Ukraine’s Path to Europe

Still Running on the Wrong Gauge Tracks

 

To understand Ukraine’s path towards Europe and its ultimate attainment of European political and economic standards, all you have to do is take a train ride across the border. Before you’re able to cross into Poland – regarded as the model for Ukraine’s continued transformation – the train sits at the border, forced to creep forward as the wheels on each car are changed.

 

In the same way, Ukraine’s progress towards Europe has repeatedly stalled. The hope following the Orange Revolution soon turned to disillusionment. Last November, Yanukovych reneged on his promise to sign an Association Agreement with the EU, sparking the Euromaidan protests that eventually led to his ouster. Now, even after newly elected President Petro Poroshenko signed the Deep and Comprehensive Free Trade Agreement with the EU, Ukraine is forced to focus on maintaining its territorial integrity rather than achieving its goals of European integration.

 

Without a doubt, Ukraine is on its way to Europe. However, like its trains, Ukraine is still running on the wrong gauge tracks. On March 21, Ukraine’s interim government, represented by Interim Prime Minister Arseniy Yatsenyuk, signed the political provisions of the Association Agreement.[i] The full Agreement was finally signed on June 27.[ii] However, no roadmap is available to help Ukraine meet the expectations of the EU. The required reforms won’t come easily and will involve significant sacrifice by the Ukrainian people. Progress will be slow and, as we have come to expect, will likely stall a few times along the way.

 

Political, economic, and civil society reforms are essential to ensure a European future for Ukraine. However, calls to improve democratic institutions, rule of law, and respect for human rights - words that look nice on paper – will be difficult to operationalize. Specific and attainable reforms must be identified, prioritized, and implemented in order to prevent Ukraine from stalling at the start.

 

Two initial reforms, outlined below, are essential. First, constitutional reform is required to establish a clear balance of power – providing much needed structure in an unstable political environment. Second, Ukraine must move away from energy subsidies for household consumers – a step that will relieve stress on the national budget and reduce the influence of Russia.

 

Constitutional Reform: Establishing the Rules of the Game

 

Establishing an equitable and efficient balance between the branches of government must be a priority. The division of power between the President, Prime Minister, and Verkhovna Rada has lacked clarity and served as a source of tension and conflict – exemplified by the 2004 amendments introduced in the aftermath of the Orange Revolution (reenacted in February[iii]) and the restoration of presidential powers by Yanukovych in 2010.[iv]

 

Ukraine must decide if the President or the Prime Minister and Verkhovna Rada will be the dominant driver of policy and must adopt a constitution that clearly establishes one or the other. This decision is complicated by two conflicting needs: 1) the need to quickly respond to challenges and enact reforms – more effectively achieved through a strong President; and 2) the need to ensure adequate representation of a divided population and increase the legitimacy of decisions made moving forward – better accomplished through a parliamentary system.

 

The election maps from 2004 and 2010 are evidence enough that no Ukrainian President in the near future will have a true popular mandate.[v] Yanukovych has shown the risks of having a strong President in a country with a pervasive culture of corruption – and Petro Poroshenko, a minister under both Tymoshenko and Yanukovych, has no moral high ground to stand on.[vi]

 

A shift towards a more parliamentary system may handcuff reform efforts. However, given the saliency of regional political divisions, the long-term legitimacy of the Ukrainian government can be strengthened by requiring broad consensus. Politicians can also be held more accountable through the establishment of single-seat constituency elections for members of the Verkhovna Rada and the direct election of regional governors.

 

Once the rules of the game are established, they must remain consistent. Political instability in Ukraine can be attributed, in part, to the constant changing of the Constitution. Judicial independence, necessary to ensure Constitutional continuity, can be enhanced by introducing life appointments for Constitutional Court judges. Currently, judges are appointed for a term of nine years, have no possibility for reappointment, and are forced to retire at the age of 65.[vii] Six judges are appointed respectively by the President, Verkhovna Rada, and Congress of Judges. Judges can also be removed by the same bodies - an action taken by Yushchenko[viii] in 2007, the Congress of Judges[ix] in 2010, and the Verkhovna Rada[x] in February of this year. Judicial independence and consistent interpretation of the Constitution will help establish the structure of a political system that is in dire need of stability.

 

Energy Reform: A Necessary Evil

 

The removal of customs duties on European imports will provide Ukrainian consumers with wider choices and lower prices. It will also force inefficient Ukrainian businesses to either adapt or die, undoubtedly leading to increased unemployment. While exceptions will remain in place for the automotive sector and certain agricultural products, all protections will be progressively eliminated over time. The long-term benefits of modernization and higher living standards will be hard to appreciate while enduring the short-term hardships.

 

Ukrainian households will be hit particularly hard by energy sector reforms. Even before signing the Association Agreement with the EU, the interim Ukrainian government raised domestic consumer gas prices by 50% in order to meet IMF demands, with further increases scheduled through 2018.[xi]

 

The recent failure of negotiations with Russia and the cut-off of natural gas supplies to Ukraine on June 16 only emphasize the need for Ukraine to wean its citizens off of subsidized energy and move towards market-based pricing.[xii] Russia’s influence over Ukraine is cemented by its role as the main energy supplier, a position Russia has used effectively in the past to secure political concessions – notably the extension of the Black Sea Fleet’s lease in Sevastopol in exchange for discounted gas, an agreement that no longer holds any significance in light of recent events.[xiii]

 

Energy subsidies are unsustainable, costing the government 7.5% of GDP.[xiv] It is estimated that, even with the price increase, state-owned Naftogaz will run a deficit of $8 billion this year.[xv] In the past, eliminating gas subsidies has been an unpopular political proposal. Moving forward, it will be a necessary evil. While the speed of fully aligning consumer prices with the market is in question, the end result is not. Rather than mourn the loss of “cheap” gas,[xvi] Ukraine should focus on improving energy efficiency in both industrial and household use.

 

According to a Sberbank Investment Research report, Ukraine’s domestic gas consumption fell almost 40% in the last five years – cutting imports from Russia in half.[xvii] Continuing this trend will pay dividends in the future. Rather than subsidize energy, resources would be better spent subsidizing updates to the residential housing sector (which consumes approximately 25 percent of the country’s electricity and 40 percent of its heat energy resources) and to increase energy efficiency standards for future construction.[xviii]

 

A Long Road Ahead

 

Ukraine’s European aspirations will entail significant upfront political and economic costs. Domestically, the average citizen will have to be convinced and constantly reassured that the short-term challenges will be worth the long-term benefits. Internationally, Ukraine will have to persevere through continued Russian roadblocks and meddling – likely without sufficient support from the EU or the US.

 

The scope of the reforms outlined in the Association Agreement is broad and the steps towards their accomplishment are vague. Respect for democratic principles, establishment of rule of law, and the protection of human rights and fundamental freedoms will require more than a new constitution and raising gas prices. A divided population and ingrained corruption are challenges that won’t be overcome quickly.

 

Ukrainian politicians must recognize that the Association Agreement with the EU is a prize that they didn’t truly earn. Failure to capitalize on this opportunity will be a disservice to the Ukrainian people. Actions taken now will determine whether Ukraine will truly join Europe or be relegated to its historical role as simply a borderland between Russia and the West. The rails may not line up, and progress may be slow, but this is a chance for Ukraine to move in the right direction. Let’s hope that Poroshenko, Yatsenyuk, and the rest don’t allow the train to run off the tracks.

 

 

Photo Credit: http://rt.com/news/ukraine-eu-deal-doubts-658/