32

Sławomir Matuszak, Arkadiusz Sarna

FROM STABILISATION TO STAGNATIONVIKTOR YANUKOVYCH’S REFORMS

NUMBER 32WARSAWMARCH 2013

FROM STABILISATION TO STAGNATIONVIKTOR YANUKOVYCH’S REFORMS

Sławomir Matuszak, Arkadiusz Sarna

© Copyright by Ośrodek Studiów Wschodnichim. Marka Karpia / Centre for Eastern Studies

Content editorsAdam Eberhardt, Wojciech Konończuk

EditorAnna Łabuszewska

Co-operationKatarzyna Kazimierska

TranslationMaciej Kędzierski

Co-operationTim Harrell

Graphic design PARA-BUCH

DTP: GroupMedia

Figures: Wojciech Mańkowski

Photograph on cover: Shutterstock

PUBlISHEROśrodek Studiów Wschodnich im. Marka Karpia Centre for Eastern Studiesul. Koszykowa 6a, Warsaw, PolandPhone + 48 /22/ 525 80 00Fax: + 48 /22/ 525 80 40osw.waw.pl

ISBN 978-83-62936-21-2

Contents

KEY POINTS /5

INTRODUCTION /8

I. POlITICAl REFORMS /11

1. Constitutional reform /112. Administrative reform /143. Anti-corruption measures /16

II. ECONOMIC REFORMS /21

1. Macroeconomic stabilisation /212. Tax reform /243. Pension reform /264. Investment climate /285. Land market reform /30

III. ENERGY SECTOR /33

1. Gas sector reform /332. Attempts to diversify Ukraine’s gas supplies /36

IV. ASSESSMENT OF THE CURRENT SITUATION AND PROSPECTS FOR THE FUTURE /40

1. Assessment of the current situation /402. Prospects for the future /42

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Key Points

• Ukraineisacountryinneedofdeeppolitical,economicandsocialreform.Aftercomingtopowerin2010,ViktorYanuko-vych andhis government developed an ambitious and com-prehensive programme of reforms across the key areas ofsocial and political life.A return to the presidential systemof government just a fewmonths after the election allowedViktorYanukovychtoconsolidatemorepowerthananyoth-erUkrainianpresidentbeforehim.This,forthefirsttimeinyears,createdtheidealconditionsfortheintroductionofdeepreformsinthecountry.

• The constitutional changes,which have given the presidentcomplete dominance on the Ukrainian political scene,wereinitiallyseenasastepwhichcouldeaseandimprovethegov-ernanceofthestateandasawaytoimplementthepresident’sreformprogramme.Themannerinwhichthesechangeswerecarriedout,however,wasborderlineillegalandconsequentlyledtoagradualerosionofpoliticalcompetition,resultinginthemarginalizationofUkraine’soppositionpartiesandeventhePartyofRegions’coalitionpartners.

• Severaloftheplannedreformshaveindeedbeencarriedout,oratleastinitiated.Thefirstandthemostimportantsuccessachieved was the stabilisation of the public finances, fol-lowingUkraine’smostseriouseconomiccrisiseverin2009.Itshouldbestressed,however,thatthiswasachievednotonlythankstogovernmentpolicybutalsothankstothefinancialassistanceprovidedbytheInternationalMonetaryFundandtheoverallrecoveryofglobalmarkets(whichimpactdirect-ly on the conditionof theUkrainian economy).TheofficialgoalofmanyofthereformswastobringUkrainianlegisla-tioninlinewithEUlaw,whichcorrelatedwiththeintensenegotiations between Kiev and Brussels on an AssociationAgreement and the creation of a Deep and Comprehensive

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FreeTradeArea.Theconclusionofthesenegotiationsin2011was seenas agreat success anda signof thegovernment’sadministrativeefficiency.

• Nonetheless,most of the planned reformshave been imple-mentedonlypartiallyorstillremainintheplanningstages.AnewTaxCodehas,aspromised,simplifiedUkraine’staxlaw,butitsnumerousinaccuracieshavecomplicatedtheprocessesofdoingbusinessforsmallandmedium-sizedenterprises.ThemeasuresundertakentoreformthegasmarketanddiversifyUkraine’s energy supplies have been slow and inconsistent.Thepensionreformhasbeencarriedoutonlypartially,andfocusedmainlyonraisingtheretirementage.Theattemptstocompletelandreformstalledatthestageofdevelopinganewlandmarketlaw.

• Inmanyotherareas,thegovernment’sperformancehasbeeneven poorer. The authorities have failed to introducemanylong-awaited and fundamental reforms in the areas of localgovernment,municipalinfrastructureandhousing(thegov-ernmenthasnowbeenworkingon this legislation for eightyears) and no progress has been made on the new LabourCode(whichwassubmittedtoParliamentbackin2007).Thegovernment’sattemptstoimprovetheinvestmentclimateinUkraine,believedtobeamongtheworstinEurope,havebeenequallyunsuccessful.SincethewelcomeadoptionofthePub-licProcurementActin2010,Parliamenthaspassedanumberof amendments to the document. These amendments havebeen aimedat excluding the compulsoryuse of transparenttendering procedures. Similarly, the highly publicised anti-corruptioncampaignhasturnedintoacompletefailure.

• The reformist zeal ofUkraine’s political elite had been pro-gressively diminishing as the parliamentary election ap-proachedandthepollsshowedadecline insupportforboththe president and the Party of Regions. During his time in

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office,ViktorYanukovychhasbeenunabletomakesystemicchanges,andhisnewpowershavebeenpredominantlyusedtocrushhispoliticalopponents.Thecollapsingeconomyandtheresultsoftherecentparliamentaryelection(whicheffec-tively ruleouta stablepro-presidentialmajority in theVer-khovnaRada)havesignificantlycurtailedanychanceofseri-ousreforminUkraine,atleastuntilafterthe2015presidentialelection.ThiswillfurtherexacerbateUkraine’spolitical,so-cialandeconomicproblems,causingthecountrytobeleftfarbehinditsCentralEuropeanneighboursorevenRussia.

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introduction

Ukraine’s political and economic transformation after 1991wasmuchmoredifficultandhappenedmoreslowlythanintheneigh-bouring countries across Central Europe and the Baltic region.ThiswaspartlyduetotheseeminglackofprospectsforEUmem-bership,seenasthemainstimulusforchangeinCentralEuropein the 1990s,andmorerecentlyalso in theBalkans.Evenmoreimportant,however,mayhavebeenthedifferentsocio-historicalexperiences of the Ukrainian people and the differentmental-ityof theirpoliticalelite. In thefirst fewyearsasan independ-ent state, following the collapse of the Soviet Union, UkrainefacedchallengesonascaleunseenelsewhereinCentralEurope.Itwitnessedthecollapseofentireindustries(includingitsheavymachinery, high technology, and arms industries), which hadpreviouslybeenclosely linkedtotheeconomiesofotherformerSovietrepublics.With thecreationofcustomsbordersbetweentherepublicsin1991,however,allsuchlinksweresuddenlysev-ered.TheUkrainianpeople,accustomedtothe‘biggovernment-small society’model,were now forced to findways to survive,with no hope of help from the state. The situationwas furthercompoundedbyhyperinflation, adeepeconomic crisis, and theweaknessofthenewlyindependentcountry.ThepoliticalreinsinUkrainewereseizedbySoviet-erabureaucratsandadministra-tors.Theirexperienceofgovernance,however,wasshapedbythehighlycentralisedmodelemployedby the formerSovietUnion,andcompletelyunsuitedtothenewcircumstances.TheseSoviet-era political circles produced the first generation of Ukrainianleaders,whichmightexplainwhythecountry’stoppoliticalposi-tionshaveneverbeenfilledbyindividualswithaclearvisionfortransformation.

Itispossibletodelineateperiodswhenthereformstookongreat-ermomentum,forexample,atthebeginningofPresidentLeonidKuchma’s first term (1994-1999) and during the premiership ofViktorYushchenko(1999-2001).Buteventhen,thereformswere

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limitedinscopeandwerequicklyabandonedduetolackofpopu-lar support, and resistance fromofficials andgrowingbusinessgroupsuninterestedinchange.Largedomesticbusinesses(whichcreatedtheso-calledoligarchs)gainedunprecedented influenceduringLeonidKuchma’spresidency,andbegantoplayanincreas-inglyimportantroleinthecountry’seconomy.Ontheonehand,thesebusinesseswere instrumental in spearheading theneces-saryprivatization,ontheotherhand,theypreventedattemptsatreforming and liberalising theUkrainian economy in linewiththe“CentralEuropeanmodel”(whichwasseenasdangerousandoverlyhastyfromtheoligarchspointofview).

Inlate2004andearly2005,itwasseemed,thattheimpetusforchangewouldcome fromtheOrangeRevolutionand the subse-quentelectionofViktorYushchenkoaspresident.Initially,Yush-chenkoenjoyedhighlevelsofpublicsupport,andtherevolutionitselfhadraisedhopesforfundamentalchangesinUkraine.Thefive-yearperiodfollowingtheOrangeRevolution,however,provedratherdisappointingwithregardtopoliticalandeconomictrans-formation.The‘orangeteam’quicklybrokeup,formingtwomu-tuallyopposingcamps,oneledbyPresidentViktorYushchenko,andoneheadedbyPrimeMinisterYuliaTymoshenko.Thislim-itedthegovernment’scapacitytobringaboutchangeandresultedincontinuingpoliticalcrises,effectivelycripplingthestate.

ViktorYanukovych,whowonthepresidentialelectioninFebruary2010, quickly consolidated all political power under the Party ofRegions,completelymarginalisingthecountry’soppositionforces.Afteramendingtheconstitutionandrestoringapresidentialsys-temofgovernmentinUkraine,YanukovychtookcontrolofParlia-ment and consequently became the country’smost powerful po-liticalfiguresinceindependence.Furthermore,boththepresidentandhispartyenjoyedarelativelyhighlevelofpublicsupport.

