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12 May, 2011

Ukraine's Domestic and Foreign Affairs: Quo Vadis?

Is Ukraine moving towards the sunlit uplands of stability, democracy and prosperity? Or is it moving toward authoritarianism and sclerosis of economic reforms? In 20 years will Ukraine be as rich as Poland is now? Or still the third poorest country in Europe? No doubt by the end of this conference we will have answered these questions entirely to our satisfaction

You may wonder where I’m coming from on all this.  I’ve actually spent several chunks of my career in and around Central and Eastern Europe, starting off with a year in 1980 as a civil servant at the headquarters of the British Northern Army Group in Rheindahlen in Germany.   We always used to joke nervously that this would be the target of the first soviet tactical nuclear missile to launch hostilities in Europe.  In the mid-80’s I spent three years at the British Embassy in Vienna, within line of sight of the Soviet Embassy.   In 1992–1995 I was in Moscow dealing with Russian economic reform.  You may argue I didn’t do a very good job.  Then from 1998–2006 I was in Bonn and Berlin dealing mainly with economic and EU issues and watching what had been East Germany recover from Communism.  I started work in Kyiv on 14 June 2008 – the day of Paul McCartney’s live concert in Independence Square.

So why are we here today?  I think the exam questions for this conference are:

1. Why should we care about Ukraine?   Why does it matter what happens in a country on the opposite side of Europe to the UK?

2. What’s going right and wrong in Ukraine at the moment?

3. What should we be doing about it – if anything?

WHY UKRAINE MATTERS

Let’s talk about why Ukraine matters.

The first reason is that Ukraine is a large European country in a geographical location of great strategic importance.  People who deal with Ukraine know well that it’s the largest country entirely in Europe – a bit bigger than France.  That it has a population of over 45 million and a 1,500km border with Russia. That it has borders with four European Union member states – Poland, Hungary, Slovakia and Romania – and that many of those borders have been subject to conflict and the exchange of territory in the 20th century.

But not everyone knows that.  Ukraine has only existed in its present form for less than 20 years.  I regularly receive in Kyiv intelligent visitors from the UK who are not quite sure which side of Russia Ukraine is on, or what language they speak there – admittedly a tricky issue.  So if we say Ukraine matters, we can’t assume everyone thinks that way.  We have to make the case.

I would argue that the size, population and strategic location of Ukraine makes it strongly in the interests of the UK, and also of the European Union, Ukraine’s other neighbours (including Russia) and other members of the world community, that Ukraine should be a stable, calm, prosperous, happy country.

A second reason Ukraine matters is rather negative.   This is that a weak, dysfunctional or unstable Ukraine could risk seeming to offer threats to its neighbours.   A dysfunctional or unstable Ukraine could lead other countries in the region to behave in ways which are unwelcome to us.   That could itself spread instability in the region.  That in turn could endanger the security and prosperity of the United Kingdom – our key goals.

Third, on a more optimistic note, Ukraine can also have a very positive influence in the neighbourhood.   Forget the doom and gloom.   Let’s imagine a compelling, desirable vision of Ukraine.  A European country aspiring to eventual accession to the EU, based on democratic rights and values and with a prosperous, reforming economy.

Such a Ukraine could have a big demonstration effect in the region.  Indeed, there is an argument that a successful Ukraine could be a swing state for the whole of the FSU.   It could demonstrate the benefits of democracy, European values and a market-orientated path – as set against the more authoritarian models that have prevailed in some countries in the region since the collapse of the USSR. 

Conversely, if Ukraine fails, it would be easy for unelected or undemocratic leaders in the region to claim that “western” style governance has no place around here.  That would be bad news not only for Ukraine but also for its neighbours – and for the rest of us who advocate a rules-based democratic system as the most stable and prosperous model for running a country. So I would say there are three key reasons why Ukraine matters – as an important neighbour; as a country whose stability can contribute to stability in the region; and as a potential swing-state for the future of the former Soviet Union.

HOW UKRAINE IS DOING

So if that’s why Ukraine matters, how do we think Ukraine is doing? I am conscious that I mustn’t answer this question too definitively.   Otherwise there won’t be any need to continue the conference.  But let’s look at a few areas.

