How EU conditionality is helping to transform Ukraine

Despite war, and political and economic uncertainty, Ukraine has made remarkable progress since its revolution in fundamentally reforming its state

Despite the simmering war in the Donbas, a jittering economy, and a governing coalition that seems continually on the verge of collapse, Ukraine has made remarkable progress since its revolution in fundamentally reforming its state. The achievements belong to the Ukrainians themselves but the fact that they have come so far is in no small part due to EU conditionality – a tool known best for its impact on pre-accession states. With the EU likely to lose leverage in Ukraine in 2016 it will be vital to find new ways of keeping up the pressure on reforms.

Along with the other eastern neighbours, Ukraine has only ever been offered association with the EU through the Neighbourhood Policy: a technocratic process of alignment that tries to imitate the success of enlargement without the financial or normative incentives. Inevitably the resulting leverage proved to be far weaker than it had been with countries such as Poland in the run up to joining the EU. Only three years ago Kyiv effectively rejected three basic conditions that had been set for greater European engagement (fair elections, progress on reform, and an end to selective justice), yet the EU felt it still had to keep open its offer of access to EU markets through the Deep and Comprehensive Free Trade Area. It was President Viktor Yanukovych’s decision to reject even this offer that sparked the the Euro Maidan demonstrations in Kyiv.

The EU’s newfound leverage

With the end of the Euro Maidan in 2014, the relationship between Kyiv and the EU saw a fundamental shift and EU pressure now has substantially more weight than it did before. When the new government embarked on a “kamikaze mission” to deliver on the promises of the Maidan with comprehensive reform, it did so promising to implement the EU Association Agreement, which was to act as an anchor to the government’s reform programme. Thereafter, according to Dmytro Shulga of the Kyiv based Renaissance Foundation “all major sensitive reforms would have been impossible without EU (and IMF) pressure”.

What changed? Firstly, the new government inherited an economy that was on the verge of a meltdown, and which only got worse with the war in the Donbas. Outside help notwithstanding, the economy has contracted by about 20 percent since 2013 and in that time the Hryvnia (Ukrainian currency) has lost 70 percent of its value. It was clear that financing was needed – and fast.

Russia, which always used to be an option for economic assistance, succeeded in alienating itself from Kyiv and the two countries now effectively remain in a state of war. The Kremlin’s suspension of a free trade zone with Ukraine at the end of 2015 and ban on food imports, for example, is expected to cost Ukraine €600 million a year. After Euro Maidan, this help had to come from the West, who wouldn’t become get involved without first setting a multitude of conditions.

Thirdly, there is now unprecedented political will to change how the country is run, kept alight by an expectant public and re-energised civil society. “Reform is the new buzzword in Ukraine”, says Hromadske TV head Nataliya Gumenyuk. This has made Ukraine much more receptive to EU incentives. EU demands are also perceived as helpful by both the government and the public, unlike in Greece for example.

Financial stabilisation

While the Association Agenda provides a guide for reform, EU pressure has above all taken the form of conditionality attached to macrofinancial assistance and, separately, to visa liberalisation. Reforms have been accompanied by far closer intervention of the EU ambassador in policy debates. Such pressure has given the government political cover for the kind of economic or social change that proved impossible in the past, as well as greater authority to fight the entrenched interests of oligarchs. Measuring the impact of international conditionality has long been problematic and no less so in this case, where there are multiple outside actors (especially the IMF), and there is a changed and changing domestic environment. Despite this difficulty it is possible to draw a link between EU demands and the success of politically difficult reforms.

It was the IMF rather than the EU that took the leading role in financial stabilisation following the Euro Maidan. It offered a $17.5 billion package spread over four years which was agreed in March 2015. However, the EU did make a significant contribution in the form of the Macro Financial Assistance programme (MFA) – a mechanism only open to countries receiving IMF support. The third MFA agreement was signed in May to provide €1.8 billion (€1.6 billion from two programmes having been disbursed in 2014). After two years, Western support has achieved tangible results. For instance, after a 15 percent contraction in 2015, Ukraine’s economy is set to grow by 1-2 percent in 2016, while inflation is decreasing and the Hryvnia is relatively stable.

Both IMF and EU funding are disbursed in tranches after satisfying conditions previously agreed by these bodies with the government. Apart from urgent measures to balance the budget and rebuild investors’ confidence, both institutions set their conditions for financing on the two issues that have needed tackling for years: corruption and the energy industry.

In order to confront the worst of the problems in Ukraine, both IMF and EU financing was contingent on the establishment of three new ground-breaking anti-corruption institutions. The National Anti-Corruption Bureau (NABU) and Specialised Anti-Corruption Prosecution Office (SAPO) were finally launched late last year. Investigations and prosecutions have already begun against judges and civil servants; while the National Agency for the Prevention of Corruption (NAPC) is due to become operational by April 2016.

The energy sector in Ukraine has been highly inefficient (which has damaged the Ukrainian economy) as well as being “one of the main sources of oligarchic corruption”. The plans for reform were drawn up years ago and international support was offered at the time. However, the reforms failed to be implemented. In its conditions the IMF focused on cutting energy subsidies, which have been a crippling burden on the budget. As a result, the unpopular decision was taken to raise prices. EU conditions focused on the implementation of unfulfilled obligations as a result of being a member of the Energy Community since 2011. These conditions included major aspects of the Third Energy Package – unbundling and de-monopolisation. The competition provoked by the reforms should be good for consumers, but more significantly, should help break up the monopolies of the oligarchs. The next tranche of EU money is now dependent on the establishment of a new (and long delayed) energy regulator.

