Yatsenyuk
Somehow, the reforms didn't work out. What the Cabinet of Ministers did and didn't do in 2015.
Almost a year ago, parliament approved the program of action for Arseniy Yatsenyuk's second Cabinet of Ministers for 2015-2016. This occurred on December 11.
There have been many rumors surrounding this date recently, including that the government's immunity will expire along with the program's expiration date. Also, that failure to implement it will formally lead to the Cabinet's resignation.
But this, as we know, did not happen.
Firstly, the long-awaited government report wasn't even scheduled. Yes, the media announced that ministers and the prime minister would report on their progress.
However, for unknown reasons, the format of this event was revised. Instead of a full report, which theoretically should have led to the question of the Cabinet's resignation, the agenda included a so-called "Government Day in the Rada."
That is, there could be no talk of submitting a resolution on confidence or the resignation of the Cabinet of Ministers to the Rada for consideration.
Secondly, even a tough interrogation didn't take place because, thanks to former BPP MP Oleh Barna, the meeting turned into a circus. Flowers, wrestling matches, and brawls in parliament outsold all the negative news regarding the actions of the prime minister and his entourage.
The current rhetoric of the BPP and the People's Front boils down to the fact that the government must absolutely not be dismissed. The most common "horror story" is that this cannot be done because the Cabinet of Ministers must complete the tax reform and the 2016 state budget, otherwise Ukraine will not receive the next tranche of the IMF.
Does this Cabinet deserve to be resigned? Do individual ministers, or perhaps even the prime minister, deserve it? The "Barna factor" and the position of international stakeholders will likely give Arseniy Yatsenyuk a head start of several months.
It's no secret, however, that reforms have failed this year—their implementation was very low over the first nine months, as EP has already reported. Little has changed during this time, as reformers were primarily active only in the first half of the year.
It was during this period that two major reforms took place, which successfully went from regulatory act to direct implementation: increasing gas tariffs for the population and the introduction of patrol police.
Overall, many questions have accumulated, both for the ministers themselves and for the work of the ministries as a whole. The EP asked journalists who had been monitoring individual ministries to assess the government's performance. We also included the National Bank in our review.
Ministry of Infrastructure: in the sky, on the water and on the land
If we were to evaluate everything that happened in the transport industry in 2015 in terms understandable to the Ukrainian reader, then this year was, rather, a year of "victory" interspersed with "betrayal."
Since the beginning of 2015, aviation has become one of the top topics in the Ukrainian media, which seems rather odd for a country where the purchasing power of citizens has fallen significantly in just one year.
It all began with an interesting experiment, opening the skies to Lviv. The Ministry of Infrastructure decided not to wait for the EU to mature before signing a common aviation area agreement and proposed that all countries lift restrictions on flights to and from Lviv. By the end of the year, Odesa also joined in, thanks to the efforts of local Governor Mikheil Saakashvili.
In both cases, the experiment did not produce immediate results, although, as we can see, no one expected them: for now, Ukraine is in a position where it must create conditions and invite, rather than dictate and demand.
The Open Skies Agreement signed with the United States this year by Ukraine should be viewed in the same light. No one in the US seriously considers initiating regular flights to Ukraine.
However, removing obstacles almost always means increasing opportunities. The main thing is that someone will eventually take advantage of them.
Ukraine's greatest hopes and greatest disappointments in 2015 revolved around the long-suffering Common Aviation Area Agreement (CAA) with the EU. Initialed under Yanukovych, the agreement has been lying dormant for several years, ready for signature. During this time, Ukraine has seen several new transport ministers, and London and Madrid are still locked in a dispute over control of Gibraltar.
Even Brussels, according to statements, fails to understand why Ukraine should be held hostage to a local dispute between two former capitals. The European Commission promised to intervene and resolve the situation by the end of this year, but only the SAPO remains.
2015 was not without major scandals in the Ukrainian aviation industry.
The first was internal and began after Saakashvili's spectacular appearance at a meeting of the State Aviation Committee, which issues flight permits. The Odesa governor delivered a fiery "anti-Kolomoisky" speech, accusing the now-former head of the aviation service, Denis Antonyuk, of "working for an oligarch."
The president, and subsequently the Cabinet of Ministers, became involved in the scandal. Antonyuk was first suspended, then fired, and a criminal case was opened.
The only problem is that the government commission's report found no serious criminal violations in the operations of Gosavia under Antonyuk's leadership. Therefore, it's quite likely that he will simply become yet another victim of the rhetorical "de-oligarchization."
