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Forecast for Ukraine: Stormy with Rays of Sunshine

19 Feb 2015
Tymofiy Mylovanov
Ukrainian President Poroshenko. Image Credit: Flickr (Петро Порошенко) Creative Commons.

A year after the Maidan revolution of 2014, Ukraine is at a critical juncture.

The conflict with Russia has been escalating. Estimates of casualties exceed 5,000, with some reports putting the number at 50,000. The cost of the war in the East is anywhere between US$5-10 million. And despite the ceasefire signed in Minsk on 12 February, fighting on the ground continues.

The Ukrainian currency Hryvna has lost two-thirds of its value in a year and continues to fall.

So far, Ukraine has met its obligations to foreign creditors, but the reserves of the National Bank of Ukraine have been almost depleted. The issue of pervasive corruption has not been addressed. Unfortunately, the new government appointed in early December has little to show so far by way of successful structural reforms.

February, however, has brought some glimmers of hope.

The International Monetary Fund has just announced a US$17.5 billion financial support package to stabilise the Ukrainian economy. The newly appointed General Prosecutor of Ukraine has asked to remove the immunity of several judges in a key court in Kyiv accused of illegal rulings. And despite the problems in implementation, at least a new peace agreement attempting to resolve the crisis in the East was actually signed in Minsk.

Yes, the IMF support is spread out over four years and might not be enough to instil confidence into foreign investors and domestic business and consumers. The new peace agreement is likely to follow the fate of an earlier cease-fire agreement and fail. And the General Prosecutor’s action could be a sign of an internal political fight over power rather than a genuine attempt to clamp down on corruption.

But, from our daily experience of interacting with policy makers in Kyiv, it does seems clear that Ukraine is undertaking some fundamental steps to become a democratic state.

Strength born out of crisis

The conflict in the East and annexation of Crimea has solidified the civil society in their desire to reform the country.

Ukraine has a new president, a new parliament and a new government, which includes many new faces.

The parliament consists of eight factions and most of the parties represented in the Ukrainian parliament did not exist a year ago. Several key ministers in the new Ukrainian government are technocrats, including foreign nationals who were granted Ukrainian citizenship: Finance Minister Natalie Jaresko, Health Minister Alexandr Kvitashvili, and Economy Minister Aivaras Abromavičius.

These are drastic changes. Take, for instance, Minister Jaresko. She was born in Chicago in 1965, raised and educated in the US and received a master’s degree in public policy from the John F. Kennedy School of Government in 1989. Jaresko moved to Ukraine in 1992 and had been an investment banker until her appointment to the Ukrainian government in December 2014. Never before has the Ukrainian government had a Harvard-educated finance minister with successful industry experience.

Gradual not radical change

The situation with the new government and the parliament, however, is neither black nor white. “There is this tendency to either see the second coming of Christ or the apocalypse when it comes to change in Ukraine,” says Samuel Charap, senior fellow for Russia and Eurasia at the International Institute for Strategic Studies. “But the reality up till now is that they have always muddled through.”

Alongside the shiny new technocrats there are also the old timers, most notably in the jobs of president and prime minister. As John Herbst, a former US ambassador to Ukraine puts it, the products of the “old system … have been slow to move on necessary reforms … [and] are supported in part by Ukraine’s super-wealthy oligarchs who stand to lose special privileges — such as protection for their businesses, public finance and immunity from prosecution — in a reformed system.“ It will take time for them and other veteran elites to adapt or be replaced through political process.

At the same time, the new Ukrainian leadership can – and should – be credited with a number of achievements since it came to power, including:

  1. Fast and efficient renewal of cooperation with the IMF and other Western donors and commitment to structural reforms.
  2. The formulation of an anti-corruption strategy that includes transparency measures and an independent bureau tasked with “cleaning up the garbage” (the Ukrainian equivalent of airing dirty laundry). What is particularly encouraging is that the applicants for the top job at the bureau include a number of highly respected and independent individuals with strong track records of fighting corruption.
  3. Deregulation that includes – among the most important measures – limiting the investigative powers of the Public Prosecutor’s office in order to curb that office’s ability to harass business and individuals.
  4. Signing the EU Association Agreement, which provides for political association and free trade between Ukraine and the EU.

Structural reforms key

Ukraine today is still vulnerable. As we’ve outlined, there are structural reforms taking place but are there enough of them and are they taking place fast enough?

It is also the case that every success – and every weakness – of the Ukrainian government will be met by increased pressure from Russia.

In August 2014, Ukraine reclaimed territory back from the separatists only to be confronted by what the rest of the world identified as a direct Russian invasion (although the Kremlin denied this). In January 2015, as world markets worried about Ukraine’s solvency, Russia threatened an early recall of its US$3 billion loan. And then, the following week, more Russian army units were observed crossing the border into Ukraine, securing additional territorial gains for the separatists.

Ukraine desperately needs help to survive the next several months. It needs time for the civil society to mature and for its governance structures to be cleaned up. When structural reforms get underway, the weather will become less stormy.

Tymofiy Mylovanov is an assistant professor of economics at the University of Pittsburgh. This article was co-written with Olena Bilan, Dragon Capital and VoxUkraine. The authors would also like to thank Olena Shkarpova and the editorial board of VoxUkraine for help in developing this piece. This article was originally published in The Conversation on 17 February 2015. It is republished with permission.