Visa liberalisation

In many ways the prospect of visa liberalisation has been even more influential. While the establishment of new anti-corruption institutions was an overlapping condition, it is the “requirements of the European Commission for liberalisation of visa restrictions” that are cited in the first report of the National Anti-Corruption Bureau of Ukraine (NABU).

The offer of visa free travel within the Schengen zone has been formally under discussion since 2008 but climbed to the top of the agenda after the revolution. It has now become a tangible prize the government can use to push through sensitive reforms, and at the same time is something that activists can use to hold the government to account. The fifth progress report last summer indicated that the necessary conditions were some way off being fulfilled, so legislation to satisfy the conditions dominated the autumn parliamentary agenda. A “visa-free regime day” in October was followed by repeated votes and negotiations to gather majorities to pass the required legislation. We should “give Ukrainians the chance to feel part of the EU and a wider united Europe”, said the prime minister, encouraging MPs to support the controversial changes.

On 18 December the European Commission formally recommended Ukraine to be fit for visa-free travel to the EU, contingent on a number of commitments to be completed by April. Having adopted legislation on 15 March to introduce obligatory electronic declaration of assets and income of state officials and their relatives, and having selected the final two Board members of the NAPC on 16 March, Ukraine can now expect visa liberalisation to come into force by the end of 2016. Decisions passed as part of the Visa Liberalisation Action Plan (VLAP) have tackled a number of areas. Chief among them, Ukraine has tackled corruption among officials by imposing new obligations to disclose assets; ensured greater transparency in public procurement; reduced the control of oligarchs over MPs by introducing transparency of funding of political parties; and reformed legislation on discrimination against gay people, an issue that remains culturally divisive and one of many that had to be voted on multiple times before being passed.

The EU’s voice in Kyiv  

The EU has also benefited from having a strong voice in Kyiv in the form of Jan Tombiński, its outspoken ambassador since 2012. He joined civil society in questioning the political neutrality of those chosen by (recently resigned) Prosecutor General Viktor Shokin to select prosecutors of the newly formed SAPO. After it was widely reported that EU funding and visa liberalisation were at risk for failing to accommodate EU concerns, new nominees were found and the new institution is now operational. Other less obvious reforms succeeded only after the ambassador intervened in the details of the legislation. For example, the new law on a more effective apolitical civil service was only passed after Tombiński made clear that holding back on it would cause financial support to be withheld.

No room for complacency

For all the accomplishments of the past two years, analysts agree that the pace of reforms is still far too slow. Changes have been met with strong resistance from parliament and government officials – there is no room for slack or complacency. 

A fast increasing number of Ukrainians are becoming disillusioned because they can’t see change happening. Prime Minister Arseniy Yatsenyuk was polling so low in the autumn that his party didn’t even take part in the local elections. The president is now as popular as his ill-fated predecessor at the start of the Euro Maidan. Opinion polls at the end of 2015 found that 60 percent of Ukrainians feel that the events in Ukraine are unfolding in the wrong direction and now only 33 percent are ready to tolerate material hardships for the sake of successful reforms – figures that are significantly down on the previous year. 

Underscoring this collapse of confidence was the resignation of the internationally regarded reformist – the Minister of the Economy Aivaras Abromavičius. He had no intention “to serve as a cover-up for covert corruption” he said, after alleged political interference in his efforts to reform state companies. Now predictions abound about early elections and there is a danger that political turmoil could lead to an unravelling of progress and the sort of disappointment that came after the Orange Revolution.   

Staying relevant in Ukraine

Regardless of who continues to run Ukraine in 2016 there is now the challenge of re-energising the reform process and starting to produce visible results. It’s essential that the EU continues to apply strong pressure if they are to succeed.

In the short term this means making full use of the leverage it commands to press for commitments to be fulfilled without allowing any loss of its own. The result of the upcoming Ukraine referendum in the Netherlands, for example has the potential to undercut a credible and coherent European position. The European Council should promise to quickly ratify visa liberalisation on the condition of continued positive monitoring by the Commission. At the same time, member states must ensure that the process isn’t held up – even despite the threat of delay that the upcoming Dutch referendum makes possible. The EU ambassador and other representatives must continue to be vocal about the need for commitments to be implemented, especially as regards the running of the new anti-corruption institutions.

After this year, however, it is possible Ukraine will be granted visa free travel and be in a much more financially stable position, limiting the EU’s leverage. Even the most pro-reform government in Kyiv will feel weaker without strong international commitments. The basis of a new relationship between Kyiv and Brussels will have to be determined so the EU can find a way of remaining relevant in Ukraine.

The EU must continue to give Ukrainians reasons to see benefits from European integration. This means continuing high level engagement with both the government and civil society, better explaining what positive changes have been made in the country, and engaging in targeted investment where it is most needed on a local level (polling suggests that fixing the bad state of roads is a good starting point). The possibility of negative conditionality should also be formally emphasised: the EU should make clear that it withholds the right to suspend visa free travel or elements of the DCFTA should new legislation be undermined in any way and so not result in the desired impact.

Far from the political intrigues and technocratic negotiations in Kyiv there remains the uneasy truce in the Donbas. On this issue Ukraine needs the West to maintain sanctions on Russia and to help rebuild a reunited Donbas.

Enforcing discipline in the reform process through conditionality has proven effective in Ukraine, even though results have not come as fast as some hoped. After being elected, President Petro Poroshenko promised that Ukraine would be ready to start discussing EU membership in 2020. EU membership is still a long way from credibly being on the agenda, but at some point the question will have to be raised. In the meantime the EU will have to see whether they can make leverage over Ukraine sustainable without the incentive of membership.

The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of its individual authors.

Author

ECFR Alumni · Former Advocacy Coordinator

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