry of Energy, Ministry of Finance, Ministry of Culture, Ministry of Infrastructure, Ministry of Social Policy, Ministry of Jusce, Ministry of Healthcare, Ministry of Regional Development, Ministry of Educaon, Secretariat of the Cabinet of Ministers, Naonal Agency for Civil Service and e-Governance Agency. Not all Ministries succeeded in agreeing on their reform priories. At the me of wring, there are seven ministries with embedded reform support teams. ⁴⁴ Among good examples are: (I) one of the major an-corrupon steps made in 2017 was the new VAT refund system, an online electronic register on the Finance Ministry's website. Developed jointly by the RST and the Ministry, it introduced a new and transparent system into VAT refunds which excluded any opportunies for corrupon; (II) The RST in the Ministry of Infrastructure, jointly with the new Directorate for Strategic Planning and Coordinaon, developed the new Naonal Transport Strategy 2030. Chapter 9 | 154

One may argue that bringing people from the outside similar approach also at a sub-naonal level where of a system, paying them beer salaries and having capacity is equally limited, as was the case in Kyiv at them carry out reforms is not a systemic approach. the beginning of the reform. While that may be a legimate view in countries with One aspect of innovaon in EU assistance that merits a strong administrave culture, a version of this menoning is strategic communicaon. Invariably, a approach was also adopted in other transion key success factor embedded in all large systemic economies; it was not unusual to have outside reforms has been public awareness raising and advisers embedded in the administraon, designing strategic communicaon. Since the illegal annexaon and developing reforms. When systems are so of Crimea five years ago and the onset of the war in inefficient, ineffecve and lacking the skills needed , the need to communicate strategically about (not to menon vested interests maintaining the the EU, its values and its support for the country, as status quo and preserve their rents), as was the case well as dispel disinformaon, has become a necessity. with the Ukrainian administraon, it is hard to With the help of the East Stratcom team, the imagine a profound change without bringing people European External Acon Service (EEAS), the EU in from the outside. launched a professional communicaon campaign, Designing a model where 20 to 30 young, movated “Moving forward together”, which is being well Ukrainians with the requisite skills to provide received across Ukraine. addional impetus to reforms while, at the same The next froner where the EU will need to connue me, adjusng the ministries to new standards, is expanding its assistance is its investment in the real rather ingenious. It is less costly compared to much economy. For the moment, there are a number of beer paid foreign advisers. Perhaps most small and medium-size enterprise (SME) support importantly, it addresses the usual cricism mounted programmes run from the regional pot of the against internaonal partners that reforms are not European Neighbourhood Instrument. One such plugged into the local social structures. Intensive programme is a DCFTA Finance Facility⁴⁵ developed parcipaon and leadership of a great number of to assist SMEs in Ukraine, Georgia and Moldova to local acvists demonstrate the organic link between invest in the upgrades necessary to export into the the reformist drive and local ownership of reforms. European market. For the standard of living of The Ukraine Reforms Architecture has been closely ordinary Ukrainians to improve, the economy will linked to the overall EU-supported public need to grow, for which it will need both financing administraon reform. This introduced new “reform and foreign direct investment (FDI). As has been seen posions” in each of the parcipang ministries. in most transion countries, the best way to aract These posions have been recruited through FDI is through transparent privasaon of state transparent procedures. They are paid at levels assets. similar to the RSTs. The idea behind this is to, over me, transion the RSTs into the staff reform Privasaon is curiously one reform area where posions and, hence, embed the reform spirit and Ukraine has been lagging behind, by at least two higher efficiency within the ministries. The EU has to years. Since Maidan, the existence of an old law on date supported the public administraon reform with privasaon was used as an excuse for not a €104 million programme (in the form of a budget proceeding with the sales of state assets. It has been transfer) to help create the fiscal space for this thanks to the Ukraine Reforms Architecture, notably comprehensive reform. Eventually, the efficiency SAGSUR working with the Ministry of Economic gains and “rightsizing” of the administraon should Development and Trade and the Reforms Delivery cover the connued costs of the reform. This model Office, that a new law was adopted: small-scale is worth studying in greater detail and emulang in privasaon launched through the ProZorro plaorm other countries with weak administraons. For with credible advisers chosen for several large-scale Ukraine, one may consider adopng in the future a privasaons.

⁴⁵ The DCFTA Finance Facility is being implemented by the EIB and the EBRD. Chapter 9 | 155

Stronger alignment with EU member states and IFIs is a closer alignment with IFIs acve in the policy field, notably the EBRD⁴⁸ and the World Bank Group. In the rush to help Ukraine aer Maidan, there were With both instuons, as well as with the European many compeng projects from different donors, Investment Bank (EIB), SGUA holds regular Ukraine oen in the same area, somemes offering different “country days” (these are now used also for other soluons. In the first two post-Maidan years the Neighbourhood and Enlargement countries beyond coordinaon among donors took place mostly in Kyiv Ukraine). This allows for beer collaboraon in the among embassies and local offices of various development and implementaon of programmes. In agencies. A lot more complicated was the a number of instances, this leads to either joint coordinaon among the headquarters that many projects or IFIs implemenng parts of EU partner agencies are in charge of strategic as well as programmes.49 This trend has been strongly allocaon decisions. As SGUA matured, it increasingly supported by Commissioner Hahn's high-level played an acve role in coordinang the efforts of iniave with IFIs50 which started early in his different partners at HQ level. In 2015 in Kyiv, a local mandate in 2015 and helped bridge the usual G7 coordinaon group was set up, mainly for polical barriers of communicaon and collaboraon among messaging, by the heads of states and government. large instuonal players. (The energy efficiency case The EU, together with its member states, is by far the study sets out the posive impact of joint missions largest supporter of Ukraine's reforms.⁴⁶ SGUA not and messaging by members of the iniave.) only acvely coordinates among member states and their agencies. It also organises regular coordinaon Conclusion meengs with member states. Interested member states with parcular experse on a given topic can In conclusion, since Maidan, Ukraine has embarked join the EU either as implementers,⁴⁷ or they can on an extremely challenging reform path. The list of even co-finance programmes with the EU, as achievements is long, but equally significant are the Germany has done with the energy efficiency reform areas that sll need to be addressed, notably or Denmark with the programme on an-corrupon breaking with the oligarchic past and making which provides support to new an-corrupon funconal instuons that invesgate, prosecute and bodies. In the case of decentralisaon, the EU adjudicate corrupon and gra. Looking ahead, it is programme is operaonally and financially supported important not only to sustain the reform momentum by Germany, Denmark, Poland, Sweden and Estonia. but also prevent as much as possible, reform In addion to member states, SGUA acvely reversals. Not only to placate Western partners, but coordinates its reform support with other bilateral mainly to restore the trust and belief of ordinary actors, notably the United States, Canada, Norway Ukrainians in their country and in polical and Switzerland. representaon. In other words, to live up to the expectaons of Maidan. Just like with bilateral partners, SGUA has become very acve in beer aligning its programmes with Supporng Ukraine over the last five years has also IFIs. One avenue has been the long-established been a good opportunity for the EU to learn and blending plaorm, the Neighbourhood Investment adjust when faced with unprecedented challenges Plaorm, where European financial instuons apply and changing circumstances. To come back to and for grants to “blend” with their loans to investment rephrase Jean Monnet, the depth and scale of the projects and technical assistance. The newer variety crisis in Ukraine has provided that “necessity” that

