You're reading: Saakashvili talks up EU integration path

The tiger is awake and moving, but almost imperceptibly.  

There is a chance that he will spring to life and start taking big leaps, but also a danger that he will go in the wrong direction. More likely, the tiger will not move far or fast for the next few years at least. But in 10 to 15 years, the tiger will be in full European stride – maybe.

Those were some of the answers to the metaphorical question of “Ukraine: Will The Sleeping Tiger Awaken?” posed by the Kyiv Post Tiger Conference held on Nov. 27 in partnership with the East Europe Foundation.

Consensus could be found on one point: Ukraine is not yet a tiger economy, meaning a fast-growing one.

Georgian President Mikheil Saakashvili gave the keynote speech at the event. Another 20 international and Ukrainian business leaders spoke, as well as several top members of Ukraine’s government, during the daylong seminar attended by 200 people in Kyiv’s Fairmont Grand Hotel.

Among the Ukrainian officials participating were Economy Minister Petro Porosenko, Deputy Presidential Administration Head Iryna Akimova and Party of Regions member of parliament Serhiy Holovaty.

Other notable speakers included Moldavan Deputy Prime Minister Mihai Moldovanu, Malasiyan economic expert Tan Sri Sulaiman Mahbob and former U.S. Ambassador to Ukraine Steven Pifer.

“You need to learn and go through the democratic process,” Saakashvili said in his 15-minute speech to open the conference. “And for the democratic process, the identity of society is the most important thing. And the identity of Ukrainians, Georgians, Moldovans – it is Europe.”

His speech came at a time when Ukraine’s democratic reversals since President Viktor Yanukovych took power in 2010 have stalled relations with the European Union and the United States.

But Saakashvili counseled patience. 

In the end, he said of Georgia and Ukraine: “We have to be in the European family, and the European family is not just structural things. One thing is to tackle the benchmarks, and the other thing is to really search for the side you’re on. And that takes time, it takes adjusting. It’s never just going up. There are ups and downs.”

The benchmarks for both nations, Saakashvili said, include eventual ratification of free trade and political association agreements with the European Union that Ukraine and Georgia aspire to join someday. 

“Europe will never be full until Ukraine is part of Europe, and I believe we’re a part of this wider package,” Saakashvili said. “It is going to happen. We just need to have patience. It takes a whole generation to get there, but we will get there.”

Armen Khachaturyan, senior partner with Asters law firm in Kyiv, moderates the Nov. 27 panel entitled “Leaning East or West: Does It Matter To Business” as International Monetary Fund representative Max Alier looks on.

While Ukraine has 10 times the population of Georgia, the nations have several similarities and differences in their quest for Western integration. Both are former Soviet republics trying to shed the stifling influence of their former Russian overlords. By most accounts, Georgia has far surpassed Ukraine in rooting out corruption, slimming bureaucracy and attracting investment.

However, Saakashvili – the American-educated president credited with transforming his society from ex-Soviet backwater to democratic beacon since the 2003 Rose Revolution – is experiencing his own political reversals.

He will leave office after his second four-year term as president ends in 2013. His party lost the fall parliamentary elections to rival and Kremlin-friendly billionaire Bidzina Ivanishvili, who became prime minister.

Moreover, Georgian society is being roiled by arrests and criminal investigations involving former high-level government officials suspected of abuse of office or corruption. There is even talk that Saakashvili could come under criminal investigation after Ivanishvili blasted the president for lavish spending, including living in the opulent presidential palace.

In Saakashvili’s speech, he briefly mentioned the problems back home, but suggested at least some of the criminal investigations amounted to political persecution. He framed the events as an assault by foes of his democratic changes.

“What is happening in Georgia now is not easy because people go after reformers, they go after those who do some radical things. There have been some investigations, but I don’t think it’s my function to intervene in the judicial process,” Saakashvili said.

After the speech, Saakashvili briefly elaborated on questions from Kyiv Post and other journalists.

“These are short-term attempts to flex muscles, a show by the new government how powerful they are. But it’s not going to work,” Saakashvili  “People will tell the new government to uphold its promises, and they were not about political persecutions.” Asked whether he feared arrest, Saakashvili said: “I am never afraid.”

Here are some highlights of the panel discussions:

Main Panel: Ending the Slumber; Section 1 – Ukraine: Finding Its Place In The World

Steven Pifer, the American ambassador in Kyiv from 1997 to 2000, sounded the alarm about Ukraine returning to a “gray zone” geopolitically because of democratic regression under President Viktor Yanukovych.

