The new Ukrainian President Volodymyr Zelenskiy is in a hurry. He is in complete control of the country’s legislative process and has a huge mandate from the people after he and his party won twin landslide victories for the presidency and parliament this year. But the honeymoon period is bound to be short lived given the scale of the reform task he faces and the venal, vested interest infected nature of Ukrainian politics. The government has to push through as many of the painful major reforms it can while it is still riding on the wave of support that swept it into office.
“Now we have a unique situation, a truly unique chance to implement all the necessary reforms. I really want that. We have everything: political will of the president, majority in the Verkhovna Rada, government and prime minister that are willing to work. The only thing we lack is time. Society won’t wait for something to start working in Ukraine in several years,” Zelenskiy said during the opening session of the Verkhovna Rada on August 29.
Ukraine’s government will target economic growth of 5% next year and at least 7% in each of the following years, the newly appointed Prime Minister Oleksiy Honcharuk said at a televised government meeting on September 2. The economy grew by 3.3% last year and the official forecast for this year is growth of around 3%.
“The main priority for the government is economic growth. Economic growth is the answer to most of the problems that the state has,” Honcharuk said.
A new cabinet was sworn in with an average age of 41 – the youngest government in Ukraine’s history – that is largely made up of liberal reformers with a few holdovers from the previous administration of the most competent bureaucrats and a couple of concessions to the other new liberal parties that competed in the elections. However, Zelenskiy’s Servant of the People (SOTP) party is firmly in charge, controlling 19 out of the 23 committees that actually do the legislative work.
Addressing Ukraine’s new cabinet, the leaders of parliament and the nation, Zelenskiy said at the televised meeting: “We’re here to set strategic tasks, with deadlines and with people who will be responsible.”
The government has set itself an ambitious legislative agenda. The new government kicked off by nixing immunity from prosecution for deputies, which by itself is a revolutionary move. The Rada is stacked with proxies for oligarchs, and other deputies have used their positions to enrich themselves by guiding state contracts to companies that are controlled by themselves or their friends. Now all the deputies are open to corruption investigations and jail time if they are caught.
The second big set piece to be launched on the first day of work was a pledge to create a market for land by next summer and end the ongoing moratorium on sales – a key demand from the International Monetary Fund (IMF). The reform was attempted under former president Petro Poroshenko's administration, but abandoned as too politically sensitive in the run-up to the elections just gone.
This reform alone will cost Zelenskiy a lot of political capital as land ownership is an emotive issue, but the previous plan estimated that a land market should bring in $2bn of new revenue to the state in the first year, and clear title to land will allow credits for investment and development that should lead to rapid gains in agriculture, Ukraine’s most attractive and productive sector.
Below is a list of the main initiatives on the table and deadlines, where they have been set, as reported by Ukraine Business News with bne IntelliNews’ comments.
Land: draft legislation to create a land market, to be prepared by October 1 this year by the Cabinet of Ministers. Abolition of the moratorium on the sale on farmland is to be implemented by the Rada by December 1 this year. Creation of a farmland market is to be created by the middle of next year. The initial market operations will be overseen by the new Ministry of Economic Development, Trade and Agriculture. A state land registry is to be created by 2021. Russia freed land ownership many years ago and has seen private investment flood into the sector and agricultural production boom.
Capital controls: to be totally removed by the end of this year. The Hryvnia to be fully convertible. The National Bank of Ukraine (NBU) has been winding down the capital controls in the last year as the economy stabilises, but the system is still not entirely free. “Full currency liberalisation is very important. It is important to ensure free capital flow so that investments come in, that people are not afraid that they will not be able to get them out of here,” Honcharuk said.
Legalise gambling, amber mining: draft legislation to legalise and regulate gambling and amber mining to be prepared by the Rada by October 1. Both these businesses are potential money earners and both currently exist mostly in the grey economy. Amber mining generates an estimated $500mn a year, but generates no taxes and wildcat miners do significant environmental damage. Casinos were banned in 2009, but underground gambling is thought to be worth billions of dollars. (Minsk has recently introduced similar policies).
Public private partnership (PPP) laws: draft legislation to create a framework of PPP concessions for the development of infrastructure to be submitted to the Rada by October 1.
Port concession tenders: contracts to handle cargo transfers at the key ports of Kherson and Olbia to be allotted to private stevedore companies by open tender by January 1. About 20 foreign and national companies have expressed interest in these contracts, reports UBN.
Re-launch the privatisation programme: the previous government’s privatisation programme failed to gather much momentum and attempts to sell big assets like Odessa Port Plant (OPP) failed multiple times. The new government will start off more modestly with a list of 500 small and medium-sized enterprises (SMEs) by December 1 that will be put up for sale via the ProZoro government electronic auction system. Ukraine has a total of circa 3,600 state-owned companies, reports UBN. The current list of state companies barred from privatisation will be abolished and a new, shorter list of companies exempted from privatisation must be prepared by the Rada by October 1. Big state-owned companies listed for privatisation must have privatisation plans ready, drawn up with the participation of investment advisers, by December 1. The first tender for a big privatisation must be offered no later than April 1 next year by Tymofei Milovanov, Minister of Economic Development, Trade and Agriculture.