President Yanukovych and the Party of Regions promised notonlytostabilisethesituationafterthechaoticruleofthe‘orange

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camp’,butalso tocarryout far-reachingreformof thestateap-paratus.Thepoliticalcoalition that formedaround thePartyofRegions,rebrandeditselfasStabilityandReform.Thenewgov-ernmenthadastrongmandatetocarryoutreforms–arealneedforchangecouldbesensedinUkrainiansociety.Subsequently,inmid-2010,thepresidentpublishedareformprogrammefor2010--2014 entitled “Wealthy society, competitive economy, effectivestate”,whichconstituted thefirstconcreteplan forcomprehen-sivereform inyears. Itsbroadscopeattempted toaddressmostof thechallengesfacingUkraine,rangingfromthestabilisationof the economy following the severe economic crisis, throughchanges in the energy sector and agriculture, to social issues,suchasnewfundingrulesforhealthcareandeducation1.Thetwoandahalfyearsthathavepassedsincetheannouncementoftheprogramme,and therecentparliamentaryelections, seenasanimportantmilestoneinYanukovych’spresidency,provideagoodopportunitytotakestockandevaluatetheworkdonebythepres-identandthePartyofRegions.

Thispaperisanattempttodiscussthereformmeasuresunder-takenbyUkraine’snewgovernment.Itshouldbestressed,how-ever,thattheauthorsdonotaimtoofferadetailedandcompre-hensive analysis of the extent towhich the individual reformshave been completed; instead, the focus here is on the actionstakenbythegovernmentandtheobservableoutcomesinseveralkeyareas:changestoUkraine’spoliticalsystem,theeconomyandtheenergysector.ThisanalysiscanthenbeusedtodiscusstheoverallchangeswitnessedinUkrainesincethebeginningof2010,andanattemptwillbemadetoanswerwhythereformshavebeenstalled,andwhatthefutureholdsforUkraine.

1 Fullversionavailablefrom:Заможне суспільство, конкурентоспроможна економіка,ефективна держава. ПРОГРАМА ЕКОНОМІЧНИХ. РЕФОРМ НА2010-2014роки;http://www.president.gov.ua/docs/Programa_reform_FI-NAL_1.pdf

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i. Political reforms

1. constitutional reform

OneoftheconditionsthatmadeitpossiblefortheOrangeRevo-lution to succeed in late2004wasViktorYushchenko’s consentforanamendmenttothe1996Constitution,whichwouldchangethecountry’ssystemofgovernmentfrompresidential toparlia-mentary-presidential. However, the changes, which took effectin2006,removedthecertaintyofcooperationbetweenthecen-tralbodiesoftheUkrainianstate.Althoughthenewsystemleftthepresident significantlyweakened,he stillwieldedsufficientpowersto,forinstance,blocktheworkofthegovernment.Conse-quently,whenanovertconflictensuedbetweenPresidentViktorYushchenkoandPrimeMinisterJuliaTymoshenko(aswellasbe-tweenPresidentYushchenkoandthethenPrimeMinisterYanu-kovych–in2006-2007),theworkoftheexecutivewasvirtuallyparalysed.TheproblemlaterspiltoutsidethearenaofUkraine’sdomesticpolitics.Throughoutthisperiod,Kievpursuedtwopar-allelforeignpolicies:onecoordinatedbytheMinistryofForeignAffairs,controlledbythepresident,andtheother,shapedbythedeputyprimeministerforforeignrelations.Onmanyoccasionsthis had rather embarrassing consequences for Ukraine in itsdealingswithothercountries2.

After2004,theUkrainianpoliticalelitewasawareoftheneedtoreformthecountry’spoliticalsystem,butcouldnotagreeonthedirectionofthesechanges.Somepoliticiansarguedfortheresto-rationofthepresidentialsystem.Amongthestrongestproponents

2 Forexample,duringameetingoftheUkraine-NATOCommissioninBrus-sels,5March2009,attendedbyUkraine’sactingForeignMinisterVolody-myrKhandogiy.DeputyPrimeMinisterHryhoriyNemyriaalso travelledtoBrusselsbuthewasnotallowedtoentertheroomsincetheUkrainiandelegation was officially headed by Khandogiy;Огрызко рассказал, как Немырю унизили в штаб-квартире НАТО, Униан,16.03.2009,http://www.unian.net/news/306014-ogryizko-rasskazal-kak-nemyiryu-unizili-v-shtab-kvartire-nato.html

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ofstrongpresidentialpowerswasYuliaTymoshenko.Beforetheconstitutionalamendmentscameintoforcein2006,TymoshenkourgedYushchenkotoignorethem.ThePartyofRegionsalsopro-claimedtheneedtoreturntoapresidentialsystem,andduringthepresidential election campaign in 2010, announcedplans torestorethe1996versionoftheconstitution.Meanwhile,otherpo-liticalgroups(includingtheCommunistPartyofUkraine)wereinfavourofreformsthatwouldfurtherlimitpresidentialpowersandincreasethepowersofParliament.

After Yanukovych’s victory in the 2010 presidential election,it was not clear whether he would be able to take full politi-calcontrolof thecountry.At thetime,Tymoshenkostillservedasprimeminister,andenjoyedextensivepowersgrantedtothePrimeMiinisterbythe2004amendmenttotheconstitution,andtheUkrainianparliamentwasdominatedbyamajoritycoalitionformedaroundtheYuliaTymoshenkoBloc(BYuT).Manypoliti-calcommentatorsbelievedatthetimethatthepoliticaldeadlockwould continue, even if Yushchenko was replaced by Yanuko-vych. The situation however unexpectedly changed. In earlyMarch2010,VerkhovnaRadaalteredtherulesunderwhichpo-liticalpartiescouldformcoalitions,byscrappingthepreviousre-quirementthatcoalitionscouldonlybeformedbywholeparlia-mentaryfactions3.ThisenabledthedissolutionofTymoshenko’sgovernmentandtheappointment,inMarch2010,ofanewcabi-netledbyMykolaAzarov.Thechangetotheparliamentaryregu-lationswasintroducedeventhoughitviolateda2008rulingoftheConstitutionalCourtwhichexplicitlyprohibitedindividualMPsfromjoiningparliamentarycoalitions.InApril2010,however,theConstitutionalCourtissuedanewrulingthatpermittedtheprac-tice.ThePartyofRegionswasabletoconvince17MPsfromOurUkraineandtheBYuT,aswellastheVolodymyrLytvynBlocand

3 “TheUkrainianparliament’snewproceduralrulespavethewaytothefor-mation of a new coalition”, EastWeek, OSW, 10/03/2010, http://www.osw.waw.pl/en/publikacje/eastweek/2010-03-10/ukrainian-parliaments-new-procedural-rules-pave-way-to-formation-a-ne

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theCommunists,whichwassufficienttogiveitamajorityinpar-liament4.Puttinganendtoseveralyearsofcohabitationpavedthewayforamoreeffectivegovernment,butYanukovychdecidedtointroducechangesthatwouldgranthimpoliticalmonopolyinthecountry.SincethePartyofRegionsdidnothaveenoughvotestocarryoutconstitutionalreform(i.e.atleast300votes),itdecidedtouseUkraine’sConstitutionalCourttoachieveitsgoals.InOcto-ber2010,theCourtreversedthe2004constitutionalreform(eventhough in2008 theCourt refused toconsidera similarmotion)claimingthatthechangeshadbeencarriedoutunlawfully,andthusrestoredthe1996constitution5.Afewmonthslaterfurtherchangestotheconstitutionwereintroduced,includingamovetoextendtheparliamentarytermfromfourtofiveyears6.

ChangestoUkraine’ssystemofgovernmenthavecontributedtothestrengtheningofpresidentialpowers toanextent thatgaveopposition politicians grounds to accuse Viktor Yanukovych ofauthoritarianism. Serious concerns have also been voiced overtheverymannerinwhichthechangeswereintroduced.Amend-mentstotheconstitutionarenotaresultofaconsensusreachedbyUkraine’smainpoliticalparties,butonthebasisofadecisionoftheConstitutionalCourt,onlyfiveyearsafterthereformwasimplemented.ItisimportanttonotethattheConstitutionalCourtisaninstitutionthatenjoyslittlepublictrustinUkraine,andfewpeoplebelieveinitsindependence.Andalthoughnolawshaveac-tuallybeenbroken,thereislittledoubtthatlawshavebeenbent.Ontheotherhand,itisclearthattheconstitutionalamendmentsintroducedafter theOrangeRevolutionhave ‘spoiled’Ukraine’s

4 Рада призначила новий уряд: список міністрів, 11/03/2010,TCH,http://tsn.ua/ukrayina/rada-priznachila-novii-uryad.html

5 The concerns raised by the Constitutional Court, regarding the mannerin which the 2004 changes were made, were well-founded. For more, seeUkraine’s Constitutional Court reinstates presidential system, EastWeek,OSW,06/10/2010,http://www.osw.waw.pl/en/publikacje/eastweek/2010-10-06/ukraine-s-constitutional-court-reinstates-presidential-system

6 Inthiscase,thePartyofRegionseasilyfound300votes,asmanyoftheMPswereworriedtheymightnotbeabletoreturntoParliamentafterelection.

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constitutionalsystemandhaveconsequentlybecomeoneof themaincausesof thecurrentparalysisof thecountry’sexecutive,preventing any real reform during Yushchenko’s presidency.Ukraine’s1996constitution,restoredin2010,providesforamoretransparent relationship between government agencies and al-lowsformoreeffectivegovernance.ThisislikelytobethemainreasonwhytheWestraisednoseriouscriticismaboutthemannerinwhichtheconstitutionalamendmentshadbeenreversed.

2. administrative reform

FollowingthechangestoUkraine’ssystemofgovernment,theau-thoritiesplannedtocarryoutdeepadministrativereform,reduc-ingbureaucracy(includingasignificantreductioninthenumberofcivil servants)andstreamlining the functioningof thestate.InDecember2010,PresidentYanukovychreducedthenumberofministriesfromtwentytosixteen;healsocutthenumberofdep-utyprimeministersfromsixtothree,andsignificantlyincreasedthe responsibilities of thosewhokept their posts.Anumber ofcentral governmentbodieswere closeddown,but over a dozennewservicesandgovernmentagencieswerecreated7.

Atthemoment,itisdifficulttosaywhetherthereformhasman-agedtoreducedcentralgovernment’soperatingcosts;itisclear,however, that inmost cases the changesweremerely cosmetic.Many individualshavebeenmoved to otherposts, someofficeswereentirelyeliminatedbycombiningthemwithothers;manyotherdepartmentshavebeenrenamed.Despitethechanges,thegovernmenthasfailedtosignificantlyreducethenumberofcivilservants8 and it ishard to talk aboutqualitative changesor in-creasedefficiencyoftherespectiveministries.

