Ukraine after Yanukovych: Dropping the pirate?

Ukraine after Yanukovych: Dropping the pirate?

28 February 2014

President Viktor Yanukovych of Ukraine clearly had no sense of irony when he placed a mock pirate ship in the lake at the mansion he built on (stolen) state land outside Kyiv. With all his vices, however, as long as he remained in power Russia, the West and Ukrainian politicians had no reason to reconsider their own inadequate policies on Ukraine. Now he has gone, all three must raise their game. This insight looks at each in turn, but focuses on what the EU can do for Ukraine, and what Ukraine needs to do for itself.

For Russia, Yanukovych was an acceptable leader of Ukraine, despite his faults. With his power base near the Russian border and his ties to oligarchs dependent on Russian markets, he was not the man to stand up to Moscow’s pressure to walk away from an association agreement with the EU in autumn 2013. His reward for doing Moscow’s bidding was a one-third cut in the price of Russian gas (to be reviewed quarterly, in case he thought of changing his mind) and a $15 billion loan (about €10 billion), of which $3 billion (€2 billion) was disbursed before his fall.

The Russians clearly did not expect that Yanukovych’s failure to sign a one-thousand page document that few if any of his opponents had read would lead to a revolution. Yet three months after Yanukovych cast his lot in with Russia, he is out of office and – as Russian Prime Minister Dmitri Medvedev said on February 24th – “We do not understand what is going on there”.

The smart thing for the Russians to do would be to join Yanukovych’s Ukrainian ex-supporters in denouncing his crimes, and then to rebuild their influence. Russia will continue to supply much of Ukraine’s gas. It already has a free-trade agreement with Kyiv, and mutually profitable trade should continue, particularly in areas like defence equipment where Soviet-era supply chains still exist. Many Ukrainians have family ties in Russia or work there. These people have no reason to feel enmity towards Moscow. A prosperous, EU-aligned neighbour should pose no threat to Russia’s interests. It could even be a better customer for Russia; it might pay its bills, for one thing.

So far the signs are that Russia is not doing the smart thing. Russian foreign minister Sergei Lavrov has claimed that the political opposition are following the lead of “pogromists”; Medvedev has claimed that what has happened threatens the lives of Russian citizens. In Crimea, the only region of Ukraine where there is an ethnic Russian majority, visiting members of the Russian Duma announced an initiative to make it easier for Crimean residents to get Russian passports. These are provocative moves. The presence of large numbers of similar ‘Russian citizens’ in Georgia’s separatist enclaves of Abkhazia and South Ossetia provided a pretext for Russia to step in to ‘protect’ them in 2008. The occupation of the Crimean parliament and major airports by armed men, and large-scale Russian military exercises near the Ukrainian border, all add to the tension.

For the West also, the fall of Yanukovych demands fresh thinking. The UK and the US were co-signatories with Russia of the ‘Budapest Memorandum’ of 1994, in which (in return for Ukraine sending Soviet nuclear weapons back to Russia) the other three countries undertook to respect Ukraine’s independence, sovereignty and borders; not to use or threaten force; and not to use economic coercion. The memorandum said that the three would consult “in the event a situation arises which raises a question concerning these commitments”. It is time the UK and US used this agreement to deliver firm messages to Moscow about the impact of its actions on future relations.

The thuggish and corrupt Yanukovych had few friends in Europe. Now the EU will have to deal with a government in whose creation it has had a hand, and an interim president who has already said that a return to the path of European integration is his priority. Brussels and the member-states should not wait passively to see what happens, as they did after the 2004 Orange Revolution. They should drive change with a judicious mixture of generosity and tough love.

Ukraine will need assistance to avoid default almost immediately. It needs to pay its various creditors over €10 billion by the end of this year; it has gas debts to Russia of over €1 billion. The IMF suspended lending to Ukraine in 2011 because of its failure to carry out agreed reforms. IMF managing director Christine Lagarde made clear after the G20 finance ministers meeting on February 23rd that Ukraine would have to start reforms before international lenders would return. If Kyiv takes her advice, Western countries should be ready to step up technical assistance and political engagement to ensure that key reforms in areas such as energy pricing are implemented quickly and effectively. They could help with funds and advice to reduce the impact of cuts in fuel subsidies on poor customers. A sharp reduction in energy subsidies in Bulgaria in early 2013 led to protests and the fall of the government.