On democracy and human rights, there has been widespread concern that standards of democracy have deteriorated in Ukraine. Let me mention a few examples:

2010 Local elections: Baroness Ashton, the EU’s High Representative for Foreign Affairs and Security Policy, said that "the electoral framework and the administration of the elections undermined public confidence in the electoral process and in the further consolidation of democracy in Ukraine".

Freedom House in January this year downgraded Ukraine to “partly free”, in terms of political rights and civil liberties, having ranked it “free” eve  ry year from 2005 to 2010.  Freedom House said: “a deterioration in press freedom, state efforts to curb student activism, intimidation of NGOs, local elections that were almost universally derided as neither free nor fair, and indications of increased executive influence over the judiciary.  Ukraine had previously been the only country in the non-Baltic former Soviet Union to earn a Free designation, and its decline represents a major setback for democracy in the region.”

In recent months we have seen a spate of what look like politically-motivated criminal investigations and prosecutions of opposition leaders and members of the previous government.

Ukraine’s ranking against Reporters Without Borders’ Press Freedom Barometer fell from joint 89th in 2009 to 131st in 2010.

In some cases we can argue about methodology and measurement; but I think this range of evidence does show there is cause for concern about the development of democracy in Ukraine.

I do not, however, think that the situation is abysmal or cataclysmic.  The Freedom House report still placed Ukraine, alongside Moldova, as the freest country in the former Soviet Union.   A recent analysis of different TV channels reported by the BBC Monitoring Service concluded that several of those which were owned by groups or individuals sympathetic to the current administration continued to report in an objective or critical way – albeit not all of them.   Ukraine still has a pretty vibrant and free press; and freedom on assembly is much better than in most other former Soviet Union countries.   Civil society, though weak by the western European standards, is well developed compared with some neighbouring countries.

That’s the politics.  So what about economic reform?   Let’s ask the IMF.   According to them, there have been important achievements in the past year on key macro-economic indicators such as the budget deficit, monetary targets.  The IMF also like some structural reforms – notably, a 50% hike in utility tariffs; drafting of pension reform bill; adoption of new tax code; new public procurement law.  Much remains to be done; but some good progress has been made.

This links into the business climate.  Again it is possible to point to positive changes: greater macro-economic stability. A potentially good new law on public procurement.  Promises of actions on automatic refunds of VAT.  Discussion of lifting moratorium on sales of agricultural land – this could stimulate massive new investment.  The latest European Business Association survey on 11 March showed modest improvements in perceptions of Ukraine’s investment attractiveness over the last three quarters.

Against that, we continue to receive from business reports of corruption; problems with the rule of law and operation of the courts; and problems with the customs and tax authorities.  There is also the fact that some changes, such as automatic VAT refunds, are repeatedly announced but not comprehensively applied.  Then there are unexpected new challenges such as the recently introduced grain export quotas.  Or proposals for a new grain export monopoly.

According to Transparency International’s Corruption Perceptions Index, Ukraine in 2010 was ranked joint 134th most corrupt country out of 178.  Less than ideal for a country that aspires to eventual EU membership.

All these developments make investors uncertain and deter investment.   I am not yet convinced that investors sitting down together in a café in Shangai to look at all the countries of the world would see Ukraine as a top investment market compared with eg Poland or Turkey, let alone China or India.   This really matters because although there are some countries keen to invest in Ukraine and some which are doing well, there are not enough. 

That hits economic growth. According to the IMF, in 2010 Ukraine’s economy with its 46 million people was worth $137 billion.  By contrast, Poland’s economy of 38 million people was worth $439 billion – three times more.  That’s where Ukraine belongs and the league it should be playing in.

Another area to take stock is external policy.   Before the election of President Yanukovych, he was often depicted as being “proRussian”.  This is too simple.  President Yanukovych certainly believes that Ukraine has to have a good working relationship with Russia.  In 2010 he extended the lease of the Black Sea Fleet in Sevastopol for a further 25 years, to 2042, with the possibility of a further extension.   This was in exchange for a reduction in the price of Russian gas supplied to Ukraine.

