VERSION ORIGINALE EN ANGLAIS DE L’ARTICLE DE PAUL NILAND

NUANCE OF CORRUPTION AND REFORM IN UKRAINE

Preface

All too often commentators pen generalisations about the problem of corruption in Ukraine, for example, a Foreign Policy articlepublished in September of 2017declared ”Four years after the Maidan revolution erupted, the country is hardly any close to solving its corruption problems;” and it is sentences like this that present a distorted view of the problem of corruption in Ukraine to audiences and decision makers.

This report does not aim to whitewash the problem of corruption, but to objectively explain and maybe quantify the issue, as well as to provide detail of the numerous anti-corruption initiatives and reforms that have taken place in the 5 years since Ukrainians took to the streets in what was initially called the EuroMaidan protests but is now more widely known as The Revolution of Dignity.

Of course corruption still exists in Ukraine, it is a deeply ingrained problem. Reducing and even hopefully ending corrupt practices requires more than just laws, it requires a major shift in attitudes and that is not something that can easily, or quickly, be achieved. 

The problem of state-level corruption in Ukraine was one of the key factors that led to onset of the 2013/14 revolution in Ukraine. While the catalyst was the announcement by the Yanukovych government that a long-awaited Association and Deep Free Trade Agreement with the European Union would not be signed, it was the undercurrent of corruption that really moved people to protest, combined with the repeated poor choices of the Yanukovych regime in attacking both the protesters, and democracy itself with the attempted imposition of the so-called Dictatorship laws on January 16th 2014.

Under Yanukovych, corruption flourished, and at the same time it also became more blatant. A free press, something that can be considered to be a legacy of the Yuschenko era, reported on the palatial estates of those who were robbing the country and impoverishing ordinary Ukrainians. At the same time investigative journalists uncovered the vast sums of money that were being put into the hands of friends and family through the corrupt awarding of state tenders. The staggering numbers enraged hardworking folk who struggled, sometimes working more than one job, to survive.

The problem of corruption is not limited to the opulent lifestyles of who benefited from positions of, or close to, power. Corruption kills, for example through the failure to provide adequate hospital services because of a lack of funds from or in the state budget. Corruption can also kill when pensioners cannot afford to heat their homes through the harsh Ukrainian winters. Corruption causes an increase in death tolls on the roads when driving licences are purchased rather than earned, and when traffic police allow road users to escape appropriate punishment for driving at high speeds or driving under the influence of alcoholor both at the same time, because a bribe is paid to them.

Corruption is, without doubt, a cancer on any society. In the Yanukovych years (from his return to the Prime Minister’s office in 2006/7 and through his elevation to the Presidency in 2010) corruption in Ukraine became a cancer that was metastasising at an alarming rate. It infected all areas of the body politic, and affected all areas of the function of government, national and local, in Ukraine.

Since the end of the Revolution of Dignity, major steps have been taken in Ukraine to cut out the cancerous cells, and to bring a targeted end to elements of the corruption that had plagued the country and ignited a revolution. Had such actions not been taken, the mood in society would not be as it is today, the mood of the country now calls for evolution rather than revolution. Though corruption has not gone away, the picture today is certainly different from the days before Maidan burned.

The perception problem

A lack of deeper, or any, understanding of Ukraine’s reform progress hampers Ukraine’s image on the international stage. On September 21st2018 a Moscow-based news outlet, BNE Intellinews, sent out an Email newsletter informing readers of a rift between two separate anti-corruption bodies in Ukraine, their covering comment to the story about The National Anti-Corruption Bureau of Ukraine (NABU) and the Specialised Anti-Corruption Prosecutor’s Office (SAPO) read as follows, “In Kyiv what was the tragedy of the failure to tackle corruption has turned into a farce.” 

Such opinion, generalising a “failure to tackle” corruption in any way, are a part of the image and reputation problem that Ukraine faces, and this report hopes to address.

Polls and opinions Vs quotes

There is clearly some dissonance between how Ukrainians feel about their country’s reform progress, vs how international experts assess the situation.

In an extensive piece of research carried out by the International Republican Institutein March of 2018, titled “Public Opinions Survey of Residents of Ukraine”, 71% of respondents believed that their country was “heading in the wrong direction”, and in the same report “corruption within state bodies was listed as the second (after the military conflict in the Donbass) most important issue facing the country.

Contrast these opinions to those of international experts, Anders Aslund, an economist and a Senior Fellow at The Atlantic Council, said as far back as September 2015, “[the] IMF treats positively the events in Ukraine, for it assesses the adopted legislation, first of all. This year Ukraine passed about 400 reformatory laws, which is a lot. There has never been so much work done on reforms in Ukraine.”

Amore recent study(dated November 11th2018) of opinions related to corruption, conducted by the Democratic Initiatives Foundation and funded by USAID, found that 91% of respondents considered corruption to be the a serious problem in Ukraine, and 61% of respondents considered that it was the single most serious issue holding back development in Ukraine. The same study found that 61% of respondents believed that the main reason for persisting problems with corruption in Ukraine was that those who were responsible for addressing this problem, the country’s authorities, are themselves corrupt, and that one of the main reason why corruption goes unchallenged is that there exists an air of impunityamongst the political elite.