The sanctions war with Russia, which flared up in Ukrainian skies by the end of the year, turned out to be a truly serious conflict.
Without going into details, Kyiv and Moscow ultimately suspended air traffic almost entirely, banning not only direct flights but also cargo and military transit.
Ukrainian passenger companies have been forced to bypass Russia since last year, and their Russian counterparts are only now experiencing this. Ukraine's neighbors have benefited from this situation, quickly trying to grab a piece of the transit passenger flow that previously flowed from Ukraine via Russia.
However, the Ukrainian transport community did not live by the sky alone.
No less stormy weather was also observed in Ukrainian ports, most of which, after the annexation of Crimea, are concentrated under the rule of the same Saakashvili, who never tires of creating newsworthy events, as in the situation with the Ilyichevsk port.
The current minister, Andrei Pivovarsky, was supposed to recruit the rather odious port director, Yuri Kruk, as an adviser, thereby paving the way for a competition for his position.
One of the biggest "victories" of 2015 was related to ports. After a rather meticulous and complex effort, accompanied by sabotage and even open conflicts with various inspectors and auditors, the Cabinet of Ministers succeeded in ensuring that all port inspections of cargo vessels now take a few hours, rather than the days and weeks that had previously been the case.
Land transport also experienced significant upheaval. Ukrzaliznytsia, the main source of income for several generations of Ukrainian corruption, became a public joint-stock company at the very end of the year.
UZ has a fairly transparent supervisory board and a streamlined chain of command. Coupled with the drafted bill on rail transport reform, which will change, if not everything, then almost everything, 2015 can be considered the year that changes began in the railways. True, the new minister will have to make all of these changes, but now "hope is in."
A separate issue is the competition to select managers for state-owned enterprises. There were numerous complaints regarding the selection of the chairman of Lviv Airport and Boryspil Airport. Members of parliament on the relevant committee even sought to negotiate for the Lviv Airport.
Ministry of Energy: minus Gazprom, minus anthracite
The main achievement of the year in the energy sector is the real diversification of external gas sources in Ukraine.
This is especially well known at Russia’s Gazprom, whose share of our market will decrease from last year’s 90% to 40% by the end of 2015.
The remaining 60% is concentrated in the hands of a diverse group of European traders. This distribution allows Naftogaz of Ukraine to navigate between suppliers' offers and select the best price offers.
Thus, the state-owned company saves tens of millions in public funds. However, this does not ease the burden on the budget, as it is simultaneously under increasing pressure from increased purchases of imported gas, which is partially redirected to meet household needs.
Thus, if in 2014 UAH 26,5 billion was spent on these purposes, then in the first quarter of this year alone this line item of expenditure already amounted to UAH 22,9 billion.
The exponential growth in costs is due to the failure of the domestic gas production development program, which covered Ukrainians' gas needs in previous years.
Another major expense for the state is the purchase of scarce anthracite coal, which is what five of Ukraine's 14 thermal power plants are designed to use.
The Ministry of Energy doesn't disclose this figure, but it's not difficult to calculate: during peak periods, Ukraine purchases 500 tons of Donbas anthracite per month, which, converted to today's price of approximately 1200 hryvnia per ton, amounts to approximately 600 million hryvnia.
In fact, this figure represents the total funding for militants from the ATO zone who control all the mines in the occupied territory of Donetsk and Luhansk regions.
Stopping these "subsidies" is impossible for two reasons. First, Ukraine hasn't established anthracite supplies from non-CIS countries in a year.
Second, the Ministry of Energy has effectively abandoned the program to refurbish thermal power plant units, which would have allowed them to convert their capacity to use other grades of coal.
At the same time, nothing has changed in the corporate public sector over the past year—many companies in the industry remain under the control of power brokers close to the government. The recent scandals surrounding Energoatom and Odesa Port Plant confirm this.
The struggle for the energy sector between the two main centers continues. The oligarchs' loss of control is confirmed by a specific example: within a year and a half of the change of power in the country, Rinat Akhmetov lost virtually all of his former influence in the energy sector.
Ministry of Finance: Tax reform and the budget failed
The most high-profile event in economic policy was the failure of tax reform. Despite declared promises and extensive public discussion, the Ministry of Finance failed to draft a Tax Code that would satisfy businesses, parliament, and the government itself.
Ultimately, the reform boiled down to a reshuffling of tax rates and a purge of benefits, including social and tax benefits for farmers.