7 УКАЗ ПРЕЗИДЕНТА УКРАЇНИ № 1085/2010 Про оптимізацію системи центральних органів виконавчої влади, Президент України Віктор Яну-кович – Офіційне інтернет-представництво, http://www.president.gov.ua/documents/12584.html

8 Forexample,thenumberofredundanciesinsidetheTaxOfficereached11%

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Thegovernment“advertised”theabovechangesasthefirststageofa largeadministrativeoverhaul,whichwould lead to thede-centralisationofpowerandbelinkedtoalongoverduelocalgov-ernmentreform9.However,despitebeingalong-standingsloganof therulingPartyofRegions, thechanges to localgovernmentinUkrainehaveremainedinthedraftingstageforyears.Mean-while,theformofgovernmentadoptedbyPresidentYanukovychhasbeenleadingtofurthercentralisationofpower,limitingthealreadyweak decisionmaking powers of the country’s regionsandlocalcouncils.

Ineffect, theadministrative reformannouncedbyYanukovychhasbeenlittlemorethanareorganisationofcentralgovernmentbodies.ManyoftheactsadoptedbyParliamenttopavethewayfortheaforementionedreformshavebeencriticisedasunconsti-tutional (including, theso-calledCabinetBillof 7October2010,whichgivesthepresidentpowerstoappointevendeputyminis-ters anddeputyheadsof other central governmentbodies).To-getherwith the earlier changes to the constitution, these lawswereanothersteptowardsevengreatercentralisationofpowerandextensionofpresidentialprerogatives10 (undercurrent law,thepresidentalsoappointstheheadsofhundredsofregionalandlocalgovernments).

insteadofthe30%requestedbythepresident.ГНСУ лишь на треть выпол-нила план по сокращению аппарата, Зеркало недели,11/02/2012,http://news.zn.ua/ECONOMICS/gnsu_lish_na_tret_vypolnila_plan_po_sokrascheniyu_sotrudnikov-97168.htmlAccordingtoUkraine’sCivilServiceAgency,attheendof2011thenumberofcivilservantswasreducedto268,100from279,500attheendof2010.See:ДЕРЖАВНА СЛУЖБА В ЦИФРАХ2012,http://issuu.com/faina/docs/ds__v_c2012?mode=window&pageNumber=6

9 See:Урядовий Кур’єр, Спеціяльний Випуск, 31.05.2012: Адміністратив-на реформа: нова архітектура держуправління і територіальної органі-зації влади: http://ukurier.gov.ua/media/documents/2012/05/30/admin-spez.pdf

10 See:Административная реформа, или Обратно в СССР, Зеркало недели. Украина, №5, 11 февраля2011,http://zn.ua/POLITICS/administrativnaya_reforma,__ili_obratno_v_sssr-75351.html

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Finally,aseriesofpersonnelchangesmadeinsidethecabinetdur-ingUkraine’s ‘administrativereform’haveallowedYanukovychto completehisplan tomonopolisepoliticalpower in the coun-try.HisdecisiontoremovefromthecabinettherepresentativesofthePartyofRegions’coalitionpartners(theCommunistPartyofUkraine,andparticularly,theLytvynBloc)wasanotherclearsignofeffectivemarginalisationoftheroleofcoalitionpartners.

3. anti-corruption measures

AmongthepledgesmadebythePartyofRegionsduringthepresi-dentialelectioncampaignwastheintroductionofeffectiveanti-corruptionmeasuresinUkraine.Althoughthepresident’sreformprogrammefor2010-2014didnotspecificallyaddressthisissue,the campaign pledge was delivered when the Verkhovna Radapassed a law on preventing and combating corruption in April2011–whichwassubsequentlysignedintolawbythepresidenton7June201211.Onthesameday,thepresidentalsosignedabillthatpavedthewayforaseriesofamendmentstoexistinglegislativeactsoncriminalresponsibilityforactsofcorruption.

Between2010and2011,thenewmeasuresallowedprosecutorstobringhigh-profilecorruptionchargesagainstseveralpoliticiansandhundredsofminorgovernmentofficials.Theanti-corruptionzealwasrelativelystrongatthestartofYanukovych’spresiden-cy,butasisoftenthecase,itdwindledratherquickly.Themostlikelyreasonforthisisthatincountrieswherecorruptionisrifeatalllevelsofgovernmentandpublicadministration,astrictim-plementationofanti-corruptionmeasurescanupsetthesystem,leadingtohighlevelsofdiscontentamongrankandfileofficials

11 Thelawhasincreasedthescopeofsuchinspections;agreaternumberofof-ficialsarenowmonitored,andnewrestrictionshavebeenadded(forexam-ple,civilservantsarenolongerpermittedtoaccept“gifts”fromindividualsorbusinesses).Thelegislatorshavealsointroducedcompulsoryannualas-setdeclarationsforofficials–whichnowalsomonitorexpenses.

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andpartymembers,whose loyalty is essential toYanukovych’spresidency.

ThetwomostpublicisedarrestswerethoseofPartyofRegionsac-tivist,AnatoliyHrytsenko,andtheheadoftheStateCommissionfortheRegulationofFinancialServicesMarkets,VasylVolha.InHrytsenko’s case, thearrestwasorchestratedbyagroupofhispolitical opponentswithin the Party ofRegions12, and althoughVolhawasofficiallychargedwithacceptingabribeof$500,00013,itislikelythathisarrestwasalsoaresultofcompetitionbetweenindividualbusinessgroups.AnadditionalmotiveforbotharrestswastoshowthatthefightagainstcorruptioninUkrainewasnotdirectedonlyatthegovernment’spoliticalopponents.

No investigationswere launched byUkraine’s law enforcementauthorities,however,concerningaseriesofscandalswhichsur-facedafterYanukovychcametopower.Mediareportsoftenhigh-lightedhighly suspicious relationsbetween topUkrainianpoli-ticiansandbusinessmen,unfair tenderingprocesses,andotherpracticeswhichledtothelossofbillionsofhryvniainstatebudgetrevenue.AmongthekeyfiguresmentionedinsuchreportswereDeputyPrimeMinisterandInfrastructureMinister,BorysKole-snikov (regarding tenders ahead of EURO 2012), formerDeputyPrime-MinisterandcurrentsecretaryoftheCouncilofNationalSecurityandDefenceofUkraine,AndriyKlyuev(regardingtheuseofEUfundstodevelophisownbusiness),andEnergyMin-ister,YuriyBoyko(regardingthepurchaseofoilrigsatasignifi-cantlyinflatedcost14).Basedonthemediareportsalone,itisim-

12 PartyofRegionsactivistarrestedinCrimean,EastWeek,OSW,02/02/2011,http://www.osw.waw.pl/pl/publikacje/tydzien-na-wschodzie/2011-02-02/aresztowanie-krymskiego-dzialacza-partii-regionow

13 Ильченко Александр, Рафал Анастасия, Волге шьют взятку на полмилли-она долларов, Сегодня, 20.07.2011, http://www.segodnya.ua/news/1426-9556.html

14 Thefirstoilrigcostthestate-ownedNaftogaz$400million,despiteitsmar-ketvalueofapproximately$250million.

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possibletodeterminewhetherthepoliticianswereinfactguiltyof these charges, but the lack of any official response from theprosecutor’sofficeortheSecurityServiceofUkrainemightsug-gestthattheauthoritiesarenotinterestedininvestigatingcasesofallegedcorruptionamongUkraine’stopstateofficials.

Figure 1.CorruptionPerceptionsIndex,Ukraine

source:TransparencyInternational

The continued lack of effective anti-corruption measures inUkrainehastranslatedintothecountry’sperformanceininter-nationalcorruptionperceptionsrankings.Inthe2011Transpar-ency International Corruption Perceptions Index, Kiev ranked152ndoutof183countries,receivingjust2.3outof10points15.Asshown inFigure 1, thesituationhasbeensteadilydeterioratingsince2006,whenUkrainerecordeditsbestresultever.Itisclear,however,thatcorruptionhasbeenabigproblemnotonlyforthecurrent government but for previous administrations also, asUkraine’sperformanceinTransparencyInternational’srankingbegantofallinthedaysofthe“Orange”government.Asmallim-provementinUkraine’sperformancein2010wasduetothean-ti-corruption campaign launchedby the thennewgovernment;

15 http://www.transparency.org/country#UKR_DataResearch

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nonetheless,asthecampaignprovedtobemoreaboutpropagan-dathanrealchange,thisupwardtrendwasshortlived.

Nevertheless,theindexcompiledbyTransparencyInternationaldoesnotmeasurethereallevelofcorruptioninthecountrybutonlypublicperceptionofthisphenomenon.Reportsproducedbyotherorganisations,however,areequallydamning.Astudycar-riedoutbytheOrganizationforEconomicCooperationandDevel-opment(OECD),forinstance,describedKiev’sprogressbetween2008-2011asnegligible.TheOECDreportpresentedanevaluationoftheUkrainianreformsaspartofalargerprojectdevelopedun-dertheIstanbulAnti-CorruptionActionPlan.Accordingtothisreport,Ukrainehadmanagedtomeetonlyoneofthetwenty-fourrecommendationsmadebytheOECD.Inaseparatereportcover-ingtwenty-fiveEuropeancountries,Ernst&YoungputUkrainelastbutone,aheadonlyofRussia.Asmanyas91%ofbusinessesreported thatbriberywascommonplace inUkraine.More thanhalfofthem(55%)believedthatin2011thesituationhadgotevenworse. Similarly, the European Business Association16, whichmeasurescorruptionlevelsintermsofthetotalcostofbribestoindividualbusinessesinrelationtotheirtotalrevenue,reportedthatbetween2008and2011corruptionhadincreasedbyalmost70%andcompanieswerenowspendingupto10%oftheirincomeonbribes17.

Somelegislativemeasures,suchasthePublicProcurementAct,whichintroducedarelativelytransparentsystemofbiddingforgovernmentcontracts,havebeenpositivelyassessedintheWest.However,theVerkhovnaRadahasgraduallyintroducedaseriesof exemptions to the bidding process, thus creating conditionsfor large-scale fraud.On 1August 2012, thepresident signedan

16 Ukraine’slargestorganisationrepresentingtheinterestsofforeigninves-torsinthecountry.

17 http://zn.ua/ECONOMICS/investklimat_vesna_otkladyvaetsya-100872.html

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amendment to thePublicProcurementAct,which repealed themandatorytenderingproceduresforstate-ownedcompanies.