As noted in a January 2017 article for Carnegie Europe, “there is a paucity of Ukrainian opinion poll data at a time when this should be vital information for anyone interested in helping Ukraine’s reform progress.” In that same article, “according to a poll carried out jointly by the Ilko Kucheriv Democratic Initiatives Foundation and the Razumkov Centre and publicised in early January, only 3% of Ukrainians think that the overall situation in Ukraine has improved.”

The problem, therefore, with assessing true reform progress in Ukraine arises from multiple factors.

  • A lack of information, in Ukraine and internationally, about specific reform initiatives 
  • A lack of trust from Ukrainians in their political leaders
  • A lack of international expertise on Ukraine
  • A failure of communication between Ukrainian state bodies and key stakeholders at home and abroad.

To find a better understanding of reform successes and failures, interested parties must seek out relevant and reliable sources of information. One good resource, generally considered to be in-depth and objective, comes from the Carnegie Endowment for International Peace, their series of 8 reports published in August 2015October 2015December 2015February 2016April 2016April 2017October 2017, and March 2018provide an invaluable oversight into how the reform process in Ukraine has progressed in recent years, detailing both successes and failures.

Examples of reform

The Gas Sector 

The gas business had, for many years, been one of the most significant areas of corrupt practices affecting Ukraine. The outcomes of the way in which this particular business was manipulated amounted to much more than the amassing of great fortunes for a select few, though that was of course one of the factors.

The shenanigans played in the gas business caused a massive hole in Ukraine’s GDP, as much as 8% of the country’s annual wealth was lost in this way and that, as is always the case, is a shortfall made up, ultimately, by Ukraine’s tax payers. But in addition, it was specifically funds that came out of this gas business in Ukraine and the gas business between Russia and Ukraine that was the financing for political projects (including their public cover through the ownership of TV channels and other forms of media) that continued corrupt practices. 

Naftogaz Ukraine, the state’s energy monopolist, was one of the first major targets for change following the revolution of 2013/4. The removal of the then senior management of the company had to be carried out by heavily armed operatives from Ukraine’s SBU, the domestic security service. 

Changes to the management and the oversight board led to transparency and investment and a commitment to acting in the bes5t interests of the country and the company, a prime example of this is that Naftogaz has pressed, and won, a case against Russia’s Gazprom in the Stockholm Court of Arbitration in Sweden, resulting in a $4.63 billion award. This action is something for which there was absolutely no political will in the Ukraine of old times, the very idea of taking Russia to court to seek to correct an unfair system and seek redress that would ultimately benefit Ukrainian citizens, as tax payers, was previously unthinkable. Under the Yanukovych system, and even before, those who controlled the gas business in Ukraine acted in tandem with their counterparts in Russia, the idea of them being adversaries in a court proceeding was not only unthinkable, but laughable.

Naftogaz is no longer a drain on the economy of Ukraine, quite the opposite. Naftogaz is now the largest single contributor to Ukraine’s state budget. In 2018, Naftogaz paid $4.88 billion in taxes and dividends to the state, a sum that equates to 15% of the total revenues to the state budget.

[Image from a Naftogaz Corporate Communications Department Email]

Police Reform

Police reform in Ukraine has been mixed, but it is nonetheless important to make note of it in this report. What has changed in this regard is the primary point of contact between citizens and law enforcement, Ukraine’s new Patrol Police has 22,000 men and women in its ranks, and operations in the 34 largest urban centres across the country (excluding, of course, the areas of the country temporarily occupied by Russia and Russian-led forces.)

The ongoing problem with law enforcement in Ukraine is that beyond the first responders there remains in place a system of investigators and other branches of police work that have not been reformed, in some cases they hamper the efforts of the Patrol Police to work effectively and honestly. 

Rank and file, or wholesale, police reform has not happened. But the establishment of the Patrol Police has meant that, since July of 2015, the reality of interaction between the police and the citizens they serve is vastly different. Thanks to the combined efforts of countries like the United States, Canada, and Japan, this new team of first responders are well trained, and carry out their duties in a manner that is a vast departure from the “Militia” of the olden days, many of whom solicited bribes as part of their everyday working norm.

A problem remains though in the fact that the remnants of the old system, some of whom had been removed from their posts but returned to their jobs by the still-problematic judiciary, linger. Ukraine is at the forefront of a challenge to correct many institutional problems that are generic throughout the post-Soviet space, one of the ways in which this problem manifests itself is in the link between law enforcement and organised crime. Another link where Ukraine is the test case to find solutions for is the link between the oligarchy and politicians. One horrific example of the way these combined problems still deeply affect the country can be seen in the murderof Kateryna Handziuk, an anti-corruption campaigner and whistle blower who was the victim of an acid attack in her home city of Kherson in July of 2018. Handzuik, just 33 years old, suffered burns to 30% of her body and she died as a result of her injuries after spending three months in hospital.

