Will Ukraine be the year when the Ukrainian economy finally takes off? I doubt it.
That should have happened in 2017, but it did not. After a promising recovery of 2.3 percent in 2016, with a growth of 4.8 percent in the last quarter, Ukraine seemed ready for substantial growth in 2017, but the growth is likely to have stopped at 2 percent.
In the second half of 2017, Ukraine should have 6–7 percent growth, but instead slowed down. For 2018, most forecasters predict a miserable growth rate of 3 percent, slower than the International Monetary Fund’s forecast for 3.7 percent growth in the global economy. After a combined output fall of 17 percent in 2014–2015, Ukraine should be recovering at twice that global rate. These growth problems are homemade.
Achievements
But let us begin by celebrating the achievements. Five institutions have successfully carried out their work — the Finance Ministry, the National Bank of Ukraine, state-owned gas monopoly Naftogaz, the Health Ministry and the National Anti-Corruption Bureau of Ukraine.
Finance Minister Oleksandr Danyliuk has emerged as the government’s reform leader following in the footsteps of Natalie Jaresko. In 2014, Ukraine’s public expenditures were 50 percent of gross domestic product, while they stopped at 40 percent of GDP in both 2016 and 2017, which is a great step forward.
Ukraine should continue reducing further to 35 percent of GDP. The budget deficit has shrunk from 10 percent of GDP in 2014 to less than 3 percent of GDP in the last two years.
The NBU has performed similarly well. Half of Ukraine’s very corrupt banks have been closed down, reducing their number to 90 from 180 in 2014. The international currency and gold reserves have risen from a miserable $5 billion in March 2015 to the current $18 billion, reassuringly sufficient for four months of imports, which has allowed the exchange rate to stabilize.
The Naftogaz management under its CEO Andriy Kobolyev has eliminated chronic losses turned a profit of more than $1 billion. Quite extraordinarily, the state-owned enterprise won a giant arbitration case against Russia’s Gazprom of as much as $56 billion in Stockholm.
Acting Health Minister Ulana Suprun successfully implemented a major reform. Its essence is the introduction of non-corrupt open procurement and sensible economic management.
NABU’s director Artem Sytnyk has carried out major arrests of the seeming real culprits at high levels of the state administration. Four arrests of the following stand out: Mykola Martynenko, the alleged gray cardinal of the People’s Front; head of the State Fiscal Service Roman Nasirov; Oleksandr Avakov, the son of Interior Minister Arsen Avakov, and Deputy Defense Minister Ihor Pavlovsky. After Nasirov’s arrest, businesspeople started to praise Ukraine’s fiscal services for the first time in switching to an automatic value-added tax refund system for exporters.
After three years with virtually no privatization, the State Property Fund finally managed to sell 83 state assets and obtained $120 million for them. Ukraine still has 3,400 more state assets to privatize.
Major issues
But if so much has been achieved, what is the problem?
The critical issue is that Ukraine lacks real property rights. Since courts are pervasively corrupt, property rights can only be secured through connections with top officials or through international guarantees such as bilateral investment treaties. Since property is unsafe, businesspeople and officials keep their assets abroad. Since independence, they have exported about $5 billion a year, corresponding to about 5 percent of GDP each year.
This money has been taken out of the country to anonymous offshore havens and presumably been put into unproductive hoarding in real estate in the United States and the United Kingdom instead of being invested in the Ukrainian economy. Because of its hostile investment climate, Ukraine has lost an additional 5 percent of GDP of foreign direct investment.
In order to grow at 6–8 percent a year, Ukraine should have an investment ratio of 25–30 percent of GDP, but its gross investment was a miserable 16 percent of GDP in the third quarter. It is crucial, therefore, for Ukraine to establish secure property rights.
The big hope for 2017 was judicial reform, but its complex design was flawed from the outset. Much hay was made out of the involvement of a civil society watchdog called Public Integrity Council. It scrutinized the selected candidates and disqualified 25 as lacking sufficient integrity to serve as Supreme Court judges. The problem, however, was that the old corrupt High Council of Justice had the decisive word and it overruled Public Integrity Council, including the 25 flawed candidates among the 111 Supreme Court justices chosen. One rotten apple makes a whole basket of apples rot. An outside body or NABU should have made the final selection. Ukraine needs to redo its judicial reform.
Poroshenko’s duty
In the meantime, Ukraine must establish at least one functioning court. Civil society now hopes for the establishment of an independent anti-corruption court, but the draft law submitted by the president before Christmas does not satisfy most of these demands. This is really a question to Poroshenko. Without property rights, investment will be low, meaning that economic growth will also be low.
Not only have judicial reforms failed, Ukrainian authorities are denigrating the real heroes. Prosecutor General Yuriy Lutsenko, who has failed to prosecute any senior official of the ousted Viktor Yanukovych administration or of the Poroshenko administration, has taken the lead. He has composed a flawed case against Danylyuk, and with the Security Service of Ukraine, is pursuing an open war against Sytnyk and NABU. Similarly, various state agencies attack Kobolyov.
Ex-central bank head Valeriya Gontareva courageously held her position for three years until April. But for eight months Poroshenko has failed to present a candidate to replace her. Suprun is not confirmed as well.
Ukrainian authorities cannot gain credibility among domestic and foreign investors, unless they stand up against corruption.
Suspicious investors
Ukraine is so open and transparent that international observers can see what is really happening and they do not fall for simplistic propaganda. The establishment of an independent anti-corruption court is key, but it is not enough. The independence of NABU is an absolute necessity.
Other important conditions for the IMF include the creation of a market for agricultural land, the adoption of a privatization law, improved pension reform and the adjustment of gas prices to market level. Western governments are also anxious to see two political demands fulfilled, namely the introduction of purely proportional elections and the abolition of the legal immunity of parliamentarians. Beside the law enforcement agencies, the Verkhovna Rada is a nest of corruption.
Upcoming elections
Key reforms are grinding to a halt. The IMF and the European Commission suspect that the authorities are not interested in fulfilling the conditions for further financing because they are more focused on the presidential elections scheduled for March 31, 2019.
At present, Ukraine can raise a couple of billions of dollars on international financial markets, admittedly at a much higher interest rate than the IMF would offer, but without conditions. But this cannot be in Ukraine’s national interest nor is it in the interest of its ruling elite.
In official circles, the excuse is that they have to focus on the presidential elections. But all the IMF demands only enhance economic growth and do no harm to the election campaign. Why would Ukrainians re-elect anybody who keeps Ukraine’s economic growth at 2-to-3 percent a year?
Ukraine’s political authorities need to decide. Do they want to keep their country as one of the two poorest in Europe together with Moldova or do they want it to succeed economically? Ultimately, the question is whether they want to be re-elected.
Anders Åslund is a senior fellow at the Atlantic Council in Washington and adjunct professor at Georgetown University.
