Ukraine drifts towards Russia’s economic projects
July 30, the Verkhovna Rada of Ukraine adopted a new law effectively ratifying
the Free Trade Zone Agreement with the Commonwealth of Independent States, an
agreement which already covers most of the former Soviet Union.
law was preliminarily signed by Prime Minister Mykola Azarov back in October
2011. In the government’s opinion, the free trade zone with the CIS will secure
a 2.5 percent growth of gross domestic product and a 35 percent increase in
sales volume between Ukraine and other member-countries. The government also
expects an additional annual budget revenue of Hr 9.4 billion ($1.2 billion).
the same time, the Agreement provides for certain limitations on the sale of
goods from 60 different categories, including natural gas and electricity, as
well as the suspension of export fees on Russian, Byelorussian and Kazakhstani
(members of the Customs Union) raw oil. The question remains: what hidden risks
does the free trade zone with CIS hold in light on Ukraine’s intentions for
European integration of Ukraine?
there might be certain risks due to the fact that the agreement provides
sanctions if any member-country concludes any other trade agreement which might
result in losses for its partner member-countries. Besides, Ukraine will no
longer be able to forward-export goods from Europe to Russia and it will also
slow any reforms necessary to bring the national economy in line with European
will deliberately keep an export window open for Ukraine, in order to tie
Ukrainian business with the Russian market and make the transformation of
Ukrainian economics and politics to meet European standards impossible.
Currently the free trade zone agreement with the CIS is only in force between
Ukraine and Russia, as so far the document has yet to be ratified by anyone
other than Ukraine, Russia and Belarus.
Union representatives in Ukraine have reported that the ratification of the free
trade zone with CIS does not prevent Ukraine from signing a similar document
with the European Union. At the same time Leonid Slutsky, chairman of the State
Duma’s Committee on International Affairs with CIS, mentioned that the
ratification of the CIS free trade zone by Ukraine might also be a step towards
joining the Customs Union.
Comment: If there is
one thing Ukrainian society and the international community dislikes more than
anything else it is unpredictable flip-flop politicians. Will they won’t they… are they good for their
word… what is their strategy…? Nothing
undermines trust more quickly than indecision. Rather than refraining from
making promises or being loyal to their word this government prevaricates,
postulates and tries to be clever with half a move this way and half a move
back. It is childish chess and hardly
worthy of a national government.
In our opinion, the problem is that this government does not have a
strategy, every decision is made on the basis of now and what is in their best
commercial interests. They do not
consider the long-term interests of the nation or the will of the people. As a result of their economic policy coupled
with their intransigence over the jailed leaders of the opposition they
actually have very few options left apart from sliding into the arms of a
rapacious Russia. For its part all
Russia has to do is to buy up sufficient Ukrainian industry to be able to call
the shots. It’s called economic
imperialism. Certainly there may be
short-term benefits in building economic ties with the CIS but any trade
agreement that limits the sale of 60 key areas is not a free trade area, it is
a trading block where you are not allowed to tread on Russia’s toes, something
Ukraine can do with ease.
Despite the current difficulties, the EU is by far the stronger trading
partner. However the EU is not just
interested in raw materials and energy.
Ukraine has a massive and totally under-utilised technology sector that
could be harnessed if those at the top were to take a more long-term view,
however, the likelihood of that happening is virtually nil as this
administration and the opposition seem only interested in is their personal
Language law to divide
Facing the parliamentary
elections in Ukraine the authorities have decided to use language issue
(granting Russian official status as a second state language) in order to gain
popular support. Early in July the Ukrainian Parliament approved the Law ‘On
the fundamentals of the national language policy’ allowing local and regional
governments to grant official status to Russian and other regional languages.
Despite massive protest against the law, involving a two- week hunger strike in
Kyiv, the law has been passed to Yanukovych for signature. Based on recent
sociological research, 34 percent of Ukrainians support the law while 42
percent are against; also whilst 37 percent of respondents believe that
Ukrainian needs more protection only 18 percent speak for the protection of
demonstrates that the number if people who are against Russian as a second
official language has exceeded the number of supporters of the law; 41 percent
of Ukrainians support the idea of granting Russian official status compared to
51 percent which are against – previously the numbers were almost even. Another
interesting fact is that the language issue is not even in the first ten
priority issues for the people of Ukraine which almost exclusively centre on
the economic ones. At the same time the people of Ukraine can see that the
government wields the language issue to manipulate their opinion – 74 percent
strongly believe that by doing so the government hopes to win their votes).
