You're reading: Reform Watch – June 3

Editor’s Note: The Kyiv Post tracks the progress made by Ukraine’s post-EuroMaidan Revolution leaders in making structural changes in the public interest in six key areas: economy & finance, security & defense, energy, rule of law, public administration and agriculture.

Overview


This will be a big July for Ukraine. On July 8-9 in Warsaw, NATO will hold a summit at which Ukraine may hope for a lot, but will likely get no more than another expression of solidarity and possibly more financial aid. Also in July, the International Monetary Fund will decide whether to restart a lending program that got frozen last year amid the political turmoil that led to a change in government in April. At stake are future tranches of the IMF’s $17.5 billion loan package for Ukraine. But Ukraine has to show more progress in making structural reforms and fighting corruption to meet IMF demands.
– Brian Bonner

Energy

Billlionaire Rinat Akhmetov must repay Hr 75 million to Naftogaz. (Kostyantyn Chernichkin)

Naftogaz scores win over Akhmetov

State-owned gas and oil monopoly Naftogaz is poised to regain Hr 75 million ($2.99 million) in debts from joint-stock energy supplier KyivEnergo this week, after a Kyiv appellate court ruled in favor of Ukraine’s state-owned oil and gas company. The debts stemmed from a 2012 deal between Naftogaz and Kyiv’s energy supplier that saw the national gas company agree to supply KyivEnergo with imported natural gas in exchange for payment. KyivEnergo, 72 percent of which belongs to oligarch Rinat Akhmetov’s DTEK energy company and the rest to the city, did not fully pay its side of the deal, Naftogaz said, leading to the Hr 75 million debt. Naftogaz itself allegedly owes more than Hr 4 billion ($160 million) in debts to its subsidiary Ukrnafta, and is also embroiled in litigation with Russian state-owned gas company Gazprom, which claims that Naftogaz owes it $32 billion in unpaid gas bills. The KyivEnergo cash will provide Naftogaz with much-needed working capital to continue its operations.

Naftogaz, however, has been delaying the provision of a clear plan for the unbundling of its assets, a move that would separate gas suppliers from distributors and create fairer competition for independent companies. The European Commission set June 1 as the deadline, but Naftogaz is yet to start the unbundling process.
– Josh Kovensky, Ilya Timtchenko

Economy & Finance

cars

Lawmakers on May 31 voted to cut excise taxes on imported used cars. (Kostyantyn Chernichkin)

Lawmakers take steps to improve Ukraine’s investment climate, boost competition

Ukraine’s parliament passed five important laws on May 31 that should make doing business in Ukraine easier. However, all five bills have yet to be signed by the parliament speaker and the president.
The long-outdated mandatory registration of foreign investment has finally been canceled by the Rada. This will slice away red tape for foreigners and reduce opportunities for officials to take bribes – a necessary step for a country that has been heavily losing foreign direct investments since the economic crisis in 2013. In 2014, foreign direct investment in Ukraine amounted to only $410 million, according to the United Nations.

The second draft law was on the Business Ombudsman Council, an independent advisory institution that investigates illegal activity against businesses in Ukraine. The law, which gives more protection to the council, passed first reading. As of May 1, the ombudsman’s office had resolved 341 of the 799 complaints cases it has received. The passing of a law to bolster the institution was one of the main requirements of the International Monetary Fund team that visited Kyiv on May 10 for the fund to continue providing tranches of its $17.5 billion bailout loan package for the country.

Parliament also passed a law that deregulates the pharmaceutical market. The law is designed to increase the competitiveness in the sector, making better quality medicine more affordable. It is also intended to weaken the local oligopoly market of Ukrainian pharmaceuticals.
Another important piece of legislation passed on May 31 cuts excise tax on imported used vehicles by up to 28 times. This will help Ukrainians get access to better quality cars at more affordable prices. Only 202 Ukrainians out of 1,000 have a car, while in Europe the number is closer to 500. However, some in the auto industry have voiced concern that the law will hurt domestic car manufacturing. According to Ukrautoprom, Ukraine’s car manufacturing association, Ukraine in 2015 produced only 8,000 cars – an all-time low for the past decade.

A law passed on June 2 makes corporate governance of state-owned enterprises more transparent. Each SOE can now have independent board of directors, more transparency in public financial statements, as well as independent and high-quality audits.
First Economy Minister Yuliya Kovaliv says that the change is extremely positive.

