The key to Ukraine’s European integration: Relaunch reforms

WASHINGTON — The EU’s ambitious Eastern Partnership in the former Soviet republics looks increasingly in jeopardy if Ukraine, by far the largest of the members, does not sign an Association Agreement and Deep and Comprehensive Free Trade Agreement (DCFTA) at the Vilnius summit in November.

The EU’s two key benchmarks for signing the agreement are an end to selective use of justice, and a resumption of economic, legal and political reforms.

In addition to outlining the reforms to be carried out by Ukraine, the European Council, the EU’s highest body, said a key factor in whether the agreement will move forward is the continued imprisonment of Yulia Tymoshenko, the former prime minister.

In 2011, a Ukrainian court sentenced Tymoshenko to seven years in prison after she was found guilty of abuse of office when brokering a 2009 gas deal with Russia. The European Union and other international organizations see the conviction as "justice being applied selectively under political motivation.” The EU has shelved the agreement with Ukraine over the issue.

A compromise to save faces on both sides was proposed, but not agreed to, in which Tymoshenko would be permitted to travel to Germany for medical treatment.

As the International Monetary Fund confirmed this month, no new agreement is being developed with Ukraine.

In 2010, Ukrainian Prime Minister Nikolai Azarov pushed through reforms at the insistence of the IMF. These reforms included programs that, for a short period, brought about successful stabilization. However, a lack of political will to complete the program meant structural reforms would not be implemented.

The IMF complained that the Azarov government’s reforms had ground to a halt by early 2011, meaning that the assistance program and aid from the IMF were frozen.

This was not unusual. Each IMF assistance program has followed the same pattern, regardless of who is in power. Ukrainian governments of all political persuasions have been reluctant to move from stabilization to structural reforms.

The conditions for undertaking reforms were good in 2010 when Viktor Yanukovych was elected President. Particularly important to the IMF’s $16.5 billion aid program was increasing household utility prices to reduce state subsidies. At the time, Ukrainians were paying only 20 percent of the cost of imported gas.

In August 2010, household utility prices increased by 50 percent, but — as with every previous government — Prime Minister Azarov balked at introducing further price increases ahead of the 2012 parliamentary elections.

Populist election promises and generous pension rights inherited from the Soviet era meant that these benefits consumed nearly 20 percent of the Ukrainian budget, one of highest public benefit obligations in the world.

In summer 2011, the government approved another unpopular IMF demand by increasing the pension age for women to 60 from 55; this change would be phased in by twice per annum over 10 years. Women were required to make an additional 10 years of pension contributions to be eligible for the entitlement. The qualification period for women was raised to 30 years from 25. Pension age for male civil servants was raised to 62 from 60 and the pension qualification period to 35 from 25 years.

Other reforms undertaken by the first Azarov government included a new tax code that reduced the number of taxes from 29 to 18 and local taxes from 14 to five. Although corporate income tax rates were reduced to 21 percent and 16 per cent by 2014, the new tax code pushed many small and medium-sized businesses into the shadow economy, or closure.

In 2010, a new public procurement law was adopted to make procedures for public purchases non-discriminatory and more transparent. The law was praised by international organizations. Unfortunately, since its adoption, more than 20 amendments have increased the temptation to make the procurement processes less transparent.

Ukraine’s high corruption levels are a systematic challenge to the country. Transparency International, a Germany-based organization that combats corruption and promotes transparency in government, has reported high levels of corruption under succeeding Ukrainian regimes.

A breakthrough came with the launch of reforms to the gas market. In April 2012 amendments to the February 2007 law on pipelines removed the ban on restructuring Naftohaz Ukrayiny, the national oil and gas company, into independent companies; in June 2012, two subsidiaries were separated.

In April 2013, the government introduced legislation to privatize the gas pipelines with the goal of creating a Russian-Ukrainian gas consortium, although the Ukrainian authorities continue to deny this. Such a consortium would infringe upon the European Energy Charter to which Ukraine, but not Russia, is a signatory.

The business climate continues to remain poor, making Ukraine unattractive to foreign investors who complain about corruption, bureaucracy, and the complex and selective nature of the judicial system.

The Ukrainian government needs to focus greater attention on improving the international image of the country. Seriously implementing a campaign against corruption would be one way to begin. Such measures have been promised but have yet to be adopted in any meaningful way.

Three steps are important for Ukraine in the upcoming months:

First, the Ukrainian government should compromise with the IMF over conditions that would enable the signing of a new IMF agreement to increase Ukraine’s attractiveness to foreign investors.

Second, Ukrainian authorities should strike a deal with Tymoshenko enabling her to travel to Germany, which would open the way for the EU to sign an Association Agreement.

Third, the government should use a new IMF agreement and DCFTA to introduce long overdue structural reforms to its economy and tax code.

Implementing the reforms would move post-Soviet Ukraine from a crossroads into the European Union of states, ensure its economic growth and increase its political stability. This is an opportunity neither Ukraine nor Europe can afford to miss.

Taras Kuzio is a non-resident fellow at the Center for Transatlantic Relations, School of Advanced International Relations, Johns Hopkins University in Washington. His book, "Commissars to Oligarchs: A Contemporary History of Ukraine," is being published by the University of Toronto Press later this year.