Experts also reveal a
significant financial issue in conjunction with the new language legislation.
Should the President sign the Law the country will have to spend annually an
additional amount of between Hr 17 billion ($2.1 billion) and Hr 50 billion ($6.2
billion) on translation, training and administration services(6).
Comment: For 70y years,
the communist party sought to eradicate the Ukrainian language and the
Ukrainian culture… they failed. This
government is once again displaying a callous disregard for the nation in
raising what should be a non-issue. In
case the government hadn’t noticed, we live in Ukraine where the national
language is Ukrainian. Of course, there
needs to be due respect to the other languages that make up the Ukrainian
culture and those include Russian, Romanian, Hungarian, Polish, Tatar and, to a
certain extent, English but to have two national languages is simply a recipe
Setting the emotion to one side and looking at the impact for one moment
it means that investors may now have to produce every legal document in both
Ukrainian and Russian, doubling the cost, time and bureaucracy. Imagine the chaos… Documents written in Donetsk,
where they could adopt Russian as their official language would need to be
authorised in Kyiv where Ukrainian is the official language… Can Kyiv refuse
them and which language takes precedent in law as you cannot have two?
That said we should really look at what is behind this hasty
decision. Gaining political favour in
the East? It will not happen as this law will not change anything for the
better. The law was deliberately passed immediately after the closing of Euro
2012 thereby silencing any debate over the success or failure of the event, the
cost of hosting it and the real value to the nation. On the first day of protest against this law
the opposition joined with the people in street demonstrations whilst in their
absence Party of Regions, with less than 70 members in the Rada (the required
minimum being a majority of 226 members), passed 36 bills worth billions into
law without any discussion using their classic ‘piano voting’. Democracy? Not even close.
The opposition again failed to intervene on the language issue as they
fear the loss of support of those who speak Russian on one side and those who
speak Ukrainian on the other hence they did nothing.. On the plus side the people
of Ukraine now understand the real value of those in the government and
Ukrainian Tax Service
blocks foreign investment
The ambassadors of the
USA, France and Hungary have openly reported that they regularly receive angry
letters from companies in their countries, complaining about significant
problems in communication with the Ukrainian Tax Service. The ambassadors have
said on multiple occasions that the Tax Service of Ukraine is scaring investors
away. The most frequent complaints of
foreign investors are: illegal cancellation of VAT refunds, a general practice
of granting VAT refunds to ‘favoured’ companies only, threats of criminal responsibility
with the purpose of collecting more funds, tax services being involved in
corporate raids and excessive numbers of inspections.
Russian business has
also been complaining about the Ukrainian Tax Service. According to Oleksy
Urin, Head of the economic policy group at the Russian embassy in Ukraine,
Russian companies have invested a lot in Ukrainian economy and their
investments must be protected. Some Russian enterprises complain about VAT
refunds, advance payments of income tax, overvaluation of imported goods by the
Customs Service of Ukraine and the lack of objectivity in the courts’ decisions
due to corruption.
Foreign experts have
advised that the governing authorities of Ukraine bring their domestic and
foreign policies in line. It means primarily that they should combat corruption
and restore the rule of law as these areas affect domestic policy most
directly. In terms of foreign policy, the governing authorities of Ukraine have
been advised to sign the Association Agreement with the IMF and develop
pragmatic relations with Russia(9).
Comment: Everybody and
every company in any country is required to pay taxes. Similarly every government is required to use
those taxes to deliver to the people a society that is the best the nation can
afford. The money belongs to the people;
the state is purely the administrator whose job is to ensure that all pay their
share in accordance with the law and that the money is used in a way determined
by the people through the election of their representatives… but not in
Here the State Tax administration is considered to be one of the most
oppressive organisations in the country, hell bent on squeezing every last drop
of revenue from society by legal means or other. International experience,
however, shows very clearly that if tax payers consider the taxes to be too
high or unjust or if they can see no societal benefit from paying taxes then
they will do almost anything to avoid paying.
