I guess we are all struggling a bit at the moment with the story on Ukraine. From the one part, the story looks increasingly good/positive, highlighting herein:
- Much improved macroeconomics – falling inflation, solid growth, moderate twin deficits, declining public debt ratios (sub-60 percent), rising foreign-exchange reserves, with orthodox and credible fiscal and monetary policy. The hrvynia has been stable, even appreciating and this opens the way for the National Bank of Ukraine to continue to cut policy rates – creating hopes of an upturn investment, growth, and jobs.
- Economic reform: The Vladimir Zelensky/Oleksiy Honcharuk administration is, meanwhile, saying all the right kind of things around headline reforms – e.g. land reform (albeit some backtracking here, delaying the reform and limiting land sales to foreigners), unbundling the gas business. A plethora of broader “reform” legislation is getting steamrolled through parliament (the downside is with little real debate/oversight) – electoral reform, ending immunity for deputies. And Zelensky’s Servant of the People Party enjoys such as large majority in the Verkhovna Rada they can get key reforms on the statute book quickly – biggest chance/opportunity for reform in 30 years, since independence in 1991.
- Peace in the east: Zelensky won the elections this spring on the back of the promise of fighting oligarchs/corruption, but also delivering peace in the Donbas, with Russia. And on this, his new approach seems to be bringing some change – with the recent prisoner swap, talk of breathing new life into the Minsk process, and some evidence of the two militaries in the Donbas are just beginning to disengage/tone down attacks (the latter can easily reverse.)
But then over the past week we have seen seemingly very different messaging around the reform agenda. Herein we would highlight:
- Mixed messaging around the PrivatBank issue – with the former owner, billionaire oligarch Ihor Kolomoisky treated to a seemingly friendly meeting with Zelensky, his prime minister, Honcharuk, and the head of the presidential administration, Andriy Bohdan. Messaging at least to the Financial Times was that compromises were being sought around PrivatBank. And here was the problem – what compromises are there, given the international financial institutions strongly supported the nationalization of Ukraine’s largest bank back in 2016 and have been strident that former owners should be pursued for the losses incurred by the state? This now begs the question whether former owners will get the bank back, and that the state will have to dig even deeper into its pocket, in addition to the 5 percent of gross domestic product cost of saving the bank, to also write a cheque to former owners. This all begs the question as to whose side Zelensky, et al. are on, the state’s (as per actions from the National Bank of Ukraine/Ministry of Finance against former PrivatBank owners) or the former owner.
- The attacks on former NBU governor, Valeria Gontareva, labeled by the existing management of the NBU in a statement, as a “terror attack” – Gontarava has been threatened, her house was burned down in Ukraine, she was knocked over in London (unclear whether by foul play), her family car was torched, and apartment in Kyiv raised by masked men. I also hear rumors of intimidation generally against reform team members – the National Anti-Corruption Bureau of Ukraine has also seemingly launched an investigation into incumbent NBU governor Smoliy for inconsistencies asset declarations.
I sense herein we are at something of a turning point.
Zelesnky is in an incredible position now to make transformational changes in Ukraine – to finally turn the country around the corner, massively positive. He has favorable macroeconomic conditions, a good team of reformers, support in the country, a majority in the Verkhovna Rada – he controls all the levers of power. And one also senses a desire from various sides for new thinking in terms of the conflict in the Donbas.
The question I guess now is who does Zelensky work for and what does he ultimately want? Is he actually a Servant of the People, as he has claimed, and indeed ran on this agenda in the elections earlier this year, or does he still feel that he owes some kind of debt to oligarchs who perhaps helped him with his election campaign – in that case, he would be Servant of the Person?
I would highlight herein that the big failing of President Petro Poroshenko’s administration, and arguably one main reason why it lost the elections, was its failure to address the issue of graft/corruption, and oligarchic capture of the political process. This ensured the erosion of the rule of law, it meant that Ukraine was a poor place to do business, investment stalled/failed, and with it growth. If Zelensky is to raise the country’s growth potential/plain, it has to address this fundamental issue, and set himself apart from ALL oligarchs. There cannot be a Special K oligarch.
How should the West approach all this?
I guess the fear is that with the likes of U.S. President Donald J. Trump and French President Emmanuel Macron now eager, even desperate to cut deals with Russian President Vladimir Putin, and bringing peace in the Donbas would greatly facilitate that, they will now look the other way, on issues to do with oligarchic state capture. They will focus on the front office, headline reform wins, like land reform, and prefer to ignore what is going on in the back office, which might suggest state capture is accelerating.
An International Monetary Fund mission is in Kyiv this week, supposedly to negotiate around revamping the existing $3.9 billion standby-agreement of last year, into a new extended facility fund, perhaps for as much as $6 billion.
Ukraine is no longer that desperate for the IMF cash (given hot money inflows onto the local debt market) – albeit it is useful – but the IMF bill of health as provided by agreement on a new loan agreement would provide the green light to the market to fund Ukraine. Developments around PrivatBank look sufficiently worrying at this stage, that a pause by the IMF and other international financial institutions might be in order – to better understand the lay of the land, and to better understand the position of the Zelensky administration. The fund might also want to see a more strident statement of support for the existing approach on the PrivatBank case. Zelensky might also want to make a firm statement in support of reformers such as Gontareva – at this stage, perhaps as important for Zelensky to reach out for people like Gontareva as for Trump. This is about reassuring the reformers, that they are physically safe in doing their jobs to the best of their ability and for what is right and just for Ukraine, and not serving a particular oligarchic purpose. Reform technocrats should not have to live in fear that their decisions will come back to put them, and their families in real danger.
Zelensky can still turn this around – he can hit the ball out of the park and revolutionize Ukraine to be the next Estonia or Poland in Emerging Europe. Ukraine can be the next great reform story in the region, and globally. But the decisions he makes over the next few weeks, not months, will set the stage for what could well be his biggest and best performance yet.