Ukraine, Pifer said, has gone from being a darling of American foreign policy in the 1990s – when the nation commanded $225 million a year in U.S. aid – to one in which all 100 U.S. senators in September unanimously passed a resolution that mentions the possibility of visa bans and financial sanctions against those responsible for the imprisonment of ex-Prime Minister Yulia Tymoshenko and other incidents the West regards as abuses of human rights. 

From left, East Europe Foundation board member Adriaan Jacobovits de Szeged, Moldovan Ambassador to Ukraine Ion Stavila and Czech Ambassador to Ukraine Ivan Pocuch.

While noting that it’s up to Ukrainians to choose their economic alliances, Pifer questioned the wisdom of joining the Russian-led customs union rather than establishing a free-trade area with the much larger European Union economy. “The customs union will kill EU free trade: Do you want a customs union with a $2 trillion a year economy or do you want to go to the largest economy in the world, (representing) some $15 trillion to $16 trillion a year?” he asked.

The former U.S. envoy also said Ukraine’s investment climate is dismal. “People say corruption has gotten worse in the last two years. They see an absence of critical mass of reform. They see arbitrary court decisions. The factors that make people want to come are absent,” Pifer said. 

Serhiy Holovaty, the former justice minister and a current member of parliament with the pro-presidential Party of Regions, acknowledged that Ukraine’s judiciary is still “corrupt and not independent.” He also said that Ukraine’s oligarchs have worryingly extended their control over not just the economy, but also the judiciary and elections. But this oligarchic state capture has some positive aspects, Holovaty said, in contrast to Russia where President Vladimir Putin “owns the oligarchs” and calls all the shots. “Yanukovych does not direct democracy and doesn’t own the oligarchs. The oligarchs put their people in parliament. It’s pluralism,” he said. 

Holovaty said he remains optimistic as long as the EU recognizes Ukraine’s individuality and adopts a consistent policy to the state and not just a particular government.

While criticizing the seven-year prison sentence that Tymoshenko is serving after being convicted last year of abuse of office, Holovaty said the fate of the nation shouldn’t be linked to hers. “The case of Tymoshenko is a shame, is a disaster for Ukraine in general,” Holovaty said. “From the point of view of political prosecutions and rule of law, it is a shame. But it shouldn’t be used as a pretext for closing the door on Ukraine. It shouldn’t be the price for the destiny of the whole nation.”

Tan Sri Sulaiman Mahbob, a member of the board of the Malaysian Central Bank, said the Southeast Asian nation achieved progress when it reached political consensus about its national goals, something sorely lacking in Ukraine.

Moderator Daniel Bilak, managing partner of the Kyiv office of CMS Cameron McKenna, argued the current government lacked direction and strategic thinking about where the country should be in 30-40 years. But he called on the West not to adopt policies that hurt ordinary Ukrainians and urged to “ease up on visas,” allowing more people to travel to the EU and America.

Bilak was encouraged by the Ukrainian nation’s fierce opposition to the permanent political monopolies found throughout the former Soviet Union.

“What gives you hope for the future is that every single government (in Ukraine) has had a grand plan to stay in power forever,” he said. And every plan has failed – “crashed on the ground of the Ukrainian electorate” who vote for whomever they want  and will revolt if their votes are stolen, he said. Bilak said the electorate has moved past its political leaders, many of whom retain a Soviet mentality.

Main Panel: Ending the Slumber; Section 2 – “Leaning East or West: Does It Matter To Business” 

Iryna Akimova, President Viktor Yanukovych’s top economic adviser, highlighted the progress Ukraine has made in fixing the nation’s business climate, noting improvement in Ukraine’s rankings in the World Economic Forum’s Global Competitiveness index and the World Bank’s Doing Business index.

Akimova also said the government welcomes advice from business, government and nongovernmental organizations. She said the government will continue to reduce the powers of bureaucrats – and the potential for bribes and corruption – by streamlining regulations and permits required for doing business. 

However, Pavlo Sheremeta, president of the Kyiv School of Economics, said that the improvements amount to baby steps since Ukraine is still near the bottom of both business rankings cited by Akimova.

Moderator Armen Khachaturyan, senior partner of Asters law firm in Kyiv, highlighted the need for Ukraine to diversify its economy away from raw material exports as a path to prosperity.

‘Ukraine’s Information Technology Outsourcing Boom and What We Can Learn From It’

The message from the information technology speakers was loud and clear: Ukraine has a critical shortage of website programmers and software developers. They want government to step in and improve educational opportunities to increase the supply.

Karl Robb, executive vice president of global operations for EPAM Systems, a software service and IT outsourcing company, said Belarus’ government offers much better support for the IT industry than Ukraine. “That country is next door and much smaller and way ahead of Ukrainian authorities in terms of expanding its education,” Robb said.