In 2010 President Yanukovych met President Medvedev around a dozen times.  Ukraine has adopted “non-bloc” status and abandoned its application for NATO membership.   It has agreed to begin demarcation of the land border (a bilateral commission has started working to do this).  And Ukraine has gone quiet about historical issues which Russia prefers not to hear too much about.

But we should not exaggerate all this.  Often, there has been more talk than substantive shifts in Ukrainian policy. “Non-bloc” status excludes NATO accession, but it also rules out Ukrainian membership of the CIS Collective Security Treaty Organisation.  There has been progress over the land border, but there has been no movement as regards delimitation of the more complex and disputed bilateral maritime border.

On economic co-operation the Ukrainians appear cool about a merger of Gazprom and Naftohaz proposed by the Russians.   Intersectoral deals in eg ship-building and aerospace remain entirely on paper.

Nor have the Ukrainian authorities shown any sign of wanting to accede to the customs union – Russia/Belarus/Kazakhstan.  One reason is that membership of the customs union would be incompatible with the prospective EU/Ukraine Deep and Comprehensive Free Trade agreement (DCFTA) – more on that in a moment.   Recent comments from the Russian side about the supposedly dire consequences to Ukraine of signing the DCFTA have led to talk of Ukrainian-Russian relations hitting a new low. 

Then there's NATO.   Clearly it is a matter for Ukraine and for the Ukrainian people whether they wish to join NATO and under what conditions.   But I have been struck over the past 16 months by the fact that military cooperation in some important areas has in fact continued, or in some cases improved, over the period when Ukraine was actively seeking to join NATO.   Examples include:

▪kraine agreeing to give up its highly enriched uranium – a major gain for counter-proliferation efforts world-wide.   Much welcomed in Washington

▪The fact that military exercises with NATO have resumed, eg Exercise Sea Breeze and Exercise Rapid Trident (the UK is also participating)

▪Continued training of Ukrainian forces to NATO standards – again, the UK is involved. 

So, to conclude on how Ukraine is doing on democracy and freedoms; economic reform; the business climate; external relations; and defence, I’d say there are a host of different indicators showing movement in different directions – a mixed picture.

WHAT WE SHOULD BE DOING

So what should we be doing about all this?  The question is actively being discussed in Kyiv: in a recent radio interview I was asked whether the EU should ban visas for oligarchs or politicians who wish to travel on the grounds that their actions were undermining Ukraine’s democracy.   And the suggestion is sometimes made that the IMF should cut off its loans, or impose additional conditionality, in order to put pressure on the Ukrainian authorities in a range of areas.

This is a super area for discussion and one where feelings run high.

The debate, as always, is around whether it is best to have people inside the tent where you can influence them, or outside the tent in the hope that this will punish them and make them do what you think is right.

My own view is that we are still strongly in a keeping-Ukraine-in-the-tent scenario, i.e. there is still everything to play for and we should treat Ukraine as a partner rather than a pariah.  But we should insist on tough conditionality for that partnership, particularly where that involves financial support or other major gains for Ukraine.

So what does that mean?  There are several areas where we can work with and influence Ukraine in a big way.

The first is through the European Union.  I’ve always seen the EU as a fantastic civilization machine.  This is nowhere more true than in its relationships with countries in its neighbourhood, which have aspirations to integrate with, or to join, the EU. 

The UK continues to support Ukraine’s EU aspirations.  We believe that Ukraine, as a European country, should have the right, under existing treaties, to join the EU once it has fulfilled the criteria for accession.

We’re realistic.  We have to acknowledge that membership remains some way off.  But meanwhile the EU can, and should, remain strongly engaged.

The EU/Ukraine Association Agreement now under negotiation will bring about strong integration between the EU and Ukraine.  That will include a much closer political relationship. It will include an action plan to make travel between the EU and Ukraine easier.   But the element that I want to focus on here is one that I touched on a few moments ago: the DCFTA.

The Ukrainian leadership has repeatedly said it wants the DCFTA signed this year.  That is a laudable ambition: I hope they’re serious.

It's obviously in Ukraine's interest.   Let’s look at the numbers again.  The EU has a market of 500 million consumers with an average GNP per capita of $32,000.