Interestingly, theauthorities arewell awareof the scaleof cor-ruptionand thedamage causedby it. In the springof 2012, theMinistry of Justice produced a special report on corruption inUkraine,inwhichitacknowledgedthatthecorruptpracticeshadremainedataconsistentlyhighlevelfor10yearsandaffectvirtu-allyallspheresoflife.Thedocumentalsohighlightedthatfor83%ofUkrainians,corruptionhasbecomeafactoflife18.Inhisaddresstothenationearlierthisyear,PresidentYanukovychalsonotedthatbureaucraticinertiaandcorruptionwerethetwomajorob-staclestoUkraine’smodernisationefforts19.

18 Юлия Рябчун, Во взятках несчастье. Минюст отчитался об уровне кор-рупции в Украине, Коммерсант-Украина, 18.04.2012, http://www.kom-mersant.ua/doc/1918091

19 Януковичу-реформатору заважають «інертні, корумповані бюрократи», Униан, 03.07.2012, http://www.unian.ua/news/512577-yanukovichu-refor-matoru-zavajayut-inertni-korumpovani-byurokrati.html

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ii. economic reforms

1. macroeconomic stabilisation

Ukraine’seconomyremainsheavilydependentontheexportsoflow-processedproducts,particularlysteelproductsandironore,whichaccountfor30-40%ofthetotalvalueofUkrainianexports.Thesetypesofproductsareverysensitivetofluctuationsinworldmarkets.NeitherLeonidKuchma’sgovernment,northenewpo-litical leaderswho came to power after theOrange Revolution,didmuchtochangethestructureofthecountry’seconomy,eventhoughthiswasaperiodofeconomicgrowthintheworld,whichalsotranslatedintorapidgrowthinUkraine.

Thenegativeconsequencesofexcessiverelianceonforeigneco-nomictrendsbecameparticularlyclearafterthe2008globalfi-nancialcrisis,whoseripplesreachedKievseveralmonthslater.In2009,Ukraine’seconomycollapsed,withGDPfiguresplummetingbyalmost15%.Thiswascausedmainlybyacombinationoffactorsdescribedearlier.SomeoftheresponsibilitythoughalsolaywiththethenPrimeMinisterYuliaTymoshenko,whosepopulistpoli-cies,pursuedinthemidstofanelectioncampaign,hadaparticu-larlynegativeimpactonlocalbusinessesandthebankingsector.FollowingKiev’sfailuretomeetitsobligations,theInternationalMonetaryFunddecidedtosuspenditscooperationwithUkraineinNovember2009.

Mykola Azarov’s government, which came to power in March2010, was able to stabilise Ukraine’s economy quite quickly. ItshouldbenotedthoughthatAzarovwasaidedinthistaskbyaneconomicupturninUkraine’smajorexportmarketsthatstartedinthesecondhalfof2009,andtheassistanceKievreceivedfromthe IMF. In2010, thegovernment resumed its cooperationwiththeIMFandwasgrantedacreditlineof$15.1billion.IMF’ssup-portforUkraineandfavourableratingsbycreditratingagenciesallowed the government in Kiev to attract funds from abroad.

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Thankstoanupwardtrendinglobalmarkets,Ukraine’sgrowthreached 4.2% in 2010 and 5.2% in 2011. TheAzarov governmentalsomanagedtoreducethebudgetdeficitto1.4%ofGDP.Theeco-nomic revival didnot last long, however, and in 2012Ukraine’seconomybegantoslowdown(seeFigure2).

TheIMFloansforUkraineweregrantedontheconditionthatKievwouldcarryoutaseriesofreforms.In2010,thegovernmentmetmostoftheconditionssetbytheIMFwithregardtobudgetsta-bility,monetarypolicyandchangestotaxlaw.Otherconditionsincluded raising the retirement age for women and increasinggastariffsforindividualconsumerstoreflectthemarketpricesofgas.Although (aftermuchhesitation) theauthoritieseventu-allyagreedtopressaheadwithstatepensionreform(moreonthisinsubsectionPensionreform),thegovernmentkeptdelayingtheagreedgaspricehike.ThissubsequentlypromptedtheIMFtosus-pendthedisbursaloftheremainingloaninstalmentsattheendof201020.Thegovernment’sreformistzealwasfurtherbluntedinlate2010bythelargestwaveofproteststosweepUkraineduringYanukovych’spresidency,sparkedbythereformofUkraine’staxlaw(seesubsection“Taxreform”).

20 Sławomir Matuszak,“Ukraine’s cooperation with the IMF – unfulfilledhopesfordeeperreforms”,OSWCommentary,15/06/2011,http://www.osw.waw.pl/en/publikacje/osw-commentary/2011-06-15/ukraines-cooperation-imf-unfulfilled-hopes-deeper-reforms

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figure 2. Ukraine’sGDPgrowthratebetween2000-2012

source:TheUkrainianOfficeforNationalStatistics

AftertheIMFsuspendeditscooperationwithUkraine,thegov-ernmentinKievbegantostruggletoserviceitsnationaldebt.Al-thoughUkraine’snationaldebtlevelremainsrelativelylow,espe-ciallywhencomparedwithmostEUcountries(36%ofGDPatthebeginningof2012;but16percentagepointshigherthanin2008),theproblemliesinthefactthatmuchofUkraine’snationaldebtis short-term debt. Kiev’s falling credit ratingmeans that gov-ernmentbondshaveveryhigh interestrates (anaverageof 14%fordomesticholders).Inthelasttwoquartersof2012,Ukraine’seconomicdownturnhasturnedintoafull-blownrecession21,rais-ing concerns about the solvency of theUkrainian state in 2013,with itshighest foreigndebt repaymentsand servicingchargesin years22. Given the deteriorating relations between Kiev andtheWest(whereeconomicproblemsarealsoquiteserious),Rus-siamightturnouttobetheonlycountrywillingtohelpUkraine.

21 Arkadiusz Sarna, “Ukrainian economy on the verge of recession”, OSWCommentary, 21/11/2011, http://www.osw.waw.pl/en/publikacje/osw-com-mentary/2012-11-21/ukrainian-economy-verge-recession

22 In2013 theUkrainiangovernmentwillhave topayon thisaccountabout$9billion.See:http://www.kmu.gov.ua/control/uk/publish/article?art_id-=245876222&cat_id=244823857

(%)

-15

-12

-9

-6

-3

0

3

6

9

12

15

5.9

9.2

5.2

9.6

12.1

2.7

7.3 7.9

2,3

-14.8

4.15.2

0.2*

* preliminary estimates

2012201120102009200820072006200520042003200220012000

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Inthepast,MoscowhasonseveraloccasionsprovidedfinancialassistancetothegovernmentinKiev,andincontrasttotheIMF,its loanshaveneverbeen conditional on the implementationofunpopularreforms23.

Meanwhile,Kievhasalsobeenfacingaseriesofotherchalleng-es.Ukraine’s greyeconomy, for instance,hasbeenestimatedat40-60%ofthecountry’sGDP.Andalthoughboththecurrentandthepreviousgovernmentshavepledgedtoreduce it, inpracticethishasentailedanincreaseofthetaxburdenonsmallandme-dium-sizedbusinesses(whileofferingpreferentialconditionsforbig business linked to Viktor Yanukovych), thereby provokingmany SMEs into evading their tax liabilities. Directly affectedbytheglobaleconomiccrisis,Ukraine’sbankingsectorhasbeendescribed by international financial institutions as the weak-est in the region.Although in thefirsthalfof 2012, localbankspostedthefirstprofit inthreeyears ($210million), thesector isstillstrugglingwithhighlevelsofbadloans24.TheinstabilityofUkraine’sbankingsectorisfurthercompoundedbylowlevelsoftrustamongtheircustomers,whichcouldeasilyturnintopanicandamasswithdrawalofdeposits.

2. tax reform

In theautumnof 2010, theVerkhovnaRadaadoptedUkraine’snewTaxCode,consolidatingintoasingledocumentalltheindi-vidualtaxregulationspreviouslycontainedinvariousstatutes.Ukraine’s previous tax laws had been described as among themostcomplexintheworld,andintheWorldBank’s2010DoingBusiness report,Ukraine’s tax systemwas ranked 181st in the

23 SławomirMatuszak, “Ukraine is becoming dependent onRussian loans”,EastWeek, OSW, 04/04/2012, http://www.osw.waw.pl/en/publikacje/east-week/2012-04-04/ukraine-becoming-dependent-russian-loans

24 Елена Губарь, Банки накопили проблем, Коммерсант Украина,06.08.2012,http://www.kommersant.ua/doc/1996123

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world (outof 183)25.Thenewtaxcodehasreduced thenumberofstatetaxesfrom29to18,whilethenumberoflocaltaxeshasdropped from 14 to 5. The corporate income tax rate has beencut from25% in 2010down to 21% in 2012 (towards a target of16%by2014–whichwillmakeitthelowestinEurope).Thenewtaxcodehasalsocreatedtwotaxbandsfor individual taxpay-ersat15%and17%,althoughoneof itsmost important innova-tions has been the introduction of automatic VAT refunds forbusinesses.ThisprovisionisthefirstseriousattemptinyearstotackleUkraine’snationaldebt towards localbusinesses,whichresultedfromoverdueVATrefunds.(Thegovernmentaddressedtheproblembyissuingitsdebtorswithso-calledVAT-bondsinsummer2010).

AlthoughthenewTaxCodesimplifiedthecountry’staxrules,itsparkedviolentdemonstrationsbysmallbusinesses(thesocalledTaxMaydanaction),whichwereattendedbytensof thousandsofpeople26.The largestoppositionwasvoicedtotheabolitionofalump-sumtaxandtheintroductionofrestrictionsontheuseofsimplifiedtaxation.TheTaxCodealsosignificantlyincreasedthepowers of tax inspectorsdealingwithbusinesses.Thenew lawwasalsoaccusedoffavouringbigbusiness,althoughitwouldbefairertosaythatthelawmakerssimplychosenottoincreasethetaxburdenonlargecompaniesanyfurther.

