A year of reforms in Ukraine. The best, the worst, and why they are so slow

reforms

 

2016/02/04 • Analysis & Opinion, Economy, Featured

Despite complaints and accusations in betrayal from Ukrainians and foreign experts, reforms took place in Ukraine in 2015. Some of them are already successful and some could be if they were brought to life.

During 2015, VoxUkraine together with partner organizations (Interfax-Ukraine, Case Ukraine, Dixi Group, Baker Tilly Group, Center for Economic Strategy) and a team of over 20 experts regularly evaluated progress on economic reforms as part of the Reform Monitoring Index – IMORE. This year, more than 300 laws, orders, and other regulations that had signs of economic reforms (or anti-reforms) which were aimed at changing rules and structural changes were evaluated. Each event is judged by a five point scale.

The results show the highest activity of reform-related processes was the beginning of 2015. However, the pace of reforms is not the same for different fields of economic life. The graph below, produced by Ekonomichna Pravda, shows actions which lead to the most progress in five fields: fighting corruption, deregulation, banking sector, energy independence, and budget policy. Key events ranking from 3 points and up on the IMORE scale are shown.

reforms

The best and worst reform measures of 2015

The reform that set gas tariffs to an economically justifiable level was the most important reform in 2015. It received the largest number of points.

Fighting corruption

Law on electronic public procurement passed – To plug the $2.3 bn that dissapears in the black hole of Ukraine’s public procurement system, a full-service electronic system for tenders was created by the Economic Ministry. Losses through public procurement are one of the main channels through which black cash gets into the economy. More>>

Law passed on creation of open online property registry – Online state registers of company ownership and real estate ownership enable the public to conduct a full search for owners, giving gives civil society powerful tools for monitoring the activity of officials, with an eye to signs of unlawful enrichment. More>>>

Law on the national police passed – created based on the Georgian model, this law aims to renew Ukraine’s corrupt police ranks. 47,000 officers who were unable to pass a competency test were fired. More>>>

Law on transparent use of public funds passed – the use of funds of Ukraine’s national and local budgets, credits given under national and local guarantees, National Bank funds and state funds etc is to be placed in the public domain.

Deputies are required to make asset declarations public – deputies of Ukraine’s Parliament are required to make public information about their property and income.

Deregulation

Certification on some markets was cancelled – basically, all deregulatory reforms also work towards minimizing corruption. Canceling compulsory certification for gas and some produce decreases paperwork and expenditures of producers.

Bank sector

Banks are required to open information on ownership. Many banks in Ukraine could have been referred to as “pocket banks” – owned by non-banking business groups, they often served as conversion centers for their ultimate beneficiaries, while also allegedly misusing refinancing loans provided by the National Bank of Ukraine (NBU). Legislature requiring banks to disclose the ownership structure decreased the number of banks from 180 in early 2014 to 130 as of 1 June 2015. If the bank fails to do so, the NBU can take measures such as declaring the bank troubled, rejecting the refinancing of the bank, or refusing to grant a general foreign exchange license to the bank.

Energy independence

Energy tariffs increased for industry and population – Minimal gas tariffs for the population were increased by 3.3 times and electricity tariffs will be raised 3.5 times by 2017. Coupled with increased prices for industrial energy, this was a long-awaited step away from Russia’s gas chokehold and inefficient energy usage.

According to experts, the reform that set gas tariffs to an economically justifiable level was the most important reform in 2015. It received the largest number of points.

Although this decision was very unpopular and painful from the social viewpoint, it solves some pressing problems: decreases chances for corruption, helps to reduce the budget deficit, and strengthens the energy independence of Ukraine’s economy.

Law on the natural gas market – creates the framework for competition in the gas market.

Almost 90% of more than 300 adopted regulations received a positive expert evaluation.

Only five laws received negative marks. Among them is the first version of the law “On State Budget for 2015,” which was later adjusted, the decision to limit the salaries of senior public officers (was canceled later), the moratorium on the export of timber and others.

 

The rocky road from passing laws to implementing them

Two reforms have already been brought to fruition after passing the regulatory act: increasing natural gas tariffs for the population and the introduction of a patrol police.

After the political decision to bring gas tariffs to economically justified levels (which was unlikely to have been passed without the support of the IMF), its implementation was a technical matter. Unlike the gas tariffs reform, going from legislation to real life with the police reform cost a lot of efforts and its implementation still continues. However, many other reform initiatives that received the highest score from the experts of IMORE, faced difficulties in being implemented.

The act on strengthening responsibility of banks owners by opening information on bank ownership. The law provides criminal penalties (up to 5 years of restriction of freedom) for owners of significant amount of shares and bank top-managers for bring the bank into bankruptcy if the amount of losses to the state or the lender has exceeded UAH 170,000 (USD 6,589.15).

During the past two years over 60 banks were removed from the market, some of these banks existed only for white-washing of money or for tax minimization. Nevertheless, a mass prosecution of owners or managers of banks is not observed, apparently because many of them are close not only to the previous, but also to the current government.

The law On natural gas market reform from the so-called IMF package was adopted in April 2015. The law provides creating competitive conditions in the gas market, according to EU rules. However, regulations for the implementation of this law have been released by The National Committee on State Regulations in Energetics and Public Service only now. But according to Director of Business Development of Naftogaz, these acts rather restrict competition than create favorable working conditions for regional gas companies.

Who wants reforms in Ukraine?

Although experts have named some fields as “the most progressive” and most regulations were evaluated positively, society faces difficulty in noticing change. Like, for example, with the case of corruption – it shows that a large amount of laws and regulations doesn’t guarantee that the actions described on paper are done on practice. Also, even reforms which are successful at first glance reveal their weak points in a few months –  like it was with the police reform. Usually the old system resists in all ways possible. Another reason for the slow pace of implementing reforms is that in all cases the interests of those who are in power are compromised, and they do not allow changes to happen. The way forward is difficult. Society feels on practice that there are not so many supporters of real changes as it may have seemed just after Euromaidan. Namely, they are:

  • a part of civic society (people who wants to live in Ukraine which is governed by the law and not by the powers that be);
  • a small part of the political and state apparatus (which belongs to either this sliver of civic society or comes from outside Ukraine);
  • international creditors and donors (because the more countries of the world are prosperous and predictable, the less problems, including security problems, will the “rich club” countries face).

The largest part of society resists reforms – because of the fear of the unknown, possible material losses, or simple laziness.

This means that changes will not be fast. But this also means that the abovementioned beneficiaries of reforms need to unite their efforts and act more by brains that brute force. And step by step increase the territory of “Europe in Ukraine.”

Translated by: Olena Makarenko
Edited by: Alya Shandra
Source: Abridged from Ekonomichna Pravda

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