Monday, September 29, 2014

Imploding DNR/LNR: Is it good for Ukraine?

By the Editorial Board of VoxUkraine
The intensity of the fighting in the East of Ukraine has subsided and the separatists are trying to establish parallel institutions in the territories under their control. The rebels intend to print their local currency, collect taxes, manage educational and healthcare institutions, nationalize or re-privatize enterprises, etc.
  1. Will the rebels succeed in building their own institutions and can these institutions become better than those of Ukraine?
  2. Is it in the interest of Ukraine to support or undermine such institution building in the occupied Donbas?

Friday, September 26, 2014

How to fight corruption: Time for qui tam laws?

By Keith Darden (American University, USA)
Corruption is the main impediment to Ukraine’s prosperity and long-term security.  If Ukraine had an effective, efficient and less corrupt state, it would enjoy legitimacy, investment, and, as a country of 46 million people, would face few threats—either foreign or domestic—to its sovereignty and territorial integrity.  
How can Ukraine become less corrupt?  One solution is lustration, or a purge of corrupt officials through massive anti-corruption campaigns.  To the extent that corruption is caused by the personal characteristics of officials, then firing or prosecuting corrupt officials and replacing them with people of integrity and ability is part of the solution.  But what if the problem is not simply bad people, but bad incentives and institutions?  Or if it is not so easy to select “good” honest and capable people to staff the bureaucracy?  If this is the case, then lustration will not solve the problem.  And the history of massive anti-corruption campaigns and lustration efforts is not terribly promising as a means to root out corruption.  Prosecution is often selective—targeting one’s political enemies rather than treating all potential cases equally—and such campaigns often devolve quickly into politically motivated efforts to redistribute the spoils of the state.  Purges of this kind may result in a turnover in personnel as the loyal members of one political faction are replaced with those of another, but not a change in the corrupt nature of the system.  Corruption remains.

Wednesday, September 24, 2014

Summary of the Ukrainian struggle for lustration

By Agnieszka Piasecka (The Open Dialog Foundation)
The origin of term “lustration” comes from Czech Republic that had implemented lustration in 1991, weeks after the last Soviet troops left the country. It is often understood as vetting but there is a difference. Vetting – screening – can (and should be) be used in every state for verification of candidates for public service. Lustration is also a form of vetting, but its main purpose is to block those whose influence may be dangerous for the newly emerging democracy.

Monday, September 22, 2014

Can Ukraine play MAD with Russia?

By the Editorial Board of VoxUkraine

The stand-off between Russia and the West is increasingly reminiscent of Cold War times. Russia’s annexation of Crimea, giving weapons to separatists in the East of Ukraine, shooting down MH17, and most recently the direct invasion of Ukraine by Russian troops has made Russia an isolated, pariah-like state. In all likelihood, this confrontation is likely to continue for a while—at least until Mr. Putin steps down—so Ukraine should prepare for a long period of tensions with Russia with a significant risk of escalation into an open war. As military assistance from NATO will likely remain limited and the West appears unwilling to inflict any meaningful economic damage on Russia unless and until an EU/NATO country is attacked, Ukraine will have to predominantly face this confrontation alone.

Obviously, the prospect of an open Russo-Ukrainian war is terrifying not only for Ukraine but also for Russia since the death toll is going to be huge. Russia has every tool to stop escalation and normalize the relationship between countries if it wishes to do so. Since Ukraine is a “little brother” in this relationship, its ability to stop the “big brother” from bullying is more limited. However, the experience of the Cold War teaches us that there are a number of policies Ukraine could follow to make the prospect of a war so costly for Russia that it will not invade Ukraine openly and en masse.

Saturday, September 20, 2014

By  Irina Paliashvili (RULG)

16 September 2014 was a dramatic day in Ukraine’s history: the Rada (Ukrainian Parliament) in a closed, secret vote adopts the Law on special status of Donetsk and Luhansk separatist regions, providing for local self-rule and amnesty to the separatists-terrorists, who in turn are not amused and respond with the announcement that they have created the joint army of “Novorossiya” (Putin’s term meaning “NewRussia”), while Russia, which lobbied for everything the new Law provides for, welcomes it with the Russian Defense Minister announcing that Russia must deploy a “full-fledged and self-sufficient” army in the Crimean direction  Also today the Rada ratifies the EU Association Agreement, but implementation of the parts of it is delayed.  On top of that, the Rada, after several failed attempts and the threat from Speaker Turchinov to keep them locked inside until they carry out the final vote, adopts the Law on Lustration too!  One of the most odious Rada Deputies from the Party of Regions is caught by protesters outside the Rada and is thrown into the garbage bin, but after being extracted by bodyguards, he has no complaints: Hey, it’s all good, no hard feelings, Guys!   As my Swiss friend says: “Well, but the Rada always has been rather sporty!”.  Blogosphere exploded and my head is spinning, it is impossible to evaluate or predict anything anymore! 