ItishardtoprovideaclearevaluationoftheTaxCode,especiallysince hundreds of amendments have already beenmade to thedocument, and proposals for further changes are continuouslybeingputforward.Thenewtaxlawdoesindeedincreasethetaxburdenonsmallandmedium-sizedbusinesses,but it shouldbenotedthatthepreviousrulesonalump-sumtaxactuallyfuelled

25 http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Docu-ments/Annual-Reports/English/DB10-FullReport.pdf

26 MassprotestsbyUkrainianentrepreneursagainstanewtaxlaw,OSW,East-Week, 17/11/2010, http://www.osw.waw.pl/en/publikacje/eastweek/2010-11-17/mass-protests-ukrainian-entrepreneurs-against-a-new-tax-law

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tax avoidance. Themain positive outcome of the reform is thecodification of theUkrainian tax law,which allows for greatertransparency.

3. Pension reform

Although theUkrainian statepension is relatively low,pensionspendingremainsaheavyburdenonthecountry’sbudget,withtheUkrainianPensionFundpermanentlyinthered.In2011,thePension Fund’s deficit reached $3.8 billion, which amounted tonearly 10%of theUkrainianbudget27. Inaddition,asmentionedpreviously,theissueofpensionsforwomenwasoneofthemainstumblingblocksinKiev’snegotiationswiththeIMF.Beforethereform,thestatepensionageformenwas60and55forwomen,makingitamongthelowestintheworld.Theaveragelifeexpec-tancyofpeoplereachingretirementage,meanwhile,was62formenand80forwomen28.

ItcameasnosurprisethatthePartyofRegionstrieditshard-esttoavoidmakingsuchanunpopulardecision.InSeptember2011,however,aftermonthsofpreparation,theVerkhovnaRadafinallypassedapensionreformbillthatincreasedthestatepen-sionageforwomenfrom55to6029.TheMPsalsolimitedthemax-imumsizeofthestatepensiontotentimestheminimumwage(currently,theequivalentof$955dollars).Therestrictions,how-ever,willapplyonlytonewpensioners,whileexistingpensions

27 Дефіцит Пенсійного фонду за 2011 рік перевищив 30 млрд.грн.,16.03.2012,http://news.liga.net/ua/news/economics/627778-def_tsit_pens_ynogo_fondu_za_2011_r_k_perevishchiv_30_mlrd_grn.htm

28 http://www.worldlifeexpectancy.com/country-health-profile/ukraineInUkraine,theaveragelifeexpectancyformenremainslowat62,theaver-agelifeexpectanceforwomenis74;http://www.who.int/countries/ukr/en/

29 Thegovernmenthas also extended theminimumcontributionperiod forthebasicearnings-relatedpension,from20to30yearsforwomenandfrom25to35yearsformen.While,theminimumcontributionperiodforthebasicstatepension(setat50%oftheminimumSERPSpension)hasbeenextendedfrom5to15years.

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exceedingthisamountwillremainunchanged.Thenewpensionrulestookeffectfrom1October2011,althoughathree-yeartran-sitionperiodwas introducedduringwhichwomencanchoosewhether theywant to takeearlyretirementon less favourableterms,ortakeadvantageofthenewrules30.Thereformhasbeenwelcomedbyanumberofinternationalfinancialorganisations(includingtheEBRD).

Inpracticalterms,thereformhasraisedthestatepensionageandincreasedtheperiodofcontribution,buthasnotchangedthepen-sionsystemitself.Ofinterestherewillbetheplannedlaunchofoc-cupationalpensionsandprivatepensionfunds,whichwouldun-doubtedlycreateconditionsforthedevelopmentoftheUkrainianfinancialmarketandwouldgeneratecapitalthatcouldbeusedfordomestic investment.Althoughthepensionreformbilldoespro-videfortheintroductionofoccupationalpensions,itisdifficulttopredictwhensuchaschemecouldberolledout.Thetwo-yeartime-frameinitiallyproposedbythelegislatorshasbecomecompletelyunrealisticduetothecurrenteconomicsituationandthestateofpublicfinancesinUkraine.Undertheseproposals,contributionstooccupationalpensionschemes31weretobechargedfromthemo-mentthestatemanagedtobalancethebudgetofthestatePensionFund.Sofar,however,anyattemptstoreduceitsdeficithavebeenunsuccessful;inmid-2012thegovernmenttookthedecisiontoin-creasethedeficitfrom$0.9billionto$2billion32.

30 Новая пенсионная реформа в Украине: на ком хотят сэкономить?, Mo-jazarplata.com.ua, 24.08.2012, http://mojazarplata.com.ua/ru/main/work-legislation/novaja-pensionnaja-reforma-v-ukraine-na-kom-hotjat-se-konomitq

31 Startingat2%ofmonthlyearnings,withanannual1%increase,upto7%.Initially,thecontributionswouldbeadministeredbythestate-runPensionFund,andaftertwoyears–followingthelaunchofprivatepensions–con-tributionscouldbetransferredtoprivatepensionfunds.

32 Дефицит Пенсионного фонда Украины будет увеличен почти в два раза, Корреспондент.net, 19.07.2012, http://korrespondent.net/business/economics/1362086-deficit-pensionnogo-fonda-ukrainy-budet-uvelichen-pochti-v-dva-raza

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In2012,theUkrainianauthoritiesalsofailedtoadoptanewLa-bourCode.AdraftoftheCodewassubmittedtoParliamentbackin2007andsuccessfullypassedfirstreadingayearlater;inSep-tember2012,however, thebillwas takenoff theparliamentaryagenda.Consequently,therepeatedlyamended1971LabourCodeadoptedbytheVerkhovnaRadaoftheUkrainianSovietSocialistRepublicstillremainsinforce.

4. investment climate

EachnewUkrainiangovernmentannouncesmeasuresaimedatimprovingthecountry’sinvestmentclimate,hopingtoobtaintheforeigncapitalnecessarytomodernisethecountry.Intheafter-mathoftheOrangeRevolution,duringaperiodofeconomicboominUkraine,severallargeWesterninvestorsenteredthecountry,especiallyinthebankingandthesteelsectors.Thisdidnotmean,however,thatinvestmentconditionswereattractive.Foreignin-vestorscomplainedaboutcorruption,bureaucracyandacomplexlegalsystemandselectiveapplicationofthelaw.

ImprovingtheinvestmentclimateinUkrainewasthereforeoneofthemostimportantaspectsofYanukovych’seconomicreformprogramme.Twoyearslater,itisclearthatthegovernmenthasfailed completely in this area. Compared to 2010, Ukraine hasslipped inalmost all the rankingsof economic freedomand in-vestmentconditions33.AsurveyofforeigncompaniesoperatinginUkraine, conductedby theEuropeanBusinessAssociation, sug-gests that the investment climate in the country is worse nowthanduringtheeconomiccrisisof2009.

Inordertoimprovethesituation,however,Ukrainedoesnotnec-essarilyneednewlegalframeworksbutratheracompleteover-haulofitsbusinesspractices.Acommonproblemfacedbycom-paniesoperatinginthecountryisthebehaviourofvariouslocal

33 See:SławomirMatuszak,Oligarchicdemocracy,OSWStudies,p.60.

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controlinstitutions,thatissuepermitsandlicenses,thelawen-forcementagencies,oreventhelocalsecretserviceofficers,whousetheirpositionstoextortbribesfrombusinesses.Inaddition,stateagenciesareoftenusedtoremoveunwantedbusinesscom-petitorsfromthemarket.Unabletoseekjusticeinthehighlycor-rupt localcourts,mostbusinesseshavenochoicebuttopaythebribes.The investmentclimatehasalsobeenadverselyaffectedbytheincreasinganti-markettendenciesinUkraine’seconomicpolicy,forexamplewithregardtoprivatisation34.

In the long term, some improvement could come from the im-plementation of the 2011 Deep and Comprehensive Free TradeArea(DCFTA)agreementnegotiatedbetweenKievandtheEu-ropean Union (initialled on 19 July 201235). It is believed thatthanks to the implementationofsomepartsof theEU’sacquiscommunautaire, the DCFTA should help create a better busi-ness environment inUkraine.However, despiteKiev’s successincompletingthesenegotiations,atpresentthesigningandtheratificationofanAssociationAgreement(ofwhichtheDCFTAisanintegralpart)seemratherunlikely.FurtherprogressontheEU-KievagreementswilldependprimarilyonalastingsolutiontoUkraine’sinternalpoliticalproblems,whichwerethereasonfortheEU’sdecisiontofreezetheprocessofsigningandratify-ingthesedeals.

34 Overthepasttwoyears,privatisationinUkrainefocusedmainlyonelec-tricity companies and the natural gas distribution sector. In both cases,winningbidswereoftenunofficiallyannouncedbeforethebiddingprocesswas closed. Consequently,Ukraine’s big business (with close links to thepresident)monopolisedbothsectors (RinatAkhmetov tookcontrolof theelectricitysector;whileDmytroFirtashboughtupUkraine’sgasdistribu-tionnetworks).

35 RafałSadowski, “Theprospects for theEU-Ukraine free tradeagreement”,OSWCommentary,18/10/2012,http://www.osw.waw.pl/en/publikacje/osw-commentary/2012-10-18/prospects-euukraine-free-trade-agreement

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5. land market reform

Ukrainehassomeofthemostfertilesoilsintheworldandacli-matefavourabletoagriculture.Sofar,however,thefoodandag-ricultural sectorhasnot contributed to theUkrainianeconomyonascalereflectingitspotential.Oneoftheobstaclestoitsdevel-opmenthasbeenthelong-lastinglandreform,particularlywithregardtolandownershipandthepossibilityofunrestrictedsaleandpurchaseofagriculturalland.ConsecutiveParliamentshavevoted toextend themoratoriumon the free saleofagriculturalland.Regardlessofthepoliticalopposition,mostlybasedonthenegativesocialperceptionofagriculturalreforms,theextensionofthemoratoriumhasbeenjustifiedbythelackoflegalandinsti-tutionalframeworksthatwouldallowunrestrictedsaleof land.Asaresult,thedevelopmentofagricultureinUkrainehasbeenbasedontheleasingoflandfromsmalllandowners(namely,vil-lagerswho,inthe1990s,weregivenownershipofso-called“Pai”holdings,thatis,smallplotsoflandinheritedfromUkraine’snowdismantled collective farms). Farmland lease agreements haveenabled the creationof large-scale farmsandagricultural com-panies,someofwhichnowcontrolhundredsofthousandsofhec-tares of agricultural land. It has been estimated that Ukraine’stwenty largest agricultural companies are currently leasing anareaequaltothesizeofBelgium36.Thecreationof“superfarms”inUkraineisacharacteristicfeatureofthewayinwhichthissec-torhasbeendevelopingsince the 1990s,and italsosetsout thelikelydirectionofitsfurtherdevelopment.

