19 November 2019

Ukraine’s government promises a fresh start – or another false dawn

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With the support of the Atlas Network, CapX is publishing a series of essays on the theme of Illiberalism in Europe, looking at the different threats to liberal economies and societies across the continent, from populism to protectionism and corruption.

If you thought British politics had been chaotic recently, spare a thought for Ukrainians.

A country most in the West knew little about, save for the Chernobyl disaster, has been thrust into the limelight; first, by Vladimir Putin’s military adventurism in Crimea, and latterly thanks to what one might charitably call Donald Trump’s idiosyncratic approach to international relations.

In most Western coverage Ukraine’s tumultuous domestic politics barely gets a look in. That’s a shame, because the government of former comedian Volodymyr Zelensky is attempting no less than a root-and-branch reform of one of Europe’s most dysfunctional economies. How successful he is will have profound implications not just for Ukrainians, but for the balance of power in Europe as a whole.

Arriving in Kyiv there is a sense of energy and a new-found national pride about the place which is infectious. The Ukrainian flag flutters not just from official-looking buildings, but from car dashboards. On Maidan Nezalzhnosti, the square made famous by the 2014 EuroMaidan protests, placards detail the heroes of 20th century Ukrainian nationalism: the politician Symon Petliura, historian Mykhailo Khrushevsky and, most controversially, the partisan leader Stepan Bandera, whom many accuse of collaborating with Nazi Germany.

Zelensky’s election, and his party’s subsequent landslide in this summer’s parliamentary elections promises a new chapter in what has been one of Europe’s most maudlin national stories. Even Ukraine’s name, roughly translated as ‘borderland’, speaks to its unenviable position in the middle of competing powers, with parts of what is now Ukraine having fallen under the yoke of the Habsburgs, the Ottomans, the Poles, the Russia Empire and, latterly, the Soviet Union. Putin’s annexation of Crimea and support for Donbas separatism are sadly in keeping with the Ukrainian people’s history of constant interference and subjugation from outside forces.

The nadir of the Ukrainian national experience was the forced starvation of the 1930s, recounted in heartbreaking detail in Anne Applebaum’s Red Famine. As Applebaum sets out, the extermination of millions of Ukrainians was not the result simply of cack-handed Soviet administration, but a deliberate attempt to destroy the Ukrainian national movement. That it claimed as many as 7 million lives and is still relatively unknown is a testament to the power of the Soviet authorities’ cover-up in the subsequent decade (along with the acquiescence of Western communist sympathisers willing to give Stalin the benefit of the doubt, or even deny the famine had taken place).

And there are those who would still deny the Ukrainians their own nationhood, airily dismissing them as ‘Little Russians’, or claiming their language is merely a dialect of the Big Brother tongue. Even today, representatives of the farcical ‘Donetsk People’s Republic’ appear on Russian TV proclaiming that Ukrainians will soon ‘remember that they are Russian’.

After the USSR

If the Soviet era was one of stagnation, penury and nuclear disaster, the years since independence in 1991 have scarcely been much better. While other eastern European countries, most notably Poland, have enjoyed rapid economic expansion, Ukrainians have endured feeble living standards and an economy weighed down by graft and inefficiency, where a select group of oligarchs exercise overwhelming political control. The average wage in  is roughly $200 a month, though that masks the kind of spectacular inequality that has become a post-Soviet cliché.

It’s hard to overstate how endemic corruption is in Ukraine. From customs officers demanding bribes, to the managers of state enterprises siphoning off public money. The thinktank Chatham House describes this as a symptom of the country’s dysfunctional government, rather than its cause, and argues that an overhaul of the civil service is “essential”. So too is cleaning up the “deep underlying culture of corruption in the judicial system”, where chequebook justice reigns supreme.

Faced with a system that offers few opportunities for advancement, many Ukrainians have voted with their feet and left the country, a decision made easier by the association agreement signed with the EU in 2017. There are estimated to be nearly 1 million working in Poland alone, attracted by the significantly higher wages on offer.

Enter Zelensky

Zelensky has made promises that match the problems he confronts – and he knows what will happen if he does not deliver. Since independence, Ukrainians have had a habit of voting in presidents on a wave of enthusiasm, only to dispatch them in a tide of disappointment and anger a few years later. Indeed, former communist apparatchik Leonid Kuchma is the only president who has ever succeeded in being re-elected.

Zelensky’s own story is a classic tale of life imitating art. A household name who went from playing a president in a popular TV show to becoming the actual president of his country. The name of the show, ‘Servant of the People’, is also the name of Zelensky’s neophyte political party, which appeared almost out of nowhere once the president’s own political star had begun to soar. They could best be described as an ‘internet party’ and only started to open regional offices after already securing electoral success.