⁴⁶ Since 2014, the EU has mobilised €14 billion in grants and loans, including from the European Investment Bank and the EBRD. ⁴⁷ For example, the public finance management programme is being implemented by Sweden and Lithuania; the decentralisaon reforms by Sweden and Poland; and support to an-corrupon bodies by Denmark. ⁴⁸ The Ukraine Reforms Architecture and support for the office of a business Ombudsman are good examples of joint policy work with the EBRD. ⁴⁹ For example, support for the newly created Energy Efficiency Fund with IFC; parts of the broader public finance management and public administraon reforms with the World Bank; and support to SMEs and investment climate reforms with the EBRD. ⁵⁰ Hahn's high-level iniave with IFIs started in 2015; this includes the EIB, EBRD, IMF, IFC and World Bank. Chapter 9 | 156

made the EU innovate in its approaches and become laws on voluntary cooperaon and amalgamaon of a stronger, more targeted and more reflecve actor.⁵¹ local communies, the law on state regional policy and the law on accession of rural councils to larger Aer several false starts over the last two decades, cies. Ukraine now has a chance to finish its transion to become a more stable and prosperous country with a The first stage of the reform, the amalgamaon of fully funconing market economy. For this to happen, hromadas has advanced much faster than expected reforms must connue. Interrupng them is like by most experts. Since 2015, almost 4,000 village stopping cycling uphill; you can quickly slide back councils have amalgamated into more than 800 new down. The EU, through the Associaon Agreement hromadas, represenng roughly 20 per cent of the and the DCFTA, provides a strong anchor and guide populaon. At the same me, local budgets have for reforms, significant financial support, as well as increased. Thanks to revenues from new local taxes, unrelenng pressure. the reform has also created incenves for local leaders to deliver quality public services and foster Ukraine has commied itself irreversibly to the local economic development. A new concept of European path, which will, in all likelihood, be “horizontal fiscal equalisaon” was introduced, followed by the newly elected President and the new reducing the space for arbitrary transfers from government that will come out of the 2019 central government to local governments. parliamentary elecons. The new leadership in Ukraine will need connued Western support and From 2007 onwards, the EU supported early efforts pressure, but also understanding in order for it to that created the ground for the broader maintain its stability and territorial integrity and to decentralisaon that came aer Maidan. Through successfully overcome the considerable headwinds UNDP the EU supported projects in the area of against reforms. community development and partnerships between cizens and authories at local level. As part of the reorientaon of EU assistance and focus on large Case study 1: Decentralisaon systemic reforms, in 2015, the EU launched a large- scale support measure, the “U-LEAD with Europe: Unl 2014, Ukraine was a highly centralised country. Ukraine Local Empowerment, Accountability and Most of the fiscal, taxaon and administrave Development Programme”. With a budget of €102 powers, as well as service delivery, were under million, this programme is the largest support central state administraon. The regional, district and measure to Ukrainian decentralisaon, but its real local councils had only limited powers and lile innovaon is its federang power as it receives influence on budget and administraon. Real local funding or contribuons in kind and experse from self-governance existed only in roughly 180 so called Denmark, Estonia, Germany, Poland and Sweden. U- “cies of regional significance”. As part of the broad LEAD covers capacity building and support to the democrasaon movement in the wake of Maidan, in amalgamaon process and enhancement of April 2014 the newly appointed Yatsenyuk administraon and service delivery at local, regional government adopted a concept on the “Reformaon and central level. It pays special aenon to the of local self-government and territorial organisaon of newly amalgamated municipalies. U-LEAD supports powers”. This reform blueprint set the path for an local government development centres established in ambious decentralisaon reform, combining fiscal 24 regions with experts providing advice and training decentralisaon with broad devoluon of powers and on financial, legal, planning and strategic issues. The establishment of local self-governance bodies programme is also funding the establishment of 600 (hromadas) across Ukraine. The reform concept was administrave service centres in the newly subsequently translated into legislaon adopted by amalgamated municipalies. Interesngly, the most the Rada, amendments to the budget and tax code, westerly region of Zakarpaa is the slowest moving,

⁵¹ Les hommes n'acceptent le changement que dans la nécessité et ils ne voient la nécessité que dans la crise.” hp://evene.lefigaro.fr/citaon/hommes-acceptent-changement-necessite-voient-necessite-crise-25639.php. In English: People only accept change in necessity and see necessity only in crisis. Accessed on 7 April 2019. Chapter 9 | 157

while some of the eastern regions are amalgamaon organisaon that were characterised by subsidised leaders. heang, where in the dead of winter the temperatures were regulated by opening windows. In Success factors: Ukraine, buildings sll consume 40 per cent of the First, the democrasaon movement of Maidan and total energy supply (with residenal buildings broad dissasfacon with the previous naonal consuming 30 per cent of all natural gas supplies), a polical leaders fuelled a high demand for local self- proporon which is much higher than in the EU. governance that would allow for greater scruny of Esmates show that if Ukraine achieved energy polical decision making and administraon by efficiency performance equal to the lowest level cizens. Secondly, the strong polical support of among EU member states, it would not need to naonal policians, including the President and import any gas at all. Crucially, Ukraine imports 40 leadership by both Prime Ministers, Yatsenyuk and per cent of all its primary energy needs. Thus, apart Groysman (the laer having served as Deputy PM from all the other benefits of energy efficiency and responsible minister in the previous government) transformaon, in the case of Ukraine, saving energy were fundamental to the kick-off as well as has a compelling energy security and a broader implementaon of the reform. Thirdly, the swi, security dimension. broad and well-coordinated support from the Improving energy efficiency, however, has many internaonal donor community helped build up, in a addional benefits. It is a great example of a “no very short me, a crical mass of experse urgently regret” public policy. Investments in energy efficiency needed by the new local governments. Finally, the in residenal or public buildings (such as schools and important focus placed on the communicaon and hospitals) improve the daily lives of cizens by public educaon aspect of the reform effort from the lowering the cost of energy, and thus making it more very beginning strongly impacted on its broad affordable while also saving the environment. understanding and acceptance among the Ukrainian Moreover, local communies benefit from energy populaon. efficiency investments, as renovaons of private residencies tend to be made by small local firms, using locally produced energy efficient materials. Case study 2: Energy efficiency reform Energy efficiency reforms thus spur employment in construcon and the creaon of new industries for Improving energy efficiency in the three most energy energy efficient building materials. They also give rise intensive sectors of industry, transport and buildings to new professions, such as energy auditors, and new (both residenal and commercial) is an urgent priority banking products to finance renovaons. All of these for Ukraine. Why? Eastern Europe is the most energy factors, combined with the overall lower energy intensive part of the world. Ukraine uses three mes intensity, have a direct posive impact on the more energy per unit of GDP than an average EU compeveness of local economies. The cheapest member state. The carbon intensity of Ukraine's energy is always the one not consumed. Energy economy is four mes higher. The problem is security and economic factors are the dominant especially acute in residenal⁵² and public buildings. reform moves in today's Ukraine. Energy efficiency Worldwide, this sector is usually the last one to also generates other posive externalies, such as adjust to new efficiency standards, due to a mix of favourably impacng climate change and air quality. informaon asymmetry and the lack of incenves for These factors are likely to grow in importance in individuals to invest in renovaons. Ukraine, in Ukraine over me, especially with the young addion, sll suffers from decades of collecve generaon's growing impact on public discourse.