“The bill will allow us to reconstruct the system of corporate governance and raise the level of transparency in state-owned enterprises to standards of the Organization of Economic Co-operation and Development, which have long been operating in developed countries.”
The Rada still needs to pass laws that will decrease the number of strategic state-owned enterprises, cancel at least six licenses for Ukrainian businesses for imports and exports, and increase the effectiveness of bankruptcy procedures, which will increase Ukraine’s Doing Business rating.

May 31 was also marked with good news for banks in Ukraine. Moody’s Investors Service changed the outlook for Ukraine’s banking system to “stable” from “negative.” In a note, the rating agency says that its change in outlook reflects its view that the economy will begin to emerge from a deep recession in the coming 12-18 months.

Improving confidence in the hryvnia and falling inflation expectations led to a 12 percent rise in local currency deposits between March 2015 and March 2016. This is a major turnaround from the past two years, when local currency deposits declined sharply, Moody’s said. It said it expects that these changes will improve the banks’ financial state.

The state banking system still remains fragile, however. According to the National Bank of Ukraine, 23.6 percent of existing loans are non-performing as of April, one of the highest rates in Europe. To improve the banking system, the parliament has yet to improve creditor’s rights by implementing judiciary reform, which will clear Ukraine’s courts of corrupt judges.
– Ilya Timtchenko, Olena Savchuk,

Agriculture

Land for loan collateral?

Parliament is yet to make a decision on whether it will cancel the controversial moratorium on agricultural land sales, or set up a clear land lease program that would make it easier for small- and medium-sized farmers to have control over their land. Ukraine’s new Agriculture Minister Taras Kutoviy says that there will most likely be a compromise in which farmers will have the ability to offer Ukrainian land leases as collateral for loans. Farmers would then be able to gain trust from the banks, which would then give out more loans.
There has been progress with one of the ministry’s biggest state-owned companies Ukrspyrt, an ethanol monopoly known for its massive corruption. Though Ukrspyrt is still on the list of state entities that cannot be privatized, the Kyiv Administrative Court of Appeals has finally unblocked the competition for hiring of a new CEO.
– Ilya Timtchenko

Public Administration

Cabinet fires state road repair chief

Ukraine’s Cabinet of Ministers dismissed the head of Ukravtodor, the country’s state-owned road repair company, on June 1.

Volodymyr Omelyan, Ukraine’s infrastructure minister, welcomed the move in his Facebook post: “Now it’s vitally important that we do not slow down the road repair process, that we prevent the theft of taxpayer money, and that we find a worthy candidate to lead this very important organization.” The Infrastructure Ministry has been lobbying for the overhaul of Ukravtodor for more than a year, saying the company is corrupt and ineffective.

In a vote on May 30, the Ukrainian parliament passed a long-awaited law that will simplify the registration process for imported drugs. Medicines produced in Canada, the United States, Australia, Switzerland and the member states of the European Union will now be registered in Ukraine within 17 days. Activists championed the bill, saying it would prevent corruption in drugs procurement, and finally give Ukrainian patients access to the kind of high-quality drugs used in developed countries. According to the non-government organization “Patients of Ukraine,” only 9,900 drugs have been registered in Ukraine so far, while in France this number is one-and-a-half times higher.
– Alyona Zhuk

Security & Defense

Police officers at swearing-in ceremony in Mariupol on May 30. (UNIAN)

Transparency comes to defense purchases

President Petro Poroshenko on June 1 signed into law a requirement for the Ministry of Defense to make all purchases in a transparent and competitive manner, using the online ProZorro system that has saved taxpayers millions of dollars in other purchases.
“This law will finalize the transparent public procurement procedure,” Poroshenko said. “It is an extremely important step towards the enhancement of the defense capacity of the country fighting against the aggressor, which invaded our territory. On the other hand, this law is a powerful anti-corruption step.”

ProZorro, an online platform for the state purchases, launched in February, 2015, has already saved more than Hr 780 million ($31.2 million) for the Defense Ministry, according to Deputy Minister of Economic Development and Trade Maksym Nefyodov.
Ukrainian Prime Minister Volodymyr Groysman said on the same day that any head of a local state administration who fails to switch to using ProZorro completely by Aug. 1 will be dismissed.

With Russia’s war against Ukraine in its third year, the measure takes on greater importance since the nation has committed to spending 5 percent of its gross domestic product (estimated to be only $100 billion this year) on defense spending.
Additionally, Ukraine plans to build about 30 warships and boats by 2020, a defense spokeswoman told UNIAN news.

