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Corruption is crippling Ukraine’s economy, and Trump isn’t helping

Posted By on October 10, 2019 @ 06:00

The top priority for the new Ukrainian government of Volodymyr Zelensky should be to establish the ‘rule of law’, according to the International Monetary Fund.

The fund’s survey team visiting Ukraine last month said the economy was at last heading in the right direction, showing growth while government debt was being controlled. But they highlighted how far Ukraine must travel to make up for the decades it has lost since its 1991 independence to corruption, poor governance and a war with Russia. Its income per capita is barely 20% of the European Union average, while its labour has only a tenth of the productivity of its European peers.

At independence, the people of Ukraine had about the same level of income as their neighbours in Poland. Polish incomes are now five times higher.

With a population of 44 million, Ukraine has an economy the size of South Australia’s plus the two territories’.

Raising income levels requires a greater commitment to structural reform, the director of the IMF mission to Ukraine, Ron van Rooden, said. ‘This includes most of all firmly establishing the rule of law—including through judicial reform—and decisively tackling corruption.’ Markets needed to be opened to competition, with a reduced role of the state and the ‘oligarchs’.

Zelensky is seeking a multibillion-dollar loan from the IMF to support Ukraine’s economy.

The IMF’s concerns about the rule of law reflect the persistent failure to prosecute cases of corruption affecting the empires of the half-dozen or so billionaires who seized control of state assets in the wake of the break-up of the Soviet Union in the late 1980s.

There is some irony in US President Donald Trump’s request to Zelensky that Ukrainian prosecutors intensify their investigations of tycoon Mykola Zlochevsky in the hope of revealing dirt on Democrat candidate Joe Biden. Zlochevsky had employed Biden’s son Hunter on the board of his gas company.

Two years ago, Trump was putting pressure on Zelensky’s predecessor, Petro Poroshenko, telling him he should back off investigations of corruption involving Trump’s former campaign chairman, Paul Manafort, who was ultimately jailed for concealing foreign bank accounts related to his dealings with the pro-Russian Ukrainian leader Viktor Yanukovych.

In both cases, Trump has been putting political pressure on the administration of justice in Ukraine, essentially perpetuating the corruption of process that is at the heart of the IMF’s concerns.

Since his election in April, Zelensky has fared better than many expected from someone whose only prior political experience was as the star of a satirical TV show, Servant of the People, which he then used as the name of his pop-up political party.

Aided by French President Emmanuel Macron, with whom he shares some affinity as a political outsider, he has made progress in negotiations with Russia’s Vladimir Putin over the border territories that have been seized by Russian secessionists. Swaps of war prisoners have been a good start.

Ukraine has been a strategic flashpoint since the 2013–14 revolution, which ousted a pro-Russian government in favour of a bid to join the EU, and was followed by Russia’s seizure of Crimea. IMF data shows that between 2013 and 2015, the size of the Ukrainian economy almost halved.

Zelensky is also pushing ahead with land reform legislation that would benefit individual private farmers at the cost of ‘oligarch’ land holdings. However, there are reasons to doubt that Zelensky will do much to upset the structure of power in Ukraine, notwithstanding his election promises to ‘break the system’.

A pointed comment in the IMF’s review is that the government should ‘make every effort to minimise the fiscal costs of bank resolutions’. This looks like a reference to the nationalisation by the former government of Poroshenko of the corrupt and failing PrivatBank, which was owned by Zelensky’s biggest backer, Ihor Kolomoisky. PrivatBank had been behind a Ponzi scheme, making ever larger and ultimately unrecoverable loans to shareholders secured by their equity in the bank.

Kolomoisky’s business empire includes the TV network that hosted Zelensky’s show. Kolomoisky says he doesn’t expect Zelensky to return the bank to him, but he’d like to be paid the US$2 billion he claims he’s owed. This would be a step too far for the IMF.

Poroshenko was himself one of the ‘oligarchs’—he made his fortune from a confectionary business. Only in Ukraine could someone gain political power claiming that it takes an oligarch to clean up the oligarchy.

Poroshenko introduced an anti-corruption agency, but according to the non-government organisation Transparency International, it has failed to bring to account any corrupt high-level official. Transparency International ranks Ukraine as the most corrupt country in Europe, with the exception of Russia.

Some saw Zelensky’s victory in April as a manifestation of the rivalry between Poroshenko and Kolomoisky.

Another reason for doubting how far Zelensky’s new broom will sweep is his decision to retain Poroshenko’s interior minister, Arsen Avakov, who has held the position since 2014. A report by the European Council on Foreign Relations claims the interior ministry has become a ‘personal empire’ for Avakov, shielding ‘organised crime and far-right militias’. ‘Zelensky appears to owe him a favour’, the report says.

The transcript of Trump’s phone call with Zelensky in July is not reassuring. Zelensky told Trump he would have a new prosecutor in place by September who would pursue the investigation that Trump requested. ‘Since we have won the absolute majority in our Parliament, the next prosecutor general will be 100% my person’, he said.

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URL to article: https://www.aspistrategist.org.au/corruption-is-crippling-ukraines-economy-and-trump-isnt-helping/

[1] survey team visiting Ukraine: https://www.imf.org/en/News/Articles/2019/09/26/pr19356-ukraine-imf-staff-concludes-mission

[2] ranks Ukraine: https://www.transparency.org/country/UKR

[3] report: https://www.ecfr.eu/publications/summary/zelensky_unchained_what_ukraines_new_political_order_means_for_its_future

[4] transcript: https://edition.cnn.com/2019/09/25/politics/donald-trump-ukraine-transcript-call/index.html