Plenary session at the fifth Europe–Ukraine Forum, held in Kyiv from the 23rd to the 25th of February 2011.

Conference reports Quo Vadis, Ukraine?

The current situation in Ukraine and the country’s economic and political development during President Viktor Ianukovych’s first year in office were discussed at the fifth Europe–Ukraine Forum, held in Kyiv February 23rd to 25th.

Published on balticworlds.com on March 26, 2011

In which direction is today’s Ukraine moving? Towards even sharper authoritarian rule, and consequently towards a new revolution by an even more angry civil society, or towards economic stability and an Association Agreement with the European Union, to be signed before the year is out?

The answer is not simple, as the signals from Kyiv are contradictory in many ways. The current situation in Ukraine, and the economic and political developments since President Viktor Ianukovych took office in February 2010, were discussed at length during the fifth Europe–Ukraine Forum, held in Kyiv from the 23rd to the 25th of February this year.

The conference, jointly organized by the Polish Institute for Eastern Studies and the Ukrainian United World Fund, was attended by prominent political figures from Ukraine, EU institutions, and several European countries, and by representatives of major independent research institutes in Ukraine, Poland and several other EU countries, as well as Ukrainian and Western European NGOs. At the political level, Ukraine was broadly represented by government officials and members of the parliamentary opposition parties.

A report of over 100 pages containing a broad analysis of the political and economic developments in Ukraine in 2010, drafted by the Kyiv-based Institute for Euro-Atlantic Cooperation, was presented to the conference. The former EU Commissioner for European Enlargement, Günter Verheugen, who spoke along with the former Ukrainian president Leonid Kuchma to a session on the successes and failures of 20 years of Ukrainian independence, was highly critical of the EU policy towards Ukraine during this period. “I know that my friends in Brussels will not be very happy about what I say, but as I no longer hold any political office, I am enjoying freedom of speech”, said Verheugen, now an honorary professor at the Viadrina University in Frankfurt an der Oder. He went on to criticize the European Union for lacking clear political leadership and a clear vision of the future EU. “When I left Brussels, Ukraine to me was an unfinished country. On visiting Kyiv, there was not much I could offer. No one in Brussels had the courage to develop a strategy towards Ukraine. To people in Brussels, Ukraine was too big, too poor and too difficult. ‘Don’t touch it’, they said.”

“I am not satisfied with what we did. Today I daresay it was a mistake that we did not offer more. I think it was because of a clear lack of vision and leadership. And it still is today”, Verheugen said. His remarks were well received by Ukrainians present at the conference.

Well aware of the past and present difficulties of the economic and political situation in Ukraine as measured against EU requirements, Guenter Verheugen compared them with the positive development in Poland. In the mid-1990s, the EU rated Poland very low, but gave it a clear goal for its reforms as conditions for future membership. That put the frequently discussed question of the relationship between EU policy toward a given country and that country’s development on the table.

In another session of the conference, Ukrainian politicians responsible for EU integration policy heard advice from their colleagues representing countries in and outside the EU: to take care of their own needs and their own problems, regardless of the attitudes, declared or undeclared, of European Union leaders.

Aleksander Mirsky, a Latvian member of the European Parliament and a member of its Committee on Foreign Affairs, strongly criticized Ukrainian politicians for not having done their homework during the past decades in order to get closer to the economic and political standards which they ought to know are prerequisites for membership in the European Union.

Andrei Popov, Deputy Minister of Foreign Affairs and European Integration of the Republic of Moldova, argued that Ukraine as well as his country must face the reality of today’s Europe, and not expect the same soft treatment that Poland, the Czech Republic and Hungary got in the 1990s. “The present lack of determination on the part of the EU cannot decide our policy concerning the ultimate goal”, he said. “We are negotiating with the EU for an Association Agreement. The EU has said nothing about the ultimate goal. We have to be aware of reality and set the ultimate goal ourselves, which is membership in the EU.”

“The fact is that, because of this attitude, Moldova achieved within a year or a year and a half what Ukraine took more than a decade to attain”, Popov said.

Today it appears that Ukraine, like its neighbor Moldova, may be on the verge of concluding an Association Agreement with the European Union. Poland, which will hold the EU presidency during the second half of this year, hopes that the Agreement will be signed during its tenure, that is, before the end of 2011. If fully implemented, the Agreement would give Ukraine a status similar to that of Norway and Switzerland today in their relations with the EU. The main part of the Agreement currently in negotiation concerns a “Deep and Comprehensive Free Trade Area” (DCFTA). This part of the Agreement is divided into three main sections or blocks covering a total of 18 different topics. The first block concerns trade in goods; the second covers trade in services, rights of establishment, investments, and capital movements; and the third block deals with intellectual property rights, competition, public procurement, and related topics. Closely related to this DCFTA are the negotiations on visa-free travel to the EU for Ukrainian citizens. Ukraine abolished visa requirements for all EU citizens in 2004.

