April is the Cruelest Month: the Coming Austerity Measures and Elections in Ukraine

Photo Credit: REUTERS/Anatolii Stepanov
Photo Credit: REUTERS/Anatolii Stepanov

The International Monetary Fund has offered Ukraine a two-year bailout package of $18 billion in return for steep economic reforms. The long-term goal of the bailout package is to stabilize a Ukrainian economy that is running up expenses and moving toward a debt default. It is hoped that economic stability in Ukraine will lead to the political stability that can then ease Ukraine’s transition to democracy, and more importantly, away from Russia. By opening up to the IMF deal, Ukraine will signal to nations like the US and Japan that they are committed to restructuring their economy and are open to investment. For example, the United States Congress is working on a bill for $1 billion in aid to Ukraine as well as economic sanctions against Russia. The European Union has put $15 billion on the table. It total, Ukraine is in position to receive around $27 billion in aid.

The downside to these deals is that the enforced austerity measures will likely hurt the average Ukrainian citizen by increasing gas prices by 50% and inflating the currency, the hryvnia, by somewhere between 12% and 14%. Therefore, we may see the cost of living rise while the purchasing power of the hryvnia plummets. Ukraine’s interim Prime Minster Arseniy P. Yatsenyuk explained that there would be a minimum-wage freeze and an increase in taxes for Ukraine’s largest companies. All of this spells out hard times for Ukraine in the coming years. But consider the result if Ukraine were not to accept the austerity measures. As The New York Times reported, Yatsenyuk “told the Parliament on Thursday that the country was ‘on the brink of economic and financial bankruptcy’ and that gross domestic product could drop 10 percent this year unless urgent steps were taken in conjunction with the fund.” With such instability, Ukraine’s interim government would not have the time or the legitimacy to set up the proper institutions before the planned election in May.

Photo Credit: Genya Savilov/AFP/Getty Images
Photo Credit: Genya Savilov/AFP/Getty Images

The top candidates for the election include former Prime Minister Yulia V. Tymoshenko, billionaire businessman Petro Poroshenko, and Parliamentary leader as well as former professional boxer Vitali V. Klitscho. Tymoshenko, who was born in the industrial and Russian-leaning eastern Ukraine, has support from the western and central provinces. However, it is Poroshenko and Klitscho who lead in the polls. No matter the result in May, the next president of Ukraine is set to face a difficult transition in all aspects of society. Somehow, he or she must ease the pains of economic liberalization, consolidate political factions, and reign in nationalist as well as pro-Russian sentiments. International aid may help, but the real battle for Ukrainian independence must be fought from within. It is a fight to defeat the legacy of authoritarianism; a fight that Ukraine desperately needs to win.

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Phoenix Rising in the Euromaidan?

360 degrees of a protest at the Euromaidan.

From various recent photos, it could be presumed that Ukraine is consuming itself into a fiery maelstrom. However, the seeds for these protests lie in the recent past, starting with the Orange Revolution. In 2004, Viktor Yanukovich (show in red for clarity) was running against Viktor Yushchenko (shown in orange) for the presidency of Ukraine. Bizarrely, even before polls had started, Yushchenko had been poisoned with dioxin, leaving him pockmarked and scarred. This was very suspect considering that Yanukovich had a history of criminal activity through assault, battery, and robbery. The exit polls gave Yushchenko a margin of victory of 11% while the official results declared Yanukovich the victor by 3%, sparking massive protests in the street. After many months, threats of secession from the pro-Russia East of the country, and a re-run of the polls, Yushchenko won by 8 points and finally took office as the president of Ukraine. The political intrigue did not end with the Orange Revolution. Viktor Yanukovich was elected president in 2010, beating the populist opposition figure Yulia Tymoshenko, one of the leaders of the Orange Revolution, which the international community observed as free and fair. Shortly thereafter, Tymoshenko was arrested and convicted to seven years in prison and fined $190 million for supposedly signing a disadvantageous contract with Russia for natural gas when she was prime minister. There were more protests, though smaller in nature and mostly only Tymoshenko supporters.

The effects of the dioxin poisoning on Viktor Yushchenko.

Within this politically charged atmosphere, there was always a geopolitical divide between pro-Europe factions and pro-Russia factions. With the return of Vladimir Putin to the presidency in Russia, there has been a revival in the idea of a Eurasian Union. Having already lowered tariffs and customs duties, Russia, Kazakhstan, and Belarus aim to create an economic union similar to the European Union. Key to this Eurasian Union is Ukraine, as it is one of the biggest markets from the former Soviet Union. Russia is the destination for a quarter of Ukrainian exports. One of the main worries for Ukrainians is that a Eurasian Union will lead to a political union dominated by the Russia, as Putin has been seeking closer ties with the former states of the Soviet Union.