⁵² Residenal buildings account for more than 40 per cent of Ukraine’s heat consumpon. In 2015, fewer than 20 per cent of these buildings had heat meters or control systems even at the level of enre buildings. Without control systems, occupants were unable to adjust heang levels. In early 2019, the share of buildings equipped with heat meters exceeded 60 per cent. A number of energy efficiency projects in the residenal sector in Ukraine have already shown that cost-effecve reducon of heat consumpon can easily reach 50-70 per cent. Chapter 9 | 158

Over the past four years, Ukraine has seen a Over two years, this group elaborated first the significant increase in energy tariffs. At the moment, concept of the reform and then proposals for the tariffs largely cover energy producon costs. In enabling legislaon. The technical work was inially line with the IMF agreement, gas prices for carried out by RPR, a collecve of Ukrainian think households are sll regulated under a public service tanks that made up for the lack of capacity in the obligaon scheme. They should reach market level in administraon in the early post-Maidan days. Early January 2020, aer an earlier increase to 80 per cent support (including technical assistance financing) was of the market level in May 2019. The increase in provided also by Germany, through GIZ.⁵⁴ The reform tariffs has made a number of energy-saving measures concept envisioned the establishment of an energy economically viable. It has also helped make the efficiency fund that would distribute grants to populaon aware of the need to save energy.⁵³ In homeowners' associaons for comprehensive fact, raising public awareness has been a key aspect renovaons of mul-storey residenal buildings. The of energy efficiency reforms. Addional important necessary legislaon included laws on: metering and factors have been the shiing of decision-making to billing of heat and water;⁵⁵ energy efficiency of the local level and reducing corrupon in the buildings;⁵⁶ housing and communal services;⁵⁷ and communal sector, especially thanks to the the establishment of the Energy Efficiency Fund (EEF) implementaon of the laws on metering and itself.⁵⁸ The adopon of the energy efficiency consumpon-based billing and the law on housing legislaon had to comply with the EU requirements. and communal services. This was ensured also through the collaboraon between SGUA/EU delegaon and the Energy Energy efficiency reform is an excellent example of a Community Secretariat, a specialised advisory body sustained and comprehensive support by the EU, in set up to assist countries associated with the EU to close collaboraon with a variety of other partners enact EU compliant energy legislaon. Working with and working hand-in-hand with the Ukrainian the depues from the Rada, both from the coalion reformers, to achieve systemic impact. and the opposion pares, was key to geng the Aer Maidan, notably among the civil society and legislaon adopted in a relavely speedy manner. some members of the Rada, there was a keen Members of the working group, and also vising awareness of the strategic necessity to improve colleagues from Brussels, held numerous meengs energy efficiency in Ukraine and thus decrease the and seminars in the Rada and gave interviews to local over-dependence on Russian energy imports. Energy media on the benefits of the energy efficiency experts of SGUA/EU Delegaon, together with transformaon for Ukraine. Ukrainian authories and other partner Simultaneously with the preparatory work in Kyiv, representaves in Kyiv, established in 2016 a Commissioner Hahn and his services were engaged in working group on energy efficiency.

⁵³ As a consequence of the dramac increases in gas and centralised heat tariffs since 2015, the number of “vulnerable energy consumers” has been increasing. By 2019, the budgets of a majority of households in Ukraine were under stress. To address this situaon, in 2015, the government put in place a support scheme consisng of housing and ulies subsidies paid to households. The number of households requiring this support in early 2019 was around 4.5 million, reaching 35 per cent of the populaon. The budget allocaons to this support scheme totalled approximately UAH 77 billion (€2.6 billion) in 2018 or approximately 2.5 per cent of GDP. While this has put an enormous burden on the state budget, this subsidy scheme did not incenvise households to save energy. That only came as part of the overall energy efficiency reform. ⁵⁴ The Deutsche Gesellscha für Internaonale Zusammenarbeit GmbH or GIZ in short is a German development agency headquartered in Bonn and Eschborn that provides services in the field of internaonal development cooperaon. ⁵⁵ The law introduces a requirement for the installaon of building-level heat and water meters within two years from the moment of enforcement. Individual metering will be mandatory under technical condions to be established in secondary legislaon. ⁵⁶ The law transposes a major part of the EU Energy Performance Direcve, including the introducon of an obligaon to cerfy the energy performance of public buildings, newly built residenal buildings and buildings whose owners seek state aid for the renovaon. It is also a legal basis for the introducon of new minimum efficiency standards for buildings and building elements (windows, thermal insulaon materials, in-house heang systems, and so on.) ⁵⁷ The law clarifies contractual relaonships between homeowners’ associaons and suppliers of communal services like water, district heang, waste management, and so on. It effecvely dismantles the oen-corrupt municipal monopolies. ⁵⁸ The EEF will focus on providing grants to homeowners’ associaons aimed at supporng thermal refurbishment of mul-apartment buildings in Ukraine, with a robust monitoring and verificaon system. Chapter 9 | 159

