Why Ukraine Struggles to Reform
June 22, 2015
Listening to the proclamations of Ukraine’s political leaders, one might think the country is in the midst of rapid institutional reform. The country’s president, Petro Poroshenko, declared on June 4 in his annual message to parliament that “reforms are the key word…The countdown of the period of reforms has started…Reforms are not yet at the finish, but not already at the start….We are building the foundation for reforms.”
No one doubts that the country’s institutions—political, economic, bureaucratic—desperately need restructuring and improvement. Even before Russian forces annexed Crimea and invaded the eastern Donbass region, the country stood on the brink of bankruptcy. After a painful currency devaluation, it is now the poorest in Europe. It is also the most corrupt, according to Transparency International’s yearly survey. The parliament is controlled by oligarchs and many sections of the government bureaucracy function like a mafia. Poverty and backwardness have been the inevitable result.
The country’s new government came to power after the pro-Europe Maidan protest movement threw out former President Viktor Yanukovych and his band of hangers-on. President Poroshenko and Prime Minister Yatsenyuk, say they want to improve how the country is governed, and they are no doubt at least partially sincere. Over the past year, the country has taken important steps forward by righting its budget and cleaning up the energy sector, for example. But progress has been halting and uneven, and it has usually come despite the political leadership rather than because of it.
Ukrainians voted for a comparatively reformist parliament, but most of the positive changes that have occurred so far have taken place in spite of parliament, where most MPs are “bought” by oligarchs and face few incentives to respond to public demands. So far, most pressure for change has come from international donors and civil society groups, while parliament has backed the corrupt status quo. Unless that begins to change—unless Ukraine can actually construct a democracy, in the sense that people’s votes affect government policy—the prospect of clean, effective, responsive government is unlikely.
Four Key Accomplishments
Though Ukrainians and their foreign partners regularly express dissatisfaction with the pace of change, the reality is that Ukraine’s government has taken important strides over the past year. The changes that have occurred are particularly remarkable when compared to the rank ineptitude of the previous government. Given the war, the hundreds of thousands of internally displaced people, and the economic collapse, the government deserves credit for four key accomplishments.
First, the government attracted talented people into government. The current array of ministers and deputy ministers includes a large number of people who came from the private sector and have never served in government before. Unlike previous governments, in which most ministers were longstanding participants in corruption rackets, the government and presidential administration now has several dozen talented top officials left well-paying private sector jobs to take ministerial salaries worth only several hundred dollars per month. They are in office not for financial reward, but because they want to rebuild their country.
It is not only the finance ministry and the central bank—traditional outposts of technocratic expertise—that are now run by officials with private sector backgrounds. The Economy Ministry, the Infrastructure Ministry, the Energy Ministry plus an array of other institutions are now managed by from officials outside of the old political caste. This bodes well for the government’s ability to stave off the return of the bureaucracy’s most brazen corruption schemes.
Second, the government has taken serious steps to clean up Ukraine’s energy industry. For years, oligarchs and criminal bands have siphoned billions of dollars from the state budget by taking advantage of a corrupt subsidy system. Ukraine bought gas at high prices, primarily from Russia. But the sale of gas within Ukraine was heavily subsidized, ostensibly to protect consumers. The real beneficiaries, however, were oligarchs and their patronage networks, who grew rich by purchasing gas at subsidized prices and selling it abroad at market rates. Such schemes bilked the budget and enriched criminals, many of whom used their newfound wealth to buy political influence. Pressured by the IMF, however, Ukraine has now hiked domestic gas prices, and within two years prices will reach market rates. That will remove a major source of corruption and cut off the oligarchs from a key revenue stream.
Third, the National Bank of Ukraine is taking serious steps to clean up the country’s banking system. For years, oligarchs and regional business elites had created banks that did little actual banking business. Instead, such firms were used to launder money abroad and (again) to swindle the government. Since the Maidan, however, dozens of such “pocket banks” have been closed. The government also passed tough legislation forcing every bank to declare its ultimate owner, which will prevent oligarchs from hiding behind corporate anonymity.
Fourth, again as the result of a deal with the IMF, Ukraine’s government is finally grappling with its persistent government budget deficit and runaway debt. Public spending is being cut and tax loopholes closed in an attempt to close the country’s yawning fiscal gap. The IMF has also backed the government’s attempts to restructure the gargantuan debt run up by the previous government. Closing the budget deficit is particularly important because the deficit had long been filled by printing money, leading to skyrocketing inflation. That scared off business investment and was particularly harmful for Ukrainians who lived on fixed incomes, such as pensioners, who unlike wealthier Ukrainians had limited ability to hold funds in foreign currency. Now inflation has slowed, and the economy may start growing again later this year.
