Thursday, November 27, 2014

Ukraine after the elections: Democracy and the barrel of a gun

Ukraine has lost control of parts of its industrial heartland, as well as Crimea. The question is whether there will now be a government in Kyiv that can make a success of the rest of the country. There are reasons for concern.

The good news is that most of Ukraine voted for a new parliament on October 26th. Pro-European parties backing President Petro Poroshenko and Prime Minister Arseniy Yatsenyuk won a majority of the 423 seats contested (which excluded occupied areas). More than 900 international observers monitored voting; they described it as "an amply contested election that offered voters real choice". The Russian Foreign Minister, Sergey Lavrov, said grudgingly that the elections seemed to be valid, though not in every part of Ukraine.

The first piece of bad news is that Russian forces and their local proxies did not give Ukrainians in the occupied parts of Donetsk and Luhansk regions the chance to cast a ballot. Instead, on November 2nd the separatists organised sham elections in the self-proclaimed statelets. These polls were criticised by the EU, the US and the Organisation for Security and Co-operation in Europe. The Russian foreign ministry, however, said that Russia respected "the declaration of the will of people in south-eastern Ukraine".

About 15 per cent of the Ukrainian population lives in the areas Russia controls (or used to live there – the UN estimates that the conflict has created over 900,000 refugees or internally-displaced persons). Ukraine, while asserting its territorial integrity de jure, is effectively challenging Russia to take responsibility for these areas: on November 15th, Poroshenko ordered state institutions in the occupied territories, including schools and hospitals, to close, and banks to cease operations. Poroshenko's action is understandable: he could not control what was happening in the area. But he risks consolidating the division between the self-proclaimed Donetsk and Luhansk 'People's Republics' and the rest of Ukraine.

The second piece of bad news is that the potential coalition partners are wrangling over the composition of the government, including which party should fill the important posts of interior minister and finance minister. The president’s 'Petro Poroshenko Bloc' has the most MPs, with the prime minister's 'People's Front' as runner up. Between them they have 214 seats, a narrow parliamentary majority. Important reforms such as devolving powers to the regions will require constitutional changes, for which 300 votes are needed. So coalition talks include three smaller parties (including the far-right 'Radical Party', which argues for Ukraine to have nuclear weapons).

What Ukraine needs, immediately, is a competent government with honest ministers, rather than one designed to divide the spoils among its constituent parties. The coalition parties should sink their differences and install a government based on ability and integrity rather than party affiliation. For most of the last two decades Ukraine was a case study in post-Soviet poor governance. The new government must do better. Fighting the corruption for which Ukraine has been famous will demand both government transparency and effective law enforcement. An EU mission will start work on December 1st on police and judicial reform; the EU should also attach advisers to ministries and agencies to help them combat corruption.

The third problem is a collapsing economy. The European Bank for Reconstruction and Development forecast in September that Ukrainian GDP would fall by 9 per cent this year and a further 3 per cent in 2015; meanwhile inflation will rise from minus 0.3 per cent in 2013 to 11.8 per cent this year. The current account deficit is undergoing a forced correction, from 9.2 per cent of GDP last year to 2.5 per cent in 2014, through a painful contraction in imports. The value of the hryvnia has fallen by almost 50 per cent this year, making imports impossibly expensive.

In theory, the devaluation of the currency should help Ukrainian exporters. Unfortunately, the Russian market, which absorbed around a quarter of Ukraine's exports in 2013, is now effectively closed; and as long as much of Ukraine's heavy industry in the east cannot operate, Ukraine's export potential will be limited.

The Ukrainian government cannot cope without international help. The $17 billion (€14 billion) IMF package and the €11 billion mixture of EU grants and loans agreed earlier in the year are insufficient. Yields on Ukrainian government bonds are over 18 per cent, with investors assuming a high probability of default. A senior American official suggested recently that Ukraine would need an extra $10-15 billion in 2015 alone. The US itself has been niggardly, giving around $1.3 billion in loan guarantees and grants; both Washington and its international partners need to do more for Ukraine to have a chance of succeeding. The EU should not have delayed implementation of its association agreement with Ukraine under Russian pressure. It should now do everything possible to accelerate Ukraine's convergence with EU standards and regulations. Then Ukraine can re-orient its economic ties westwards (as Georgia did, successfully, after its war with Russia in 2008).

Finally, the ceasefire agreed in September has broken down. According to NATO, Russian forces and equipment are again crossing Ukraine's border. The Russians' aim may only be to consolidate their hold, and perhaps straighten out some 'kinks' in the front line (for example by taking the town of Shchastya, home to a power plant supplying almost all the Luhansk region's electricity, or they may intend something more ambitious, such as capturing the port city of Mariupol and the rest of the coastline between there and Crimea (which is proving hard to supply by ship from Russia). Poroshenko has said that Ukraine is prepared for a "scenario of total war" with Russia; but in reality, while Ukrainian forces could certainly inflict large-scale casualties on attacking forces, they could not resist an all-out invasion from better equipped and more numerous Russian forces.

So far, Western leaders have refused to do much to increase Ukraine's military capability, hiding behind the mantra that "there is no military solution" to the conflict, and suggesting that arms supplies might encourage Kyiv to think that there is. But as long as Ukrainian forces are so much weaker than Russian forces, there is indeed a military solution: outright Russian victory. The best way to deter further Russian advances is to help Ukraine with equipment, training and intelligence, so that the domestic political cost of victory for Russia, in casualties incurred, becomes prohibitively high.

'Realist' commentators like Henry Kissinger often assert that Ukraine matters more to Russia than to Europe or the United States. A strong case could be made, however, that the success of Ukraine matters more to the West than it does to Russia. The EU and NATO would be better off with a prosperous, stable nation of 45 million people next door, rather than a corrupt, unstable economic basket-case. The West should be prepared to invest in achieving the right outcomes by both strengthening the government-controlled parts of Ukraine and preventing Russia from further demolishing the country.

Ian Bond
Director of foreign policy, Centre for European Reform

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