It is widely believed that the attack on Handziuk was related to her efforts to tackle corruption and expose the corrupt, and there is good reason to suspect that it is the politicians of her home city and the members of law enforcement that they collude with in their illicit activities, ultimately, lie behind the murder. This hypothesis appears to be substantiated by the fact that the official investigation into the attack has not yielded any results. Her murderers remain at liberty. Her family has seen no justice.

Banking sector

Ukraine has also undertaken a deep and comprehensive reform of the banking system in the country. As noted in Business Ukraine magazine, “Anyone complaining about the slow pace or superficiality of Ukraine’s post-Maidan reform process clearly does not have the country’s banking sector in mind. Since 2014, Ukraine’s banking system has undergone an unprecedented overhaul that has seen decades of corrupt practices confronted. Around half of the country’s banks have since closed or been forced out of business, while those that have survived the reformist purge now find themselves in a new regulatory environment altogether.”

The Business Ukraine article on banking sector reform goes on to quote Gerhard Boesch, First Deputy Chairman of Raiffeisen Bank Aval, as follows, “The National Bank of Ukraine (“NBU”) now has a different institutional DNA,” he reflects. “I would go so far as to say that five years ago, there was a broad consensus internationally that the NBU was probably the worst central bank in the region. This perception has undergone a complete transformation. While it may not necessarily be universally regarded as the best in the region, the NBU is now seen as the institution that has made the biggest and fastest progress.”

Further underlining the strategic importance of this reform, Mr. Boesch also said, “It is still far too early to say ‘mission accomplished.’ We are not there yet, but the policy mix is now in place. The NBU is no longer an outlier in terms of monetary policy. This has broad implications not only for the banking sector but for macroeconomic stabilization in general.”

In total the NBU closed 90 banks in the years following Ukraine’s Revolution of Dignity, much of the reform in the banking sector was done in close collaboration with the European Bank for Reconstruction and Development (“EBRD”), commenting on this issue in an interview with the Kyiv Post, the Head of the EBRD’s financial institutions operations in Ukraine, Alexander Pavlov, said

“The bad guys are gone, that’s it. They are not present in the banking sector right now. Everybody now is trying to do normal banking business — watching over risks, profitability.”

“We’re not looking at another crisis. We’re actually looking at a significant improvement in the banking system and an increase in lending, and new lending to normal private companies,” 

“A lot of banks are coming out of the crisis actually much stronger, much better, more efficient, and their risk appetites have started to increase.”

“There are still too many banks in this country, but it is not a critical situation,” Pavlov said. “The stress test the NBU is performing now on a regular basis shows a much stronger and more robust banking system in terms of organization, funding, foreign exchange, and risk management.”

The reason why this sphere had to be tackled so comprehensively is that many of Ukraine’s old banks served as little more than laundry machines for corrupt individuals to wash their dirty money into the international banking system, if the owners of the banks could also con regular citizens out of their life savings at the same time, that was, for them, a fringe benefit.

The largest single element of the transformation of Ukraine’s banking system was the nationalisation of the country’s largest bank, Privat, formerly owned by key oligarchs Ihor Kolomoisky and Gennadiy Bogolubov. The story of the state takeover of this bank and the events that preceded it are perfect examples of the abuse of financial structures in Ukraine at the hands of unscrupulous individuals. A report commissioned by the National Bank of Ukraineinto the financial shenanigans behind the scenes at Privat concluded:

PrivatBank was subjected to a large scale and coordinated fraud over at least a ten-year period ending December 2016, which resulted in the Bank suffering a loss of at least USD 5.5 billion.

Key findings of the investigation include:

 1. Extraction of funds. There are clear indications that loan proceeds were used to purchase assets and to finance business enterprises inside and outside of Ukraine for the benefit of former shareholders and their affiliates.

2. Disguising the origins of funds. The mechanisms used to disguise the origin and destination of loan funds demonstrated the characteristics of a large-scale money-laundering scheme. The volume and timing of the transactions within minutes of each other and with no declared connection between the entity repaying the loan and the original borrower and the extensive use of Special Purpose Vehicle (SPV) companies based in off-shore jurisdictions, demonstrated indications of a concerted attempt to disguise the true nature of the economic purpose from regulatory and other stakeholders for the benefit of the former shareholders and their affiliates.

3. Bank within the bank. Central to the coordinated manipulation of the loan book, and extraction of benefit was a shadow banking structure within PrivatBank. The secretive structure processed and facilitated the movement of the proceeds of hundreds of loans worth billions of USD to parties related to the former shareholders and their affiliates. This shadow banking structure used hundreds of employees embedded within the bank.

4. Structure and administration of the loans. The shadow bank administered the related party corporate loan portfolio. It issued new loans, typically used to repay principal and interest on existing related party loans (Recycling Scheme) and was the architect of fund flow mechanisms to disguise the origin and destination of the loan funds, presenting a façade of an ordinary client-focused bank. The Bank attracted funds from private and commercial depositors from Ukraine and other countries, which facilitated the Loan Recycling Scheme.

This long term hidingof such a large exposure to related parties required PrivatBank to make repeated false representations of its financial position. This misrepresentation could only have been achieved through multiple instances of banking fraud and false accounting by the former management of the bank.