Last year Viktor Ianukovych let the Ukrainian government and parliament introduce an important change in the official documents outlining Ukrainian foreign policy, dropping the Euro-Atlantic integration goal and hence the goal of NATO membership. Meanwhile President Ianukovych, the government, and the parliament have all remained steadfast on EU integration, declaring membership of the European Union as the strategic goal of Ukraine’s foreign policy. For years, opinion polls have shown that this goal has broad support among Ukrainian voters.

The rival Russian proposal of a customs union that would also include Belarus and Kazakhstan has so far been turned down by Ukraine. As Marcin Swięcicki, Director of the UNDP Blue Ribbon Analytical and Advisory Centre in Kyiv, underlined in his speech to the conference, a customs union with Russia, Belarus and Kazakhstan would create a common customs zone of four countries vis-à-vis the EU, automatically ruling out a free trade agreement between Ukraine and the EU.

If Viktor Ianukovych and his government began a honeymoon with Russia shortly after taking office in February 2010, today there are several indications that it has come to an end. The most significant document signed between Ukraine and the Russian Federation last spring was the Kharkiv Pact, the treaty that allows the Russian Federation to station its Black Sea Fleet in the Crimean port of Sevastopol, on Ukrainian territory, until 2042. As a reward, it promises Ukraine a 30 percent discount on the price of gas imported from Russia. This treaty was ratified by the Ukrainian parliament on April 27, 2010. According to the report presented to the conference, the Kharkiv Pact was an “unprecedented case of political and economic bartering in which Russia’s conditional economic preference was exchanged for Ukraine’s strategic geopolitical concessions”. No wonder that this agreement was sharply criticized by the political opponents of Ianukovych.

For Russia, the political-economic barter agreement was only the first step in a new political offensive aimed at regaining control over important parts of Ukraine’s economy as well. Last year, Russian business interests tried to get their hands on two of Ukraine’s biggest metallurgical companies, the giant Zaporizhstal in the city of Zaporozhzhia and the Illych Iron and Steel Works in Maryupol’, near the Sea of Azov.

When Zaporizhstal was put up for sale last year, the Ukrainian oligarch Rinat Akhmetov concluded a deal with the owner and made a down payment of 50 million USD. Later, the owners got a better offer from Russian business interests related to the state-owned Vneshekonombank, whose supervisory board is chaired by Vladimir Putin. The owners of Zaporizhstal then declared their intention to pay back the 50 million USD they had received from Ahhmetov, plus another 50 million USD as a penalty. Akhmetov refused the offer and filed a complaint with a court in London where the case will be examined.

In the case of Illych Iron and Steel Works in Maryupol’, unspecified Russian business interests acting through a Cypriot company declared that they had reached a deal with Illych, and bought 100 percent of the company that in turn holds nearly 90% of the shares of Illych Iron and Steel Works. The news led to a sharp reaction in Ukraine, and Voldomyr Boiko, who controls the remaining shares, stated that “we are dealing with a raider attack on behalf of Russian companies”. The “attack” was repulsed, and negotiations for a merger with a company controlled by Rinat Akhmetov were initiated instead.

According to independent analysts’ reports, the Russian “raider attack” on the Ukrainian metallurgical sector was not discussed or coordinated with the Ukrainian presidential office. The Ukrainian reaction showed once more that Ukrainian businessmen are not keen to let too much Russian capital into the country. According to official statistics, only 7.1 percent of all direct foreign investments (FDI) comes from the Russian Federation. Although this figure certainly does not reflect the real influence of Russian capital in Ukraine (nor even the real Russian share of FDI, as many Russian companies as well as Ukrainian businessmen act through companies registered on Cyprus), it is important to note that the EU is a key partner for Ukrainian business. The European Union also remains by far the most important foreign investor in the Ukrainian economy, and more than 16% of the total FDI in Ukraine comes from Germany. In sectors that are crucial for the modernization of the Ukrainian economy, the inflow of western capital is decisive. That is why politicians as well as oligarchs — their interests often intertwined — look more towards the EU than to Russia.

