A mixed picture on economic reforms in #Ukraine

| October 15, 2019

Upon his election as the new President of Ukraine, Volodymyr Zelensky (pictured) sent emissaries to Brussels to reassure his western allies that he was committed to continuing the process of economic reform initiated by his predecessor. Since then, the former comedian’s Servant of the People party has won a crushing victory in the Parliamentary Elections, while his Prime Minister, Oleksiy Honcharuk, has committed the government to achieving a minimum 40% economic growth and the creation of one million new jobs over the next 5 years, writes Vladimir Krulj, a Fellow of the Institute of Economic Affairs.

Elected on a populist platform, Zelensky ran on a manifesto devoid of any real substance. He has since come face-to-face with the formidable practical challenges of running a reform-focused government. So, how is he doing?

Often referred to as the “bread basket of Europe”, Ukraine is one of the world’s largest grain exporters. However, with 32 million hectares of arable land it should be much more of an agricultural powerhouse than it is. Ukraine’s agricultural sector is characterized by massive inefficiency and the huge amount of farmland currently sitting unused. Both of which stem from a longstanding ban on the sale of farmland.

Designed to protect small-scale farmers from the pressure to sell all, or parts, of their property, the ban means farmers can’t access the finance they need to make best use of their land. The government has announced its intention to remove this prohibition, a move which should attract billions of dollars of foreign investment by establishing an open market for agricultural land.

Ukraine’s network of state-owned enterprises is a legacy of the soviet-era which continues to stifle economic growth. Marked by operational inefficiencies, many of these businesses rely on government financial support. Recognizing the scale of this issue, Zelensky’s government has announced its intention to pursue a large-scale privatization program.

The program is likely to include some of Ukraine’s largest banks. The process of cleaning up the banks’ balance sheets and re-organizing their senior management teams is complex, but the sooner they are privatized, the sooner Ukraine will be able to attract international capital and provide the lending Ukrainian citizens and businesses so desperately need.

Real progress has also been made reforming Ukraine’s energy sector. In July, Ukraine introduced the long-awaited liberalized electricity market, a move that enables the country to synchronize its energy grid with the EU and facilitate cross-border trade between the two blocs. The liberalized market is crucial to Ukraine’s energy security and independence, and it will also increase domestic competition and help attract the foreign investment required to upgrade the country’s decaying energy infrastructure.

However, the energy industry is in urgent need of further reform. Top of the priority list is the need to unbundle Naftogaz, the vertically integrated, state-owned, natural gas monopoly. Separating its transmission from production and supply operations will introduce much needed competition in the sector and help maintain Ukraine’s role as a gas transit country.

Clearly then, the first few months of the Zelensky Government have displayed an active approach to ongoing economic reforms. There are, however, some dark clouds gathering around the undue influence of billionaire oligarch, Ihor Kolomoisky.

The first warning signs came with appointments to Zelensky’s private office and key government and regulatory posts. It seems more than a coincidence that former employees, advisors and allies of the billionaire Oligarch have been parachuted into such positions.

These concerns have been compounded by the conciliatory moves made by President Zelensky and his allies in relation to PrivatBank. The bank, previously owned by Kolomoisky, was on the verge of collapse in 2016 when a $5 billion “black hole” was discovered in its balance sheet. The bank was subsequently nationalized, with the rescue bill picked-up by Ukrainian taxpayers. Kolomoisky, who fled the country, is now demanding that the bank should be returned to him, or he should be compensated for its nationalization. The IMF has already warned Ukraine that any moves in this direction will compromise its chances of accessing much needed international finance, including a new loan program worth up to $6 billion USD.

The latest concerns surround the decision to open the country up to direct electricity imports from the Russian Federation. The decision – rushed through the Ukrainian parliament by a key Kolomoisky ally without any public debate – will undermine domestic electricity producers and reduce their ability to re-invest and modernize Ukraine’s creaking electricity infrastructure. It will also increase Ukraine’s energy dependence on Russia and poses a real security threat to the country.

Apart from Russia, the most obvious beneficiaries of this decision are the owners of energy intensive businesses – such as the ferroalloy plants owned by Kolomoisky – who are likely to benefit from a significant reduction in the price of electricity.

At a minimum, the “optics” of these events do not look good for a President committed to governing on behalf of the people of Ukraine. For all his talk of representing a break from the past, the evidence points to President Zelensky continuing a long-standing Ukrainian tradition of Presidents who have unhealthy links to powerful oligarchs.

For the sake of Ukraine and its relations with the West, President Zelensky needs to confirm that it is his, and not Kolomoisky’s reform agenda that he is implementing.

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Category: A Frontpage, EU, Ukraine

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