Economic reform and corruption: what next for Ukraine?

It’s a fine winter’s day in Kyiv and I’m sitting down for a meeting with a couple of prominent business people on the eve of the inauguration of President-elect Yanukovych. The business folk explain the immense economic potential of Ukraine as an energy and mineral producer, transit country, agricultural powerhouse and home to millions of highly qualified, hard-working, multilingual Ukrainians. Then they set out for me the excellent prospects for their company – a world leader in its field and a major exporter. Finally they set out the problems – the challenging business environment, and – in particular – the problem of delayed VAT refunds. The problems, they say, are so great as to imperil the profitability of their entire operation.

This raises the $64,000 question. Can the new Ukrainian president, and whatever government he ends up working with, do anything to help the Ukrainian economy? It’s clear what’s needed.   First, Ukraine needs to pursue its efforts with the EU to conclude a Deep and Comprehensive Free Trade Agreement as part of the Association Agreement due to be completed later this year.  Second, Ukraine must undertake a series of economic reforms.  These include stabilising public finances (including through adjusting the pension system and increasing energy prices); stimulating private investment, including through deregulation; restructuring the financial sector; and tackling corruption.

On the EU, I’m optimistic, based on statements by both EU and Ukrainian leaders over the past couple of weeks, that action will be taken forward.  Both sides understand how important this is and the actions that are needed; and a strong structure for negotiations is in place.  It’s harder to be sure about the likelihood of economic reforms.  On the plus side, there have been several encouraging statements of intent from Ukrainian leaders since the presidential election making clear that some people at least know exactly what must happen.  On the down side, everyone has known for years that deep-seated economic reforms are needed in Ukraine.  The need to introduce economic reforms and to create an environment welcoming to foreign investment is something every diplomat and business person in Kyiv raises with the authorities at every possible occasion, including through this blog.  But progress has been frustratingly slow, with the various branches of governance in Kyiv tending to blame each other for holding things up.  Meanwhile Ukraine has slid to place 142 (out of 183) in the World Bank index of the ease of doing business, just behind Gambia and Honduras, and to place 146 (out of 180) in Transparency International’s corruption index, tied with Russia, Zimbabwe, Cameroon, Ecuador, Kenya, Sierra Leone and Timor Leste.

No-one’s saying economic reform or tackling corruption are easy in any country.  Both need a firm, in-control government prepared to tackle the powerful vested interests which benefit from a lack of economic transparency and clear rules.  But if the new president and the government make economic reform and fighting corruption a priority, there’s no doubt progress can be made in both areas.  That would help the people of Ukraine and the country’s international reputation.  It would release a wall of foreign investment eager to seek out new, profitable opportunities.  And it would also mean business people and government alike could spend less time battling bureaucracy and corruption and more time investing in the future of Ukraine.