Through this whole background, Ukraine was slowly inching towards European integration. Under Yulia Tymoshenko, a EU-Ukraine Association Agenda was agreed upon in 2009. Yanukovich continued closer ties with the EU through negotiations to lift visa requirements and establish a free trade agreement with the EU. However, November 2013, the Ukrainian government decided to suspend agreement talks, sparking the largest protests in Kiev since the Orange Revolution. Shortly thereafter, Ukraine and Russia signed a treaty where Russia would buy $15 billion in Ukrainian bonds and supply natural gas at a reduced rate. This is widely considered to not only keep Ukraine in the Russian sphere of influence, but also to keep alive the dreams of the Eurasian Union. Russia has even tried to influence the Ukrainian economy by banning the import of Ukrainian chocolate.

Protesters in Kiev battle with police on the streets.

This has not set well with the Ukrainian people, especially those around Kiev. They have set up protests in Independence Square, now known as the Euromaidan, camping out there since November 2013. Protesters have barricaded themselves in government buildings, including the ministry of justice and Kiev city hall. The Ukrainian government passed a series of harsher restrictions on protests, known by protesters as the “dictatorship laws”, by a show of hands. These laws include such flagrant violations of civil rights and protests, such as trial in absentia and a blanket amnesty against those who commit crimes against the protesters, like the security and law enforcement officers. The law with the most far-reaching consequences is the law requiring non-governmental organizations accepting foreign funding to register as “foreign agents”, modeled on a similar law passed in Russia.

The Ukrainian parliament votes for restrictions on protest with a show of hands.

In Russia, the “foreign agents law” has been used to crack down on civil society organizations. The Golos Foundation, a civil society organization that helps monitor elections, has been fined $10,000, even after they stopped receiving funding from foreign sources. Amnesty International, Transparency international, charities, non-orthodox churches, and even a french language school have been raided by the Russian security forces trying to weed out “foreign agents”. The nature of the law has been to “stigmatize and discredit NGOs engaged in human rights, election monitoring, and other critical work”. In essence, the law has been used to stymie dissent from organizations promoting community-wide discourse. There is the fear that Yanukovich, with his his criminal history and suspected involvement with vote-rigging, could clamp down on civil society and harass organizations in a similar manner as they have in Russia. Luckily, the Ukrainian parliament repealed the anti-protest laws with near unanimity. However, as it’s shown in the past, the Russian bear is always waiting in the wings.

New and Improved: Top Economies for Business Reform in 2012/2013

The World Bank’s Doing Business Index measures the ease of doing business in countries around the world. The highest-ranked countries have the simplest regulations on businesses and the strongest protections of property rights, which together enable a thriving private sector. A country’s ranking is based on its scores in ten areas: ease of starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency. The World Bank scores countries in these areas by studying laws and regulations and consulting with in-country government officials and professionals. The recently-published 2014 index ranked Singapore as best in the world, followed by Hong Kong, New Zealand, the United States, and Denmark.

Since the first Doing Business index was released in 2004, countries have made an effort to reform their regulations and remove the “bureaucratic obstacles to private sector activity” to improve their rankings on the index. The “most-improved” countries that best reformed their regulatory systems between 2012 and 2013 were Ukraine, Rwanda, the Russian Federation, the Philippines, and Kosovo. While these countries are still generally ranked low on the Doing Business index, they were able to improve their scores and their business climates in the past year.

Top Reforming Countries

Country

2013
Ranking

2014
Ranking

Ukraine

137

112

Rwanda

52

32

Russian Federation

112

92

Philippines

138

108

Kosovo

98

86

“Most Improved” Countries, 2014 v. 2013 rankings

This is not the first time Ukraine and Rwanda have been on the “most-improved” list; Ukraine placed second between 2011 and 2012, and Rwanda was ranked the second-best reformer in the six-year period between 2005 and 2011. In the past five years, the two countries have implemented reforms in every area measured in the Doing Business index.

Between 2012 and 2013, Ukraine simplified many of its complicated procedures, making many aspects of doing business in the country easier. It streamlined procedures for registering businesses and obtaining construction permits, simplified tax forms, implemented a new customs code which makes it easier to import and export, and changed the bankruptcy laws so that insolvency can be resolved easier.

During the same period, Rwanda made it easier to obtain a registration certificate for a business, streamlined the processes to obtain construction permits and transfer property, and strengthened protections for investors. Rwanda has also been using technology to streamline its business processes, implementing the online Land Administration Information System for processing land transactions, rolling out an electronic tax filing system for businesses, and introducing an electronic single-window system at the border to make cross-border trade easier.

Ukraine and Rwanda are still hardly the best places in the world to conduct business; Ukraine is ranked 112th overall, and Rwanda is ranked 32nd. Nevertheless,  these countries have been making a serious effort to improve their business environments, because doing so can lead to huge payoffs.

International businesses entering new markets look to the World Bank’s Doing Business index to determine whether they should invest in or move into a country. A good score, especially compared to a country’s regional neighbors, can help that country attract foreign direct investment, bringing capital and employers into the country. The Doing Business index is not only providing incentives for improvements in regulations and property right enforcement, but is also making it easier to track such reforms in countries like Ukraine and Rwanda.