A lot of the short-term pain of reform will fall on un-modernised heavy industries in the east and south of the country, which have relied on unsustainably low gas prices to remain viable. The deep and comprehensive free trade agreement (DCFTA) offered by the EU should offer a significant long-term boost in growth (estimated at about 0.5 per cent per annum), but the gains will be diffused widely, while the losses will be concentrated. Russia has put a considerable propaganda effort into heightening the fears of the likely losers. Moscow will probably now put up the price of gas and perhaps restrict the flow in order to punish the new Ukrainian government, further hitting Ukrainian competitiveness. The EU is close to offering Ukraine financial assistance (likely to be more than the $1 billion (about €700 million) announced by the US). Regions of western and central Europe which have successfully undergone economic restructuring should share their expertise with Ukraine. The EU should also press forward with plans to enable Ukraine to get gas from Slovakia, assistance with energy efficiency and other steps to mitigate Ukraine’s dependence on Russian gas.

The EU has concluded that although the interim government might like to sign the association agreement as soon as possible, it would be better not to do so before presidential elections in Ukraine on May 25th. One reason for this is to avoid questions about the legitimacy of the transitional authorities; another is to allow more time for an increased public information campaign to explain what the association agreement means for Ukraine. The British government commissioned research in Ukraine in early 2013 which showed low levels of knowledge about the EU and high levels of suspicion, particularly in the east. The British Embassy in Kyiv has done much since then to ensure that information about the agreement is available, including translating a summary into Russian as well as Ukrainian. Meanwhile the EU delegation’s staff have taken the lead in ensuring that the Ukrainian authorities are technically prepared for the time when the agreement is in force. But it is time that the information effort was stepped up and properly resourced, ideally with the EU delegation and as many member-states as possible spreading the word. Central European countries have a particularly important contribution to make because of their own experiences of transition, association agreements and ultimately EU membership; senior visitors from these countries could help to reassure eastern Ukraine of the benefits of association with the EU.

As a result of events in Kyiv, member-state resistance to offering Ukraine an EU membership perspective seems to be fading, gradually. The last statement by EU foreign ministers ended enigmatically: “the Council expresses its conviction that [the association] agreement does not constitute the final goal in EU-Ukraine co-operation”. Several senior European officials have gone further, including President of the European Council Herman Van Rompuy, who said that the future of Ukraine belonged with the EU. Successive Ukrainian governments have defined their country as ‘European’; it is time that the EU started to set out the conditions Ukraine would have to meet in order to become a member of the Union.

There is a Russian saying that it is better to see once than hear a hundred times. The EU should press forward as quickly as possible with visa liberalisation for Ukrainians, to make it easier for people to see what two decades of transition have achieved in countries like Poland and the Baltic states. The Union should also increase funding for student exchange programmes and study visits to EU countries by officials, particularly from eastern Ukraine.

One reason Ukraine’s economy is in such a mess is the immense scale of corruption. The Swedish economist Anders Aslund estimates the Yanukovych family fortune at $12 billion (almost €9 billion), but the president and his relatives were not the only ones profiting at the expense of the Ukrainian state. A number of EU member-states, including Austria and the UK, have been happy to put out the welcome mat for members of Yanukovych’s circle. Former prime minister Mykola Azarov and his wife have property in Austria; companies which are alleged to be fronts for Yanukovych and his family are based in London.

These and other European countries should now help the Ukrainians to recover some of the loot. They should also look closely at their own implementation of anti-money laundering legislation. In 2011 the UK’s Financial Services Authority found that three quarters of the banks it investigated had not done enough to establish that customers who were senior politicians or their families had acquired their wealth legitimately. Putting this right would help Ukraine (and other countries) recover funds from corrupt politicians, and also set the tone for the future. Western countries should not preach good governance and the rule of law in Kyiv while allowing Ukrainian leaders to launder their money in European capitals.

