Eastbook

Tomasz Filipiak: In your recent book “Ukraine. What went wrong and how to fix it” you express an opinion that the crisis Ukraine is facing now should be seen an opportunity to reform the country’s economy provided, that the war in Donbas does not escalate. Do you really find it possible to introduce deep economic reforms given the circumstances?

Anders Åslund: Yes, of course. It is happening. The Ukrainian economy hit the bottom, stabilised and is now recovering. According to the first available statistics the growth started and equalled 1,8% in the 3rd quarter of this year. It remains a question whether the Ukrainian economy is going to grow by 2-3% a year or 6-7%, as it had before, between 2000 and 2007. It is also an opportunity for the Polish entrepreneurs. Since the salaries in Poland are now 6 times higher than in Ukraine, it should be natural to move some of the production, especially the kind that does not require extensive investment, to Ukraine.

Polish entrepreneurs still hesitate to invest in Ukraine and the assessment of the recent events remains uncertain. What would you see as the main achievements of the post-revolutionary Ukrainian authorities in reforming the country?

First of all, presidential elections were held only 3 months after the “Revolution of Dignity”. Soon afterwards parliamentary elections were organised and a new reformist government was appointed in December 2014. It instantly launched a reform programme.

Economically speaking, the successes include the energy and financial reforms. Energy prices have been unified, just like in Poland in 1992, allowing to save approximately 8% of GDP. The gas prices for consumers were increased 11 times. At the same time, Ukraine managed to lower its gas consumption by approximately 20% in 2015 and by estimated another 10% in 2016. These are enormous achievements, essentially meaning that Ukraine is becoming more and more independent from Russia in terms of gas supplies. Ukraine is buying increasingly more gas in the European markets and although this might be as well the Russian gas, it is purchased without political conditions. At the same time, the big source of corruption, that is gas imports and gas trade inside the country, have been eliminated. Once again, these are enormous achievements.

The macro-economic indicators seem to be improving…

The public deficit as a share of GDP fell from 10% of GDP to 2% in the last year. The public debt has levelled down to 80% of GDP, contrary to the estimates of the IMF that were indicating 94% of GDP. This is a massive fiscal adjustment that Ukraine has gone through.

Furthermore, the payroll tax that used to amount to 45%, starting from this year equals 22%. While this might not have led to reduction of the shadow economy in the short term, it will inevitably have this effect in the long term.

What are the failures in the reforms then? Kiev is still behind with certain reforms.

What has not been done is the reform of the judiciary system. The judiciary reform has been legislated but it has not been moving forward.

On the other hand, although the reform of judiciary is stuck, the improvement of transparency in the Ukrainian system has been quite extraordinary. Officials have been forced to declare their incomes and assets in very considerable detail. The owners of the banks have been revealed and a lot of various property registries have been established in electronic form. New anti-corruption bodies were introduced. But as I said, the corruption in the judiciary system is now what one should focus on.

What remains to be solved is the pension system reform – this is a key IMF demand, the reform legalising private sells of agricultural land and, finally, privatisation of state enterprises. These three issues are now crucial for the Ukrainian economy.

You mentioned the need to tackle the corruption in judiciary. Speaking more generally, do you see corruption as a persistent problem of the Ukrainian political system?

Ukraine’s corruption exists on all levels, there is no doubt about that. What I would like to emphasise, however, is that it is not the oligarchs who are the problem here. Everybody is used to say that the oligarchs are responsible for the pathologies of Ukrainian politics and economy, but the real problem is the state officials who sit on state enterprises and are involved in corruptive schemes. They, obviously, have their say in the parliament, which in turn, controls the judiciary system.

If, as you say, the oligarchs and their interests are not an obstacle to the reforms in Ukraine, you would rather advocate involving them in the political process, or trying to marginalise their influence?

The power of the oligarchs has declined. They lived off monopolies. Now we can see that for example Dmytro Firtash and his group are essentially gone, because they lived on gas trade – unification of prices and declining gas imports from Russia caused that. Rinat Akhmetov has seen his wealth declining by 85% in the last 3 years. In general, in the last 2 years the oligarchs as a group have lost 2/3 of their wealth, and several of them, such as Oleg Bakhmatyuk or Vadim Novinsky are completely out. The oligarchs are not a problem anymore, because they suffered heavy losses. One should ignore them rather than engage them in politics, because it is politics that would make them benefit again.

You share an opinion that Vladimir Putin’s aim is to discredit Ukraine and to hamper the transformation of the Ukrainian political and economic system. Do you see a risk of further escalation of the conflict in Eastern Ukraine?

I think Putin sees the annexation of Crimea as a major success, and the war in Donbass as a major failure. What he wants is small victorious wars to boost his domestic popularity and he did not accomplish that by destabilising Donbass. Still, I don’t think Putin is likely to expand the war. It is simply too expensive and Donbass is not attractive enough.

In what terms is the annexation of Crimea Putin’s success?