5. Balance sheet. Prior to nationalization in December 2016, more than 95 percent of corporate lending was to parties related to former shareholders and their affiliates. Towards the end of 2016, 75% of the loan book was consolidated into loans to 36 borrowers related to the former shareholders and their affiliates. The majority of these loans remain overdue and unpaid, resulting in a loss to the Bank of at least USD 5.5 billion.

Privat provides banking services to 20 million Ukrainians, close to half of the population. It is worth noting that the sum believed to have been embezzled from that bank, $5.5 billion according to the independent report by New York based corporate investigations specialists Kroll Inc. that was commissioned by the NBU, is almost identical to the sum that was required to be injected into the bank to avoid a disastrous collapse of that bank and the resultant loss of savings for depositors across the country. Put simply, the former owners are alleged to have filtered a sum of money out of their bank that then had to be replaced by the state, ultimately therefore at tax-payers’ expense.

The actions of the NBU, not only in the Privat Bank case but their wholesale clean up and internal reorganising, have recently attracted international acclaim when the Central Bankingmagazine praised Ukraine’s central bank for their transparency. In their article explaining the reasons for presenting the NBU with an award for transparency the magazine wrote:

“Ever since a revolution brought down the country’s president in 2014, the NBU had to cope with multiple problems, including rapidly spiralling inflation, an escalating war in the country’s east and a compromised banking system. It would have been tempting to release no new information, or even reduce the NBU’s transparency.

“But under the leadership of governor Valeria Gontareva (2014 to 2017) and her successor, Yakiv Smolii (from May 2018 onwards), the NBUtook the opposite path. It considerably increased the amount of information it released on how it did its job. The NBU worked hard at making this information available in a clear, timely manner to those who needed it.

“The central bank did not hide the extent of the problems it found in the country’s banking system. Instead, it gave clear information on the issues it found in many undercapitalised or fraudulently run banks. Its transparency in these matters has consistently improved during the past four years. This has put it well beyond the standards of some central banks in neighbouring countries, including some Eurosystem central banks.

“By persisting with its efforts, the NBU has shown that increased transparency is not just something that benefits comfortably independent central banks in the world’s most prosperous jurisdictions. Transparency can also be a vital tool for central banks seeking to reform economies hit by crisis.”

Health care

Under the leadership of Acting Health Minister Dr. Ulana Suprun, Ukraine’s healthcare system has undergone a period of transformation that has seen 18 million Ukrainians sign up to the newly designed health care service. The website of the Ministry of Healthdescribes the changes as follows:

The key to transforming the Ukraine’s old healthcare system is to focus on patient needs. The first step is the implementation of the new healthcare financing mechanism – “money follows the patient”. The state will now allocate money for the specific needs of a patient instead of financing hospitals, doctors, and inpatient beds.

Secondly, the reform introduces “family” doctors. Patients now have legal rights to choose their own family doctor based on his/her skills (and regardless of the place of registration) and sign a transparent agreement with him/her based on quality and respect. Family doctors should constantly take care of the patient’s health, and receive salaries depending on the number of patients who have contracted with him/her. Therefore, doctors have incentives to ensure that patients are healthy and satisfied with their services.

Next, primary care, palliative care, and emergency medical care are 100% funded by the state. Besides, the state provides reimbursement for medicines for cardiovascular diseases, asthma, and type 2 diabetes (in the near future, patients will be able to get prescriptions filled online). 

New methods for procuring and distributing vaccines are being introduced to eliminate shortages, to ensure the highest quality, and to reduce corruption at the local level. Instead of the current ad hoc approach, this process involves a three-year planning and better monitoring.

To restore confidence in the regions, patients will soon have access to new modernized medical centers with new diagnostic equipment for doctors, built or restored in full compliance with the latest sanitary standards. Moreover, patients will be able to book doctors’ appointments on-line or by telephone.

To restore confidence across the country, doctors’ qualifications will be secured through new licensing and educational standards. In fact, medical education has traditionally been one of the most corrupting areas in Ukrainian healthcare, since it opened the way to equally corrupt medical practices, which is why ensuring a sound academic background is one of key prerequisites for healthcare transformation. Therefore, the reform envisages requiring higher passing grades for External Independent Testing and more rigorous graduation exams for medical specialties.

Finally, Ukrainian doctors are now obliged to adhere to international treatment protocols in their everyday practice. There used to be thousands of domestic treatment protocols in Ukraine, most of which were out-of-date and inconsistent with current medical progress. In addition, the use of evidence-based medicine and the exclusion of corrupting components should make treatment cheaper for patients.

Now much depends not only on doctors, but also on patients. Patients should have the courage not to give bribes; to figure out which services are free; to write a request or a complaint if a bribe is asked or demanded of them; and to not visit an incompetent doctor or follow instructions they do not understand. 

At the same time, doctors should get what they have long dreamed of: respect, high standards and appropriate financial compensation.

