Issue 1: Monday 16th August 2010
In this Issue:
Article 1: The Ukrainian government receives the first tranche from the IMF.
Article 2: The Party of Regions hastens the termination of 2004 political reform.
Article 3: The President has signed the law on local elections.
Article 4: The Ukrainian government accelerates the reform of energy sector.
President Viktor Yanukovych and his political party continue to concentrate power in their hands, trying to broaden presidential powers and change the rules for local election. Whilst the IMF unveils a new lending program for Ukraine the Government considers structural reforms in the energy sector.
The Ukrainian government receives the first tranche from the IMF.
IMF Board approves a fresh loan for Ukraine, a stand-by program of $15.15 billion, to overcome the country's economic crisis and to ease the creation of structural reforms. According to Vice Prime Minister for Economics Tyhipko the first tranche of $ 1.89 billion, will be spent on the repayment of the state budget deficit ($1 billion) with the remaining $890 million allotted to the restoration of foreign exchange reserves in Ukraine’s National Bank.
The second tranche is expected in December 2010. The further allocation of funds will depend upon the Ukrainian government’s successes in meeting the IMF’s continuation criteria, which include the raising of the retirement age, reforms in the energy sector and public utilities, reducing the budget deficit to 3.5% of GDP by the end of 2011 and to 2.5% - by 2012, the recapitalization of banks by the end of 2010, and the development of a reliable monetary policy for the National Bank of Ukraine. The new IMF loan significantly increases both the public and state-guaranteed debt of Ukraine, which was estimated to amount to $43 billion on the 30th June this year.
People First Comment: Borrowing is easy, paying it back is not. Whilst few would doubt the necessity of the loans questions need to be asked as to how this ever increasing mountain of debt is going to be serviced. The national debt stands at $43 billion and with interest the sum is growing. That’s approximately $3,500 per household which in international terms is tolerable but in Ukraine, where the average household income of only $300(1) per month, this figure is worryingly high.
The GDP per capita of Ukraine is one of the lowest in Eastern Europe at a little over $2,450(2) (only 13%(2) of neighboring Slovakia). Government funding only comes from one source; taxation. Taxes taken from salaries and from businesses every month and if there is not enough money in the state budget to repay the loans then the only options for the government are to either negotiate a deferment that will make all loans to Ukraine even more expensive or not pay state salaries or to increase taxes.
We believe that the alternative for the government is to create an environment where companies’ particularly small and medium sized companies can flourish. In the EU approximately 67.4%(3) of the labour force is employed in the SME sector and contribute 57.7%(3) of GDP whilst in Ukraine the figure is only 25%(4) contributing a paltry 7%(5) of GDP, yet almost 85%(6) of the Ukrainian tax inspectorate are dedicated to the SME sector. The balance is completely wrong. Parliament must look more to the national interest and not the vested interests of a powerful few.
Sources: 1. Ministry of Finance of Ukraine
2. World Bank Data
3. European Union Data
4. Office of the Prime Minister of Ukraine 2009
5. State Committee of Ukraine for State Policy and Entrepreneurship
6. Party of Small & Medium Business in Ukraine
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The Party of Regions hastens the termination of 2004 political reform.
Party of Regions representatives insist the necessity of cancelling the political reforms programme adopted in 2004, resulting in a return to the presidential-parliamentary structure of government in Ukraine. To this effect, a joint submission of 252 MPs was delivered to the Constitutional Court of Ukraine, supporting the motion for Constitutional changes to the presidential / parliamentarian relationship. The presiding Judge of the case is S.Vdovychenko, previously employed as a judge in the Donetsk region. These factors suggest the possibility of a swayed decision at the Constitutional Court in President V.Yanukovych’s favour.
In case of an adjudicate decision by the Constitutional Court, the 2004 political reforms judged to be in conflict with the Constitution of Ukraine would be open for modification or interpretation by the Party of Regions. Thus enabling them, through a vote of 300 MP’s or national referendum to return broad powers to V.Yanukovych. Currently, the preferred option for the Party of Regions, is to hold referenda on changes to the Constitution of Ukraine.
People First Comment: In order to make any changes to the Constitution of Ukraine or its procedures the government need a clear mandate from the people. This is a fundamental of the democratic process. To acquire a mandate the issue should have been presented to the people at the last Rada or Presidential election in order that the people could decide whether they want such a change or not. Judge Vdovychenko despite his pre-eminence has no authority to decide on this issue without the formal approval of the people. If Party of the Regions want to recommend such changes let them put their arguments to the people in a free and fair democratic referendum where both the ‘yes’ and ‘no’ camps have equal access to the media and the cost of the referendum are tightly controlled . Politicians are the elected representatives of the people and as representatives they too have no authority to make such far reaching decisions without a mandate from their electorate. In our opinion, without a clear mandate from the people Party of the Regions would be exceeding their authority as representatives of the people and thus any change would be morally indefensible.