That Zelensky won such a crushing victory over Poroshenko this April was perhaps a little harsh on the billionaire confectionary magnate, who had instituted a wide range of reforms. The World Bank cites fiscal consolidation, reforming energy tariffs and simplying business regulations among some of his government’s achievements. He was certainly an improvement on his spectacularly corrupt predecessor, the ogreish Kremlin puppet, Viktor Yanukovych. Mezhohoriya, Yanukovych’s grotesquely over-the-top wooden palace just outside Kyiv, is now a tourist attraction, complete with its own zoo and a golden toilet.

Ultimately Poroshenko paid the price for failing to deliver on his promise to end the war in the east of the country – which is now in its fifth year – and was easy to skewer as yet another representative of the oligarch class. Zelensky, by contrast, appears fresh-faced and full of energy. He will need it, given the scale of the task ahead of him. Chief among them is resolving the rebellion in the East, where the self-appointed ‘Donetsk People’s Republic’ have bedded in with Kremlin support, and the Minsk peace process showing little sign of bearing fruit. Ukraine’s foreign minister, Vadym Prystaiko, has floated the idea of peacekeepers – something not mentioned in the Minsk discussions so far – but at the moment that is more of a suggestion than a concrete policy proposal.

Just as big a priority is improving the sluggish economy. Prime Minister Oleksiy Honcharuk has talked a big game, promising GDP growth of 40% over the course of Zelenskyy’s term, equivalent to about 7% a year. That is a bullish but not entirely unrealistic target, given the low base from which they are starting.

Nor is Ukraine without economic potential. Along with rich deposits of various minerals and metals, it was the bread basket of the Soviet Union and remains one of the world’s leading grain exporters. A well-developed IT industry is also reaping the benefits of ‘near-shoring’ with firms increasingly outsourcing work to eastern Europe, rather than the Far East. What’s more, the fact Zelensky and his party have both the presidency and a thumping majority in parliament gives them an unprecedented chance to undertake sweeping reform.

An ideological fudge

How will Zelenskyy go about releasing this potential? On the surface, his is an economically liberal agenda – and he’s made great play since his elections of making it known that Ukraine is open for business, touring the world on trade missions and underlining that his government will protect foreign investment. That is part of a broader PR strategy designed to show Zelensky is a new kind of politician, with a less formal style than his predecessors. He’s trimmed down the presidential motorcade and done away with grandiose military parades on Independence Day in favour of a ‘March of Dignity’ featuring public sector workers and children.

Another plank of that strategy has been touring the country firing officials accused of corruption and graft in full view of the assembled press pack. In one memorable exchange, he challenged Andriy Ivanchuk, a lawmaker in the western region of Ivano-Frankivsk, to personally find $7m to repair a local road, a challenge he grudgingly accepted. When Ivanchuk used a post on his Facebook page to backtrack, Zelensky popped up with a comment: “No, Mr. Ivanchuk. You made a promise, so you should pay for it”.

This kind of crowd-pleasing populism aside, the tenor of the reforms so far has been encouragingly liberal. That said, Zelensky and his party wear their ideological clothing lightly. Although Servant of the People was initially billed as a libertarian party, Zelensky has not been especially effusive about his own political views, beyond some slightly tokenistic campaign promises to decriminalise cannabis and sex work.

Mykhailo Lavrovsky of the libertarian Ukrainian Economic Freedom Foundation describes Servant of the People as a semi-liberal party with populist tendencies. “I’m a supporter of the president but in terms of the party, it’s so-so…they have a lot people who don’t even know what the word libertarian means,” he says.

That sentiment seemed justified when newly elected party chief Oleksandr Korienko issued a comically vague statement about the party embracing a mixture of liberal, conservative and even socialist elements. “We have ‘human-centrism’,” Korienko explained. “If we look at our decisions, we are moving towards people power, to increasing people’s opportunities. But the difficulty of immediately building liberalism in Ukraine means there are conservative elements too”.

Taming the oligarchs

In place of a particular ideological platform, Servant of the People has made great play of its deputies’ youth and lack of political experience – an asset in a country where politics is virtually a byword for corruption. However, Zelensky has not entirely dispensed with the old order. The controversial figure of Arsen Avakov, a veteran of the Poroshenko government, has clung on as Interior Minister in the face of protests at his conduct.