a high-level EC-IFI iniave⁵⁹ on enhanced energy bills of many cizens were paid directly by collaboraon in key sectors in the European the state, there was lile movaon to save on Neighbourhood and Enlargement countries. The first ulies. The monesaon should thus create a topic collecvely chosen for this enhanced much stronger incenve for the Ukrainian people framework was energy efficiency. All the instuons to save energy. agreed that many projects have been successfully • Thirdly, the government insisted on having a implemented in this area. So far, however, none has credible internaonal partner for the EEF who reached the scale necessary to show the true impact would ensure full transparency of all processes and, that energy efficiency transformaon offers. Four especially, the allocaon of resources. Due to their pilot countries were chosen for the joint iniave: long-standing involvement in the sector in Ukraine, Ukraine, Georgia, Serbia and Tunisia. SGUA was the Internaonal Finance Corporaon (IFC), the assigned to lead and coordinate the planned joint private arm of the World Bank Group, was selected efforts in Ukraine. If the energy efficiency reform as the main partner, jointly by the Ukrainian proceeded as planned by the government, the EU government, the German environment ministry and was ready to invest around €100 million in grants to the EU. support it. The EEF was officially established and registered in In 2017, the EU led a joint mission with IFIs to Kyiv July 2018. By early 2019, all secondary acts to discuss the key parameters of the reform. The necessary for its funconing have also been adopted. combined pressure of the EU and IFIs influenced the design of the reform in three important ways: The EEF's current statutory capital is around UAH 1.5 billion. An addional UAH 1.6 billion is foreseen • First, the future EEF was inially envisioned as a in the 2019 state budget. The total EU contribuon, state instuon that would distribute grants in two tranches, is €104 million. Of this amount, €80 directly to final beneficiaries, the home-owners' million will go to EEF grants and €24 million will go to associaons. Through the discussions with the various types of expert support by: the IFC and the government, a less potenally market-distorng World Bank (support to the EEF, management of model was chosen: the EEF was going to channel donor resources, financial and technical monitoring government and donor funding via local branches and selecon and training of commercial banks); of commercial banks. The extensive branch UNDP (training and support for the local networks of several banks would ensure a much homeowners' associaon); GIZ (training and support quicker roll out of the financial support across the for the new profession of energy auditors); and the country. The banks could also develop and Polish Fund for Environmental Protecon (training of customise their products to beer fit the different the technical staff of the EEF). The first projects needs in different parts of Ukraine. under the “Early-Movers” Programme (set up to test • Secondly, the system of heat subsidies to the procedures of the EEF) started in January 2019. vulnerable households (an alarmingly large Success factors: percentage of the total households) was not paid out in cash. Instead, the state covered the cost of • Polical will and commitment from the highest heat. For the reform it was important to “monese” levels of government – a key ingredient in any these subsidies to make their costs transparent, comprehensive reform. Deputy Prime Minister first at the level of energy ulies and, later, at the was the clear reform champion level of households. While this was a long-standing who has worked on the reform from its incepon requirement of the IMF, it was not unl the IFIs and through implementaon. At key moments, the the EU used their combined pressure that the personal support of Prime Minister Volodymyr monesaon at the level of ulies took place in Groysman and Finance Minister Alexandr Danylyuk 2018. As of March 2019, monesaon at the level were crical to its success. of households has now also commenced. When the

⁵⁹ The enhanced collaboraon iniave started by Commissioner Hahn included the IMF, the World Bank, IFC, EIB and the EBRD. Chapter 9 | 160

• Acve involvement of key reform stakeholders at every stage of the reform process, including the civil society and members of the Verkhovna Rada (both coalion and opposion depues). More recently, during the implementaon phase, various associaons of local authories and the Covenant of Mayors⁶⁰ (with close to 200 mayors acve in Ukraine) are acvely promong the reform. • Instuonal support from the energy efficiency working group was crical. Over more than two years the group, led by the EU delegaon in cooperaon with other donors and the Ukrainian government, developed the reform concept and legislave proposal. • Well-coordinated support from main partners was key. Too oen, efforts of internaonal partners do not align well. In this case the close collaboraon between SGUA/EU delegaon and the German government (including financial support for technical assistance) in the early stages was important. The US and Switzerland also supported the reform. Later, under Commissioner Hahn's EC- IFI iniave on enhanced collaboraon, a robust collaboraon framework under the leadership of SGUA helped channel support from IFI partners to the outstanding reform measures. • EU support, through the first and second Energy Efficiency for Ukraine programmes (totalling €104 million), was condional on the adopon of sector- related reform laws; seng up the EEF and the monesaon of subsidies at the ulity level. All the condions of both tranches of the programme were fulfilled ahead of deadlines. • Improving the incenves for the reform allowed its implementaon. Most notable among these were the increases in gas tariffs to reflect actual costs (an IMF condion) and the monesaon of subsidies. • Assistance from the IFC, a strong internaonal partner, in the seng up and running of the EEF is key for the fund's credibility and also for any future donor support.

⁶⁰ EU-supported programme for local authories in the Eastern Partnership countries. Annex 1 Annex 1 | 162 Annex 1 Report on reforms in 2016-17

Leszek Balcerowicz Ukrainian and internaonal public. Obviously, this should not prevent them from urging quicker I formulate below some observaons and improvement in policies whenever it is jusfied. recommendaons based on my own analysis and on the materials provided by the other members of 2. The improvement in policies, that is in stabilisaon SAGSUR as well as by internaonal instuons and policies and in the structural reforms of the state and individual experts. Needless to say, my remarks are the economy, has been very uneven depending on inherently selecve and to some extent subjecve. the sector. Generally speaking, achievements in However, I have tried to focus on what I consider to macroeconomic stabilisaon has been much greater be especially important for the future stability and than in structural reforms, although their pace has growth of the Ukrainian economy and – which is differed, too. Somewhat arbitrarily I disnguish four strictly related – on the quality of its government categories: instuons. • The greatest achievements. 1. The economic situaon in Ukraine in 2014 was • The moderate or modest improvements. very bad because of the legacy of the Yanukovych • The delayed starts. regime and the Russian military and economic • Outright failures. aggression (including bans on Ukrainian exports to Russia). These two factors were sufficient to cause a 3. The greatest achievements include, first, policies very deep decline in GDP (about 17 per cent decline). which have allowed Ukraine to avoid economic I do not see any realisc policies which would have catastrophe: been able to prevent it during 2014 and 2015. In addion, given the Yanukovych legacy and the • Thanks to the monetary and fiscal policy adopted Russian shocks, Ukraine was also threatened by a the pace of money creaon has receded and true economic catastrophe: inflaon declined sharply from above 60 per cent in 2014 to just over 10 per cent in 2017. • First, by connued deficits which would have to be • The budget deficit was reduced from about 10 per financed by the accelerated prinng of money – cent of GDP to about 3 per cent last year. And this which would result in hyperinflaon. has happened while the expenditures on naonal • Second, by the collapse of the banking sector defence have been sharply increased and hundreds which was heavily infected by the related lending, of thousands of refugees from the occupied fraud and a heavy dose of non-performing loans. territories were absorbed.

