Ukraine: Corruption risks soar as Western influence subsides

Ukraine is a large, fertile and populous country, of the kind that tends to attract foreign investment. Scratching beneath the surface, however, suggests that corruption, far from being cured by the country’s revolution of four years ago, is imperilling political stability and poses a serious risk to business operations.

New boss

President Petro Poroshenko was the chief beneficiary of Ukraine’s Euromaidan revolution of 2014. According to the Western narrative of events, in that year a grassroots movement of liberal protesters used peaceful means to force from office Viktor Yanukovych, labelled the world’s most corrupt leader by London-based NGO Transparency International, bringing about a shift to liberal democracy.

In response, Russia annexed Crimea and supported insurgents in eastern Ukraine, in the process shooting down a Malaysian airliner that, in theory, had every right to overfly an active warzone in which anti-aircraft munitions were in constant use.

A more cynical analysis would be that the democratically elected Yanukovych’s great mistake was not corruption but rather his decision to sign an association agreement with Russia, rather than with the European Union. This is what triggered the Euromaidan protests, named after the square on which they began. Thousands of young pro-E.U. demonstrators camped in Kiev’s main square through the harsh winter until the government fled, in what many supporters of the former government view as a movement orchestrated by the CIA and other Western intelligence agencies.

With the dust having now settled on the civil war, which crippled Ukraine’s economy, Western investors are being encouraged to return. By some measures, Ukraine has seen significant successes in the years since; the budget deficit remains below 3 per cent of GDP while gold and foreign currency reserves have recovered to USD18 billion, equal to four months of imports. Politically too, the government has made headway in securing major changes to the healthcare system, cutting long-term costs.

Yet Ukraine’s economic progress has stalled. In 2007, GDP per capita was 160 per cent larger than neighbouring Moldova. Now it is only 8 per cent larger, and Ukraine is the second-poorest country in Europe after its western neighbour. Moreover, the government’s refusal to adhere to IMF conditions – particularly as regards corruption and privatisation – has jeopardised a crucial economic lifeline.

IMF isolation

Ukraine is one of the largest borrowers in the IMF. In March 2015, the U.S.-based fund approved a USD17.5 billion rescue package for Ukraine, which at that time was in the midst of its destructive civil conflict. The IMF demanded strict conditions for the release of the funds, which were due to be transferred over a four-year period. These included large-scale privatisation and the creation of an anti-corruption court.

However, the IMF has been unimpressed by Ukraine’s efforts thus far, and it held back a tranche of the funds in 2017. In order to ‘unlock’ the rest of the loan, the IMF demanded that Ukraine legalise the private sales of agricultural land, adopt a law on privatisation, make major changes to pensions, adjust gas prices to market standards, and most importantly, set up an anti-corruption court compliant with the lender’s standards. In January 2018, the Ukrainian government passed a privatisation law, but has done little to tackle the other key points.

Backsliding

Rampant corruption, and an absence of any political will to tackle it, has weighed heavily on economic recovery.

In December 2017, under pressure from the IMF, Poroshenko submitted a draft law on creating a court to prosecute corruption cases. However, the IMF and the World Bank both criticised the draft, saying the proposal was not in line with recommendations made by the Venice Commission, a legal advisory body of the Council of Europe (the European human rights organisation which includes European Union members and 19 other countries).

Specifically, the Venice Commission recommended that international organisations and donors had a decisive role in the selection of judges; Poroshenko’s law affords them only an advisory role. The jurisdiction of the proposed anti-corruption court also does not include all the crimes under the investigative jurisdiction of Nabu, Ukraine’s anti-corruption law enforcement agency.

Opposition activists claim that Poroshenko’s proposals fall short of the Venice Commission recommendations because members of the political elite are terrified that they could be prosecuted. They claim that the government’s recent criticisms and investigations of Nabu prove its determination to protect the elite.

Nabu is currently investigating more than 450 corruption cases, many of them involving high-profile figures and entities. This includes an investigation into the prosecutor general, Yuriy Lutsenko. Shortly after the agency announced its probe into Lutsenko’s finances, the prosecutor general summoned Nabu agents for questioning over alleged bribery.

Anti-corruption NGOs also claim that they have been targeted by government bodies. In March 2017, Poroshenko signed a law requiring NGOs and journalists involved in anti-corruption efforts to make the same asset disclosures as politicians, a move that was widely criticised by domestic and international NGOs. Under this law, the national security service has brought criminal charges against one of the leading anti-corruption activist groups, AntAC. Its chairman is facing a five-year prison sentence for punching a video blogger who he claims had harassed him on multiple occasions.

A saviour in Saakashvili

Around 80 per cent of Ukrainians believe that the government’s anti-corruption efforts have been unsuccessful. Large protests are occurring more and more frequently, particularly in the capital Kiev. While nowhere near the scale of the revolutionary rallies in 2014, anti-corruption demonstrations are the largest they have been for three years. More than 300 cars travelled to the house of Yuriy Lutsenko to protest against his interrogation of Nabu agents.

The opposition politician Mikheil Saakashvili has capitalised on the concerns of citizens desperate to see change. A former prime minister of Georgia, Saakashvili was appointed governor of the south-western oblast of Odessa in May 2015 by his then-ally Poroshenko. However, he resigned in November 2016, saying that Poroshenko himself personally supported corruption in Odessa, and quickly set up an anti-corruption movement that he later registered as a party.

Poroshenko was furious and stripped Saakashvili of his Ukrainian citizenship. Undeterred, Saakashvili built a protest movement, which has since become a permanent camp in the centre of the capital Kiev. When police attempted to detain Saakashvili in December 2017, their vehicle was surrounded by thousands of protesters who managed to free him and hide him in the protest camp for several days.

Saakashvili is not as popular in Ukraine as many Western media outlets believe, and the scale of pro-Saakashvili protests are relatively manageable in Ukrainian terms. However, the government risks inflaming anger by continuing to target him.

On 12 February, Saakashvili was detained and deported to Poland after losing a court appeal against his extradition to Georgia, where he faces multiple charges of abuse of power. This will probably spark mass protests in Kiev and weigh heavily on the government’s poor popularity ratings, a year ahead of parliamentary elections.

Power struggle

An ongoing conflict with separatist militants in the east is another drain on the economy, and nationalists fighting to re-unite the country have made matters worse. In February 2017, opposition politicians and veterans of the civil war launched a six-week long unsanctioned blockade of the Donbas region, home to the self-declared ‘republics’ of Donetsk and Luhansk.

The government originally criticised the blockade but did not intervene, fearing a backlash from nationalists and noting that the blockade enjoyed popular support. In fact, in March 2017, the government approved a full freight blockade on territories not controlled by Kiev. The separatist authorities quickly reacted by ‘nationalising’ more than 40 industrial companies under their de facto jurisdiction.

The blockade has focused particularly on stopping rail shipments of anthracite coal from territories currently controlled by separatists. The nationalist activists complained, saying the sale of the material was funding anti-government militias supported by Russia.

Ironically, however, Ukraine has doubled its imports of Russian coal since the blockade began. Previously, eastern coal plants had provided 9 million of the 24 million tonnes burned every year in Ukraine.

The central bank assessed that, in 2017, the blockade increased Ukraine’s trade deficit by USD1.8 billion – equal to 2 per cent of GDP. Despite this, in January 2018, the parliament passed a bill aimed at regaining control over the separatist territories and reaffirming the blockade as a legitimate tactic to achieve this aim.

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