President Poroshenko, Governor Saakashvili Assess Situation in Odesa (Part Two)

*To read Part One, please click here.

Ukrainian President Petro Poroshenko has entrusted Georgia’s former president, Mikheil Saakashvili, with jolting Odesa province from backwardness into modernity, and to try this amidst a war. This unprecedented reform experiment has turned Odesa into a pivotal province of Ukraine. In Ukraine’s current situation, reform is coterminous with state survival. With Odesa designated as a test case for the rest of the country, Saakashvili’s success or failure is likely to correspondingly influence the further course of events in Ukraine and in Europe’s East writ large (see Part One in EDM, July 13).

President Poroshenko conferred with governor Saakashvili’s team in Odesa on July 8, preceded by the United States’ ambassador to Ukraine, Geoffrey Pyatt, two days earlier. Reflecting the high stakes involved, Poroshenko brought along the governors of all 24 provinces of Ukraine to confer with Saakashvili; while Pyatt arrived with the US embassy’s political, trade, naval and media attaches for an overall assessment. Both visits helped to highlight the dramatic disproportions between modernization goals and the resources available.

The condition of roads is assessed as ruinous, partially isolating some areas of this province from each other, and the entire province from the European highway network. There is no funding in sight for remedying this situation. Ukraine’s state-owned road construction authority, Ukravtodor, has recently announced insolvency. Saakashvili’s first priority in this sector is capital repair of the decrepit Odesa-Reni road, whose terminus can (if upgraded) connect directly with Romania’s highway network, which, in turn, provides a convenient link to Bulgaria. Turning this road into a highway seems, however, a more remote prospect.

Bulgarian President Rosen Plevneliev, visiting with Poroshenko on July 7, endorsed the Odesa-Reni project, which holds collateral benefits for the large ethnic-Bulgarian community in Odesa province (see EDM, April 13). That community’s core district, Bolgrad (southern Bessarabia), is coincidentally Poroshenko’s birthplace. Poroshenko and Plevneliev intend to approach Romanian President Klaus Iohannis to join this road repair project. Romania and Bulgaria could apply for some European Union funding, and might contribute some funding on their own; but Ukraine does not have either option.

Instead, Poroshenko and Saakashvili hope that some funding can be raised for this road project through more effective collection of customs duties in Odesa’s ports. According to estimates, a successful clamp-down on corruption in the customs service could increase revenue from existing duties by at least 50 percent. At Poroshenko’s initiative, the government of Arseniy Yatseniuk has drafted legislation whereby one half of that additional customs revenue would be retained locally and channeled toward road construction. This draft legislation has the character of an experiment, applying at first to the Odesa and Lviv provinces (Ukrinform, Dumskaya.net, July 6–9).

The Kyiv government and the Odesa gubernatorial administration estimate that they lose some €500 million to €1 billion ($550 million–$1.1 billion) annually in Odesa province alone, as a result of corrupt practices of the tax service, law enforcement agencies and other state authorities. Suppressing corruption along the Georgian model could, if successful, turn that loss into an actual source of revenue. Such conjectures underscore the dearth of investment capital in this long-mismanaged province with a high development potential.

With few exceptions, the large-scale industrial plants in the province are loss-making, hence paying little or no taxes. The Odesa oil refinery, controlled until 2014 by former “Yanukovych Family” member Serhiy Kurchenko, is insolvent (Odesskaya Zhizn’, July 1). The Kyiv government intends to hold privatization tenders for state-owned enterprises as soon as possible. The Odesa Portside Plant is by far the most attractive state-owned industrial asset in the province.

A flagship of Ukraine’s chemical industry, the export-oriented and profit-making Odesa Portside Plant produces mainly nitrate fertilizers. It also boasts Europe’s largest ammonia reservoir and an overland ammonia pipeline as additional assets. The plant has long been procuring its natural gas from a subsidiary of Dmytro Firtash’s Ostchem holding. Recently, however, the Odesa plant has switched to the German company E.On for gas supplies. Firtash and his long-time rival, the Pryvat Group of Ihor Kolomoysky and Hennady Boholyubov, are expected to be among the participants in the privatization tender for the Odesa Portside Plant (Odessablog.com, June 24; Interfax-Ukraine, July 8).

US Ambassador Pyatt participated (see above) in an international business forum (“Focus on Odesa: Odesa Donor and Investor Conference“), indicating that “the United States fully supports Mikheil Saakashvili’s team, we will do our best for them to be successful.” Meeting with local authorities and civil society representatives, Pyatt conveyed two basic theses, echoing Saakashvili’s. First, that the front in Donbas “against Russian aggression” and the domestic anti-corruption front are equally vital to the Ukrainian state; and second, that Saakashvili’s team needs the local civil society as an ally, to overcome resistance to reforms (Dumskaya.net, July 6–8; Odessablog.com, July 14).