If these risks had materialised, the collapse in GDP • The central bank has made a successful transion would have been much deeper endangering the to inflaon targeng, has performed a major social stability and the posion of the new cleaning operaon in the banking sector while authories which emerged in 2014. Their greatest reducing its staff by more than 50 per cent. These achievement, in my view, was to purse tough policies are outstanding achievements on the world scale. which prevented these catastrophic developments • One of the major structural reforms has occurred in and have improved the stability of the economy. the gas sector and allowed a sharp reducon in the quasi-fiscal deficit, previously high due to massive It is all too easy to cricise the economic fraud, corrupon and waste. Together with the developments aer 2013 if one does not compare eliminaon of subsidies to households gas (and them with the truly catastrophic developments which heat) prices it also reduced the consumpon of gas were prevented by the Ukrainian authories during thus liming Ukraine's dependence on its imports this period. from Russia. Domesc and foreign experts could, and should, do a • Another major achievement, in my view, has been beer job in communicang this message to the the creaon of the new public instuons: NABU Annex 1 | 163

and other an-corrupon bodies, Business • Deregulaon is widely and officially recognised as a Ombudsman, and so on. key priority. And, indeed, it is very important for • The package of laws enacted during the summer of improving the business climate in Ukraine and for 2016 created the legal basis for the cleaning and the eradicaon of corrupon. However, the restructuring the court system. improvement so far, as measured by the World Bank's “Doing Business” Report is modest. Clearly a • However controversial, the introducon of concentrated effort is needed which should focus electronic declaraons signalled the determinaon on those aspects of the regulatory environment of the Ukrainian authories to fight corrupon and where Ukraine is lagging the most. In my view, the the basis to do it. Business Ombudsman is doing a very good job • Finally, I would single out the creaon of ProZorro trying to idenfy and remove the impediments to and its applicaon in public procurement. business. However its potenal, and its legal 4. All these major achievements require the posion, should be strengthened. A legislave consolidaon and compleon: proposal to this effect had not been so far accepted in parliament. • The great achievements of the central bank have to • There is a vast scope for demonopolisaon of the be strengthened especially with respect to the economy, which is crucial for improving its cleaning up the banking sector (PrivatBank). This efficiency but the progress in this respect has been and further an-inflaonary monetary policies modest, too. I think that the an-monopoly office obviously require a connued competent has a competent leadership and strong support leadership and the independence of NBU. from internaonal experts but it is very much • Further fiscal consolidaon demands more constrained in its acvity because insufficient structural reforms, especially pension reform. A funding does not allow it to hire more professional spending review would help to target professionals. This constraint should be quickly and prepare the necessary measures on the relaxed. The addional funds should be regarded as spending side. an important investment in improving the • In the gas sector, Naogaz requires unbundling efficiency, and thus economic growth, of the which is related to creang more scope for the Ukrainian economy. This is all the more important private sector. as Ukraine has made a commitment to the EU to • The new public instuons should be protected raise its compeon law to the European level. and strengthened when necessary. Beer co- Besides, a stronger an-monopoly effort is operaon arrangements between them and the necessary to idenfy and remove the monopolisc exisng instuons in the same field have to be posions of the oligarchs. The same obviously established and followed, especially between the applies to state-owned enterprises. NABU and Central Prosecuon, which requires • Moderate improvements also include e- further restructuring. government and local government reforms. In the • Judicial reform is entering the implementaon first case Ukraine has great potenal for leap- phase which will decide the shape of the judicial frogging because it has many competent and highly system in Ukraine, a key component of the state. movated IT-specialists and a vast scope for • Clear and fair rules on how to deal with the improvement. What is lacking so far is informaon provided in electronic declaraons concentrated support from the top of should be worked out, communicated and applied. administraon. In the second case, the focus should be put on the basic level of the local • The potenal of ProZorro should be used more government. One should accelerate the integraon broadly, including in the privasaon process. of the “hramady”. Also, the government should 5. Under the “moderate and modest improvement” design and introduce a rule-based system of local category I would like to menon two important finances with a higher share of their own resources market policies: deregulaon and demonopolisaon. for the communies and the cies. Annex 1 | 164

6. “Delayed starts” include instuonal reforms in Improving the corporate governance of the SOE's transport infrastructure and health. should not be regarded as a substute for their privasaon. No such reforms can be effecve on a • Transport infrastructure is a serious economic large scale. Corporate governance reforms can and boleneck in Ukraine and its improvement would should be introduced and maintained in the few at the same me enjoy wide popular support. Crisis selected cases of the larger state companies management has probably distracted the aenon (Naogaz, railways, post-office). But even in these of the top policymakers from this priority. Also, the cases the privasaon of their parts or assets can improvement was hampered not only by the lack of and should be performed. funds but also by the inherited and hugely inefficient organisaonal structures and their Privasaon of state-owned banks deserves a special related personnel. However, there are new teams menon. Aer the necessary naonalisaon of the both in railways and road infrastructure. If they are Privatbank, the state accounts for more than 50 per allowed to connue the reforms, rapid progress in cent of banking assets. This is dangerous situaon as transport infrastructure is possible. state ownership of banks allows their policisaon • So far there have been few reforms in health. As a which ends in deep crises. Research by the World result, it is very inefficient and plagued by the Bank (Finance for Growth 2001) has shown that the massive informal payments (pey corrupon). higher the parcipaon of the state in a country's However, a competent team in the Ministry of banking sector, the higher the risk of a banking crisis. Health, helped by external advisers, has prepared a The recent example of the collapse of the state- reform project for the basic level of healthcare: the dominated banking sector in Slovenia, or “cajas” in family doctor. A similar reform was introduced in Spain provide dramac warnings against the state- Poland years ago and worked very well. It is, ownership of banks. Therefore, the Ukrainian therefore, very important, that the reform proposal authories should urgently prepare a privasaon in Ukraine is introduced, as planned, that is in the plan for banks. middle of 2019. • Ukraine is probably the only country in the Europe 7. “Outright failures” include two fundamentally (besides Belarus) which bans the sale of agricultural important market reforms: privasaon of state- land by extending each year the moratorium on its owned firms and the introducon of the land market. sale. This blocks a great potenal for improvement in agriculture – an important sector of the • The economic raonale for the privasaon of the Ukrainian economy. SOE's is beyond reasonable doubt. There is a massive body of empirical research on the The introducon of the land market is unpopular in comparave efficiency of private versus state- Ukraine but this was also true of slashing of the owned firms, including in the post-socialist budgetary spending or eliminang the subsidies to economies. It is also very indicave that western gas and heat – measures which have already been European countries, where historically the state- introduced. It appears that – for some reason – the enterprise sector accounted for up to 20 per cent Ukrainian authories have so far made no serious of GDP, tried various unsuccessful reforms of the effort to introduce the land market, that is, work out sector and finally opted for the privasaon of the a serious reform proposal and to prepare and launch least some state firms in the 1980s and 1990s. And a professional an-populist communicaon campaign in Ukraine there is an addional argument for their before it is introduced. Time will tell what will be privasaon: state-owned firms have been subject done this year. to exploitaon by private interests. It is unclear to 8. It is not easy to explain, without much deeper what extent this harmful process has been invesgaon in the realm of polical economy, why reduced. But it is clear, that only privasaon (that such striking differences have occurred in the pace of is transferring the property rights from policians the improvement of various policies in Ukraine. It is and bureaucrats to genuinely private enes), can not very surprising that success in the stabilisaon of end it. Annex 1 | 165

