KYIV BLOG: EBRD gives Ukraine poor marks in its progress report

KYIV BLOG: EBRD gives Ukraine poor marks in its progress report
EBRD President Sir Suma Chakrabarti
By Ben Aris in Berlin September 19, 2017

EBRD President Sir Suma Chakrabarti gave a balanced but tough report on Ukraine’s progress at the annual 14th Yalta European Strategy Annual Meeting (YES) in Kyiv, which acknowledged the real progress that has been made, but warned “Ukraine just does not have the luxury of further delaying the reforms".

The message was clearly one of muted criticism as Ukraine’s international donors are loosing patience and faith in the government’s commitment to see the programme of reforms through. The IMF in particular has almost halted the tranches in its $17.5bn stand by programme, releasing only $1.5bn this year and is unlikely to issue any more until there is some visible progress on reforms.

“When and where appropriate, we have sung the country’s praises as loudly as any other well-wisher, if not more so. And, as good friends should, we have not been shy of offering advice when we perceive reform setbacks,” said Sir Suma, addressing an elite audience at the YES summit in Kyiv on August 15.

“We will not hesitate to challenge the country’s leaders to be more ambitious and more dynamic when we see momentum flagging. We do so very much as allies in a common cause,” said Sir Suma, couching what is obvious criticism in the most diplomatic of terms.

He also acknowledged the big progress made: “In 2013, we at the EBRD had stopped investing in the public sector. And our private sector clients were suffocating in the most hostile of environments. Today the landscape looks quite different,” said Sir Suma. “The country is benefitting from macroeconomic stability. And growth, while still too modest, has returned. The situation with public procurement bears no comparison with that previously.”

Ukraine has gone up in the rankings of EBRD destinations. While the development bank’s investment projects in Russia have been frozen, Ukraine has overtaken Russia as an important country of operation. And while many of the other countries in the region have made some real progress, as Ukraine is only now starting on much of the transition work its development bank role is very relevant.

The EBRD is now the single largest investor in Ukraine (as it was in Russia before the freeze) with cumulative investments of €12bn, of which €3bn was invested in the last three years alone. In addition the EBRD manages another €2.5bn in donor funds dedicated to safeguarding the site at Chernobyl , as well as €715mn of additional funding from EBRD specially for ensuring the safety of the site.

“You can’t even travel to Kiev from the EU by road, for example, without using the motorway which we financed,” says Sir Suma. “Our highway maintenance programme brought such welcome changes to some Ukrainian roads it recently earned star billing on TV under the title '200km of happiness'.”

Probably the most significant investment the bank has made is into the national gas operator, which for years was a drain on the public finances thanks to big subsidies. At the IMF’s insistence domestic gas tariffs have been hiked, but the company’s own finances were still in chaos. “When Naftogaz needed financing, in the fall of 2015, to buy gas and get through the winter, the EBRD was the only institution with the will and ability to support it,” Sir Suma said at the summit.

However, things are not running smoothly at Naftogaz. Two independent directors have resigned from the board of Naftogaz, the more recent leaving in September, citing government interference as the reason. Previously in April the EBRD sent a strongly worded letter to the government warning of a “possible collapse of the country’s energy sector reform” that could “shatter international confidence” in the current government in Kyiv.

Sir Suma said that the implementation of the corporate governance action plan for the state-owned gas utility signed earlier between the bank and the Ukrainian government is being “unduly delayed” by the lack of enactment of the required legislation. 

In September Charles Proctor, an independent member of the supervisory board, quit citing the same problems. Proctor said he will resign from his post in late September, citing lack of government support required to deliver corporate governance reform. The issue has not been resolved and other independent members of the board are reportedly equally unhappy.

Still, the EBRD opened new offices in Kharkiv and Odesa last year. Both are supported by the EU through the EU4Business Initiative and are already giving local SMEs the advice and support they need, according to Sir Suma.

“We are particularly proud of our role in helping to create the Business Ombudsman Council, a vital mechanism by which the private sector can register its complaints about unjust treatment at the hands of the state or municipal authorities,” the bank’s president added. The council’s work has already yielded a direct financial impact of almost €330mn – and that over a period of less than two years, according to the EBRD.

But Sir Suma ended with a stinging rebuke of the Ukrainian government: the reforms made so far are welcome but are insufficient to transform the country into a vibrant economy. The diplomatic Sir Suma didn't not say so explicitly, but made it clear the bank is unsatisfied with either the pace of reforms or the government commitment to seeing them through.

“International financial institutions can be of assistance here. But there is only so much we can do on our own. If Ukraine is to enjoy inclusive and sustainable growth, the remaining barriers to investment, whether foreign or domestic, need to be dismantled. And dismantled sooner rather than later,” said Sir Suma. “Ukraine just does not have the luxury of further delaying the reforms required to complete the foundations and build out the structure of its economy. The rates of growth we see now are, of course, heartening after the experience of recent years. But in no way are they enough – or indeed what Ukraine is capable of.”

Sir Suma highlighted the weak property rights and rule of law as major hurdles, but explicitly pointed to the country’s oligarchs as causing problems.

“We see signs that vested interests feel under threat and are pushing back,” said Sir Suma in a rare comment by the leader of an international financial institution (IFI) on the power games that are being played out between President Petro Poroshenko and his business rivals.