Friday, September 19, 2014

What Ukraine needs most now? Evidence from Slovakia Reforms

Ivan MikloŇ° (former Minister of Finance and deputy Prime Minister of the Slovak Republic)

I visited Ukraine for the first time in March, only a few weeks after the tragic and heroic events around Maydan. Since that time I have begun to intensively think about how to help Ukraine with necessary reforms. I spent almost all of my professional life preparing and implementing economic reforms in my country, Slovakia. The main aim was to change my country from backwardness and stagnation into a modern, competitive European state. We enjoyed mixed success, but in general we can say today that Slovakia has produced a successful transition. We are not only in the EU but also in the Eurozone (unlike neighbouring Visegrad countries, Poland, Czech Republic and Hungary). We have recorded the highest cumulative economic growth among all EU countries from the breakdown of the communism until now and we have been one of the world’s most successful economies in that period. At the time of independence in 1993, Slovakia had only 62% of the Czech Republic’s GDP per capita. Just this year, we caught up with our westerly neighbour on this metric. Twenty-five years ago Slovakia produced antiquated Soviet tanks and another heavy military equipment but not one car. Today we are the number one producer of cars in the whole world, per capita. The most important reason for that success is reforms. Let me illustrate this by comparing convergence success of the Visegrad countries from 2004 until 2008. Over those four years, GDP per capita in PPP in comparison with the EU average improved in Hungary by 1%, Czech Republic by 3%, Poland by 5% and Slovakia by 16%. These were the first four years of EU membership for all of these countries, therefore the big difference among their convergence progress has to have had different reasons. This reason is reforms.

Wednesday, September 17, 2014

Ukraine: Strategic considerations.

By Andrei Kirilenko (Sloan School of Management, Massachusetts Institute of Technology)

In this essay I outline a strategic vision for the state of Ukraine. I begin with the main principles of the role of the state. I then argue that the Ukrainian state has largely failed to fulfill its role. I rejoice in seeing spontaneous volunteer efforts outside the failed state structures and suggest that instead of trying to administer a multitude of these efforts, the state needs to set a strategic overall direction so that its people can rally behind it. I suggest that this direction is ensuring independence from direct foreign interference now and in the future. Then, I argue that the place to start is with energy independence. I show that there are not enough resources in the entire domestic financial system to support Naftogaz in its current incarnation and that it cannot continue without external technological and financing resources. I argue that because of their systemic importance, the decisions on Naftogaz are inherently political and then outline options on dealing with the decision paralysis at the top, as well as a possible process for getting things started. I then suggest that once a political decision is made, the process would start with a standard problem of valuing risky cash flows. I outline the main sets of cash flows and describe potential but not insurmountable difficulties in valuing them. I then remark that once the risky cash flows are valued, policymakers can be presented with the recommendations about what to keep, what to sell off and for how much, and what to get rid of. I conclude with thoughts on other types of independence that need to be achieved in tandem.

Monday, September 15, 2014

DCFTA is delayed – so what?

or Implementation of the Association Agreement was delayed. Estimation of Economic and Political Consequences

By the Editorial Board of VoxUkraine

On September 12, the EU announced that provisional application of the Association Agreement between Ukraine and the European Union will be postponed till 2016. This decision was a result of tripartite ministerial meeting of the EU, Ukraine and Russia aimed to resolve Russia’s trade concerns regarding allegedly negative impact of the EU-Ukraine DCFTA on Russia’s economy.

