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Democracy Watch, 2011 - Issue 18

06-16-2011 10:28 AM CET | Politics, Law & Society

Press release from: People First Foundation

With international finance on hold for Ukraine, observers stress the plight of the SME sector. As Verkhovna Rada’s duty to democracy is called into question, public scandals distance Ukraine from Europe.

Dark days for the middle class

Observers of the Ukrainian SME sector warned of total collapse at the recent Ukrainian Investment Summit in London in May. Prominent economist Anders Aslund and Petro Poroshenko, a businessman who has held a number of positions in government, both commented on the disappearance of tens of thousands of small businesses since the beginning of 2011. Poroshenko also illustrated the impact upon the middle class; which could serve to undermine the stability of the political system. Participants of the Summit also noted that the bulk of reforms, intended to raise Ukraine’s investment attractiveness, have been blocked by the office of the President. The impact on infrastructure can already be seen in the nations capital with the closure of shops aimed at regular consumers in favour of VIP boutiques serving the super rich – emphasising the depth of social division. The majority of economic voices are hailing a period of severe economic imbalance in the wake of the new Tax code.

The government’s overt response to the negative trends in the economy has been to announce the creation of a state-owned Ukrainian Development Bank with the purpose of funding strategic initiatives. Vladislav Kaskiv, Head of the State Agency for Investment and National Projects, stated that the new bank will operate with total transparency.

The authorities in Ukraine like to talk about shared burden of risk with investors, but when it comes down to policy its case of the heavy boot of legislation crushing the budding future of business and dark days for the middle class.

People First Comment:

In considering this issue there are two possible scenarios. The first, and the one favoured by most conspiracy theorists is that the geriatrics that make up the current ruling elite have hatched a master plan to eradicate the middle class and force the workers back to the factories so that they can control how they vote at the next election…

A more plausible explanation is that few of the current government or the bureaucracy that supports them has ever run a small to medium sized enterprise and so they create laws based on figments of their own imagination and their own profiteering practices. The current tax laws might well generate more revenue for the exchequer and close down many organisations that are operating outside of the current tax system but if they also kill off a whole swath of legitimate business then who is going to pay the taxes next year… When the enterprise owners complain rather than listening and understanding the government digs in its heels and refuses to budge as if the complaints are a personal insult. Unfortunately many of the elite belong to the bygone era where the government knew best…

Small and medium sized enterprises are the bed rock of all national economies. In the EU, an organisation this government seeks to emulate and one day join some 57% of national GDP is generated by this sector of business. In Ukraine the figure is 17% and falling. Similarly an attack on the middle class in this way will cause a drop in the sale of capital items such as cars and apartments which will then further rebound down the line into all aspects of society and that certainly will not be good for the 2012 elections.

Tit for tat scandals jeopardise relations between Ukraine and Europe

In mid-May this year the Ukrainian Ministry of Foreign Affairs delivered a note to the Head of Czech diplomatic service at the request of the security services. The note informed that all Czech military and defence attaches had been declared personae non grata, accusing them of espionage regarding military technology and politics. Czechia has banished two Ukrainian diplomats in response. Unlike traditional “spy scandals” this has all taken place very much in the public realm. Speculations regarding the cause of this scandal include the idea that this action forms Ukraine’s revenge for the Czech government granting political asylum to Ukraine’s ex-Minister of Economy Bogdan Danylyshyn; an opinion held and voiced by the Czech Minister of Foreign Affairs Karel Schwarzenberg.

Another perspective is that this scandal was orchestrated by Ukraine’s “eastern neighbour” in an attempt to put strain on the relations between the EU and Ukraine. This event comes in at a tentative time in the negotiation process over the treaties on Association, Free Trade Zone and liberalisation of visa regulations. This scandal may indeed be designed to steer Ukraine towards a Customs union with Russia.

Regardless of its cause, Ukrainian diplomats and experts agree unanimously that this scandal will cause significant damage to Ukraine’s international image and will impede cooperation with the EU.

People First Comment:

This kind of tit-for-tat diplomacy is really reminiscent of the Soviet Era when Moscow would expel US or British diplomats just to make a political point. It really is rather childish particularly when you consider that successive governments have so badly underfunded the Ukrainian military it is a wonder that they have any secrets left to spy on and as for the state of Ukrainian politics, nobody in their right mind would want to emulate such misguided confusion.

Perhaps it has something to do with Olga Kurilenko starring in the last James Bond epic but more likely it is yet another attempt by Ukraine’s eastern ‘friends’ to put a spanner in the works of Ukraine signing the Free Trade Agreement or attaining visa free travel with the EU. If Ukraine’s neighbour really wants the world to take them seriously they should fire the architects of this type of cold war policy and look to how they can make themselves more attractive to potential suitors.

Ukraine tests the patience of the International capital market

Ukraine’s attitude the lending conditions set out by the World Bank and the International Monetary Fund has led Max Alier, IMF Resident Representative in Ukraine, to publicly reaffirm that until Ukraine meets four requirements it will receive no new tranches of credit. These conditions cover: pension reform, increase of gas prices, a guarantee that the budget deficit of “Nafotogas” will not exceed 3.5% of GDP and that the law obliging the National Bank of Ukraine (NBU) to purchase domestic government bonds be annulled. International Experts have also called on the government to further increase the prices for public utilities for the population. The international funding bodies show no sign of lessening their conditions, as negotiations with the IMF have been deferred and the World Bank has declared that it is withholding the 500 and 350 million dollar loans for the development of Ukraine’s national finance sector until conditions are met.