It is symptomatic in this regard that Russia has so far failed to reach its strategic goal of gaining control over the gas transportation system in Ukraine. Instead, Ukraine, by joining the European Energy Community in September 2010, has taken an important step towards freeing itself from Russian blackmail using the gas supply as a political weapon. The merger of Gazprom and Naftogaz Ukrainy, an earlier proposal favored by Putin and Gazprom, would probably not meet the conditions of the Energy Community. By signing the Energy Community Treaty (ECT), Ukraine has undertaken to adopt the full energy chapter of the EU acquis. As Ukraine still is one of main transit countries for gas distributed from Russia and other countries to the EU, this amounts to a legal revolution with respect to transit as well as the domestic distribution of energy in Ukraine. As a consequence, the Ukrainian energy market will be free and open to western companies. According to the rules stipulated in the various Energy Packages, energy transportation must be separated from energy distribution. Ukraine’s gigantic state-owned company Naftogaz must therefore be divided into three legally and financially independent companies. Gazprom will have to conclude separate deals with the separate Ukrainian companies, and distribution to Ukrainian consumers will be separated from the transit agreement. Moreover, according to the EU energy acquis, Gazprom will be formally obligated to sell gas at the border to western energy companies operating on the Ukrainian domestic market at the same price that Ukrainian companies pay.

The question arises how Gazprom will react. This new reality makes it more difficult for Gazprom to continue its habitual use of gas delivery to Ukraine as a political instrument. The ECT may even conflict with the Kharkiv Pact, which stipulates a discount on gas as a “gift” in exchange for prolonged access to the port of Sevastopol.

Both the Ukrainian reaction to the Russian offensive towards key elements of the Ukrainian economy and Ukraine’s signing of the Energy Community Treaty are clear evidence that neither the Ukrainian government nor the Ukrainian oligarchy wants to be part of a “Great Russia”. According to the evaluation made in the report presented to the 5th Europe–Ukraine Forum, the “results of Ukraine’s accession to the ECT will be tremendous not only for the country, but also for the entire region, including Russia and the EU”.

Ukraine’s negotiations with the EU on an Association Agreement were initiated after the Paris Summit in September 2008, during the presidency of Viktor Iushchenko and during the premiership of Iulia Tymoshenko’s tenure as prime minister. So far, fifteen rounds of negotiations have been held, the latest in February in Kyiv. Due to conflicts between the president and the prime minister and between different groups of oligarchs in Ukraine, the negotiations progressed slowly and with great difficulty for the first year and a half. Several participants from the European Union said at the Forum that the 12 months of Viktor Ianukovych’s presidency since February 2010 have seen much smoother negotiations and more vigor on Ukraine’s part in enforcing agreed action plans and reforms. Ianukovych’s regime has also been praised by the EU and international financial institutions, including the IMF and the World Bank, for its reforms aimed at stabilizing the country’s financial situation and curbing the budget deficit. These measures include a reform of the pension system, raising the retirement age for women and increasing premiums for individual entrepreneurs, with the objective of drastically reducing the budget subsidy to the pension fund. The draft budget for 2011, with a projected deficit of 3.1% of GDP, meets all the major IMF conditions for the financial support already agreed.

Since last year the Ukrainian economy has been back on a stable growth track, after the deep crisis of 2009 when the GDP shrank by 15%. Last year GDP grew 4.5%, and the prognosis for 2011 is 5% GDP growth. Inflation fell below 10% during 2010 for the first time in nearly a decade.

Although huge steps forward have been made in the technical negotiations on the Association Agreement, last year’s important questions remain unsolved. One of them concerns Ukrainian access to the EU agricultural market. So far, Ukraine has demanded free access for its products, naturally under the condition that its producers meet EU sanitary norms. Ukraine has also been unwilling to give up its defense of the uncompetitive Ukrainian automotive industry. Compromises, involving quotas and transitional periods, will have to be reached on these and other technical questions.

Several times during the past year both the EU and Ukraine have expressed the hope that the Association Agreement, including the DCFTA, can be concluded during 2011. The most important hindrance might not be the various technical or economic questions, but the political situation in Ukraine. If Ukraine has been able to streamline negotiations with the EU and to implement changes quicker and more smoothly during the Ianukovych presidency than during the Iushchenko period, it has been at the cost of greater concentration of political power in the hands of the president and a weaker democracy in Ukraine.

Shortly after being sworn into office, President Ianukovych set about obtaining complete political control over the parliament by changing the constitution, in effect bringing back the constitution of 1996. The political consensus that had been achieved during the Orange Revolution, which transformed Ukraine into a parliamentary democracy, was dismantled. Today Ukraine has a very strong presidential system. Since September 30, 2010, the president has had the power to dismiss the prime minister and any member of the Cabinet at any time for any reason, without consulting the parliament. He can appoint new ministers as he pleases, and needs the consent of the parliament only when appointing the prime minister. Since the parliamentary rules have also been changed back to those of the Kuchma era, not only factions but also individual MPs can now to form a governmening coalition. The reform of 2004 had forbidden such individual actions, so that only political party factions in the parliament could form governing coalitions. This constitutional amendment was made in 2004 to stop the notorious “buying” of individual MPs during the Kuchma era. Since the new reversal, more than 50 MPs originally belonging to the Orange coalition have gone over to the presidential faction in the parliament.