The reform initiatives that have marked the term Dr. Suprun has led the Ministry of Health team have, of course, been resisted by some parties with related interests in the corrupt old system. To put context to how this Ministry had been run in the past, former Minister of Health Raisa Bohatyrova, who held that post during the Yanukovych era, was closely linked to many of the companies that supplied the drugs (and, in some cases, tablets with zero pharmaceutical benefit and no active ingredients) purchased by her Ministry. Such blatant abuse of office was then commonplace and since the events of the winter of 2013/14 the procurement side of operations of the Ministry of Health is now run via a relationship with UK procurement agency Crown Agents.

Bohatryova, like many of the most corrupt of Yanukovych’s inner circle, is now believed to be residing in Russia.

Decentralisation

Ukraine’s trajectory in changing the model of local governance throughout the country by decentralizing certain decision-making processes and empowering local communities with more power over their own affairs is another key factor in Ukraine’s reform, and anti-corruption process.

It should be noted that decentralisation was one of the key demands of the Maidan revolution from November 2013 to February 2014. It was argued that too much power lay in the hands of Kyiv, and that this power was at the same time being used to line the pockets of the officials who held that power. It should also be noted that decentralization was the one element of constitutional change specifically mentioned in both of the Minsk peace agreements designed to bring an end to the conflict in the Donbas region in Ukraine’s east. 

 (An important side note here is that because of the Minsk agreement commitment to decentralize, this concept was taken by Russia and turned into a call for a quite different kind of constitutional reform, one that would see Ukraine become a federalized state, these things are fundamentally differentand Ukraine has consistently rejected Russia’s calls for a federalized state.)

The process of decentralisation began with a set of bills being submitted to Parliament for consideration on May 15th2014, less than three months after the second Minsk Peace Agreement had been signed. The proposals had been drafted by a 15 members special commission appointed by the parliament on March 4th2014. 

The state’s own websitededicated to this topic provides the following outline of the reasons for and successes of decentralisation:

“State Policy, Legislative Groundwork, and Provisional Results of the First Stage of Decentralisation of Power in Ukraine

“The state policy of Ukraine in the area of local self-government is based, primarily, on the interests of residents of territorial communities and provides for drastic changes and systemic reforms, decentralisation of power – that is, transfer of a significant part of powers, resources, and responsibility from the executive branch of the government to the bodies of local self-government. The provisions of the European Charter of Local Self-Government and the best world practice of public relations in this area are put at the bottom of the policy.

“The necessity of drastic change in the structure of power and its territorial basis at all levels, taking actual steps to encourage the country’s development, responding properly to current challenges required legislative action.

“In April 2014, on the initiative of the then Vice Prime Minister – Minister of Regional Development, Construction, and Housing and Communal Services of Ukraine, Volodymyr Groysman, the Government approved a major approach document – the Concept of Reforming Local Self-Government and Territorial Structure of Power. Thereafter, the Action Plan was approved to implement the Concept, thus launching the reform.

“To implement provisions of the Concept and tasks set out in the Action Plan, it was required to, primarily, amend the Constitution of Ukraine and develop a package of new legislation.

“Amendments to the Constitution, in the first instance, had to resolve the issue of establishment of executive bodies within Oblast (regional) and Rayon (district) councils, the reorganization of local State Administrations into controlling and supervisory bodies, and provide a clear definition of the community as a political subdivision.

“Through the efforts of domestic experts, scholars, and practice area specialists, the draft amendments to the Constitution were developed and submitted for extensive public discussion. It is important that the proposed amendments were supported by the society and highly appreciated by the Venice Commission.

“Meanwhile, the major package of new legislation has been developed and become effective, the priority legislative initiatives of which legislation are currently being implemented. This refers to:

“Laws on amendments to the Budget and Tax Codes of Ukraine. Due to those amendments, local budgets increased by UAH 123,4 billion: from UAH 68.6 billion in 2014 up to UAH 192 billion in 2017. The share of local budgets in the consolidated budget of Ukraine is continuously increasing and, as of the end of 2017, it is 51,2 % (in 2015, it totalled 45.6 %).

“The Law « On Voluntary Amalgamation of Territorial Communities”. It made possible to start forming a capable basic level of local self-government. As of the beginning of October 2018, 874 amalgamated territorial communities(the « ATCs ») were already established. Those ATCs are composed of about 4,004 former local councils. Currently, 9,1 million peoplereside in the ATCs. International experts regard this rate of inter-municipality consolidation to be very high. 

“The Law « On Cooperation of Territorial Communities”. It established the mechanism of dealing with common problems faced by communities: waste management and recycling, development of joint infrastructure, etc.).287 cooperation agreements are already being implemented. 1122 communitieshave taken advantage of that mechanism.

“The Law « On Fundamental Principles of the State Regional Policy”. The government support for regional development and the development of infrastructure in communities increased by 39 timesover the period of reform: from UAH 0.5 billion in 2014 up to UAH 19.37 billion in 2018. The decision on the establishment of Regional Development Agencies has already been made in 21 Oblasts (Regions), the Centres of Local Self-Government Development operate in all Oblasts, which centres, among other things, assist the local authorities in implementing regional strategies.