It is highly unlikely that the government will fulfil all requirements in the near future – fearing major social upheaval within the country. Thus the government will inevitably seek a compromise between the IMF and the demands of the Ukrainian people. Despite the complexity and high-pressure of the situation Ukrainian officials have been relentlessly optimistic claiming that the next tranche will be received before the end of summer 2011.
NBU Head Serhiy Arbuzov mentioned that there is high probability of Ukraine receiving 3 billion dollars by the end of the first half of the year. According to observers a partial fulfilment of the IMF requirements this year will improve the economic situation in the long term.

At this time it remains unclear whether the government possesses the grit to implement all the changes required by IMF in order to received the tranches and preserve a relative investment attractiveness of Ukraine.

People First Comment:

Ukraine is not only losing access to capital markets it is losing all shred of financial credibility. The international money markets are not stupid; they fully understand the games that are played in Kyiv. For one; international financial bodies rarely accept any government figures preferring to use their own sources. Of course there are inevitably discrepancies but if the figures are similar then they know the country is on the right track, if they are totally different it implies that somebody is being economic with the truth.

At a recent investment conference in London the general consensus was that Ukraine is very definitely on the wrong track and serious questions need to be asked. This concern is reflected in the fact that the World Bank are holding back on what is for them extremely small loans whilst the IMF is happy to lend over $100 billion each to Ireland and Portugal yet they are holding back on $3 billion for Ukraine. This says everything as successive Ukrainian government policies now come back to haunt the financial sector.

Money markets operate totally on trust. At present Greece is going through very painful financial reforms that are hitting just about every sector of society but unless they go through the pain nobody is going to lend them a cent. Portugal and Ireland have been somewhat more successful as they have delivered on their promises and in return they have received support. As for Ukraine it is generally understood that the exchequer of almost every government since independence has leaked like a sieve, that the current economic policies are equally short term, that the objective of most politicians is to plunder state assets and that the rule of law can be bent in favour of he who pays. Is it therefore any wonder that the international financial markets are growing bored with and even hostile toward Kyiv?

Ukrainian parliament – bad in practice, bad in attitude

Verkovna Rada’s response to the global shock at the depravity of Ukraine’s legislative body, which was exposed when visiting Polish dignitaries filmed Ukrainian deputies fraudulently voting on the behalf of absent members, was to do nothing. In April 2011 an average of 90-100 out of 450 deputies were absent from plenary sessions, yet somehow the system records show that the vast majority of these supposed absentees successfully entered their cards and voted. It is worth noting that this trend is common amongst all parties including: the Party of Regions, Yulia Tymoshenko Bloc and Nasha Ukraina - Narodna Samooborona. Although this practice highlights a certain camaraderie and trust amongst the ruling elite – it has quite the opposite effect on the relationship between the rulers and the people and demonstrates either profound ignorance of democratic duty of a flagrant disregard of it.

Adding insult to injury, Parliamentarians overturned a proposition on March 12 to revise the law on personal voting, ensuring the continuation of the current practice unabated. Commenting on the refusal of reforms Oleksandr Yefremov, Leader of the Party of Regions, mentioned that in his opinion the remand of deputies’ ability to multiple vote would result in the whole of the Ukrainian legislature grinding to a halt.

In summary the discredit earned by Verkovna Rada’s practice is exceeded only by its attitude towards it, since the political elite have no apparent interest in reforming any aspect of the system that serves them so well is it any wonder so many Ukrainians see no point in participating in it.

People First Comment:

The solution to this dilemma is simple… abolish Verkhovna Rada after all today it serves no real function beyond legitimising the decisions of the President and the parliamentary majority. There is no tangible link between the Rada and the people, few deputies ever attend parliamentary sessions or visit their so called ‘Constituencies preferring to run their corporate empires, all the decisions are made in Bankova Street and the Cabinet of Ministers and the voting system is nothing more than a rubber stamp. Therefore Verkhovna Rada serves no political purpose and provides nothing of benefit to the nation.

Lets end the farce by saving the tax payer millions in salaries and operating costs and let the President and his Regionaires run the whole thing. It would mean admitting that Ukraine is no longer a democracy but then we have all known that since the last elections. But on the positive side there would be no need to harass the opposition as there wouldn’t be an opposition to harass…

What is really needed is a total redesign of the entire political system from the ground up that removes immunity from prosecution thereby taking away the need to mix business and politics, re-establishes the morality and primacy of the law, creates a truly accountable system in both public and financial terms, that has checks and balances to prevent the current abuses of power and takes corruption by the horns. All that is needed is the political will, the desire to see Ukraine truly excel and a team of new and much younger politicians who can visualise the future as opposed to idealising the past. Until then we’ll just have to put up with the farce and pretend to be a democracy.

Quote of the week:

On every front there are clear answers out there that can make this country stronger, but we're going to break through the fear and the frustration people are feeling. Our job is to make sure that even as we make progress, that we are also giving people a sense of hope and vision for the future.

Barack Obama
The 44th and current President of the United States

Democracy Watch is the weekly monitor of the People First Foundation and serves to raise public awareness of how government and parliamentary action is impacting upon Ukrainian democracy and democratic due process. The information is copyright free and may be reproduced but we ask that any comments are reproduced in full and with reference to the People First Foundation.

People First Foundation
1 Skovorody Street, Kyiv 04070, Ukraine
Telephone: +38044 536 1508 / Fax +38044 536 1509

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