President Yanukovych’s government has announced plans tocompletethelandreformandintroducecivilisedrulesforthesaleandpurchaseofagriculturalland.Thisannouncementwaspart-lytheresultofpressurefromthefarminglobby,whichseeksto

36 Составлен рейтинг самых крупных землевладельцев Украины, lb.ua,15.07.2012, http://economics.lb.ua/food/2012/06/15/156433_sostavlen_reyt-ing_samih_krupnih.html

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legaliseits“superfarms”,andpartlybecauseUkraine’sleftwingparties(themostvocalopponentsofthereform)havegraduallylost their influence. Inaddition,althoughtheUkrainiansocietyissplitontheissue(roughlyinhalf),itseemsthatthereformat-tractslesscontroversythaninthe1990s.Significantprogresswasmadewith thepassingof theLandRegisterbill inAugust2011,whichintroducedasimplifiedmechanismforthekeepingoflandrecords37. The land registration process is expected to be com-pletedby2015.Meanwhile,Parliamenthasreceivedadraftbillonthelandmarket,which,ifpassed,wouldcreatethelegalbasisfortheintroductionofunrestrictedsaleandpurchaseoffarmlandinUkraine– this is the lastof thebills,withoutwhicha free landmarketcouldnotbeestablished.Undertheproposedlaw,Ukrain-ian farmland could only be purchased by Ukrainian nationals,althoughforeigninvestorswouldbeallowedtoleaseagriculturallandfromlocalfreeholders.Thebillalsoincludesaseriesofre-strictionsaimedathinderingmarketspeculationandover-con-centrationoflandownership(forexample,throughthelevyingofhightaxesonsaleswithinfiveyearsofpurchase)38.ThebillwassuccessfullypassedatfirstreadinginDecember2011,butdespiteplans tomove it forward, its second readingwasnot scheduledbeforethe2012parliamentaryelections.TheplanstopermitlandsaleinUkrainehaveattractedcriticismfromanumberofpoliti-calparties.Amongthemainopponentsofthereformhavebeenthenational-democraticpolitical forces, aswell as theCommu-nists,whointhe2007-2012Parliamenthelpedformtherulingco-alitionandarealsonowseenaspotentialalliesoftherulingPartyofRegionsinthenewlyelectedVerkhovnaRada.Theworkonbillhasalsocomeunderafairamountofpressurefromthedifferentlobbiestryingtoaffectthefinalshapeofitsindividualprovisions.

37 “TowardstheintroductionoffreelandtradeinUkraine”,EastWeek,OSW,10/08/2011,http://www.osw.waw.pl/en/publikacje/eastweek/2011-08-10/towards-introduction-free-land-trade-ukraine

38 ВР приняла в первом чтении закон о земле, Униан, 09.12.2011, http://www.unian.net/news/473413-vr-prinyala-v-pervom-chtenii-zakon-o-zem-le.html

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Consequently, thePartyofRegionshasdecided topostpone thevoteon thebilluntilafter theparliamentaryelections (heldon28October2012).On20November2012,however,theVerkhovnaRadavotedtoonceagainextendthemoratoriumonthesaleandpurchaseofagriculturalland–thistimeuntil2016.TheprospectofcompletingtheUkrainianlandreforminthenearfuturehasbecomeratherunrealistic.

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iii. energy sector

1. gas sector reform

One of themain causes of Kiev’s financial difficulties has beenthehighpriceofnaturalgasimportedfromRussia–thesourceofabouttwothirdsofallgasconsumedinUkraine.Thecurrentpricing formulausedby theRussians,however, isbasedon the2009gas contracts signedby formerUkrainianPrimeMinisterYulia Tymoshenko. The other important reasonwhy the state-ownedNaftogazhasbeenmakingalossandrequiresheavysub-sidiesfromthestatebudget39hasbeeninsufficienttransparencyandthelackofreformsintheUkrainiangassector.

Althoughanychangeinthepricingformulawouldrequirearene-gotiationofthecurrentcontracts,areformofUkraine’sgassectordependsentirelyonthewillofthegovernmentinKiev.Further-more,giventhatapproximately75%of theEU’sgas importsaretransportedthroughUkraine,Brusselsisalsointerestedinhelp-ingtocreateatransparentgasmarketinthecountry.Tothisend,BrusselshassuggestedthatKievadopttheEU’sinternalregula-tions on the energy sector. The first document paving thewayforsuchcooperationwasadoptedbyTymoshenko’sgovernmentbackinMarch2009.Atthetime,theEUandUkrainesignedtheso-calledBrusselsDeclaration, inwhich theEUendeavoured toguaranteethatinternationalfinancialinstitutionswouldprovidethefundingforthemodernisationoftheUkrainiangaspipelines,aslongasUkraineagreedtoreformitsgassector.However,due

39 TheexactbudgetdeficitatNaftogazishardtoestimate.The2011figurestoodat$2.5billion,whilethe2012estimatesrangefrom$1.5billion(accordingtothegovernment)toasmuchas$5.7billion(accordingtosomeexperts).See: Бойко нашел способ уменьшить дефицит «Нафтогаза», lb.ua,11.06.2012,http://economics.lb.ua/state/2012/06/11/155594_boyko_nashel_sposob_umenshit_defitsit.htmland, http://www.rbc.ua/rus/finance/show/v-2012-g-defitsit-naftogaza-sos-tavit-47-mlrd-grn---analitiki-27042012173400

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to theoutbreakof the economic crisis inUkraineand the startofanotherelectioncampaign,thegovernmentinKievneverevenstartedthereforms.

Later, Yanukovych’s government did implement some changesthat brought Ukraine’s gas sector regulations in line with EUstandards.InJuly2010,forexample,thepresidentsignedintolawabillreformingthenationalgasmarket,whichincludedlegalpro-visionsfortheseparationofextraction,transportationandsalesintodifferentfinanciallyandlegallyindependentcompanies. Inaddition, in February 2011, Kiev joined the Energy Community(EC)40.DespitetheobligationsstemmingfromUkraine’smember-shipofthisorganizationandtheearlieradoptionofthegasmar-ketlaw,Kievtookitstimebeforeimplementinganyofthechang-es.Infact,thefirstrealchangedidnotcomeuntil2012.InApriloflastyear,ParliamentadoptedamendmentstotheUkrainianlawonpipelinetransport,removinganearlierbanontherestructur-ingofNaftogazanditssubsidiariesinvolvedingastransit.Undertheamendments,changestothestructureofthegroupcannowbemadebythegovernmentwithoutParliament’sapproval.Theamendedlaw,however,keepsinplacetheearlierrestrictionsontheprivatisationofthosepartsoftheNaftogazgroupwhichareresponsible for transit (namely, the pipelines carrying RussiangastotherestofEurope).InJune2012,thegovernmentseparatedfromNaftogaz two of its subsidiaries:Ukrtranshaz responsiblefor transportation, and Ukrgazvydobuvannya focusing on ex-traction.Andfinallyinautumn2012,Naftogazlostitsmonopoly

40 Anorganizationestablishedin2005tocreateacommonenergymarketun-derEUregulations.ItsmembersincludetheEUmemberstates,sevenBal-kanstates, aswell asUkraineandMoldova.Kievhasagreed toadoptEUregulations(theso-calledthirdenergypackage)byJanuary2015).See:Wojciech Konończuk and SławomirMatuszak, “Ukraine &MoldovaandtheEnergyCommunity”,EastWeek,OSW,28/03/2012,http://www.osw.waw.pl/en/publikacje/eastweek/2012-03-28/ukraine-moldova-and-ener-gy-community

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ontheimportofgastoUkraine(introducedin2008byYuliaTy-moshenko’sgovernment).

Thelegislativechangesdonothoweverindicatethefuturedirec-tionofthegassectorreform.TheUkrainiangovernmentclaimsthat the reformwill be carried out in accordancewith the re-quirementsoftheEnergyCommunity,althoughRussiawillun-doubtedly play an important role in this reform. Yanukovych’sministershavebeentryingtorenegotiatetheunfavourablecon-ditions agreed in the 2009 gas contracts – albeitwithoutmuchsuccess. In exchange for such concessions (including lower gasprices),Moscow seeks effective control over the Ukrainian gassector.Sofar,KievhasresistedthepressurefromRussia,but itispossiblethatinthefutureUkrainewillbeforcedtogiveintoMoscow.Foryears,thelackofreformtothegassectorhaslimitedtransparency,whichsomebusinessmen(withlinkstothesucces-sivegovernments)haveusedtotheiradvantage.Therefore,iftheseparationofextraction,transportationandsaleofgasintodif-ferentfinanciallyandlegallyindependentcompaniesweretogoaheadasplannedby2015,Ukrainecouldwitnessfiercecompeti-tionforthetakeoverofthemostprofitableofthenewcompanies–particularly in thegasextractionsector.This,however,couldhavehighlyunpredictableconsequences.

Thereformoftheenergysectorrequiresdecisiveandcourageousdecisions, including significant gas price hikes for individualconsumersanddistrictheatingschemes,aspartofacomprehen-sive strategy tomodernise Ukraine’smunicipal housing sector.Although these changes are seen as one of the priorities in thepresident’sreformprogramme,theirimplementationhasbeenasslowandinconsistentasthereformofthegassector.Attheendof2011,thegovernmentsetuptheNationalCommunalServicesRegulationCommisionofUkraine(anindependentbodyregulat-ingtheprovisionofcommunalservicesmarket,whichunderthepresident’splanswas tobeestablishedby theendof 2010).TheUkrainian business is getting ready for the privatisation of the

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localservicesmarket.Meanwhile, inSeptember2012, theVerk-hovnaRadatookofftheagendaaproposalforanewHousingCode,whichisnecessarytodealwiththecurrentcomplicatedandex-tensivelegalframeworkspreventingchangeinthehousingsector(includingthecreationoftheso-calledOSBBs,orassociationsofco-ownersofmulti-apartmentresidentialbuildings).Despitethesignificanceofthedocument,Parliamenthasfailedtopassitforthepasteightyears.