“A package of laws pertaining to the enhancement of powers of local self-government bodies and the optimisation of administrative services provision. It allowed delegating powers to provide administrative services to local self-government bodies of respective level: individuals registration at the place of residence, issuance of national identity documents, state registration of legal entities and individuals, entrepreneurs, associations of citizens, civil registration, registration of proprietary rights, dealing with land issues, etc.

The new legislative framework significantly strengthened the motivation to inter-municipal consolidation in the country, created appropriate conditions and mechanisms in terms of legal framework for the establishment of capable territorial communities in villages, towns, and cities consolidating their efforts with the aim of resolving pressing problems. Also, the new model of financial support to local budgets has proved to be effective, which budgets obtained autonomy to certain extent and independence from the central budget.”

Published on June 15th2018, the foreword for a publicationby the Organisation for Economic Cooperation and Development titled “Maintaining the Momentum of Decentralisation in Ukraine” reads, “This Multi-level Governance Series study focuses on Ukraine’s advances in regional development, territorial reform and decentralisation since 2014. The Government launched a reform to merge local governments and strengthen the decentralisation process, giving additional power and resources to sub-national authorities. In a short period, successful steps have been taken toward achieving municipal mergers and greater fiscal, administrative and political decentralisation, complemented by the State Strategy for Regional Development 2015-2020.”

As a result of this structural reform, budgets to local communities continue to rise significantly, from $7.4 billion dollars in 2017 to $8.3 billion in 2018. The reform is not only fiscally important though, as noted by Ukrainian musician, social activist, and potential presidential candidate Svytoslav Vakarchuk in an articlein October of 2015, titled “What it will Take to Change the Elites in Ukraine “to make sure that new leaders emerge, it is necessary to give local authorities a chance to make decisions independently. In the future, many local activists and officials could become politicians, forming that new, deep cadre of professional politicians that Ukraine needs so badly. As a result, we would finally have competition between political leaders. There will be a wider choice of people trying to get into the central government.”

ProZorro

In February of 2015 all public procurement contracts in Ukraine began to be managed through a transparent online platform called “ProZorro”, translated from Ukrainian the name literally means “transparent”. Prior to Ukraine’s revolution, the awarding (to friends and family usually) of government procurement contracts was one of the major forms of corruption in Ukraine’s old system.

The vision to change these corrupt old practices initially came from civil society, as is often the case, but as the new platform was being developed international partners such as Transparency International, the European Bank for Reconstruction and Development, and others all became part of the process of creating and delivering this new system. ProZorro has since won international recognition as one of the world’s best e-procurement platforms. In May of 2016 ProZorro won the World Procurement Award at the Public Sector Awards in London, and the Annual Prize at the Open Government Awards in Paris in December of the same year.

By conducting all state tenders through a transparent (the official moto of ProZorro is “everyone can see everything”) platform where all interested parties can see how the tender process is being conducted and who the eventual winners of each tender are, Ukraine has managed to end the previous “friends and family” way of allocating state budgets, and in the process also ensure that a better quality of end product is also delivered. 

The savings to Ukraine’s state budget through ProZorro are estimated to be in the region of $1 billion per year. By contrast, prior to the revolution the single largest recipient of state tenders was Rinat Akhmetov, the country’s richest man (estimated net worth in 2013, $18.3 billion) and a major backer of Victor Yanukovych’s Party of Regions. Another major beneficiary of state tenders during the Yanukovych era was his son, Alexander Yanukovych, and a third party who was also extremely “lucky” in “winning” such tenders was a young man from Kharkiv called Sergey Kurchenko, who went from not having sufficient wealth to be included in the annual rankings of Ukraine’s richest people in 2012, to being included at 7thplace in the 2013 listwith an estimated fortune of $2.4 billion. At the time he was 28 years old.

Tax reform

In December of 2014 a cabinet reshuffle saw the appointment of American born Natalie Jaresko take over the running of Ukraine’s Ministry of Finance. As an American of Ukrainian heritage, and with a background of bring international investment into Ukraine and then purchasing and reforming Ukrainian companies, Jaresko set about reforming both Ukraine’s foreign debt obligations and Ukraine’s domestic taxation system.

One reason why Ukraine complicated tax system required reform was that it was frequently contrarian, and so following the laws as they stood meant a great deal of human resource time on the part of companies, and often matters of non-compliance were exploited by unscrupulous tax investigators who found problems in order to solicit bribes to ignore those problems. Thus, by closing loopholes and removing contradictions from Ukraine’s deliberately complicated tax system, Jaresko also managed to close one of the prime spaces for corrupt activity from officials. 

The new tax system introduced under Jaresko’s watch meant that the total number of individual taxes businesses were required to pay was significantly reduced, meaning compliance would be easier and less labour intensive for companies, in addition, payroll taxes were cut in half to stimulate the full payment of wages in an official way, rather than wages being paid (as has been the norm in Ukraine for many years) being paid partly in envelopes full of cash.

Establishment of anti-corruption bodies

In the wake of the revolution that ultimately removed Yanukovych from power, a National Anti-corruption Bureau (NABO) has been established, so too has a Specialised Anti-corruption Prosecutor’s Office (SAPO, a Business Ombudsman’s Office, and now more recently legislation has been passed paving the way for the creation of an Anti-corruption court.