Not in economic terms, it is all political. If you look upon Putin’s economic policy, it is mostly about macroeconomic stability at all cost. Real incomes in Russia fell by 10% last year and 5-6% this year. In the meantime, Putin is using small wars to rally the population.

What is the probable Russian policy towards Ukraine now?

For Putin the best way to operate in Ukraine is now by non-conventional means, that is the FSB, GRU actions, diversion, bombings, provocations, information war and policies introduced by Russian infiltrators at all levels. We need to realise that Ukraine is still completely infiltrated by Russian agents. We should even expect the most radical Ukrainian nationalists to be Russian agents.

What Russia cannot do is to get in a massive trade war over gas against Ukraine any longer. Also, although the war is led using all these available means, the military component is playing a progressively smaller role.
It is for the West to realise that Putin’s foreign policy is about creating instability around Russia. This is what can be observed in Abkhazia, South Ossetia, Nagorno Karabakh, Transnistria, Crimea and Donbass. The more instability, the better from Putin’s perspective. Poles understand it better than others.

Russia must be seen to constitute a negative factor in the process of Ukrainian transition. However, one of the pillars of your argument is that the international support should be activated in order to secure the Ukrainian transition. You see the EU as the anchor for modernisation of Ukraine. Do you think that contemporary EU, facing the immigrant crisis and the Brexit, is capable to handle the Ukrainian crisis?

No. Ukraine’s public debt in the end of 2013 equalled 73 bln dollars, at the end of 2015 it was 65,5 bln dollars. It means that Ukraine has been paying back approximately 8 bln dollars to the international community, while the international community has pretended to help. It was particularly the EU that did not contribute. In addition to that, the Deep and Comprehensive Free Trade Agreement signed between the EU and Ukraine contains no less than 36 import quotas, essentially concerning the big Ukrainian export products: agricultural and steel articles constituting around 37% of the Ukrainian export. These quotas are often very small.

To give you an example – the EU quota for chicken meant is 1% of total Ukrainian production. Thus, the Ukrainian chicken producers do not attempt to sell their products in the EU, because the market is simply too small to be financially viable. The EU officials, in turn, use it as an argument against increasing the quota – why should it be increased if the Ukrainians don’t even use what is available? It is a vicious circle. There have been some increases in quotas, mainly because of the shortage of certain products in European markets. All things considered the EU is doing far too little to help Ukraine.

So, what should be done?

Firstly, it is necessary to increase the import quotas. Secondly, the financial support delivered by the EU is now very limited. The European Investment Bank and the European Bank for Reconstruction and Development could deliver more than the macro-financial assistance, which is limited anyway. So far, the EU contributed only 1,2 bln euro to Ukrainian transition. This is very little.

In your latest book you advocate for what you called a “Marshall Plan” for Ukraine. Is the argument still viable after the elections in the U.S.?

It is necessary to understand that Ukraine has lost 6 to 8 bln dollars of Foreign Direct Investments because of the war and this should be treated as a market failure. Foreign companies simply do not invest in a country, where war breaks out. This is precisely the moment when the West should come in. Take for example the EU, the U.S., the EBRD, the EIB, the World Bank, the IFC, and if they all contributed, you would gather 5 bln dollars a year for investment in Ukraine. It is within the range of these institutions.

However, the big danger to any such plan is Donald Trump, who clearly wants to make a grand bargain with Putin. This man is mad, egotistic and completely irresponsible. We can expect absolutely anything from him.

It is a common concept in Poland that the Polish transformation can serve as a model for Ukraine. Do you think this is true, considering the fact, that the starting point in the Polish case seems to be different and Poland had the incentive in perspective of joining the EU? Are Polish and Ukrainian cases comparable?

I think Ukraine is not very different from Poland, it is just 25 years behind it. If you take into consideration the economic structure of the two countries, they are surprisingly similar: coal and steel industry, machine building and large agricultural sector. In some of the sectors Ukraine is even better off than Poland, f. ex. the Ukrainian hi-tech industry owes 3% of the GDP.

The major thing that helped Poland in 1989 was that millions of Poles received their education and work experience abroad. Ukraine is in the same situation now. This is a big difference between the events of 2004 and now in Ukraine. These West-educated people were not there 12 years ago, but now they are taking over senior positions at the administration. The quality of the human capital improved a lot over these years in Ukraine. And it is often forgotten how important a role it played in the case of Poland.

The economic environment also bears some resemblance. The markets opened for Poland almost immediately. And even though I complain that EU market is too closed for Ukraine, 39% of the Ukrainian exports went to the EU in the first half of this year. In reality, never before has it been more accessible for Ukraine.

The major macroeconomic changes in Ukraine are comparable to what Leszek Balcerowicz did in Poland, so the situation is more similar than one could think.

Poles take many successes for granted now, but it was Norman Davies in his “God’s Playground” who expressed an idea that Poland was played by its neighbours and could not develop on its own. Precisely the same narrative we face now with regards to Ukraine. It is not true.

Warsaw, 17th November 2016