2. attempts to diversify ukraine’s gas supplies

Ukrainehasoneof themost energy-intensiveeconomies in theworld. According to local estimates, the amount of energy re-quiredtoproduceoneunitofGDPinUkraineis3to5timeshigherthaninCentralEurope.Thecountryisalsoheavilydependentonenergyimports,mainlyfromRussia.Asaresult,successivegov-ernments inKievhavebeen stressing theneed todiversify thecountry’senergysupply(especiallygas)butlittlehasbeendonetoputwordsintoaction.Initially,aftertakingpowerin2010,ViktorYanukovychandhisgovernmentdidnot treat thismatter seri-ously:thepresident’s2010reformprogrammemadenomentionoftheneedforthediversificationofUkraine’sgassupplies.Kiev’sfailure in gasnegotiationswithRussia, however, has promptedaU-turnontheissue.

Oneofthe“flagship”projectsunderthenewpolicywasaplannedconstructionofanLNGterminalwithatargetcapacityof10bil-lionm3,whichwouldallowUkrainetoimportgasfromAzerbaijanortheMiddleEast.WorkontheprojectwaslaunchedinAugust2010,undertheso-calledNationalProjectsinitiative–aseriesofstate-runprogrammes aimed atmodernising the country – butlittleprogresswasmadeoverthenexttwoyears.Inearly2012,theSpanishcompanySocoincompletedafeasibilitystudywhichthegovernmenttentativelyapprovedon8August2012.CommentingonthesigningofanagreementwithSpain’sGasNaturalFenosaandUS-basedExcelerateEnergy,underwhichthepartieswould

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create a consortium of investors for the LNG terminal project,PrimeMinisterAzarovproudlyannouncedon26November2012:“Thisisahistoricmoment…We’vetakenthefirstreallybigstepinsecuringUkraine’senergyindependence”.However,laterthatday,theSpanishcompanydeniedsigningthedealwithUkraineandrejectedreportssuggestingthatithadbeenrepresentedatthemeetingbythepersonnamedbyUkrainianofficialsasthecom-pany’sofficialrepresentative.Kievtriedtoplaydownthescandalandquoted“technicaldifficulties”asthecauseoftheconfusion41.Subsequently,thegovernmentwasforcedtoadmitthattheSpan-ishsignatory to thealleged“agreement”didnothavepowersofattorneytosignit,thedocumentsdidnotmentionanyfinancialorlegalobligations,andno“historicmoment”everhappened.Thescandal(andlossofcredibility)notwithstanding,theprojecthasraisedanumberofconcerns.Theexpectedtimeframeandtotalcostoftheprojectisbelievedtobetoooptimistic42.Anotherprob-lemisthelackofadequateinfrastructureinAzerbaijantoexportitsliquefiedgas(AzerbaijanisbeingconsideredasthemainLNGsupplierfortheproject)aswellaspossibledifficultiesinsecuringTurkey’spermissionfortransitofgastankersthroughitsstraits.

InNovember2012,Ukrainewasable to, for thefirst time in itshistory, successfully importgas fromacross itswesternborder.Aftermonths of negotiations, Kiev signed a contractwith Ger-man’sRWEforthesupplyof56.7millionm3ofgastoUkraine.ThegaswastransportedthroughPolandinNovemberandDecember2012.Duetothelimitedcapacityofthisparticulartransitroute,UkraineiscurrentlyintalkswithRWEtore-routethisyear’sgas

41 TheSpanishsignatorytotheagreementwasonlyaskedtostandinwhentheofficialdelegationfromGasNaturalFenosawasdelayedonthewaytothemeeting.

42 OnavisittoQatarinNovemberoflastyear,PresidentYanukovychsaidthatthefirstshipmentofgasunderthenewprojectcouldreachUkraineatthebeginningof2015;whichseemsratherunrealisticduetodelaysattheplan-ningstage.Theofficialvalueoftheprojecthasbeenestimatedat€865mil-lion, although some commentators have suggested that, based on similarprojectsabroad,therealcostcouldbemuchhigher.

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supplies through Hungary. Ukrainian Energy Minister, YuriyBoyko,hassaidthat in2013Kievwould liketousethisroutetoimport5billionm3ofgas.Regardlessofwhethertheseplansma-terialise,truediversificationofUkraine’sgassuppliesisseverelylimitedbytheamountofgasthatcouldbeimportedtoUkrainefromtheWest.

AmoreviablealternativemightbetoincreaseUkraine’sdomes-tic production. Currently, locally extracted gas canmeet aboutathirdofthecountry’sannualgasneeds.Ariseindomesticpro-duction,however, is beingheldbackby the lack of appropriatetechnologyandfinancialresourcestocovertheinvestmentcosts.Initially,theUkrainiangovernmentwashopingtoattractRussianinvestorstotheproject.Inlate2010andearly2011,NaftogazandGazpromsignedamemorandumestablishingajointventurethatwouldextractfiredamp(minegas)inUkraine,whileaseparateagreement was inked by Chornomornaftogaz (a Naftogaz sub-sidiary)andLukoilforjointprospectingontheBlackSeashelf43.However,itisnotintheinterestofRussiancompanies(especiallyGazprom)tosupportgasproductioninUkraine.Asaresult,KievhasturnedtotheWestwithanoffertocooperate.InMay2012,thegovernmentselectedthewinningbidsforshalegasexplorationattwosites;thesuccessfulbidscamefromChevronandShell.Iftheactualsizeofshalegasdepositsat thetwositesmatchesearlierestimates,bothcompaniesmayinvestupto$7billionindevelop-ingthefields44.ThegovernmenthasalsoinvitedWesterncompa-niestodevelopconventionalgasdepositsonitsBlackSeashelf.InAugust2012,aconsortiumofUScompanies ledbyExxonMobilwonatenderfortheextractionofoilandgasattheSkifskyfield.

43 “Ukraine:NaftohazandGazpromannouncetheestablishmentofjointven-tures”,EastWeek,OSW,29/12/2010,http://www.osw.waw.pl/en/publikacje/eastweek/2010-12-29/ukraine-naftohaz-and-gazprom-announce-estab-lishment-joint-ventures

44 SławomirMatuszak,“WesternoilcompanieswillinvestinUkraine”,EastWeek,OSW,22/08/2012,http://www.osw.waw.pl/en/publikacje/eastweek/2012-08-22/western-oil-companies-will-invest-ukraine

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Thesitehasbeenestimatedtoholdupto35billionm3ofgas,andtherequiredinvestmentmayreach$10-12billion45.Inbothcases,thestartofproductiononanindustrialscalewouldcoincidewiththe endingofKiev’s gas contractswithRussia. If, by that time,UkrainealsomanagedtolaunchtheplannedLNGterminal,thecountry’srelationswithRussiacouldchangedramatically.

ThemosttangibleresultsinthisareacouldbeensuredthroughasignificantreductionofgasimportsfromRussia.Basedondatafrom late2012,Ukraine importedabout34billionm3ofRussiangas(downfromabout40billionm3in2011and36.5billionm3in2010); of this, 26billionm3waspurchasedunder theNaftogaz-Gazpromcontract.InviewofthecontinuinghighpricesUkrainehastopayRussiaforitsgas,Kievhasindicatedthatin2013Naf-togazmight reduce the levelofRussiangas importsdowntoaslittleas20billionm3.TheresultinggasshortageontheUkrainianenergymarketcouldthenbefilledthanksto the“reverse-flow”supplies from Europe (RWE)46. Such a significant reduction inRussiangasimports,however,wouldviolatetheprovisionsofthe2009contracts,whichsettheminimumannualpurchaselevelat33billionm347.Consequently,ensuringgoodrelationswithRus-sia–Ukraine’smajorgaspartner–isseenasatopprioritybythegovernmentinKiev.Inviewoftheabove,Ukraine’s“diversifica-tionpolicy”appearstobelessofaconsciousenergystrategy,andmoreofanegotiatingtacticaimedatcreatinganimpressionthatUkrainehasaccesstoalternativesourcesofgas,whichmightwinitsomeconcessionsfromMoscow.

45 SławomirMatuszak,“WesternoilcompanieswillinvestinUkraine”,op.cit.46 http://news.zn.ua/ECONOMICS/ukraina_esche_bolshe_sokratit_zakup-

ki_gaza_v_rossii_i_uvelichit_import_iz_evropy-112200.html47 The contract contains a “take or pay” clause; although the addenda

signed in2010effectivelyremovedtheprovisionsonthetypesandthesizeofpenaltiesforcontractualviolations,theydidnotrepealthe“takeorpay”clauseitself.

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iV. assessment of the current situation and ProsPects for the future

1. assessment of the current situation

Areturn to thepresidential system,coupledwitha stableanddisciplinedparliamentarymajority,hasgivenPresidentViktorYanukovych unprecedented political powers. Even PresidentKuchma,whoenjoyedequallyextensivepowersbutwasstalledbythe fragmentationofhispoliticalbase,couldnotmatchYa-nukovych’s capacity for implementing change. The concentra-tion of power and relative stability of theUkrainian economybetween2010-2011,createdidealconditionsfortheimplementa-tionofthedeepreformsproposedbythepresidentin2010.Ya-nukovych’spositionwasadditionally strengthenedby the factthathehadmanagedtocompletelymarginaliseUkraine’soppo-sitionforces48.Thiswasmadepossibleinlargepartbyeliminat-ingthemainleaderoftheUkrainianoppositionfromthepoliti-calscene,YuliaTymoshenko.Inaddition,theoppositionpartiesappeared to lack an evenbasic awareness ofhow to engage inseriouspolitics,not tomentionacomplete lackofaviableandcoherentpoliticalstrategyforthecountry,whichhadbeenre-placedbyaseriesofpopulistslogans.