The website of NABU shows statistics relating to their activities to date, as of August 31st2018 they have undertaken 644 investigations, which have given rise to 161 notices of suspicion, lead to filing of 244 charges, 155 court cases, and 21 criminal sentences. As records of effective activity go, the best way to describe this is as a good start.

The mission of NABU, an organisation created by an act of parliament on October 14th2014, is “preventing, exposing, stopping, investigating and solving corruption-related offences committed by high officials, and averting new ones” according to their website. Their mission statement continues, “when choosing to work at NABU, you choose to work on cleansing government of corruption using just and legal ways and thus contributing to building civil society in Ukraine and turning it into a state with a better quality of life.”

SAPO is a, theoretically, independent branch of Ukraine’s Prosecutor General’s Office (PGO) and it is tasked with supporting and overseeing criminal investigations launched by NABU. The establishment of SAPO was one element of the total reform package that Ukraine needed to work through in order to gain the right for Ukrainian citizens to be able to travel to EU countries without the need for first having obtained a visa. While the fact of Ukraine gaining visa-free travel is well known, it is less well known that the EU used the promise of this significant move to persuade Ukraine to pass in excess of 140, mostly reform-related, laws.

While it is fair to say that the combined efforts of these two bodies has not, to date, been stellar, the important thing to note is that they exist, and are mandated to perform serious tasks where the political will exists to allow them to do so. Ukraine’s anti-corruption structures are in place, and that in itself is a major achievement. 

One of the key foreign experts who was responsible for helping to create NABU, Giovanni Kessler, previously the Head of the European Anti-Fraud Office from 2011 to 2107, recently made the following remarks about the current status of investigatory bodies in Ukraine:

“New tools of eliminating endemic corruption and kleptocracy are tested out there, right now. If successful, they should be multiplied to other countries with similar problems, which means most of the developing countries in the world. No one involved has the right to fail.

 “For any country, trust in the judiciary and in public institutions matters a lot. But for the country like Ukraine at this stage of development, it is even more instrumental – building up new public institutions and waiting for the results yet to come requires time and therefore public confidence that the country moves in the right direction. Recently, Ukrainian people started to be frustrated with no tangible results of the anti-corruption reform: cases are triggered, but nobody is eventually held accountable, officials are detained but released under mockable bails, corruption schemes investigated but the beneficiaries continuing making fortunes. Headline corruption proceedings, once giving hope and causing genuine surprise, today evoke only irony and disappointment.”

The activities of the Business Ombudsman’s Office are more noteworthy, as it is not a state body, the BOO finds itself freer to investigate complaints that are brought to their attention. This office was created in 2014 and is financed by a multi-donor account through the European Bank for Reconstruction and Development (EBRD.)

The Ombudsman is Mr. Algirdas Semeta, an economist from Lithuania. Mr. Semeta served as Lithuania’s Minister of Finance from 1997 to 1999 and again in 2008 and 2009. He later became a European Commissioner, first responsible for Financial Programming and Budget (2009-2010) and the for Taxation, Customs, Statistics, Audit and Anti-Fraud. 

The team of 16 investigators and 4 junior investigators operate under Mr. Semeta’s direction, to date they have received a total of 4,444 complaints, many of which have been closed or dismissed, but their websitecontains easily accessible and detailed information on the cases that they have investigated and caused action to be taken on.

Though not yet functional, the topic of an anti-corruption court in Ukraine has been discussed since December of 2016. Parliament eventually passed the relevant laws to create the court in June of 2017 and President Poroshenko signed the laws in the same month. The court will consist of 35 judges and should be operational by the end of 2018. As in the case of both NABU and SAPO, the key thing to note with the Anti-Corruption Court is that structures to combat corruption in Ukraine continue to be created.

Current, additional, reform priorities

The Judiciary

With regard to the judiciary, wholesale reform is not only needed but it is long overdue. While the focus of judicial reform efforts to date has been with regard to the Supreme Court and the Special Anti-Corruption Court, across Ukraine there are close to 10,000 seated judges and the simple truth is that very few of them, possibly a % in single digits, can be relied on to rule on the merits of any case before them rather than ruling due to political or financial persuasion. 

One of the best ways of demonstrating how the courts continue to be political tools, or are abused by the wealthy and those connected to political power, can be seen in the sabotage of the work that has been done by the aforementioned anti-corruption agencies of NABU and SAPO. While their responsibilities are confined to investigating allegations of corruptions and arresting the perpetrators should they uncover sufficient grounds, the courts have not been keen to act on their work, and at the time of writing this examination of the results of the work of NABU and SAPOthere were only three people looking  likely to face justice, since the time of writing that piece one of those three, Roman Nasirov, has been reinstated by a court to his previous position as the Head of the State Fiscal Service. This, despite the fact that he had been credibly accused of involvement in a $70 million scam.

Courts have also overturned previous orders freezing bank accounts linked to the entourage and family of runaway ex-President Victor Yasnukovych, and this is something that has taken place as recently as December of 2018, when 26 accounts thought to be holding funds looted from the state railways company were unfrozen. While it can be speculated that the judges ruled on these matters based on the facts before them, it can more plausibly be speculated that the motivations for the judges’ actions were either political, financial, or both. 

