A Year in Review: Ukraine Faced Mixed Fortunes, Missed Opportunities in 2017

Ukraine missed some chances to improve the domestic situation last year, with the fight against corruption not as efficient as Western creditors expected and the economy growing at only a sluggish pace. Among the country’s achievements in 2017 were the long-awaited ratification of the association and free trade agreement plus a visa-free travel bonus from the European Union, and Naftogaz Ukrainy’s victory over Russian Gazprom in an international arbitration court. Nonetheless, there is still no light in the end of the tunnel as far as the conflict with Russia-backed militants in Donbas is concerned, and Ukraine deepened the split by stepping up the economic blockade of the area. The governing coalition led by President Petro Poroshenko proved stable, but it will face challenges ahead of both presidential and parliamentary elections, scheduled for 2019.

The year 2017 started with nationalist groups blocking roads leading to the Moscow-backed “people’s republics” in Donetsk and Luhansk, and far-right activists vandalizing subsidiaries of Russian banks. The radicals argued that Moscow’s proxies or businesses are not to be dealt with in a de facto state of war with Russia. Poroshenko, himself criticized for not selling his confectionery business in Russia, thought it safe to bandwagon, banning all trade with occupied Donetsk and Luhansk (see EDM, February 24, 28, 2017). The ban affected the key metals and mining sector, slowing economic growth last year to only 2 percent, the same as in 2016. Foreign direct investment also declined compared to 2016, when Russian banks refinancing their subsidiaries were the main investors in Ukraine. Ironically, the Donbas blockade prompted Kyiv to boost coal imports from Russia (Podrobnosti.ua, July 7, 2017; UNIAN, January 9, 2018). Economic growth is expected to pick up to 3 percent or so this year.

Donbas throughout 2017 featured no large-scale escalations but also no peace breakthroughs, with the two sides continuing to shell each other and the death toll rising. International efforts brought no results for another year running. While Washington became more active with the newly-appointed special envoy, Kurt Volker, discussing a possible United Nations peacekeeping mission for Donbas with Vladimir Putin’s aide Vladislav Surkov, European Union mediation petered out following elections in France and Germany. On the upside, Ukraine did not plunge back into a broader war. It is difficult to predict how the situation will evolve this year, following the US’s and Canada’s decisions to allow lethal weapons sales to Ukraine (Interfax, December 23, 2017; Segodnya.ua, December 26, 2017). The presidential election in Russia, scheduled for March, could also complicate this year’s developments.

Although inactive as far as the Donbas settlement is concerned, the EU continued to support Ukraine in other matters. Along with the US, it maintained the sanctions against Russia over the Donbas war and the Crimea annexation, ratified the association and free trade deal with Ukraine that had been signed in 2014, and allowed Ukrainian citizens to travel to EU countries, except the United Kingdom and Ireland, without visas. At the same time, Brussels refused to allocate the last tranche of its macro-financial assistance loan, the main reason being Kyiv’s poor track record of fighting official corruption (UNIAN, December 1, 2017).

Mainly for the same reason, the International Monetary Fund (IMF) transferred only one tranche of its $17.5 billion loan last year. Ukraine adopted reforms of its healthcare system, education, and pensions, continued deregulation efforts, and simplified rules for investors last year. But the political establishment’s contempt for the new anti-corruption bodies, which were established under pressure from Western creditors in 2015–2016, combined with Poroshenko’s soft stance on official corruption, outweighed the successes. Toward the end of 2017, the West was compelled to tell Kyiv in clear terms that undermining the work of the anti-corruption investigators, pressure on anti-corruption non-governmental organizations (NGO), and procrastination over the establishment of a special anti-corruption court would cost Ukraine Western support (Apostrophe.ua, Eurointegration.com.ua, December 7, 2017). Poroshenko in December submitted to parliament a new bill on the anti-corruption court, but Transparency International said the bill ignored recommendations from the Venice Commission, the Council of Europe’s constitutional norms advisory body, and urged Poroshenko to recall it (Ti-ukraine.org, accessed on January 10, 2018).

With presidential elections scheduled for spring 2019 and parliamentary elections for fall 2019, the window of opportunity for reforms is closing. This concerns not only anti-corruption institutions. International creditors have insisted on Ukraine lifting the ban on farmland sales; instead, the parliament prolonged it for another year (Epravda.com.ua, December 7, 2017). The status quo is likely to continue, given the strong domestic lobby of the richest agro-businessmen who oppose land reform while exploiting lands rented to them cheaply. Creditors also insist on swift and transparent privatization of energy and chemical assets, but the Ukrainian legislature is unlikely to rush to change privatization rules. Also, as always tends to happen in the run-up to elections, fiscal discipline is likely to slacken this year, disappointing the IMF.

The government of Prime Minister Volodymyr Groysman has been stable since its appointment in spring 2016, in spite of the absence of a stable majority in the unicameral parliament. At the same time, several important positions, including those of the central bank head and the health minister, remain unfilled, underscoring differences between the coalition partners—the Bloc of Petro Poroshenko and former prime minister Arseniy Yatsenyuk’s People’s Front. The differences are likely to deepen ahead of the elections, as opinion polls show that Poroshenko and his team have a good chance of winning them, while the People’s Front seems to have no chance at all. The polls also indicate that Yulia Tymoshenko, the populist leader who was prime minister in 2008–2010, remains Poroshenko’s main rival, rather than the flamboyant former Georgian president Mikheil Saakashvili, who hit the headlines across the world with his anti-Poroshenko protests and police failures to arrest him (Ukraine-elections.com.ua, accessed January 10, 2018; see EDM, December 11, 2017).

By the end of 2017, the state oil and gas company Naftogaz Ukrainy won a life-or-death dispute with the Russian giant Gazprom in the Stockholm arbitration court. A defeat would probably have bankrupted Naftogaz. The judges in Stockholm decided that Naftogaz will not have to pay $56 billion to Gazprom for 2010–2017, according to the controversial take-or-pay clause in the contract from January 2009. Also, the price Naftogaz had to pay for gas in the second quarter of 2014 was cut retroactively, and Naftogaz will not have to pay for gas delivered by Gazprom to Moscow’s proxies in Donbas. Now, the Stockholm court is to deliver a verdict on the Gazprom-Naftogaz gas transit contract, also from 2009. Naftogaz’s claims reached $16 billion, and it hopes for a positive outcome at the end of February (Naftogaz.com, Vedomosti, December 22, 2017).

Judging by all this, the year 2018 is unlikely to be easy for Ukraine. Unpredictable Russia remains the big unknown. But almost certainly, the elections scheduled for 2019 will dominate the domestic political and economic agenda.