Asaresult,afteryearsofpoliticaldeadlock,Yanukovych’spresi-dencycreatedanopportunity to implement real reforms in thecountry.Severalofthemhavenowbeencompletedwhileothersarestillinprogress.Amongthemwasthehighlyunpopularpen-sionreform,whichraisedthestatepensionage.In2010,aftertheinitialchaosthatfollowedtheglobaleconomiccrisis,thegovern-mentmanaged toget thepublicfinancesundercontrol.Severalgooddecisionshavealsobeenmaderegardingthediversificationof Ukraine’s gas supplies, although it could be argued that the

48 It should be noted that the situation in Ukraine is no longer comparabletothecircumstancesinRussiaorBelarus.

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government’s actions came rather late andhavenot as yetpro-ducedtangibleresults.Nonetheless,comparedwiththegovern-mentsthatfollowedtheOrangeRevolutionandfailedtocarryoutanyseriousreform(between2005and2010),Yanukovych’spresi-dencyhasbeenquitesuccessful.Itshouldbenoted,however,thatduringthisperiodViktorYanukovychwasbrieflyprimeminis-ter(2006-2007),whileYuliaTymoshenkoneverhadthechancetogovernaloneandlackedastableparliamentarybase.

On the other hand,most areas of life in Ukraine have seen nosignificant changeunderYanukovych,while inmanyother ar-easthesituationhasdeteriorated.Contrarytotheofficialpolicyof liberalisation andderegulation of the economy, protectionisttendenciesfavouringbigbusinesslinkedtothepresidentandhispolitical allieshave intensified (as canbe seen in theprivatisa-tionoftheUkrainianenergyandgassector).Atthesametime,thepressureonsmallandmedium-sizedbusinesseshasbeenrising,bothwithregardtothetaxburdenaswellas,forexample,wide-spreadextortionpractices(oftenblamedonYanukovych’spoliti-calallies).Thegovernmenthasfailedtoimplementeffectiveanti-corruptionmeasuresandtheinvestmentclimateinthecountryisasbadasduringthe2009economiccrisis.

On the whole therefore Yanukovych’s performance between2010 and 2012 leaves much to be desired. And although aftercomingtopower,thecurrentgovernmentdidimplementsomeunpopular but necessary changes, it is hard to determine theextenttowhichthesemeasuresweretheresultofagenuinede-sireforchange,ratherthanaresponsetoobjectiveandexternalfactors,includingtheeconomiccrisisandtheneedforfinancialassistance from the IMF. Similarly, it is hard to resist the im-pressionthattheeffortstowardsthediversificationofUkraine’sgassuppliersstemmedfromthefailureofYanukovych’spolicyonRussiaand theunsuccessfulattempts tonegotiationarevi-sionof the2009gascontracts. It is safe tosay thoughthat thegreatpotentialandthefavourableconditionsmentionedearlier,

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havenowbeenwasted.Theconsolidationofpoliticalpower,ini-tially seen as a necessary condition for the implementation ofrealreformsinthecountry,wassubsequentlyusedtograduallyremove Yanukovych’s opponents from the Ukrainian politicalscene.This,inturn,scupperedUkraine’schancetosignanAs-sociationAgreementwiththeEUin2011andbuildaDeepandComprehensiveFreeTradeArea.Nonetheless,thecompletionofnegotiationsonbothagreementsshouldbeseenasasignificantachievement of the Ukrainian negotiators and an unclaimedsuccessofYanukovych’spresidency.

Still,sincepoliticalpowerinUkraineiscurrentlyconcentratedinthehandsofthepresident,itishewhomusttakefullresponsibil-ity for theoutcomesofhispolicies.ViktorYanukovych,despitehismanyaccomplishments,turnedouttobeincapableofimple-mentingcomplex,systemicchange.Itisdifficulttosaywhetherthisstemsfromhisreluctancetobringaboutchangethatcouldupset his supporters in big business, orwhether he lacked thecouragetopushthroughunpopularreformswhenpublicsupportforthegovernmentbegantodrop.Thisquestionalsoremainsun-answeredaftertherecentparliamentaryelections.

2. Prospects for the future

The results of the parliamentary election held on 28 October2012suggestthatthereis littlechanceofsubstantialreformsinUkraine,at leastuntil2015,whenthecountrywillhold itsnextpresidentialelection.Despitesecuringanominalvictory,thepro-presidentialPartyofRegionsmaynonethelessstruggletomain-tainastablemajorityintheVerkhovnaRada.Thisissimplybe-causefindingloyalcoalitionpartnersisalwayseasierintimesofeconomicprosperitythanintimesofcrisis.

TheeconomicsituationinUkraineremainsverychallenging.Thecountry’sGDPfiguresforthesecondhalfof2012showedthefirstsigns of decline in years,while the preliminaryfigures for the

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wholeof2012showgrowthofjust0.2%-theworstperformanceoftheUkrainianeconomysincethe2009crisis49.

However,unlikein2010,whentheeconomybegantobounceback(having bottomed out during the crisis), the economic outlookfor2013,forbothUkraineandothermarkets,israthersubdued.ThisisparticularlyworryingforthegovernmentinKievbecauseUkraine’seconomicperformanceisdirectlylinkedtotheeconom-icconditionsonUkraine’smainexportmarkets.(Asmuchas60%ofUkraine’sGDPisgeneratedthroughexports).

Theseveryharsheconomicconditionsrequireaustereeconomicpolicies,withoutwhichUkrainecouldnotsecurefinancialassis-tancefromtheWestinthefuture.Suchmeasuresthough,coupledwiththeexpectedintensificationofradicalandpopulistdemandsof the Ukrainian opposition, could drastically reduce Yanuko-vych’schancesof re-election. It is therefore likely that thegov-ernmentwillmakeonlysmallchangesaddressingthemostpress-ingissuesandwillrefrainfromcarryoutlargereformsnecessarytosecureexternalfunding,suchasariseingaspricesoramoreflexibleexchangerate.Thegovernmentwillprobablypressaheadwith thegassectorreform,although theexactdirectionof thisreformisnotclearandwilllikelydependontheoutcomeofKiev’snegotiationswithMoscowonchanges to the2009gascontract.Workmightalsocontinueonthelawlegalisingthesaleandpur-chaseofagriculturalland,althoughtherecentdecisiontoextendthe current moratorium until 2016 suggests the possibility ofalongandfiercedebateinParliament,coincidingwithapresiden-tialcampaign.

It is unlikely that as we move closer to the 2015 presidentialelection, the government will take any unpopular decisions or

49 Arkadiusz Sarna, “Ukrainian economy on the verge of recession”, OSWCommentary, 21/11/2012,http://www.osw.waw.pl/en/publikacje/osw-com-mentary/2012-11-21/ukrainian-economy-verge-recession

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carryoutreformsadverselyaffectingindividualbusinessgroups.Therefore, small-scale changes are going to be directed atwin-ningovertheelectorateandtryingtomaintainsocialspendingabovethelevelofinflation.Thiswillundoubtedlyleadtoabiggerbudgetdeficitandhigherlevelsofpublicdebt,whichinitselfwillblockanymajorreforms.Overthenexttwoyears,Yanukovychisgoingtofocusonhisre-election,andinordertowinhewilltrytoavoidantagonisinglocaloligarchs.Thislastelementwillbepar-ticularlyimportantasdespitehisbesteffortshehassofarfailedtocreateabusinessempirethatwouldendhisrelianceoncam-paigndonationsfrombigbusiness50.Anyattackontheinterestsof theUkrainianoligarchs (whichcouldbecausedby thedeep-eningeconomiccrisisandtheneedforradicalactiontoincreasestaterevenues)wouldleaveYanukovychatRussia’smercy.Mos-cow’shelpwould likely comewith specific conditions attached,includingmembershipof theCustomsUnion,whichwouldendUkraine’scurrentpro-EUforeignpolicy.

Meanwhile, the victory of an opposition candidate in the 2015presidentialelectionwouldnotgivemuchhopeforchange.Atthemoment,theoppositionhasbeentakingafairlypopulistandre-actionarypositiontowardsthegovernment’sreformprogramme,and,forinstance,hasannouncedplanstoreversetherecentpen-sion reform51. So far,Ukraine’s oppositionpartieshavenotpro-posedanyalternativeideasabouthowthereformsshouldbecar-riedout.Althoughitmaybetooearlytotryandguesswhatwillhappenin2015,themostlikelyscenarioisthatthenextpresiden-tialcampaignwillfocusonthepersonaltraitsofthecandidates,and the oppositionwill call for a change of leadership,withoutacoherentplanforwhattodonext.Ithasbecomequitedifficult

50 SławomirMatuszak,“Oligarchicdemocracy”,OSWStudies,p.46.51 A statementbyOleksandrTurchynov, oneof the leadersof theBatkivsh-

chynaparty.Турчинов пообещал отменить пенсионную реформу и лик-видировать налоговую милицию, Українські Новини, 28.07.2012, http://ukranews.com/ru/news/ukraine/2012/07/28/75656

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toidentifyanyoppositionleaderwhocouldofferreal(orevenil-lusory)hopeforsystemicreforminUkraine(aswasthecasewithViktorYushchenko).

Meanwhile, radical reforms in Ukraine are essential, as KievlagseverfurtherbehindtherestofEurope(currentlyonlyMol-dova and Kosovo are poorer). Immediately after independence,Ukraine’sGDP per capitawas higher than in Bulgaria and 40%lowerthaninPoland;in2011Poland’sGDPpercapitawasalready3.7timeshigherthaninUkraine,whileBulgaria’sfigureswere2timeshigher–andthereisnoindicationthatthistrendislikelytochange52.Theinabilitytoimplementsystemicchangeiswide-spreadacrosstheCIS.ItseemsthattheUkrainianpoliticalelite(boththegovernmentandtheopposition)arenotabletosetthem-selves apart from their CIS partners.However,Ukraine is cur-rentlyinamuchworsesituationthan,say,RussiaorAzerbaijan,wherethelackofsufficientreformscanbeoffsetbyhighrevenuesfromoilandgasexports.Allof theabovesuggests thatwhenitcomes to modernisation and economic development, Ukraine’soutlook for the comingyears remains fairlybleak.The countryrunsaseriousriskofbeing leftbehind,notonly incomparisonwithotherCentralandEasternEuropeanstatesbutalsowithitsdirectneighbours,suchasRussia.

sławomir matuszaK, arKadiusz sarna

52 In2011,Ukraine’sGDPper capitawas$3615.InBulgariaandPolandthefigurestoodat$7158and$13463respectively.Source:WorldDevelopmentIndica-tors & Global Development Finance,World Bank, http://databank.world-bank.org/ddp/home.do

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