Torben Majgaard, the founder and CEO of Ciklum, an IT outsourcing company, contrasted the stability of his native Denmark to Ukraine’s unpredictability. In Denmark, “any kinds of changes in tax laws or legal laws would be announced years in advance after discussion with the industry and usually they would amount to minor adjustments,” Majgaard said. Ukraine must “try to create some predictability to the legal framework.” 

‘Growth Sector To Watch: Agriculture and Food Security’

If there is one sector that Ukraine is pinning its future economic hopes on, it’s the agricultural one, given the nation’s abundant supply of fertile black earth. It’s the sector that many view as resistant to oligarchic domination, unlike heavy industry, although some fear that opening up Ukraine’s land market could lead to concentration of ownership.

Despite the high hopes, agribusiness is underperforming. Experts on the panel say that Ukraine could easily and quickly double or triple its output with the right mix of government policies and investments.

John Shmorhun, president and general director of Harmelia Holdings, which manages nearly 75,000 hectares of farmland in Kharkiv Oblast, said “the biggest problem is lack of investment.” He estimates that 20 percent of Ukraine’s crop is lost due to poor storage and other factors.

Lack of stable government policies is also a problem, most recently highlighted by legislation to extend the moratorium on land sales to 2016. “Investors want long-term and stable lease agreements and trade policy in Ukraine,” Shmorhun said, noting the changeability can mean “today we can export wheat, tomorrow we cannot export wheat.” 

Kyiv Post staff members register conference participants at the Fairmont Grand Hotel in Kyiv on Nov. 27.

‘Growth Sector To Watch: Energy and Energy Efficiency’

As moderator Daniel Bilak noted the sector underwent rapid changes in the last year, driven by Ukraine’s need to cut expensive natural gas imports from Russia. “We’ve had a revolution,” Bilak said, but added: “We have the problem of mixed messages. Sometimes realities don’t meet the rhetoric. This sector has perhaps three major challenges: capacity, cronyism and corruption.”

Graham Tiley, the country manager for Shell Ukraine, said that the challenge by 2050 will be to meet the increased energy demands of 9 billion people while reducing carbon dioxide emissions. Even with the development of renewable energy sources, hydrocarbons are still projected to supply 60 percent of the world’s needs. “Oil, gas and coal will be with us for a long time,” Tiley said.

Shell is negotiating a 50-year production sharing agreement with Ukraine’s government for exploration of the Yuzovska field in Kharkiv and Donetsk oblasts. Stable, long-term deals are essential, Tiley said, because energy companies often make multibillion-dollar investments up front in the hopes of eventual profit.

But Ukraine’s investment climate has been anything but stable and secure.

Peter Justin O’Brien, country manager of EuroCape Ukraine, involved in wind power, said the government started changing what were meant to be 20-year wind-power agreements within four years by changing required share of local content required in turbines – something many regard as an artificial barrier to competition, designed to protect powerful domestic interests. “If our industry can’t get four years into a 20-year marriage, I hope you have better luck with 50 years,” O’Brien told Tiley.    

‘Finance and Corporate Governance’

Ukraine’s banking sector suffered greatly during the 2008-09 crisis, when dollar loans became too expensive to repay after the hryvnia devalued 40 percent and collateral lost value. Four years later, as much as 40 percent of loans are non-performing.

Pavel Cetkovsky, CEO of Erste Bank, expects more consolidation in the sector, but noted weak creditor rights meant many loans were intentionally not being repaid.

On the investment front, Natalie Jaresko CEO of Horizon Capital, said that “today it’s very difficult if not impossible to raise private equity” because investors don’t believe there’s enough liquidity to sell companies. “We can make good investments. The companies can be profitable. But the investor makes a return only when we sell the investment,” she said.

As for the hryvnia, Tomas Fiala, CEO of Dragon Capital, said businesspeople “would prefer a floating exchange rate” instead of the current peg. “Ukraine’s foreign exchange policy has been driven by political considerations not economic considerations,” Fiala said. “We hope this period will be ending shortly.” He expects the hryvnia to slip to Hr 8.4/$1 by the end of the year and Hr 8.8/$1 by the end of the next, though some expect greater devaluation.  

Likewise, the experts noted, mergers & acquisition activity and initial public offerings have dried up. 

This report was written by Kyiv Post chief editor Brian Bonner with contributions from Kyiv Post editors Katya Gorchinskaya and Jakub Parusinski and Kyiv Post staff writers Svitlana Tuchynska and Maryna Irkliyenko.