the economy has so far been much greater than – on for Ukraine. Let me finish by stressing what are its average – in structural reforms. The situaonal crucial determinants. Long-term economic growth pressures in the first case were much more intense depends on labour supply and investment and, which than in the second one. In addion, Ukraine was very is partly related to that, on the dynamics of the lucky in having outstanding leaders responsible for overall producvity. Given its demography Ukraine stabilisaon, especially in the central bank and – cannot count on the posive contribuon of during 2015 – in the Ministry of Finance. However, employment (although pension reform is very why such have large differences appeared in the pace important to avoid a decline in employment). of structural reforms? Therefore, future growth will crucially depend on the investment-producvity nexus. If improvements in Instead of engaging in intellectual speculaon let me this nexus are slow, the economics growth in Ukraine generally say what are the necessary condions for will be slow, too. The improvement in the the success of reforms: investment-producvity nexus depends on the • A highly movated and competent leader. There government and market reforms, where, as I are no reforms without the reformers. menoned, the progress so far has been very uneven. • A highly movated and competent team, which is In crucially important respects it has been only possible only if there is a good leader. Also, modest (deregulaon, demonopolisaon) or none at sufficient funds to hire professionals are needed. all (privasaon, land market). • Sufficient room for manoeuvre due to the One can say that in these spheres Ukraine has determinaon of the leader, the instuonal important and untapped “reform reserves”. If they are independence of the instuons they lead and/or finally are tapped, that is reforms are quickly relavely weak resistance to reforms. accelerated, economic growth would accelerate, too. • A reform coalion which accepts the reform If the missing reforms are further delayed growth package and strongly monitors its implementaon. would remain slow and fragile. Needless to say, economic growth also requires that macroeconomic For the success of the reforms all these condions stability is further strengthened. And this, in turn, have to be met at the same me while the failure to depends on structural reforms, especially in public meet just one of them is sufficient to prevent a finance with a special focus on spending (pensions successful reform. It would be very useful to know and other major items of social spending). more on what factors accounted for relavely successful reforms and which ones explain the reform failures or only modest successes. As an example, I would only menon that the failure of privasaon is due to the non-fulfilment of the condion (a), while the limited results in demonopolisaon can be explained by the insufficient resources of the An-monopoly Commiee.

Generally speaking, the acceleraon of reforms in Ukraine requires replacing of non-reformers with reformers, when needed and a stronger coordinang and monitoring acvity by the leaders of the reform coalion, that is the reform centre.

9. Aer a deep and largely unavoidable decline in GDP, the Ukrainian economy has started to grow in 2016 and 2017, although at a rather slow pace. Further and sustained growth is crucially important Annex 2 Annex 2 | 167 Annex 2 The role of the government and MPs in reform implementaon in Ukraine

Yaroslav Zheleznyak The analysis shows that there is no direct correlaon between the polical situaon at the moment of There is no quantave criterion for the assessment appointment and the effecveness of coordinaon of effecveness of the parliament or cooperaon between the execuve and legislave branches of between the government and the parliament. power. The available stascal data allow us to count the Out of six governments only three had an approval number of decisions taken by the parliament, but not rate higher than 35 per cent for their iniaves: the the quality of such decisions. second Timoshenko government, the first Azarov Based on these stascs we can, however, compare government and the second Yatsenyuk government. the levels of coordinaon between the government It is important to point out that despite the fact that and the parliament during different prime ministerial the first two governments were appointed by a very tenures. weak coalion (and vice versa, the Yatsenyuk government was appointed by a strong coalion) all Based on the data presented in Figure 1 we can of them are united by a single factor – a significant idenfy two different approaches to parliamentary change in the polical situaon (appointment of a relaons – before and aer the Revoluon of Dignity. new president or beginning of the mandate of a new We compare the mandates of three prime ministers parliament) which opened a window of opportunity both from before and aer the Revoluon, taking for legislave change. into account the following performance indicators: And at the same me the highest approval rate for • Number of legislave iniaves of the government governmental iniaves ever recorded was a mere 55 during its mandate. per cent (the first Azarov government). This is • Rate of approval / rejecon of the governmental significantly lower than approval rates observed in iniaves. other pro-reform countries. For example, in 2017 the Slovak government submied 96 governmental dra Figure 1 laws, of which 83 were passed (an approval rate of Approaches to parliamentary relaons – before and more than 86 per cent), while the remainder aer the Revoluon of Dignity connued through the legislave process in 2018. Source: hps://rada.gov.ua/ This rate was even higher (in some cases even Reform points reaching 99 per cent) for periods when those (qualitave countries (Poland, Slovak Republic, Georgia and assessment Pieces of of stakeholders' others) were in the process of acve reform Author pro-reform impact on reform implementaon. of iniave dra legislaon implementaon) According to this data all of the six governments Government 91 180.7 (especially the three following the Revoluon of Mps 154 226.9 Dignity) were faced with a difficult situaon: striving President 27 57 to implement much-needed reforms while having only a one-third chance of their iniaves succeeding Source: hps://rada.gov.ua/ in parliament. These data are then related to two important In this scenario, MPs become key to reform progress. indicators (which describe the polical situaon at It is when they become the authors/imitators of pro- the moment of government appointment) – the reform legislaon that the laws have a good chance number of MPs who voted for the government of successfully making it through the parliament. The appointment and the size of the coalion in the MPs thus, in a way, substute for the government parliament. where the laer struggles to garner sufficient support Annex 2 | 168

for its reform iniaves. During the VIII convocaon average level of support amounng to 84 per cent. of the parliament (held on 5 November 2018) 452 The same situaon occurred with such complex pieces of dra legislaon, submied by MPs, were polical issues as the medical and pension reforms, approved. That is 1.6 mes more than the number of both of which were supported with greater zeal by approved governmental dra legislave acts (281) the opposion than by the coalion. and 3.3 mes more than the number of approved That is why in the current polical climate (when the presidenal dra laws (133). government does not enjoy the necessary level of This means that MPs' iniaves represent a support in parliament) it is crucial for further reform significant share of the overall legislave agenda and, sustainability that the numbers of such “young blood” consequently, exert sizeable influence on the speed MPs do not decrease in next convocaon. of reform implementaon. Moreover, there is one more significant role for the In such cases the number of reform-oriented MPs or “young blood” MPs in current convocaon of so called “young blood' in the parliament is a strong parliament. As the average number of votes for a law determining factor in further reform development. is usually slightly higher than the minimum required According to the VoxUkraine's Index for Monitoring 226, the persistence of such MPs is crucial in Reforms (iMoRe) from January 2015 unl November countering the adopon of an-reform laws. They 2018 MPs' iniaves were doubtlessly the most have blocked many such iniaves, including the law impacul in achieving reform implementaon, both on special confiscaon (#4057), tax police restoraon in quantave and qualitave terms (see Figure 2). A (#0940, amendment #10), and internet censorship significant number of laws required for the (#6688). A large number of regressive iniaves were implementaon of energy, an-corrupon, not even proposed to the parliament for deregulaon, tax liberalisaon and other reforms consideraon, given their low chances of success. A were prepared and submied by MPs. significant share of MPs' dra legislaon which have been evaluated by iMoRe's rang as pro-reform were This was largely made possible by the fact that there submied by the “young blood” MPs. are a lot of young pro-reform MPs in the current convocaon of the parliament. Such MPs not only At the same me, many posive iniaves received a vote for posive dra legislaon, but also: green light thanks to the principled posions of such MPs. This was the case for the laws on the payment • act as reform ambassadors in their facons of dividends to joint-stock companies (#1310), • provide their expert views/ amendments during reform of public procurement (#3559), medical consideraon of such laws in the parliament procurement by the internaonal organisaons • promote issues on the agenda (#2150) and other posive dra laws. • help government representaves in the process of It is worth nong that this group of MPs also became going through the parliament with their iniaves “watchdogs” in parliament, demanding compliance • block negave/an-reform iniaves both during with regulaons, for example by opposing non- the discussions in the commiees and during the personal vong. vong. Young depues in the current convocaon reached Moreover, one of the unique features of the current the minimum crical amount, thus becoming a convocaon is the “blurred” line between the disnguishing feature of this parliament and bringing opposion and the coalion. Many votes on dra about posive results. laws of great importance to the government/ coalion have been supported by opposion facons (the laer somemes lending even stronger support than the coalion). The dra legislaon on the an- corrupon court is a case in point. It was supported by five facons/groups from the opposion with Annex 2 | 169