In November of 2018 the findings of a USAID opinion survey on trust in the judiciaryand knowledge of judicial reforms was released, it stated that the level of trust in the judiciary stood at just 16%. The authors of the study also noted though that this figure represented a significant improvement compared to previous years, citing a figure of just 5% trust in the judiciary from Ukrainian citizens in 2015.

State Owned Enterprises

State Owned Enterprises continue to be a haven for corrupt activity, it was the imposition (by people close to the President) of managers and senior executives to such companies that became the publicly-stated reason for the resignation of Aivaras Abromavičiusfrom his post as the nation’s Minister for Trade and Economy in February of 2016. As a result of the allegations Abromavičiusmade in his resignation press conference, he is now being sued for defaming the reputation of business man and Parliamentarian Ihor Kononenko, a close associate of President Poroshenko. In yet another example of why the judiciary needs to be reformed, the judge overseeing this case has refused to allow Abromavičiusto enter certain evidence into the record on the flimsiest of excuses.

If Ukraine’s state-owned enterprises can be sold, or, in some cases, simply shut down if there is no chance of turning them into profitable enterprises, then this would have a three-pronged effect. In the first instance, it closes another marketplace where corruption thrives. Second this would reduce the harm to the economy that is the current situation and is a result of inefficient and/or corrupt practices. And thirdly the privatisation of these assets would bring much needed revenue into the state budget.

Fixing the problem with state owned enterprises was one of the early goals that Abromavičiusset himself when he was appointed to lead the Ministry of Economic Development and Trade, and his results were notable, in anAtlantic Council article from February 2018, the following statistics tell the story quite clearly. “Ukraine has approximately 3,350 state-owned enterprises that are opaque, ineffective, and inefficient. When Abromavičius joined the government in December 2014, the combined losses of the state-owned companies were $10 billion.

“For an economy of a little less than $90 billion, it is huge. And just next year the combined profit was already $1 billion,” said Abromavičius. “It means that because of our transparency-aimed initiatives, because we drew much more attention toward the problems of state-owned companies, because we changed quite a few CEOs and raised their compensation to market levels, and obviously because Naftogaz is just working differently, all of a sudden we have a different picture.”

After dragging their feet for more than two years since the resignation of Minister Abromavičius, in May of 2018 the government of Ukraine finally outlined their general plan regarding the future of state-owned enterprises. It is envisaged that 15 of these entities will remain in state hands as they are deemed to be of strategic importance, and an additional 360 entities will remain in state hands for reasons related to something obliquely referred to as “state functions.” The remaining objects, just under 3,000 in number, will either be liquidated or sold. As of yet, no sales of state-owned enterprises have been completed.

Conclusion

While there is much work to be done in undoing Ukraine’s deeply corrupt past, and in changing the mentalities that have enabled that corruption, it is clear to see that great efforts have already been made. But it should be noted that there is not one politician or political grouping in Ukraine who can claim credit for these important achievements. Reform progress in Ukraine has been achieved not because of but in spite of the present batch of politicians, though, it must be said, there are a number of elected officials, MPs Ministers and Mayors included, who can genuinely claim to be reformers and who have been instrumental in efforts to change the system from within.

The direct effects of the anti-corruption measures highlighted in this report affect the balance sheet of the country by several billion dollars per year, the combined savings from ProZorro and the taxes and dividends paid by Naftogaz alone add up to almost $6 billion per year. The volte-face of $10 billion in losses from state owned companies to a $1 billion revenue for the state is also a massive accomplishment, despite the fact that the planned-for privatisations have not yet transpired. 

 Alongside the saving made through anti-corruption initiatives, we should also consider the potential financial upside of Ukraine continuing on the current trajectory. In an interview dated September 30th2018, former Finance Minister of Slovakia Ivan Miklos, now an advisor to the Ukrainian government, said:

“If Ukraine continues to reform, if it accelerates reforms, it can truly prosper and become a successful and forward-looking country. 

 “I’ll give you an example. Today, growth is at 3.6%. That’s better than a few years ago, but still not enough. 

 “Ukraine has the possibility to grow steadily at about 6-7% annually, but only if the reform process and European integration continue.”

The statements made at the beginning of this report, “Four years after the Maidan revolution erupted, the country is hardly any close to solving its corruption problems;” and “In Kyiv what was the tragedy of the failure to tackle corruption has turned into a farce” are not only facile, but they are factually incorrect, they are misleading, and they ignore the many great reform successes that it has been my pleasure to present in this report.

My respect goes to all those who have continued to fight to dismantle the corrupt edifices that had been created not just under Yanukovych, but during the quarter century of Ukraine modern day independence.

My respect goes to all those who bravely stood on the Maidan from November 21st2013 until February 22nd2014 as they demanded real change for their country and accountability from their elected representatives.

My respect goes to the 354,000 brave men and women serving today in Ukraine’s armed forces who have participated in frontline duties to defend their country against Russia’s unprovoked and unwarranted military aggression.

Paul Niland

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