The same can be said about the 2016 budget, which once again became the subject of haggling and behind-the-scenes negotiations. As in the previous year, deputies passed it at night. This time, until 4:05 a.m. Compared to last year, this represents an improvement of four days. Then, deputies passed next year's budget on December 29 at 4:22 a.m. Prime Minister Arseniy Yatsenyuk promised that such a thing would not happen again. As we can see, the situation remains unchanged.
Officials' promises regarding the moratorium on business inspections were once again unfulfilled. It came into effect in January 2015 and expired on July 1. Officials claimed that the Cabinet of Ministers had approved an extension of the moratorium on business inspections until the end of 2016, but the Rada never passed the relevant law in its entirety.
Another example is the gap between what was expected and what was actually achieved from the "tax compromise." Its implementation was expected to add up to UAH 3 billion to the treasury.
However, businesses did not demonstrate trust in the tax authorities, fearing criminal prosecution or large additional charges.
As a result, according to official data, following the “compromise” campaign, the budget was replenished by 794 million hryvnias.
Another high-profile, but more effective, event was the restructuring of foreign debts totaling approximately $15 billion. An agreement with Russia on restructuring the $3 billion "Yanukovych loan" failed, and legal proceedings are expected.
The "completed" status in economic policy can be assigned to the items related to amendments to the Budget and Tax Codes. However, these were adopted in December of last year.
Thus, as part of the tax reform in 2014, it was possible to reduce the number of taxes from 22 to 11, transform the simplified tax system by reducing the number of simplified tax groups to four and lowering the single tax rates.
Overall, the government's actions over the course of the year can hardly be called reformist.
Ministry of Economic Development: Much has been done
The department of Aivaras Abromavicius has managed to accomplish a lot.
First, there's the reform of the public procurement system. It has undergone radical changes that will save the state treasury billions of hryvnias.
A pre-New Year success was the adoption of one of the latest laws on public procurement on the night of December 25. This law establishes rules for conducting all public procurement through the Prozorro e-procurement system starting April 1, 2016, for ministries and large state-owned companies, and starting August 1, 2016, for all state-owned companies and government agencies.
Secondly, deregulation and the cancellation of a number of permits for businesses.
Thirdly, successful negotiations on a free trade zone with the EU, Canada, and other countries took place.
Along with this, a slight improvement in the Doing Business ranking was observed. However, it should be noted that only six months of work by Abromavicius' team were assessed.
One of the biggest problems is the failure of privatization. However, it's unlikely that the Ministry of Economic Development alone can be blamed for this—rather, it's the collective responsibility of the Cabinet of Ministers, the Verkhovna Rada, and the Presidential Administration.
Privatization reforms have been blocked in parliament all year. The main reason is the lack of political consensus on what to do with state assets. Government bill No. 2319a, which would abolish the mandatory pre-sale of 5-10% of a company's shares and bar persons associated with an aggressor country from participating in privatization, was unsuccessfully included on the parliamentary agenda 11 times.
HR policy in the public sector has also not been particularly successful—competitions for the leadership of state-owned companies like Ukrspirt, Ukrposhta, and Ukrzaliznytsia were accompanied by scandals, lawsuits, and disruptions.
However, even here, the main problems arise at the level of the relevant ministries. The final authority, the Nominating Committee, which operates under the Ministry of Economic Development, has performed almost perfectly.
Cooperation with international financial institutions is also questionable. The disbursement of funds for projects financed by international lenders is very low, partly due to fluctuations in the hryvnia exchange rate. Ultimately, this is also the government's overall fault.
As a reminder, cooperation with the IMF continued throughout the year, but was at risk of collapse at the end of the year.
In 2015, Ukraine received two tranches from the Fund totaling $6,7 billion. The third tranche was expected in October, but due to uncertainty over the 2016 budget and tax reform, its release has been delayed indefinitely. According to the EP, the funds may not arrive until the end of January.
Ministry of Agrarian Policy: Business is thriving, competitions are not taking place
If you listen to the leadership of the Ministry of Agriculture, they always talk about the same thing: the locomotive of the national economy, record yields, producers adapting to European standards, and successes in deregulation.
Recently, the head of the Ministry of Agrarian Policy has often mentioned the independence of the Russian food market.
Be that as it may, such achievements do exist. The agricultural sector tops the list of export-oriented industries and annually records new harvest yields. Around 250 domestic enterprises have successfully completed certification and are authorized to supply their products to EU markets.
