WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

By Vasily Astrov and Veronika Janýrová

A panel discussion held on 22 October 2018 in Vienna presented a mixed picture of the reform success achieved in Ukraine in recent years, and the big challenges yet to be tackled. It took place at the Vienna School of International Studies and was organised jointly with the Ukrainian Embassy in Austria, the Vienna Institute for International Economic Studies (wiiw) and the International Renaissance Foundation. It brought together leading Ukrainian and wiiw experts who discussed Ukraine’s economic reforms and challenges of the implementation of the Association Agreement (AA), including the Deep and Comprehensive Free Trade Agreement (DCFTA), with the EU. Chaired by wiiw economist Peter Havlik, the panellists presented an interesting mix of narratives from the perspective of the Ukrainian government, civil society, and the international expert community.

In his keynote speech, Taras Kachka, Strategic Advisor at the Kyiv-based International Renaissance Foundation and former member of the Ukrainian negotiation team in the Ukraine-EU association talks, emphasised a dedicated ‘U-turn’ that Ukrainian economic policy has taken since the signing of the AA in April 2014. He pointed to progress in corporate governance and the transparency of state-owned companies, as well the increased compliance of Ukraine’s energy sector with the EU legislation, including the obligations resulting from the country’s membership in the EU Energy Community. Importantly, the National Bank of Ukraine (NBU) is now operating independently from political influence, forcing the government to be more fiscally disciplined. However, many believe that now is the last chance for reforms before parliamentary and presidential elections due in 2019.

Olha Stefanishyna, Director at the Ukrainian Government Office for European and Euro-Atlantic Integration, also stressed the heavy engagement of the Ukrainian government in the implementation of the AA and illustrated its various successes. For instance, Ukrainian SMEs have taken advantage of the opportunities offered by the DCFTA agreement, which can be already seen in the significant increase and diversification of Ukraine’s exports to the EU over the past few years. There are more than 300 new items exported to the EU, including not only agricultural and food products (where Ukraine has traditionally had a comparative advantage) but also, for instance, car components. Ms Stefanishyna also pointed to the newly granted possibility of visa-free travel to the Schengen area (in place since June 2017), which has contributed to the outflow of labour from Ukraine and brought down the unemployment rate. Via inflows of remittances, workers who have gone abroad also contribute to strengthening Ukraine’s current account position. The reform of public procurement and the improved food quality feature among other key benefits of the AA with the EU.

Maria Repko, Deputy Director of the Kyiv-based Centre for Economic Strategy presented a more mixed assessment of successes and failures, focusing in particular on the financial sector. On the one hand, she acknowledged the painful financial crisis of 2014-2015, when the Ukrainian currency lost some 70% of its value and inflation reached almost 50% in 2015 alone. On the other hand, she praised the NBU for wide-ranging banking sector reforms, such as cleaning of the banking sector (the number of banks has been reduced by half) and improved banking supervision, which limited credit to related parties and tightened capital adequacy ratios. Also, the newly introduced floating exchange rate regime (in place of the former exchange rate peg to the US dollar), as part of transition to inflation targeting, has been instrumental in bringing inflation under control.

Borys Davydenko, Executive director and editor-in-chief of the Kyiv-based independent analytical platform VoxUkraine, pointed to the public’s fairly negative perception of reforms in Ukraine. Although more than 750 reform-oriented legislative acts have been adopted over the past four years, 76% of Ukrainians do not think that reforms have considerably progressed, according to opinion polls. Besides, the Index for Monitoring of Reforms, compiled by VoxUkraine on a regular basis, suggests that reform momentum has been generally weakening over time. Also, badly-needed inflows of foreign direct investment have so far remained disappointingly low. One reason for this is the only limited success in fighting corruption: according to the latest Corruption Perception Index of Transparency International, Ukraine is now ranked 130^th in the world – only slightly up from the 140^th place it held in 2013.

The issue of pervasive corruption was also addressed by Dmytro Boyarchuk, Executive Director at the Kyiv-based branch of the Polish Centre for Social and Economic Research (CASE Ukraine). One particularly blatant example is systemic smuggling: according to recent findings by CASE, nearly one-third of Ukraine’s external trade in goods is done illegally. However, efforts to fight corruption have picked up markedly compared to the pre-Maidan period. More generally, Mr Boyarchuk shared the conclusions of other Ukrainian experts, outlining the three most important areas of reform progress implemented over the past few years: (i) reform of the exchange rate which enabled borrowers to take informed decisions, (ii) the gas tariff reform which reduced the fiscal deficit, and (iii) the banking sector reform which “cleaned the sector of fake institutions”, while at the same time acknowledging that the progress in institutional reforms is generally lagging. All in all, the Ukraine of today is radically different from Ukraine of 2013; barring another “black swan” event, the country’s economic prospects are improving.

Some of these views on the success of reforms were, however, challenged by Vasily Astrov, economist and Ukraine expert at wiiw. In particular, he argued that the steep currency depreciation in 2014-2015 was the direct consequence of transition to a flexible exchange rate, which could only be stopped by imposing capital controls. Besides, gas tariff hikes have been excessive and can hardly be justified on economic grounds, since expensive imported gas is no longer needed to cover household demand. Both reforms have been very painful socially and have weakened popular support for reforms in general. When it comes to the issue of the AA, Mr Astrov showed appreciation for Ukraine’s drive to get closer to the EU, but also stressed that this is not a “one-way street”. The desired benefits may not materialise unless the EU offers concrete membership prospects to Ukraine, which could provide a badly needed incentive for the implementation of necessary reforms. This assessment was broadly shared by Peter Havlik, who has argued in a recent study that the costs associated with the AA implementation are substantial and largely front-loaded, whereas the potential benefits are less certain and more long-term in nature.