How likely is it that the DCFTA will happen?  The negotiations have been going on more than three years (with the 16th round held this week in Brussels).  They are getting tougher as they draw closer to the finishing line.  But that tends to happen in the final stages of a serious negotiation.   What really matters is that Ukraine focuses on the bigger picture.   What do I mean by that?

The DCFTA is the most ambitious FTA the EU has ever tried to negotiate.  Like ‘orthodox’ FTAs, it envisages tariff liberalisation – in this case beyond what Ukraine negotiated with the EU when it joined the WTO in 2008.

But it’s much more than that.  The DCFTA will require Ukraine to align much of its commercial-policy legislation and regulatory frameworks with the EU acquis.  To a significant degree, Ukraine will become part of the EU single market.  That’s what I mean by “the bigger picture.”  That’s what is at stake.   The DCFTA is an historic opportunity for Ukraine.

In my view this is all about political will: the “vision thing.”   What kind of country do most Ukrainians want Ukraine to become, and does the leadership share that vision?  So far I remain optimistic that both the leadership and the people of Ukraine feel more attracted on balance to the European model than to any other kind.   If political will at the highest level – meaning the President and the Prime Minister – remains strong to move towards a DCFTA, I believe that has a good chance of happening.

Another key area of action for us is the macro-economic financial assistance being provided by the International Monetary Fund.  The UK is of course an IMF share-holder.  That means we will continue to press for the strict application of IMF conditionality in the current program.   That will entail difficult reforms.   But that is what is needed to create the conditions for sustained economic recovery.  Ukraine cannot and I am sure does not expect other IMF share-holders to give it something for nothing.

Another area where we can help reform is the Ukrainian energy sector.   Ukraine probably has big undeveloped gas reserves both in the Black Sea and on land, including unconventional gas.  Reform, including liberalisation of gas prices and other reforms required under the Energy Community Treaty which Ukraine has now ratified, would improve incentives to increase production.   It would also stimulate energy efficiency – Ukraine remains one of the least energy efficient countries in the world.  Both would reduce dependence on imported energy.

A final key area of cooperation is military.  There's a lot the UK can continue to do to work closely with Ukraine to help its armed forces to reform and to make them more capable of integrating into, and working with, NATO forces. That includes:

▪Developing Ukrainian military capacity and helping Ukraine to get into a position where it can support peacekeeping operations in third countries. Includes in-country teams helping Ukraine move towards NATO accreditation – eg 4-week training courses for naval infantry

▪Training and development of future defence civilian and military leaders ▪UK assistance for development of noncommissioned officers

▪A peacekeeping English project which has taught over 5,000 officers to speak English

▪Providing training through the British Military Advisory and Training Team based in Czech Republic

▪A special Defence Adviser who works in the Ministry of Defence in Kyiv.

It’s all good, crunchy stuff.

The position of the UK remains that Ukraine can become a member of NATO if that’s what the Ukrainian people want.   At the moment they have voted in a government in a fair election which does not seem to want it.   But the real point is that Ukraine has a highly developed relationship with NATO, institutionalised in the NATO/Ukraine Commission and a series of Annual National Programmes, which oversee the process of reform to NATO standards within Ukraine.  What we should focus on is how to make those reforms a reality.

We basically see these reforms as good for Ukraine and good for our military-military relations.

SUMMARY

In summary, therefore, I would, first, make a case for Ukraine being a country of great strategic importance, and one whose stability, democracy and prosperity we should do everything in our ability to underpin.  That’s not altruism.  So far as the UK is concerned, that in turn will help support our twin objectives of ensuring our own stability and prosperity. 

Second, I would argue that the situation inside Ukraine presents a number of challenges, including in key areas of human rights and democracy, but that some things are going right too.   We are not yet at crisis point but need to remain closely engaged and to continue to make the case for the type of reforms we wish to see.

Third, I would argue that we possess many strong mechanisms to encourage and influence Ukraine.  We should use them.  Thank you very much!”

BIO

Born in 1958, Robert Leigh Turner graduated from Cambridge University in 1979. After working in the Departments of Transport and Environment, the Treasury and the Foreign and Commonwealth Office, he has been British ambassador to Ukraine, resident in Kyiv, since 14 June 2008.


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