What does it mean for Ukraine? Let’s consider key points of the arrangements.
  1. Ratification first – flexibility next. The arrangements come into force in the case of ratification of the Association Agreement. According to the Joint Ministerial Statement “… the Commission is ready, in the event that Ukraine ratifies the Association Agreement with the EU, to propose additional flexibility.” It is important as it means that there will be no changes in the text of the Agreement, and the ratification – i.e. irreversibility of the Agreement – is a precondition for any temporary concessions.
  2. EU market remains open. The EU will prolong autonomous trade preferences for Ukraine till 31 December 2015 thus providing the Ukrainian exports free-market access for majority of products. Autonomous trade preferences replicate the schedule of trade liberalization envisaged for the first year of the implementation of the Association Agreement and set duty-free regime for 95% of industrial products and 84% of agricultural goods, and duty-free tariff rate quotas for the rest of agricultural goods. It is definitely beneficial for the Ukrainian business currently reorienting its export flows from Russia towards the EU. According to the State Statistics Service of Ukraine, exports to the EU grew by 14.9% yoy in the first half of 2014, while exports to Russia dropped by 23.3% over the same period.
  3. Ukraine’s business gets extra time to improve competitiveness. The delay in the implementation of the DCFTA provides the Ukrainian business with additional time to get ready to trade liberalization and intensified competition on the domestic market. However, we should understand that sharp devaluation of hryvnia has already provided much more serious shield for the domestic market compared to delay in gradual elimination of import duties, the average level of which is currently about 4%.
  4. Russia committed to adhere to the CIS FTA. According to the Joint Ministerial Statement, “…Russia and Ukraine confirm that they will continue to apply the CIS-FTA preferential regime”. This commitment reduces the risk of revocation of duty-free regime for Ukrainian exports to Russia. In July, Russia published draft regulation envisaging the increase of import duties to the MFN level for selected categories of Ukrainian exports. The regulation was expected to be enacted after ratification of the DCFTA. Now probability of its introduction is much smaller. Also, Russia should not be able to refer to Annex 6 of the CIS FTA as there is no free-trade regime for the EU exports to Ukraine. However, non-tariff rather than tariff barriers have always been major trade impediments in exports to Russia. Likelihood of continued ad-hoc barriers on exports explained by alleged violation of TBT or SPS requirements remains high.
  5. Major risk is postponement of reforms. Key feature of the Association Agreement is harmonization of the Ukrainian legislation with the EU acquis. It should ensure not only better quality of the Ukrainian legislation, but also its proper implementation – hence, improvement of investment climate in the country. Postponement of the provisional application of the Association Agreement means that the implementation schedules embedded in the Agreement are shifted and there is less international pressure for reforms. Definitely, reforms can and have to be continued for the sake of Ukraine itself, but one of the ‘sticks’ is temporary removed creating risk of delay.
  6. Additional time for Russia’s pressures. The delay of provisional application and continuation of tripartite talks create additional space for Russia to bargain further concessions and delays in the implementation of the Association Agreement. This risk is amplified by unstable political environment in Ukraine.

Hence, we would wrap up that in the economic terms the delay in implementation of the Association Agreement might have a moderate positive effect for war-torn Ukrainian economy, although the risks, namely the reform stalemate and continued Russia bullying, should not be underestimated.

The political implications of this decision are harder to interpret, especially as no much information on the negotiations is available yet. The optimists could take a view that Russia should now be appeased by the delay in agreement implementation and stop meddling into the Ukrainian affairs. So, in other words, it provides a face-saving exit for the President Putin, which got at least part of what he wanted, while at the same time will avoid further sanctions to be imposed on the already weakening Russian economy.

However, there could be also an alternative, less rosy, view. It’s pretty clear that the ultimate goal of Russian leaders is to retain Ukraine in its sphere of influence, while the delay in implementation of Association Agreement does not change Ukraine’s external orientation vector. Moreover, this decision could be considered by Russia as a sign of weakness (first of all on the EU side) and it might try to build up on this success by increasing the pressure on Ukraine by different means.

Reform priorities: expert survey results

By the Editorial Board of VoxUkraine

After many years of mismanagement, Ukraine badly needs reforms in nearly all areas. A key question is where to start and how to set priorities. In the first week of September, VoxUkraine conducted a survey among Ukrainian and international economists asking them to rank political and economic reform priorities for Ukraine and comment on their choice. 30 responses were received. Given the challenges currently faced by Ukraine, the majority of professional economists suggest to follow an integral approach to ensure complementarily of reforms and hence to improve outcomes. Survey results identify five clusters of most urgent reforms.