But Are the Reforms Sustainable?
Despite these very real changes, the outlook for continued reforms is mixed at best. The reason is that Ukrainians still have very few levers of power over their own government. Officials know this, so they make little effort to act in the public interest. As a result, Ukrainian bureaucrats spare no effort in devising corruption schemes, but devote far less attention to running the country’s health and education systems.
The reforms that have been implemented over the past year show that some change is possible even within the current system. But the last year has been exceptional for two reasons. First, the incredible wave of civil society activity that drove the Maidan and that helped to sustain Ukraine’s defense efforts placed immense pressure on bureaucrats and politicians to shape up. Civic activism has left its mark, and Ukrainians continue to devote intense efforts to organizations designed to expose corruption and to improve education. But civil society cannot remain so mobilized forever. Many Ukrainians have been working ‘two shifts’ since the Maidan, one at their day job, another building up civil society groups. Their successes so far have been tremendous, but such efforts can only take Ukraine so far.
The second reason that the past year is exceptional is the influence of Ukraine’s foreign donors. The IMF, for example, is only lending to Ukraine in exchange for cuts to gas subsidies that fund oligarchs. European countries are involved in an array of technical-assistance and civil society projects, across every sphere of government and society. The US government opened a court case against oligarch Dmytro Firtash, and the US ambassador publicly intervened against another oligarch, Igor Kolomoisky, who was resisting government efforts to wrest back control over a state-owned oil company that Kolomoisky had hijacked.
At the very time that Ukrainian society placed unprecedented pressure on the government from below, Ukraine’s foreign donors pushed for complementary changes from the top. This double squeeze has scored some real successes, but it is not a sustainable long-term strategy.
What Ukraine Needs
If Ukraine is to cut corruption, improve the effectiveness of its bureaucracy, and jettison its current feudal structure and become a modern European state, it needs to actually establish an effective democracy. Ukraine now holds free and fair elections, but the structure of its political system means that these elections have limited relation to government policy or bureaucratic decision making. There are three main problems—oligarchs, media, and election funding—none of which the Ukrainian government has yet seriously addressed.
Since independence in 1991, the country’s most powerful figures have neither served in parliament, nor in government. The oligarchs—most of whom accumulated their wealth by stealing funds from the state—consolidated power bases in different regions and bought representation in central government. Today the main oligarchs are Rinat Akhmetov, Ukraine’s richest man, whose powerbase is the eastern Donbass region; Igor Kolomoisky, a vehemently anti-Russian businessman from the central city of Dnipropetrovsk; and gas tycoon Dmytro Firtash. (Ukraine’s president, Petro Poroshenko is also a rich entrepreneur who owns a TV channel, though he differs somewhat because his fortune is not primarily from theft but from the reasonably competitive chocolate business.)
Until the power of the oligarchs are curbed—until they are stripped of their TV channels, dispossessed of their voting blocs in parliament, and forced to obey the law—Ukrainians will struggle to exercise control over the government via the ballot box. Today, elections have only a loose effect on government policy, because oligarchs buy representatives in many political parties. The process is sufficiently transparent that it is discussed openly in Ukrainian media. A recent analysis by Kristina Berdinsikh, a leading journalist, found that Firtash had representatives in four different parliamentary parties, while Kolomoisky had proxies in five parties. In many ways, the oligarchs’ cross-party networks of MPs exercise more real influence on the political process than do political parties themselves. Under the current system, no matter which party you vote for, you’ll end up with representatives of Kolomoisky and Firtash.
Unless that changes—unless Ukraine manages to develop real political parties, with coherent ideologies, established support networks, and some measure of voter loyalty—Ukraine’s democracy will struggle to take shape, regardless of how many elections are held. Toward this goal, reform-minded activists and intellectuals in Kyiv are pushing for publicly financed elections and a BBC-style public broadcaster that could compete with the existing major TV channels, all of which are owned by oligarchs.
In the short term, debate in Ukraine is consumed by efforts to cut back the bureaucracy; to eliminate regulatory agencies, many of which function like protection rackets; to reforming the police force; and decentralizing government. All of these reforms are desperately needed.
In the short run, the only hope for success is to continue the ‘double squeeze’ on Ukrainian officialdom, coordinating the demands of civil society and foreign donors regarding efforts such as reducing corruption and cutting graft.
But Ukrainians and their friends abroad must also realize that they need a sustainable long-term strategy for holding government officials to account. In functional democracies, the technique is to keep political parties responsive by subjecting them to regular elections. In Ukraine, which lacks functional political parties, this mechanism does not work. Until Ukraine develops real political parties in place of today’s oligarch coalitions, success in reform will be sporadic at best.