Figure 2 Vong of the 8th convocaon of parliament, November 2014-1

375

325

275

226 Trend line

175 Source: hps://rada.gov.ua/

Despite the fact that this convocaon of parliament 2017 “soy amendments”, which provide for the has not outdone others in the number of decisions abolion of VAT refunds on oilseed exports and adopted, it is disnguished by the quality of the destroy fair compeon in the agricultural market, decisions made. Thus, due to many factors, including were adopted. This was done for the benefit of one the Revoluon of Dignity and the arrival of a large financial group. number of “new faces” to the parliament, most of the There are many more such cases, but compared to decisions taken were reformist in nature and were other convenons, they have become much less aimed at improving the quality of the country's frequent. regulaons. Consider the case of government procurement The key difference between the “old” approach to regulaon. In almost every convocaon (IV-VI), parliament coordinaon and the “new” one that took iniaves were taken to reduce compeon in this root aer the Revoluon of Dignity is the absence of area, increasing corrupon risks. Only in 2011-12, plutocrac tendencies of the laer (a small group of some 17 amendments and addions to the law on oligarchs had exclusive impact on almost all members state procurement were introduced, which resulted of the coalion). This means that even though some in significant distoron of the principles of MPs maintain relaons with financial industry groups compeon, efficiency of use of funds and the parliament oen takes decisions that are transparency of procurement procedures. beneficial for the country's economy while not necessarily profitable for the interest groups. At the same me, the decision was taken to create the ProZorro electronic system of public Nevertheless, there have been instances of the procurement, which was recognised as the best in plutocrac approach even in this convocaon. For the world. example, on 23 November 2018 the parliament adopted amendments to the Tax Code, which, among The same applies to other regulaons as well. other things, entrenched the monopoly of exisng According to the data from the Doing Business rang, electronic property valuaon sites. The amendments the decisions taken by the parliament considerably were adopted in favour of one polical group with reduced administrave barriers for businesses in strong links to the oligarchs. Similarly, at the end of Ukraine (see Figure 3). Annex 2 | 170

Figure 3 • Strengthening of independent media and equal Administrave barriers for businesses in Ukraine access of polical representaves to them. • State budget funding for polical pares. Paying Taxes – Starng a Starng a Payments Increasing cense for submissionAn-populist Business – Business – (number (budget) fuses: law can Years Procedures Time per year) • Prohibing or significantly liming polical 2019 6 6.5 5 adversing and ghtening control over elecon law 2018 6 6.5 5 violaons. 2017 6 6.5 5 • Cancellaon of parliamentary immunity. 2016 5 8 5 • Increasing the salaries of MPs as well as 2015 7 22 5 parliamentary staff. 2014 7 22 28 The current convocaon has made scant progress on 2013 8 23 28 this list (only budget funding for polical pares has 2012 10 25 135 been approved) and failed to create condions for a significant change in parliament composion. 2011 11 28 135 2010 11 28 147 Parliamentary reform 2009 11 28 147 2008 11 28 147 Numerous analyses and recommendaons have been 2007 11 34 147 produced (including by respected internaonal 2006 16 35 147 organisaons) concerning the need to change the current parliamentary procedures. Many of them are Source: Doing Business rang crucial for improving the qualitave and quantave The requirements of internaonal partners to adopt a indicators of the parliament's effecveness. These number of important systemic pieces of legislaon in are the key 15 recommendaons: conjuncon with the effecve struggle of “new 1) Introduce vong by simple majority (both for first faces” against regressive and corrupt iniaves and second reading), except for an exclusive list of resulted in the adopon of a large number of far- decisions. reaching changes. 2) Increasing cense for submission of laws. For The gas market, the electricity market, healthcare example, the law could be submied by a group of reform, the strengthening of an-corrupon control, MPs of the size of the smallest facon (15 depues business deregulaon, public procurement, control of or more). The coalion MPs could not be authors of polical pares and government officials – these are laws without government resoluon. among the many areas that have historically been examples of poor regulaon and corrupt pracces 3) An-populist (budget) fuses: law can be registered and that have been significantly reformed by this only if accompanied by a financial and economic convocaon of the parliament. jusficaon, and a mandatory conclusion of the Budget Commiee for consideraon in the first There is not a single soluon to boosng the reading. The conclusion of the Budget Commiee numbers of “young blood” MPs in the parliament. It is would in turn not be possible without a posion a complex issue that is highly dependent on electoral leer from the Ministry of Finance (deadlines for preferences of voters and evoluon of the polical preparaon of the leer could be fixed at for system. However, the following measures stand a example maximum 10 days). good chance of shaping the composion of future parliaments in the posive direcon: 4) Agenda formulaon: priorisaon of laws – list of top 50 laws, which cannot be modified unl all laws • Changes to the elecon law, including abolion of on the list have been fully considered. the single-member (regional) system. Annex 2 | 171

5) Establish rights of the opposion in the process of as evidence in court. agenda formulaon. The opposion has the right to 11) Reform of the majoritarian electoral system “n” per cent (for example, in proporon to the towards a proporonal system or open list system. number) of the top 40 laws. Apply (a representave of the opposion, or the opposion council – one 12) Abolion of parliamentary immunity. person from each facon, group or non-faconal) list from the top 20 per week. The coalion chooses in 13) Significant (three/fourfold) increase of MP order of filing. salaries.

6) Strengthening the role of the government: the 14) Conduct an administrave reform of the need for a leer from the government for laws apparatus of the Ukrainian parliament, including a originang from the coalion to fall into the Top 40 reducon in the number of staff and wage increase Agenda and / or to be included in the agenda of the for those that remain. commiee. 15) Amendment of the Constuon to give MPs the 7) The Regulatory Commission: to set and guarantee right to retain their mandate during / aer their post compliance with the rules during plenary sessions. in the execuve branch of government.