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The President has signed the law on local elections.
V.Yanukovych has signed the revised law on local elections, which demands a return to the majority-proportional system. Local elections will be held on October 31st with the election campaign officially scheduled to begin 50 days prior. Under the law, the process of nominating candidates for the position of deputy in local councils will be implemented through local organizations of political parties, denying unaffiliated citizens the right to stand for local election.
In addition, the law stipulates that candidates can be put forward only by those parties registered not later than one year before the elections. This rule disallows the nomination of the new wave of charismatic politicians and their political forces, including; “Strong Ukraine” of S.Tyhipko, “The Front of Changes” of A.Yatsenyuk, "The Citizens Platform" of A.Gritsenko, and others. For these politicians the only chance to gain power at local levels is by uniting with old-party players. By changing the election rules at the local level before the elections, the Party of Regions wants to rid itself of its political rivals of the new generation, who currently receive a more sympathetic response from Ukrainian voters.
People First Comment: These changes to the system of local elections do nothing to build the credibility of current administration. These are the sort of changes we would expect to see in banana republics as dictators cling to the last vestiges of power. In a free democracy anybody should be allowed to stand for election. It is up to the people to decide whom they want as their representatives not up to those in power to select the candidates. Ukrainian democracy just took a major step backwards but those in power may well have underestimated the people of Ukraine who normally prefer to support the underdog. Messers Tyhipko, Yatsenuk and Gritsenko have just been given a massive boost. They and other forward thinkers will come to power, perhaps not this time, but when they do the boot will be on the other foot.
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The Ukrainian government accelerates the reform of energy sector.
The Cabinet of Ministers of Ukraine together with the management of NJSC “Naftogas of Ukraine” is holding an evaluation of the assets of the state owned oil and gas company, after which the launch of a joint venture between “Gazprom” and “Naftogaz” is probable. The Russian contribution to the venture, according to the chairman of “Gazprom” A.Miller is likely to be a deposit with reserves of 1 trillion cubic meters of gas. At the same time, Ukraine's accession into the European energy community and the adaptation of its legislation to fit EU norms could prevent the unification of the Russian and Ukrainian gas monopolies. During the July visit to Kyiv the European Commissioner for Energy informed the Prime Minister M.Azarov that Ukraine could, within six months, become a member of the European energy community.
The next step for Ukrainian authorities in reforming the energy sector is the suggestion from Moscow and Brussels to create a unified gas consortium, Ukraine - Russia - EU. For this purpose the Ukrainian government is seeking guarantees from Russia of annual pumping through Ukraine of at least 150 billion cubic meters of gas per year, for the next 10 years. Correspondently the EU must provide a guarantee of matching these volumes of gas in purchasing. These requirements greatly reduce the likelihood of such a gas consortium coming into being, and hinders the dynamic development of the energy sphere of Ukraine.
People First Comment: Gazprom is one of the largest energy companies in the world whilst Naftogaz is often cited as being on the verge of bankruptcy. Are we really expected to believe that Goliath is inviting David to tea? Naftogaz should not be bankrupt, it has been mismanaged and seen as a cash cow by successive governments for years. It has failed to invest in either the national pipeline network or Ukraine’s vast gas fields to a point where the country may have to surrender control of its most important assets simply to avoid a total collapse of the system. Ukraine should be a net exporter of Gas but virtually nothing has been done to develop the off-shore assets of the Black Sea, the coal bed methane assets of the Donbass region or the shale gas assets of western Ukraine. Western energy companies who have the technology to develop these assets twiddle their thumbs waiting for the bureaucracy to allow them to move forwards. It is in the national interest to develop these assets as soon as possible but the lack of transparency and accountability of government that has evolved since independence mean that it is virtually impossible for anybody to see what is really going on.
A merger between Naftogaz and Gazprom is unlikely to enable extensive development as it would not be in Gazprom’s long term interests. Furthermore the European Union now wary of its dependence on Russia is investing heavily in liquefied natural gas therefore Russian gas flows to the EU are more likely to go down rather than up. In our opinion Naftogaz is a prime example of why new standards of democratic accountability and transparency need to be introduced into every aspect of government in Ukraine
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