Even more controversial has been the return from self-imposed exile of oligarch Ihor Kolomoisky, the man some believe to be the power behind Zelensky’s throne – mainly because he owns 1+1, the TV channel on which Zelensky first rose to prominence. Kolomoisky left the country when the Poroshenko government nationalised his bank, PrivatBank, due to a $5.5bn hole in its balance sheet and allegations of rampant fraud. Since Zelensky’s election however, Kolomoisky is back in town and had a well-publicised meeting with the new president in September. The Prime Minister, Oleksiy Honcharuk, has also intimated he may be willing to come to some sort of deal with Kolomoisky, who has launched multiple legal actions to reverse the nationalisation and reclaim his frozen assets.

It’s essential that the government loosens the grip of the oligarchs, not just to curry favour with voters, but to make clear Ukraine is somewhere foreigners can invest in with confidence. As political analyst Olexiy Minakov explains: “The first obstacle is oligarchs, our economy is highly dependent on oligarchs, a lot of spheres are monopolies or oligopolies. If you want to destroy monopolies and create normal conditions and attract investors we should fight oligarchs.”

Maryan Zablotsky, a libertarian former thinktanker and lobbyist who is now a Servant of the People deputy, insists that oligarchy is “completely incompatible” with the new government’s plans. “We called them oligarchs because they used the state and state-run companies to create their own business models and their business models rely only on preferences and handouts from the state – that should be eliminated.”

Given his carefully cultivated image as a fresh, new kind of politician, it is striking how much Zelensky seems to be keeping the big players close. Minakov sees this as an error of judgment on the president’s part: “At the moment we see Zelensky has good relations with them, photos with Kolomoisky, meetings with [Viktor] Pinchuk, speaking with [Rinat] Akhmetov. At the moment Zelensky is in contact with them and I think it’s a mistake.”

An economic reformer?

While de-oligarchisation will likely be a lengthy and fraught process, a somewhat simpler short-term priority is land reform. Since the early 2000s Ukraine has been one of the few countries in the world where it remains illegal to buy and sell land, an honour it shares with Venezuela, Cuba and North Korea. That partly reflects fears that the oligarchs would simply buy up all the land and concentrate even more power, but it has meant stagnation for the already desperately poor rural parts of the country.

According to the World Bank, reforming the land system alone could add as much as 1.5% to Ukraine’s GDP. Still, the legislation does not go far enough for some, in that it does not allow foreigners to buy land in Ukraine, leaving a potential opening for wealthy Ukrainians to have their pick of the spoils.

Zablotsky says liberalising the sale of land will be just the start of a series of deregulatory reforms aimed at removing the dead hand of the state from Ukraine’s economy. “We want to destroy state monopolies in several sectors, this mainly includes railways, gas extraction, energy resources, so we want to move to the private sector as much as possible”.

He is clear that the government must move briskly, before the disillusionment that has typified Ukrainian politics starts to set in. “It’s going to be relatively easy by the end of this year because we have enormous public support and we have a genuine and true intention to actually eliminate state monopolies and free up the economy,” he says. “We do assume that after the new year as time progresses every politician’s public support fades, and this will happen regardless of what we do because people get tired, even of good things – people always require change.”

Liberalising reform also has the potential to root out some of the country’s endemic corruption. As Zablotsky puts it: “If you have economic freedom you don’t have corruption. If you have no licence there is nobody to take bribes for giving you a licence, if there are no state subsidies, nobody to receive a kickback for those state subsidies”.

Of course, it’s not just the Soviet-style state monopolies that Zelensky needs to get to grips with. His government recently passed a reform of the judiciary, part of which aims at cleaning up the qualifications process for judges. Thinktank the Atlantic Council describes the steps as “not ideal” but says the law “paves the way for fundamental reform”.

Putin’s nightmare?

Though Western coverage of Ukraine has understandably fixated on the Trump impeachment process, in the longer term the success of the Zelensky government’s domestic agenda – and whether it can fundamentally change the nature of Ukraine’s economy, could be much more important.

For one thing, the idea of a thriving Western-style liberal democracy on his doorstep is the stuff of Putin’s nightmares. Ironically, it is his brash military adventurism and interference that has probably done more than anyone to forge a sense of Ukrainian identity. And no matter how many tanks he sends in or ‘political technologists’ he employs, Putin can do little to change the outlook of younger Ukrainians, those with little memory or attachment to the Soviet past who are turned firmly towards Western Europe.

Few are under any illusions about the scale of Zelensky’s task, or the fickleness of Ukrainian voters when they feel their politicians have failed them. Nonetheless, Ukrainians need only look over the border to Poland to see that rapid economic expansion is achievable within a short space of time.

Certainly Maryan Zablotskyy and his fellow deputies are in now doubt as to the urgency of reform, and what is at stake for their country if they fail. “We know that maybe in the next 28 years no political party will have a majority as we do – and we know that if we screw this up it will be for the next generation to bear the consequences”.

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John Ashmore is Editor of CapX