As for Russia, producers there have managed to diversify their export markets by targeting countries in Europe, Asia, the CIS, and the Middle East. Ukrainian exports to Russia have fallen from 12% of all Ukrainian production to 2%.
Also on December 8, Parliament adopted a package of 22 regulations eliminating a number of documents required for work in the agricultural sector.
It's probably fair to say that this is largely due to the businesses themselves, or to the agricultural lobbyists who drafted those same deregulatory norms. But it's still happening with the support and assistance of the relevant ministry on every possible front. At least no one is putting a spoke in the wheel.
It's no wonder that Oleksiy Pavlenko is considered one of the "untouchable ministers" who, in the event of a Cabinet reshuffle, would remain in office.
However, this picture only appears ideal at first glance. The weakest point of the Ministry of Agriculture and its leader is the management of state-owned enterprises subordinate to the Ministry of Agrarian Policy.
More than 400 enterprises with an uncertain future, barely breathing, but with ample opportunity to line the pockets of their leaders. Now, most of them can't take a single step without the knowledge of the Minister of Agriculture. The Ministry of Agrarian Policy has a special department that monitors all operations of state-owned enterprises online.
Is this good or bad? In 2015, several scandals emerged involving the three largest state-owned agricultural enterprises—the State Food and Grain Company of Ukraine, the Agrarian Fund OJSC, and Ukrspirt. Regarding the latter, the most controversial event was the election of the state-owned enterprise's head, which has been ongoing for over a year.
The ministry likes to talk about the transparency of the selection process and the independent commission involved in it. However, the protracted nature of the tenders and the current state of affairs at Ukrspirt, where the level of counterfeit alcohol on the market has already reached 40%, indicate otherwise.
Moreover, it recently became known that searches were conducted at the office of the chairman of the PJSC Agrarian Fund, Andrey Radchenko, and at the office of one of the minister's full-time advisers.
At the same time, according to information from the European Parliament, members of the Samopomich party, under whose quota Pavlenko was appointed, are conducting their own investigations into the minister's activities.
NBU: reforms are stalling
Financial market reforms, overseen by National Bank Governor Valeria Gontareva, also stalled in 2015. The National Reform Council assessed progress in achieving sector objectives at 69% over the first nine months.
According to the National Council, macroeconomic stability has been achieved, the financial sector is being cleaned up, the NBU's gold and foreign exchange reserves are growing, the first stage of the banking system recapitalization has been completed, the NBU has been reorganized, and a number of relevant bills have been developed and adopted.
The most significant and successful changes occurred in the banking sector. The NBU continued to withdraw from the market both small institutions—Unikombank, Ukrinbank, Sofiyskiy—and large ones, such as Finance and Credit. More than 60 banks are in the process of liquidation, and four are under temporary administration.
To meet all regulatory requirements, the remaining market players had to increase their capital. In total, shareholders contributed almost UAH 90 billion to the banks' capital. Only part of this amount was contributed in cash—shareholders chose to convert sub-debt into equity.
The NBU also began more thoroughly scrutinizing transactions with related parties. In particular, loans were placed under special scrutiny. Furthermore, the regulator required banks to disclose their ownership structure to the ultimate beneficiary.
Significant changes have also taken place within the National Bank itself. The regulator's structure has been completely restructured, and laws have been passed that strengthen its institutional capacity and financial independence.
Amendments to the Civil Code introduced the concept of term deposits: now, clients have the right to withdraw funds only at the end of the contract term. Previously, all deposits were essentially on demand: clients could terminate the contract at any time with minimal losses.
The NBU's most significant shortcoming is its delay in stress testing large banks. The results were supposed to be available in September, and shareholders are required to agree on a recapitalization plan with the regulator by December 31.
However, the test results have not yet been approved, so the deadline for approving the recapitalization plans has been extended until February 1, 2016.
Furthermore, the state-owned banks development strategy, which the NBU is developing jointly with the Ministry of Finance and the IMF, has still not been adopted. Its review by the Cabinet of Ministers was scheduled for October, but an agreed-upon text for the strategy has yet to be released.
The European Parliament recently published a draft strategy. The issue of stripping banks of state guarantees for deposits generated the most controversy.
Currently, Oschadbank depositors have unlimited guarantees for the return of their deposits, unlike clients of commercial banks, to whom the Deposit Guarantee Fund only returns up to 200 hryvnias.
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Dmitry Denkov, Galina Kalacheva, Dmitry Ryasny, Roman Romanyuk, published in the publication Economic truth
Translation: Argument
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