Ukraine is also trying to encourage the movement in the U.S. Congress to force the U.S. Defense Department to stop buying rockets to send U.S. military satellites into space. The head of Ukraine’s Space Agency, Lyubomyr Sabadosh, said on May 31 that he proposed a joint U.S.-Ukraine plan to replace Russian RD-180 rocket engines, which the U.S. Congress has ordered to be phased out by 2019.

Moreover, according to the deputy chief of the Ukrainian Armed Forces’ General Staff, Colonel Vladislav Shostak, Ukrainian companies will begin to produce their own combat aircraft, Ukrinform reported. “The Ukrainian Air Force is currently comprised of Russian-produced combat aircraft, including Su-27, MiG-29, Su-24, and Su-25. Their military transport aircraft are predominantly Ukrainian-built Antonovs.
On the domestic security front, Western-style police patrols replaced Soviet-style corrupt traffic police in recent weeks in Mariupol, Severodonetsk, Lysychansk, Rubizhne, Krivy Rih, Kramatorsk and Slovyansk.

Meanwhile, vetting of the National Police is currently under way in five oblasts as part of efforts to cleanse the police system from corrupt and incompetent officials. The reform faces sabotage from courts that are reinstating fired officers. Additionally, representatives of civil society are leaving vetting commissions, which are being packed with loyalists of the Interior Ministry opposed to reform, Yevhenia Zakrevska, a lawyer for EuroMaidan victims and a member of a vetting commission, told the Kyiv Post.
– Alyona Zhuk,
Brian Bonner, Oleg Sukhov

Rule of Law

Prosecutor General Yuriy Lutsenko (UNIAN)

Ukraine makes tentative moves on court, prosecutorial reform; skepticism remains

The Verkhovna Rada on June 2 approved constitutional amendments on judicial reform designed to bring Ukrainian courts closer to Western standards. The law envisages setting up an independent regulatory body called the Supreme Council of Justice to oversee the court system. The changes also stipulate vetting judges and increasing their wages.

An anti-corruption court will also be created under the amendments, though it is not clear when a special law on the court will be passed. Yegor Sobolev, a lawmaker from the Samopomich Party, says that the authorities lack the political will to set it up.

The amendments have been criticized for effectively delaying the implementation of the reform until 2019, failing to renew the court system by starting an open competition for judges’ jobs, and not engaging civil society in the reform.

Another important reform – that of the prosecution service – is still in limbo.
Prosecutor General Yuriy Lutsenko’s first actions on the job sent mixed signals. But overall, so far he has failed to show a strong commitment to reform.

On the upside, Lutsenko has appointed war veteran Petro Shkutyak to cleanse the prosecution service from corrupt officials and promised to appoint Bohdan Vitvitsky, a U.S. prosecutor trusted by Ukraine’s civil society, to vet members of the General Inspection Service. But Vitvitsky will not be appointed until July.

Earlier this week Lutsenko appointed three new deputies. One of them, Valentyna Telychenko, has been praised as an excellent lawyer, but at the same time supported discredited ex-Prosecutor General Viktor Shokin, who sabotaged prosecutorial reform and investigations.
The selection of another deputy and ex-lawmaker from the People’s Front party, Dmytro Storozhuk, has been criticized as a sign of political horse-trading.

Lutsenko has so far failed to fire top Shokin loyalists accused of derailing reform and investigations. Several top Shokin proteges will remain, though Lutsenko has urged three other Shokin loyalists to resign. Only one of them has stepped down as of now.

Moreover, Lutsenko has not abolished a controversial department accused of fabricating political cases and has not delivered on his promise to fire its leadership.

Nor has he so far sent any high-profile criminal cases to court. Moreover, Lutsenko has not yet submitted to parliament a request to arrest lawmaker Yury Boiko in a theft case, which some see as a litmus test for Lutsenko’s ability to prosecute corruption.

One of the most controversial steps taken by the Prosecutor General’s Office since Lutsenko’s appointment is a tax evasion case against Teimuraz Nishnianidze, an ally of Odesa Oblast Governor Mikheil Saakashvili. The governor believes the case is a political vendetta against him by corrupt officials, including allies of President Petro Poroshenko.

Another setback for the rule of law is that parliament on June 1 failed to approve the creation of a special commission to investigate the offshore schemes of Poroshenko and other politicians and political corruption.

– Oleg Sukhov