Foreign investment protection legislation: new laws to improve the investment environment by strengthening investment protection, property rights, etc. to be enacted by January 1, 2020.
Anti-corporate raiding legislation: new legislation to end the practise of corporate raiding by strengthening property rights, expanding and improving property registers and automatic monitoring of risky transactions with extra confirmation by participants, to be prepared by the Rada by October 1.
Labour law liberalisation: draft laws to further liberalise the labour market to be submitted to the Rada by January 1. The intention is to ditch more of the legacy Soviet-era worker protections and make it easier to hire and fire employees to stimulate private enterprise and SME development. This was one over the very first reforms that Russian President Vladimir Putin made on taking office in 2000 and has led to a vibrant and competitive labour market. Today Russia boasts record post-Soviet low unemployment.
Inland shipping bill: to revive shipping via the Dnipro river by laying out inland river shipping regulation and taxes that should be enacted by November 1. There is already a draft version that needs revision that would use a single river tax to fund investment into Soviet-era locks and boost traffic significantly. Some 65mn tonnes of cargo travelled along the river in 1991. This year the river will carry 13mn tonnes of cargo.
Private locomotives bill: legislation to regulate and allow privately owned locomotives on the state-owned rail tracks to be enacted by December 31. Russia introduced the private ownership of gondolas but not locomotives that remain under the control of Russian Railways (RZD). The reform led to an inflow of investment and a rapid consolidation of the fragmented railway logistics that is a Soviet-era legacy to create some highly attractive logistics companies. Ukraine is proposing to skip a step and go straight to privately operated locomotives.
Re-structure Ukrzaliznytsia (Ukrainian Railway): in parallel the government is proposing a deep restructuring of the state-owned national rail operator that should act as a significant economic multiplier. “Elaborate a restructuring plan for Ukrzaliznytsia, in particular with a view to liberalising the locomotive market and improving the transparency and efficiency of Ukrzaliznytsia,” Zelenskiy said.
Reform of the police and security services: the new Interior Minister Arsen Avakov has already started to dismantle the police’s Department of Economy Protection, which is notoriously corrupt. The Ukrainian Security Service (SBU) and the State Fiscal Service are also being told to abolish their “economic crimes” units, which only engender corruption. The reform of the security services and police will be among the most difficult of all the reforms as they are home to the most powerful vested interests, however, unlike most of the other ministries, security and police fall directly under the constitutional control of the president, who doesn't necessarily need the Rada to make changes. The Rada has been tasked with preparing draft legislation for a successor agency, the Financial Investigation Service, by December 1 this year.
Budget 2020: It’s easy to forget that in the welter of reforms, the government also has to do its housekeeping. The Rada has to prepare a budget for 2020 by September 1. The state’s finances have improved dramatically in the last two years and tax collection in particular has improved. Next year's budget should be similar to this year’s budget and will almost certainly be IMF compliant.
Close oil and gas deals: several prospecting and production agreements have been sold off using the proZoro system this year, but the government must sign off on these deals with the winners by December 1 this year. The new Minister of Energy and Environmental Protection Oleksei Orzhel said: “There will be legislative initiatives to increase gas production. There will be reforms in the market, we are inviting everyone to invest,” as cited by UBN. Ukraine currently produces 1.2% of its known reserves each year, well below the global average of 4-5%. The country also produces some 20bn cubic metres (bcm) of gas a year, enough to meet around half of its domestic needs.
Power connectivity: The Rada must reform the utilities sector to improve and cut the costs of connecting to the electricity and gas networks. This one is straight out of the World Bank’s Doing Business rating as one of the six criteria that go into that index.
Mortgage promotion: the government must “encourage the reduction of mortgage rates” by October 1. It is not clear how the government can do this as mortgage rates are a function of the NBU overnight rates and the central bank has successfully maintained its independence from government. Currently it is more focused on bringing down high inflation rates than cutting overnight rates. However, Russia followed a similar policy and the government in recent years subsidised mortgage rates over 12% in an effort to boost home ownership. Property ownership acts as a “social glue” and tends to promote more engagement between the citizenry and the state.
E-government: Zelenskiy has already talked about his concept of “government in a phone” and intends to follow Estonia by putting as much of government online as he can. The Rada must put the 30 most heavily used government services for citizens and businesses online by January 1 next year and an e-citizen profile for all Ukrainians must be created for enrollment in a Unified State Demographic Register. Honcharuk said: “2020 will be the year of total digitalisation of the country. In 2020, we will digitalise everything that we don’t have time for ... This means that after 2020 Ukraine should be completely in digital, on a smartphone.”
Customs service reforms: another notoriously corrupt service must see a comprehensive reform launched by December 1. A single-window customs service must be launched by January 1 next year.
Judicial and state organ reforms: like all the state bodies, the judiciary is also notoriously corrupt. Zelenskiy is calling for the system to be purged and 2,000 new judges to be vetted and hired by January 1 next year. As part of this purge by the same date “the most corrupt state agencies” should be purged, including the agencies for Geodesy, Cartography and Cadastre, Geology and Subsoil, Architectural and Construction Inspectorate, Environmental Protection, Transport Safety, and Highway Agency, reports UBN. This is another Augean stables reform and it is not clear which nearby river Zelenskiy can divert to get this job done this quickly.