8) Reading and publishing the conclusions of the Changes 1) 2), 12), 15) require changing compulsory commiees to be a prerequisite for Constuonal provisions, which is a long process and consideraon by the parliament. requires a vote of two-thirds of MPs (more than 300).

9) Vong on all proposals in one day / at a certain This is not an exhausve list of all the changes me, not only aer debates on the law. required to reform the parliament. Rather, these are the key changes that could significantly improve its 10) Strengthening the role of parliamentary hearings. effecveness in the current polical reality. Indicaons during the hearings can be used further

Figure 4 Stascs before and aer the Revoluon of Dignity

Aer the Revoluon of Dignity

Number of Number of Submied Approved and Rejected Governments MPs in the votes for dra laws signed (%/DLs) (%/DLs) coalion appointment

Groysman's government (16 April 2016 – today (31 October 2018) near 226 257 555 22% 122 5% 26

Second Yatsenuk government (2 December 2014 – 16 April 2016) 302 341 408 37% 150 11% 45

First Yatsenuk government (27 February 2014 – 2 December 2014) near 250 371 169 31% 52 17% 29

Total AFTER the Revoluon of Dignity 1.132 29% 324 9% 78 Before the Revoluon of Dignity

Number of Number of Submied Approved and Rejected Governments MPs in the votes for dra laws signed (%/DLs) (%/DLs) coalion appointment

Second Azarov government (18 December 2012 – 28 January 2014) near 240 357 310 20% 61 12% 36

First Azarov government (11 March 2010 – 18 December 2012) near 226 242 744 55% 406 13% 96

Second Timoshenko bovernment (18 February 2007 – 3 March 2010) near 226 226 592 36% 211 21% 125

Total BEFORE the Revoluon of Dignity 1.646 41% 678 16% 257 About SAGSUR About SAGSUR | 173 About SAGSUR (Strategic Advisory Group for Support of Ukrainian Reforms)

In April 2016, upon request from President Petro The team of experts comprises the following: Poroshenko and Prime Minister Volodymyr Groysman the Strategic Advisory Group for Supporng • Ivan Miklos: Ukrainian Reforms (SAGSUR) was established, Chairman, Chief Economic Adviser to the Prime inially co-headed by two successful reformers – Minister of Ukraine Leszek Balcerowicz, the former Deputy Prime • Pavlo Kukhta: Minister and Minister of Finance of Poland, and Ivan Deputy Chairman, Fiscal Policy Miklos, the former Deputy Prime Minister and Minister of Finance of Slovakia. • Jerzy Miller: Deputy Chairman, Governance and Instuonal The new Groysman Cabinet made a commitment to connue with an ambious reforms agenda in order • Luba Zimanova Beardsley: to secure financial, economic and polical stability of Adviser, Ancorrupon and Jusce Sector the country, emphasising a pragmac strategic, consensus-based and results-oriented approach to • Karel Hirman: the transformaon process. Adviser, Energy Reform

Based on this commitment, the Ukrainian authories • Alexander Skurla: have asked the EBRD and the EU to help with Adviser, Business Environment and Land Reform speedy conceptualisaon and implementaon of the • Andriy Boytsun: reform process. To this end new reform support Adviser, Privasaon and State-owned Enterprise architecture has been conceived (URA), which Reform consists of SAGSUR, a Reform Delivery Office of the prime minister (RDO) and the Reform Support Teams • Zlata Fedorova: (RSTs) in selected priority ministries. The members of Adviser, Public Communicaons the reform support architecture provide mutual • Yaroslav Zheleznyak: support to each other, with SAGSUR helping Adviser, Parliamentary Communicaons coordinate the reforms effort on a high level. • Olena Kondrauk: SAGSUR consists of a team of advisers providing Administrave Assistant crucial expert advice to the prime minister on the content and implementaon of the key reforms in Ukraine based on first-hand experience gained in reform implementaon of reforming countries, notably those in central Europe. Since April 2017 SAGSUR has been headed by Ivan Miklos as the sole chairman. Glossary of terms | 174

Glossary of terms

AEP – authorised electronic places (in an online HR – human resources aucon) IER – Ukrainian Instute for Economic Research bcm – billion cubic metres IFC – Internaonal Finance Corporaon CE – central Europe IFI – internaonal financial instuon (e.g. World CEPEJ – Council of Europe Bank, EBRD)

CoE – Council of Europe IMF – Internaonal Monetary Fund Home

CoM – Cabinet of Ministers (Ukraine) iMoRe – VoxUkraine's Index for Monitoring Reforms and Trade DCFTA – Deep and Comprehensive Free Trade Agreement MGU – Mahistralni Gazoprovody Ukrainy

DoZorro – monitoring portal for public procurement MoJ – Ministry of Jusce (Ukraine) sit ProZorro Mwh – Megawahour EBRD – the European Bank for Reconstrucon and Development NABU – Naonal An-corrupon Bureau of Ukraine

EC – European Commission NACP – Naonal Associaon for the Prevenon of Corrupon ECFR – European Council on Foreign Relaons NAPC – Naonal Agency on Prevenon of ECHR – European Court of Human Rights Corrupon

EEAS – European External Acon Service NATO – North Atlanc Treaty Organisaon

EEF – Energy Efficiency Fund NBU – Naonal Bank of Ukraine

EIB – European Investment Bank NEURC – Naonal Energy and Ulies Regulatory Commission ENTSO-E - European Network of Transmission System Operators for Electricity NGO – non-governmental organisaon

EU – European Union ODB – Open Data Barometer

FDI – foreign direct investment OECD – Organizaon for Economic Cooperaon and Development GDP – gross domesc product OPZ – Odessa Portside Plant GIO – general inspecon office PIC – Public Integrity Council GIZ – Deutsche Gesellscha für Internaonale Zusammenarbeit GmbH ProZorro – electronic public procurement system

GRECO – Group of States Against Corrupon RoL – rule of law ha – hectares RPR – Reanimaon Package of Reforms

HDI – Human Development Index RST – reform support team

HQCJ – High Qualificaon Commission of Jusce Glossary of terms | 195

SAGSUR – Strategic Advisory Group for Support of Ukrainian Reforms

SAPO – Specialised An-corrupon Prosecutor's Office

SBU – Ukrainian Secuirty Service

SC –

SCJ – Superior Council of Jusce

SES – state enforcement service

SEZ – special economic zone

SFS – state fiscal service

SGUA – Support group for Ukraine

SME – small and medium-sized enterprise

SOB – state-owned bank

SOE – state-owned enterprise

SPF – state property fund tcm – thousand cubic metres

TPS – thermal power staons

TsO – Ukrainian gas transmission operator group

UAH – Ukrainian hryvnia

UGV – UkrGasVydobuvannya

UNECE – United Naons Economic Commision for Europe

UTG – Ukrtransgaz

V4 – Visegrad 4 (Czech Republic, Hungary, Poland and Slovak Republic)

Verkhovna Rada – Ukrainian parliament (also called the Rada)