Ukraine’s economic future will not be secured, however, by asset recovery (however politically valuable it would be). It needs trade and investment to drive growth. Even before the DCFTA comes into force, the EU should be generous with market access. The Union set an important precedent by increasing Moldova’s wine export quota in January 2014 to compensate for Russia restricting its imports of Moldovan wine; if Russia takes similar steps against Ukrainian agricultural and industrial products (as seems likely), the EU should respond by opening its markets again.

Finally, the Ukrainians themselves need fresh thinking. It has been easy to blame Yanukovych for all that ails their country. But his departure does not mean the end of their problems; and he was not responsible for all of the mess. From independence onwards, Ukrainian presidents and governments have ducked hard choices and allowed corruption to flourish.

In 2004 the protesters in the Orange Revolution were (to some extent at least) led by the politicians. In 2014, the protesters on the Maidan were consistently ahead of the politicians and wary of the opposition as well as the government. When Vitali Klitschko, leader of one of the main opposition parties, announced to the crowd the terms of the (still-born) deal brokered between Yanukovych and the opposition by the French, German and Polish foreign ministers, he was booed off the stage. The engagement of civil society in political life is in some ways encouraging: much better than apathy. But it also contains threats: the risk of vigilante justice, and the temptation for politicians to resort to populist measures, rather than attempting hard but necessary reforms.

The new authorities need to prioritise. Whether Ukraine defaults or not, its economy is a mess. The interim government needs to be frank with the population about how tough it will be to turn Ukraine round after two decades of decline, and it needs to start the process quickly, without waiting for the presidential elections in May. That way, all parties in the unity government will share responsibility for the reforms required to put Ukraine on track for sustainable economic growth. The interim prime minister, Arseniy Yatsenyuk, a highly intelligent technocrat, has started to explain how bad things are; he needs support from other politicians. Leaders should not be distracted by peripheral issues: reducing the status of the Russian language will no doubt please some western Ukrainians, but it should not have been one of the first pieces of legislation passed by parliament after the fall of Yanukovych. It will do nothing for the economy, and will exacerbate worries in the south and east on which separatists can then play.

Ukraine needs a constitution that works. The 2004 constitution left too many uncertainties about the division of powers between the president, the prime minister and parliament; the 2010 constitution put too much power in the hands of the president. With the help of the Council of Europe’s Venice Commission on democracy through law, the new authorities should start work on a new constitution, to be put to a referendum as soon as possible. The president to be elected in May 2014 should serve a shortened term pending adoption of the new constitution.

Ukraine also needs honest politicians. The Office for Democratic Institutions and Human Rights (ODIHR), part of the Organisation for Security and Cooperation in Europe (OSCE), judged the 2012 parliamentary elections to have been a step backwards for Ukraine, characterised by abuse of administrative resources, murky campaign finances and biased media coverage. The resulting parliament is now in charge of the country. Various oligarchs ‘own’ blocks of seats in the Rada; it was their decision to drop Yanukovych which led to the vote to replace him. The interim government should ask ODIHR to help draw up new electoral legislation, including on campaign finance, establish a new electoral commission and hold parliamentary elections as soon as a new constitution is in place. It should also work with international anti-corruption bodies to draft and implement far-reaching legislation to force politicians and officials to declare their assets and any possible conflicts of interest.

Ukraine itself does not have the resources to pay for a major economic change programme itself; it will need foreign investments, as the countries of Central Europe did. To attract foreign investment it will need to change the ingrained culture of corruption. By leaving behind a treasure trove of documents showing the extent of graft, Yanukovych has strengthened the hands of transparency campaigners (some of whom are now poring over the evidence). Ukraine should work with organisations like the Open Government Partnership and Transparency International to build openness into government contracting processes and the tax system. It should also ask for help from the OSCE and the Council of Europe to rebuild the judiciary and law-enforcement bodies so that they serve the people and the state, not the elites who corruptly buy their services.

Ukraine has rich agricultural land, an industrial heritage and an educated population. It should be doing much better than it is. After two false starts, perhaps it will be third time lucky. The pirate king has gone; now Ukraine should be helped to chart a new course.

Ian Bond is director of foreign policy at the Centre for European Reform.