Furthermore, in another law adopted last October, the parliament reduced the power of the Cabinet of Ministers, diminished its own control over the government, and strengthened the power of the president, granting him full control over the Security Service of Ukraine, the SBU. As the new head of the SBU, the president appointed a close friend, Valeriy Khoroshkovsky,  who is closely connected to the ownership of the largest media holding in the country. Various NGOs have sharply criticized Khoroshkovsky’s actions, including his attempt to strip the TV channel 5 Kanal of its broadcasting frequency for being too close to the political opposition.

President Ianukovych also gained control over the Constitutional Court by dismissing judges and appointing four new ones. He has also brought a large part of the justice system under his influence by appointing his close political ally and family friend Viktor Pshonka as Prosecutor General (Ianukovych is godfather to Pshonka’s son), and by appointing Valeriy Khoroshkovsky to the Supreme Council of Justice.

Using this control, President Ianukovych initiated a wave of criminal prosecution against former leading members of the cabinet of Iulia Tymoshenko. Among the former ministers now in jail awaiting trial for “misappropriation of state assets” is the former minister of Internal Affairs, Iuriy Lutsenko. He is accused of overpaying his official driver at the Ministry. Also in jail and awaiting trial are the former defense minister, Valeriy Ivashchenko, the former deputy transportation minister, Oleksandr Davydov, the former environment minister, Hyhoriy Filichuk, and several other high-ranking government officials from the Tymoshenko government. The former prime minister, Iulia Tymoshenko, is not in jail, but is forbidden to leave the country and is regularly subjected to prosecutors’ investigations. She is accused of using 425 million USD in state funds received for sales of carbon credits in accordance with the Kyoto to make up the deficit in the state pension fund, instead of using the money to improve the environment.

At the same time, the Ukrainian government, president, and parliament have failed to adopt the recommendations of the EU on public procurement, a crucial point in negotiations on the Association Agreement. Instead, in January of this year the parliament passed exceptions to a recent, stricter law on public procurement. The degree of corruption in this area seems to be as high as ever, if not worse. In Transparency International’s 2010 Corruption Perceptions Index, Ukraine was ranked 134th of 178 countries.

In another international index, the Press Freedom Index published each year by Reporters without Borders, Ukraine fell in 2010 to the 131st place, about the same level as Russia, after being ranked 83rd in 2009.

According to the Freedom House survey on the general level of freedom and democracy in countries, Ukraine slipped from being the only country in the region rated “free” every year since 2005, to being rated only “partly free” in the survey published in early 2011.

Representatives of the European Union have clearly criticized the present regime for using the criminal code to fight its political opponents. Visiting Kyiv in January this year, the EU Commissioner for Enlargement and European Neighborhood Policy, Stefan Füle, praised the progress being made in the technical negotiations and then turned to what he called a “particularly important part of EU-Ukraine relations, which is crucial for Ukraine’s future development”:

I speak of our common values, those which constitute the foundation a healthy democracy. These values are respect for human rights, democratic principles and the rule of law. In the 21st century, democratic authority cannot be sustained without an independent judiciary and media: this is a question of moral leadership. I would therefore like to recall the need to ensure that criminal law is not used for political ends, and that the principles of a fair, impartial and independent legal process are fully respected.

In late February, as a further step to underline the gravity of the present situation, the European Union temporarily froze a scheduled transfer of 100 million USD, part of the loan to stabilize Ukraine’s finances.

Without a doubt, the strong trend towards authoritarian rule in Ukraine remains a threat to negotiations with the European Union. At the same time, Ukraine has a significantly stronger civil society than Belarus or Russia. This is not simply an effect of the Orange Revolution, but of a different history that goes back centuries.

Today in Ukraine, the new and growing disappointment with the political developments of the last year is easy to read, see, hear and even smell. Recent opinion polls by the well-known Razumkov Center show that support for President Ianukovych has fallen from 40 percent to 20 percent since last spring, and a majority of Ukrainians polled said that they are even ready to take to the streets in order to force through new changes.

“If the president and the government do not react positively to the strong criticism from the EU and to the organized voices raised inside the country, I am sure we are heading towards a new revolution”, says Oleh Rybachuk of the New Citizen campaign, one of the representatives of Ukrainian NGOs at the 5th Europe–Ukraine Forum.

NOTE: Do please also read an interview with Borys Tarasyuk at http://balticworlds.com/borys-tarasyuk/

Please load down the Visegrad Group and Germany Foreign State Ministers Statement on the Eastern Partnership.

Peter Johnsson