Ukraine’s reform drive is powering ahead

September 6, 2017
After the lengthy saga of its signature and ratification, the Association Agreement between the European Union and Ukraine finally came fully into force on September 1.

This is, probably, the most dramatic EU deal with a non-EU country. Its earlier rejection by Ukraine's former president Viktor Yanukovich sparked the Euromaidan protests in 2013, which in turn were "punished" by Vladimir Putin's Russia through its annexation of Crimea and the war in Donbas. These events have transformed a bureaucratic text into a symbol of the changes that many Ukrainians are striving for.

Much of the story since 2013 is tragic. The war in Donbas has taken more than 10,000 lives and continues. Many reforms in Ukraine advanced more slowly than was needed; the economy has struggled under a huge recession and is only now recovering.

On the other hand, for the first time since independence in 1991, Ukraine is involved in genuine reforms that will empower ordinary citizens and not just the corrupt elites. The EU agreement helps, directly and indirectly. Outside pressure and incentives are key to keeping reform on track.

The Agreement's main concern is with free trade. After Russia banned Ukrainian agricultural products in 2016 and cancelled its trade deal with Ukraine, the opening of the EU's markets helped Ukrainian producers to re-orient their exports.

Ukraine is known for its agriculture and steel, but other sectors are developing, from IT services to electronic equipment, from juices to drones, from fashion clothes and textiles to water filters and radiation detectors.

Some are large, such as the IT sector, some are less so. But today the EU's share in Ukrainian exports has jumped to more than 40 per cent, from about 25 per cent four years ago.

Differences in food safety requirements between the EU and Ukraine remain an important obstacle. But things are changing here too: 281 Ukrainian producers have so far proved that their food and non-food goods meet EU standards. Ukraine is now transferring EU norms into its legislation to eliminate differences in safety requirements. Access to the EU's single market is a powerful incentive.

Another important area is public procurement, a huge arena for corruption in the 1990s and 2000s. Making it fair and transparent is an important goal of the Association Agreement (see articles 148-156); it was a requirement for an IMF disbursement and EU visa waiver.

But Ukraine went further. Its online procurement system, ProZorro, has already become a global brand. It won a World Procurement Award in 2016; the World Bank plans to use it in procurement for its Ukrainian projects.

ProZorro's aim is to eliminate corruption and deliver better prices, and is mandatory for large purchases. It saves millions for the national budget; one piece of research by the Kyiv School of Economics shows that it allows savings for public institutions of €10 on every 1,000 cubic meters of gas, for instance.

Take another example, regional development. The Association Agenda, a tool for implementing the EU-Ukraine deal, laid the foundations for devolution, one of the most promising reforms so far. Previously a highly centralised country, Ukraine today is transferring more powers and funds to local communities.

With more powers and greater incomes, some of Ukraine's local communities are repairing roads and improving utilities, healthcare and education. They buy surgery equipment for hospitals or telescopes for schools. They repair kindergartens or install energy-efficiency technologies. Some communities are merging to become sustainable.

Another important field is energy efficiency. Ukraine is still among the least energy-efficient nations of Europe, but today both internal and external pressure — from the EU, the US and the IMF — are helping to change this. Numerous Ukrainian households and communities are insulating homes and refitting them with double glazing, energy-efficient boilers and upgraded lightbulbs. These changes are not yet massive, but the country is moving in the right direction.

Some Ukrainians have found creative energy solutions. One man built a house using empty glass bottles, which is good for heat preservation. Ukrainian companies are building houses out of straw and smart passive houses that are energy self-sufficient. Or there is an app that can tell you when you left the iron on, for instance. Supported by a national "warm loans" programme, such efforts may go further with the help of the European Energy Efficiency Fund, a joint public and private-sector initiative.

However, in the fight against corruption, progress is still slow. The EU-Ukraine Association Agenda requires anti-corruption reform; it was also one of the conditions for the EU visa waiver and IMF loans. Ukraine has established some anti-corruption institutions but they remain fragmented. Anti-corruption courts and efficient corruption prevention are lacking, and some anti-corruption activists suffer legal persecution and misinformation attacks.

Other pressing issues include judicial reform, better rule of law, better taxation and healthcare, and more efficient public administration. Some of these reforms have just started. Many of them, especially of the judiciary and public administration, depend on human capital: the need to bring in new people, professional and honest, which is always the biggest challenge. Insufficient staffing at public institutions remains an important obstacle.

More transformations await Ukraine in the future. Reforms are costly and time-consuming. The Association Agreement is their symbol, although it cannot change the country alone. Grassroots movements, political will and external pressure are needed to build institutions that serve citizens. But despite such problems, the signs are numerous that changes are taking place and that they are irreversible.

This article was originally published at Financial Times website.

Volodymyr Yermolenko and Ruslan Minich
Analysts at Internews Ukraine and at UkraineWorld, an information and networking initiative

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