Ukraine moves ahead with reforms after slow start

By bne IntelliNews January 8, 2015

bne IntelliNews -


Ukraine's new post-revolution authorities have taken the first steps in their ambitious reform programme and more are promised in 2015.

Despite achieving power in late February 2014 after the ousting of Viktor Yanukoyvch, Ukraine's new pro-EU government only got round to real reforms on October 14, after fighting off a Russian landgrab over the summer. In its last sitting before dissolving for elections on October 26, the parliament reduced the powers of the country's highest legal office, the prosecutor general, and laid the foundations for new anti-corruption institutions.

Reforming the Soviet-era powers of the prosecutor general – which included 'powers of supervision' over criminal investigations - by handing all investigative decisions over to a new separate organ,  the State Bureau of Investigation, was a clear necessity if the country was to move closer to Europe. The previous system had allowed the prosecutor to protect corrupt practices. The former prosecutor general, Viktor Pshonka, made a hasty departure from the country in February 2014 after the fall of Yanukovych.

The new law on the prosecutor's office duly transferred investigative powers to a new body, the State Bureau of Investigation, establishment of which will be one of the main tasks for government reformers in 2015. On the same date, October 14, parliament passed a package of anti-corruption laws, including the establishment of a dedicated National Anti-Corruption Bureau separate from the State Bureau of Investigation, with wide-ranging powers to tackle corruption. A law on lustration of Yanukovych-era officials was also passed.

How these two new anti-corruption bodies will be established and who will head them are likely to be a key political story in the first quarter of 2015, given the bodies' potential for political disruption. Ukraine's President Petro Poroshenko may indeed be backing further foreigners to be appointed to these posts, following the naming of citizens from the US, Lithuania, and Georgia to key government posts. Italian Giovanni Kessler, head of the European Anti-Fraud Office (OLAF), has been already appointed to the commission that will help choose the candidate, due to first meet on January 14.

But there are already apprehensions that the new investigative and anti-corruption bodies might have their hands tied from the start. At the end of December, Ukraine's parliament passed a law expanding the powers of the National Security and Defence Council, including giving the council power of oversight over the new investigation and anti-corruption bureaux. The security council in turn is headed by political insider Oleksandr Turchinov, who was acting president immediately following Yanukovych's ousting, and then parliamentary speaker until elections in October.

Poroshenko has also named as a priority of the anti-corruption bureau the recovery of assets allegedly stolen by former president Yanukovych, which critics see as a distraction from the task of combatting present corruption among the political elite. “Contrary to the president, we believe the main task of the anti-corruption bureau is to investigate corruption currently occurring at the top levels of government. For its effective work, it should not fall under the purview of the National Security and Defence Council,” writes Concorde Capital analyst Zenon Zawada in a research note.

Yury Lutsenko, head of Poroshenko's parliamentary group and former interior minister, announced on Facebook on January 8 the finalisation of plans to transform Ukraine's Soviet-era 'militia' police into a European-style police force, including mandatory tests for all militia officers wishing to qualify for the new body. The new police force would be organized separately from the interior ministry, which will thus also be transformed from its Soviet roots into a European-style home ministry, Lutsenko promised.

Poroshenko's major project of constitutional reform is set to start in 2015, but could take “a number of years” to compete, Lutsenko said at a press briefing on January 3. The coalition has a constitutional majority on paper, but the parties themselves are all brittle new creations, with the exception of former prime minister Yulia Tymoshenko's Batkyvschina party. Already one of its members, the third largest party Samopomich, has suffered a split in its ranks. Moreover, at the late night voting on the budget on December, of the five coalition parties, only in two did a majority of MPs vote in favour of the bill.

This means that Poroshenko will proceed with constitutional reform in a piecemeal manner, Lutsenko said, starting with measures to crackdown on the judiciary, by abolishing judges' immunity from prosecution,  which could happen as early as January.

The move may also help bring pressure to bear on Yanukovych-era judges, who are seen as hostile to the new pro-EU authorities after the supreme court referred new laws on lustration of Yanukovych-era officials to the constitutional court in November. A decision of the constitutional court on the key law, under which scores of top officials,have already been fired, is expected in January.

The constitutional court is seen as a lingering threat to the new authorities, not least because of the lack of clarity over whether Ukraine's current semi-parliamentary constitution is really valid: it was restored by a majority in parliament at the time of the ousting of Viktor Yanukovych in February 2014, but not signed into law by the president at the time, for obvious reasons. “The current constitution lacks full legitimacy, which is why we need a new one,” Marina Stavniychuk, former adviser to Poroshenko on constitutional affairs, told bne in October.

Following reform of the police and,judiciary parliament will consider a proposed radical decentralisation of power to local administrations to be implemented by October 2014, parliamentary speaker Volodymyr Hroisman – himself a former town mayor - says, in an article published in the government bulletin Holos Ukrainy on January 6. Decentralisation has been one of Poroshenko's reform watchwords, but it remains to be seen what is intended under the term. Ukraine's government claims its new budget for 2015 boosted the tax revenues assigned to local governments, but critics argue that in reality the budget drained financing for local government in order to shore up the cash-strapped central government.

Economic liberalisation

On the economic front, some of the government action plan announced in early December was implemented in the budget law - passed at 4am on December 25, despite MPs complaining they had not seen the text of the law on which they were asked to vote.

Government pledges to slash the number of primary taxes from 22 to 9, to clamp down on tax-dodging transfer pricing practices and to introduce a reduced social insurance payments for companies that legalise their workforce, were all included in the budget.

Further economic reform measures slated for 2015, according to the government action plan, include a root and branch reform of Ukraine's notoriously corrupt gas sector. The sprawling state-owned pipeline monopolist Naftogaz will be split into two new companies - “Pipelines of Ukraine' and 'Underground storage of Ukraine' - to make the gas sector conform with the EU's third energy package. The plan then envisages an international tender to be held to find investors for the group's massive Soviet-era infrastructure.

The governemnt has also pledged to introduce market tariffs for energy and abolish subsidies, but provides no timetable for doing so - although this is a key demand of international lenders - perhaps due to fears of a political backlash.

Small business is promised a break both from inspections for two years starting 2015, and a halving of the unified single tax paid by small firms, according to the government action plan.

In the agriculture sector, the government has promised to introduce legislation for long-term lease of agricultural land up to 50 years. But there are no plans declared for lifting the controversial moratorium on sale of agricultural land, which has prevented any real market in agricultural land emerging, and hampered investing in land and using land as collateral for bank loans. One reason for this may be opposition from politically powerful large landowners, who hold hundreds of millions of hectares of agricultural land via short term leases of myriad land plots from small landowners, and fear that their highly leveraged companies lack funds to buy out the smallholders en masse.

"Economic problems in 2015 will intensify political conflicts we saw over the budget law, and could cause the coalition to falter," Volodymyr Fesenko, director of Penta think tank, told bne. "But even in this case, it is likely we would see the coalition's reorganisation rather than the feuding that happened after the Orange Revolution of 2004," he said.

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