BUSINESSEUROPEOPINION

Doing business in Ukraine – Part 3

By Joshua Noonan

The following op-ed is part of the three-part series of articles providing an overview of financial and social reforms Ukraine is set to go through. This is Part 3 (here are Part 1 and Part 2)

Doing Business

As I wrote in my first article in this series, Ukraine is facing structural economic issues that cannot be wished away. Thankfully, the current Prime Minister, Arseny Yaseniuk sees his government on a “kamikaze mission” of structural economic reforms. These were highlighted in the 2014 Doing Business Report for Ukraine put out by the World Bank. The major factors that could improve the state and the state of business were easing the payment and administration of taxes.

In the second article in the series, I utilized the World Economic Forum’s Global Competitiveness Index of 2013-2014 to flush out other factors on which to focus structural reforms.  The biggest problem addressed by 16.7% of surveyed Ukrainian executives was the problem of access to financing. This issue could be addressed by attracting additional foreign banks into Ukraine.  Inefficient government regulation at 13.4% and policy instability at 10.1% were issues that were partially driven by bribery as well as the unstable nature of Ukraine since the Orange Revolution. Tax regulations at 11% and tax rates at 8.4% percent highlight the issue of collection and administration of taxation faced by both business and government in Ukraine. The last issue concerned corruption in which 15.5% of executives polled of individuals stating it was a key problem in their businesses.

Structural Drivers of Corruption in Ukraine

This article will focus on the issue of corruption, which is a major growth-inhibiting factor. Ukraine has been a center of corruption since the collapse of the Soviet Union.  In 2013, Ukraine ranked 144th of 177 countries surveyed by Transparency International’s Corruption Perception Index, a Berlin-based corruption watchdog.

Corruption thrives in various manners in Ukraine, many of which are bolstered by interests of the venal in the previous the governments in Kiev.  In the 1990s to today, Ukraine served as a washing-spot for illicitly earned money flowing from the Russian Federation to Europe. The southwestern border of Ukraine with Moldova and its Russian-sponsored breakaway region of Transnistria increases the propensity of illicit goods, smuggling, and other organized criminal behavior to thrive. Moreover, the transit of massive amounts of natural gas prove a unrootable source of corruption.  The distortions brought by local and Russian subsidies only deepen the rot in Ukraine.

Political Drivers of Corruption

Corruption was one of the main drivers of the Euromaidan protests from November 2013 to the collapse of the government was the rapacious corruption that the former President Yanukovych regime.  Former President Yanukovych had a history of corrupt action and dirty tricks both during the Euromaidan protests and during the Orange Revolution. Former President Yushchenko was allegedly poisoned with polychlorinated dibenzodioxins or dioxin by the operatives of Former President Yanukovych in the run-up to the October elections in September 2004. This alongside the massive irregularities lead to a re-vote in 26 December and the victory of the Yushchenko camp by 52% of the vote in the second round. Despite the promise of the Orange Revolution, Ukraine continued to limp along under the Yushchenko government.  By the end of the Yushchenko government, it had lost all credence with Ukrainians and Yanukovych ran against Tymoshenko in the second round.  With Yanukovych’s win, his regime lasted from 25 February 2010 – 22 February 2014 signaling his staying power within the elite of Ukraine and through his Party of the Regions in the East and South-East of the country.

Venal Politicians

In 2009  it is estimated that Yanukovych had $7,000,000 in hidden income.  By 2013 more of the income was legitimized with an estimated $4,500,000 still hidden. Nonetheless, a massive ownership of property was left unreported totaling 30,143 acres. The presidential mansion, which protesters entered after the collapse of the regime was one of the signals of the dearth of probity in the regime.

The former president is not the only one benefiting from the largess siphoned from the state, others include his son Oleksandr Yanukovych, who is one of the wealthiest businessmen in Ukraine.  His notable increase income is seen after the ascension of his father to the presidency. In 2010 it was estimated that he had seven million dollars but by 2013 it was estimated that he had 510 million dollars.

Anti-Corruption Action

Since the fall of the Yanukovych regime, there has been a popular backlash against corruption in the public sphere.  Several activities have been taken by the new government to fight the culture of corruption. Tetyana Chornovol is the anti-corruption bureau chief.  She became widely-respected after surviving a beating by unknown assailant during the Euromaidan uprising against the former regime.

Yet another example of actions taking place is the lustration campaign.  This work of mass-blacklisting of members this committee of the Yanukovych Regime. This committee is led by Yehor Sobolev, who is a career journalist and was one of the Euromaidan key strategists and organizers.  According to Alexander Artyomyev, several hundred are anticipated to be banned from holding a position of authority in the coming weeks. This is the first of several iterations in the law that are expected to continue throughout the spring.

Civil society has also been acting against corruption even before the Euromaidan protests started. As noted in the second of this series, the “I Paid A Bribe” website of Dav Khabara which is useful for highlighting post-Euromaidan bribe-giving. It was stated by Ukrainian civil society in October 2013, but it has been quite active in collecting incidents of bribe giving during and after the Euromaidan protests.  Nevertheless as the website notes, corruption is still taking place after the fall of Yanukovych. Thus, the new regime has only a short amount of time before it starts losing legitimacy due to venality.   While low-level corruption is still rampant, it is important to start stigmatizing its pernicious effects upon society.

The Future of Ukraine

In its “Scenarios for Ukraine: Reforming institutions, strengthening the economy after the crisis report”, the World Economic Forum projects three outcomes for Ukraine after the Russian-orchestrated crisis. Outcomes included in the report ranges in projects in a reformist to a backward-sliding set.  The reformist includes “Unlocking the Virtuous Circle” where reforms can build upon others for a stronger and more vibrant economy. The worst option was the “Lost in Stagnation” projection where the state of the economy and institutions continue to fail. The mid-range projection of  “Back to the Future” seems to be the most likely with some modest and piecemeal reforms taking place, but nothing to change the baseline growth. The deadweight of corruption looms large in all of these forecasts, blighting growth and the development of effective institutions. In its report The World Economic Forum argues that in addition to the anti-graft efforts of the government leaders, businessmen,  and civil society in Ukraine must act to build deep and effective institutions as the route out of corruption-driven short-termism.

Conclusion

With the pernicious culture of corruption still seen throughout Ukraine, it is the duty of this government’s  “kamikaze mission” to remove as much of the systemic rot as possible. With the establishment of the Anti-corruption Bureau and the Lustration Committee, the government has made the correct first moves. Nonetheless, the powers of these bodies may be manipulated to serve the political desires instead of the public good and thus must be monitored objectively as businessmen, civil society, and international actors assist Ukrainian institution building.  Through these actions, doing business in Ukraine can be eased as the rules of the system of equally and fairly upheld with the good of the public and its constituent parts bettered instead of the venal and the corrupt.

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Joshua Noonan

Joshua Noonan is an Azerbaijan News Analyst; John Hopkins SAIS MA Candidate in Russian and Eurasian Studies, International Economics and is the Presidential Management Fellowship Finalist. Joshua Noonan is a frequent contributor to Foreign Policy News.

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