It is, in mathematical terms, a classic example of the law of
diminishing returns and in Ukraine the people have every right to withhold
taxes as the very fabric of society is now in severe decline.
In Ukraine the average book keeper will spend up 75% of their time
simply dealing with the tax office and the ridiculous multiple filing
requirements whilst finance directors spend upwards of 30% of their time
dealing with STA interpretations of the law which invariably contradict each
other depending upon the officer concerned.
Is it any wonder, therefore, that international investors which are the
lifeblood of every modern economy are abandoning Ukraine simply because it is
just too much hassle? This government
has singularly failed to understand that international investors don’t really
mind the level of taxation as this is just a cost of doing business, but if the
system is uncertain resulting in wasted executive time then they will simply
move to more enlightened environments.
Ukraine unites over
Activists in Ukraine
have united to monitor the quality of roads signalling a positive step for
civil society development. Members of the Road Repair Control group have
created an official web-site (http://4road.net/)
for posting photos of potholes all over Ukraine. By this record the capital of
Ukraine has become a leader in the number of holey roads. New evidence of the
negligent attitude of the authorities appear on the web-site every day. The
movement has united car enthusiasts, civil organisations and regular people who
refuse to silently accept potholed roads and corruption in the field of road
repair and construction as well as shady parking practices.
The key message of the
movement has been – “we will not remain indifferent to robbery!”.
This suggests that the people of Ukraine are starting to wake up and walk away
from passive surveillance, towards active protection of their rights.
Members of the movement
stress that the problem of corruption can be solved only though the
establishment of such an environment in which the people expose the
government’s illegal activities. The movement also teaches people to refer all
road problems to the local authorities – by following a laid-out complaints
procedure for filing an official suit.
From time to time the
movement’s activists organise protests in front of governmental buildings to
draw attention to specific road problems. Activists even draw circles and signs
around potholes in white paint. This has become a people’s address to the
They give away white
paint to everyone willing to support this initiative so that potholes are
painted all over Ukraine. So it seems that with the help of white paint, a
web-site and civil activity, Ukrainians not only save road users from danger
and promote control of governmental activities but also help each other
understand that by doing so they are building better Ukraine.
Comment: The M06 is one
of Ukraine’s major arterial highways. It
is part of the pan-European transport corridor that links Kyiv to Hungary and
the whole of Southern Europe thus it is one of the most significant highways in
the country. The road had little importance in the Soviet era thus it was not
well maintained and this, coupled with the vast increase in heavy transport
traffic following independence, meant that by late 1990s this highway was
The Yushchenko government, in a bid to revitalise the Carpathian region,
turned to the EBRD to finance the refurbishment. For their part EBRD wanted to finance the
complete reconstruction of the highway to create a European-style motorway that
would link Kyiv to Budapest and Zagreb. Kyiv
opted for a less expensive refurbishment.
The work began in 2007 on the worst sections across the mountains and
was completed in 2009. At the same time
the Hungarians extended their motorway network to within 50km of the Ukrainian
Today the Hungarian motorway is a real pleasure to drive in that it is
smooth, even and very well-maintained whilst the Ukrainian sections are back as
they were in the late 1990s with tram line ruts, huge potholes, pealing
surfaces, pools of melting tar and areas so bad that the average speed is down
to 30 km
per hour. The comparison could not be
starker. The Hungarian roads were built
properly to withstand the pressures of modern transportation. In Ukraine it was
an expensive, poor quality, patch-up that will now have to be done again
costing the nation millions and the same is true for most of the road
refurbishments in Ukraine as once the black top is laid, it is very difficult
to see what is underneath. But then this
is what happens when you combine false economy with endemic corruption. Good
luck to the Road Repair Control, you are doing a great job.
Viktor Tkachuk is chief executive officer of the People First
Foundation, which seeks to strengthen Ukrainian democracy. The
organization’s website is: www.peoplefirst.org.ua and the e-mail address is: firstname.lastname@example.org