Economic Analysis

Economic Outcomes and Prospects of Ukraine: Progress, Regress or Status Quo?

On the one hand, the year 2018 is characterized by relative stability of the economic situation in the country, and, on another hand, is showing the lack of achievements. At the same time, foreign economic situation in 2019 may worsen, while leading to greater stagnation or even economic crisis. In turn, Ukraine is still completely unprepared for the year 2019 because of the government's failure or reluctance to show political will to implement the reforms. Accordingly, Ukraine should learn how to minimize the economic risks of probable occurrences, not just their consequences post factum. What was remarkable in 2018? Compared to previous years, the economy of Ukraine developed in the absence of significant shocks in 2018. The main changes that have had a greater or lesser impact on economic development were the following: • Macroeconomics and finance. The fact that for the first time since the crisis the banking sector has become and remains profitable can be stated among the achievements in this area. Also, tax revenues have raised. On the other hand, this growth was more due to inflationary processes in the country and due to the increase of wages. This has affected the expansion of the tax base and, accordingly, the tax revenues. At the end of 2018, a balanced budget was adopted. On the other hand, the slow pace of economic growth and insufficient growth of domestic production were felt, inflationary pressures increased remarkably. Accordingly, the discount rate was raised, which currently amounts up to 18% per annum, thus restraining the economic development. Further stability of the economy is unlikely to be able to "be guided" only by the discount rate and currency intervention. A three-year budget planning for minimizing the shocks has not been launched. In addition, the following was observed in the economy: - insufficient amount of investments, problems with timely allocation of money of financial organizations and other funds for infrastructure projects; - the share of non-performing loans in the Ukrainian economy reached 54.31% (as of October 2018); - there were problems with reimbursement of benefits and subsidies for the enterprises of housing and communal services, etc. • International economic relations. It looked like that only the NBU fought with the results of non-market price increases, turbulence in foreign markets and the decrease of investors' interests in Ukraine in 2018. Meanwhile, there was a relative stability of hryvnia, the dynamics of replenishment of gold and foreign exchange reserves was positive during the year. At the same time, asymmetries in foreign trade and insufficient lobbying of national interests was present. In particular, this led to the fact that Ukraine used quotas for the main commodity groups in trade with the EU during the first months of 2018. According to the latest State Statistics Service data, the negative foreign trade balance of Ukraine is $ 3.45 billion after 3 quarters of 2018 passed. For comparison, during the same period of 2017, the negative foreign trade balance was equal to $ 1.11 billion. In addition, the following facts should also be noted: - emigration remains one of the main problems of Ukraine in recent times; - the entering to the foreign borrowing market in 2018 was not urgent; the strategy on external and internal debt remains declarative; - Ukraine could not agree with the IMF on the tranche during the year. There is still a small chance to get a tranche for the New Year's holidays. • "Non-market Shocks". Among the "non-market shocks" in 2018, the following is particularly highlighted: - Situation in the waters of the Azov Sea and the problems with the passage of ships to Ukrainian ports. Despite the fact that the total turnover of Azov ports is barely up to 4 million tons, the delays in the delivery of cargoes in this region have created threats to the functioning of local infrastructure and worsened the transit status of Ukraine. - The introduction of the martial law has become a precedent for Ukraine and economy. Although it will not significantly affect the state of the economy in 2018, however, it has given negative signals to investors regarding the development of the situation in the country. • Energetics. Form the positive side, it is worth mentioning the encouragement of the increase of the green energy share. On the other hand, currently, the share of renewable energy in Ukraine is only 1.8% (in price - 8.3%). In addition, the Stockholm Arbitration Court ordered Gazprom to pay the Ukrainian company $ 4.63 billion for short supply of gas under transit contract (or $ 2.56 billion, taking into account the Ukrainian side's debt for the supplied gas). There were no other achievements in the energy sector. All the same problems remain with the "creation" of formula tariffs, subsidies and payments between the major suppliers in Ukraine (due to which problems in receiving hot water and heating occurred in a number of cities), the general constant increase of tariffs for households and industrial producers, overloading of power stations, etc. In addition, the unreasonable government policy, insufficient gas volumes in the storage facilities during early March led to its deficit in the country (which was the reason for the declaration of an emergency situation), and which was solved by additional, more expensive imported gas. • Privatization. There was a failure of privatization again because of poor management of state property and the inability to trade: the sale of state property brought less revenues to the state budget than was planned. The reason was the disruptions / failures of large privatization objects sale due to their unsatisfactory conditions, including finance, and peculiarities of participation in tenders, the politicization of some decisions. The inability to sell the companies resulted in the decrease of their attractiveness, while reducing their estimated value and possible revenues to the budget. As a result, large privatization has been postponed for 2019. • Improved transparency. Under this aspect, in particular, the transparency of the banking system has partially increased due to the new requirements for the organization of risk management system, due to the disclosure of data on components and capital adequacy of banks, and due to the creation of a credit register. As for other spheres of economy, an online resource for price tracking was launched, new sections were introduced on e-data regarding the openness of local budgets data, there was some degree of de-shadowing and improvement of tax servicing, small privatization on ProZorro.Sales and pilot projects on the introduction of electronic receipt (e-Receipt) were launched. Nevertheless, the openness of data is unlikely to effectively impact the minimization of corruption in the country at this stage. What does await Ukraine in 2019? The following year, Ukraine will need to concentrate on the following areas: • Macroeconomic indicators. Among the main ones it is necessary to highlight: - Growth of GDP in 2019 will slow down to 2.3% due to lower growth rates of the global economy and due to allocation of significant amount of money on debt financing. - In the beginning of the year, the inflation will significantly accelerate due to rising gas prices for the population and corresponding revision of tariffs for heating and hot water. In general, inflation will decrease to 6.8%, primarily as a result of tight monetary policy in 2019. - The election campaign can lead to an increase in social standards while lacking the sufficient economic growth.   KEY INDICATORS Final data Estimate Forecast Year 2014 2015 2016 2017 2018 2019 2020 NATIONAL ACCOUNTS               GDP, billions UAH 1 567 1 979 2 385 2 983 3 483 3 918 4 348 Real GDP, apc** -6,6 -9,8 2,4 2,5 3,0 2,3 2,6 Real total consumption, apc -6,2 -15,2 2,0 7,1 3,5 2,1 2,1 Real gross fixed investment, apc -24,0 -9,2 20,4 18,2  14,0 8,0 8,0 MANUFACTURING AND AGRICULTURE               Real industrial output, apc -10,1 -13,0 2,8 0,4 1,7 2,2 2,4 Real agricultural output, apc 2,2 -4,8 6,3 -2,7 8,0 0,0 3,0 HOUSEHOLDS               Population at the start of the year, millions 45,5 45,3 45,2 45,1 44,9 44,8 44,7 Real disposable household income, apc -11,5 -20,4 2,0 7,4 8,0 2,0 2,0 Average monthly real wages, apc -6,5 -20,2 9,0 19,1 13,0 5,0 5,0 Average monthly nominal wages, UAH 3 480 4 195 5 183 7 104 8 912 10 371 11 898 Unemployment rate, ILO methodology, % 9,3 9,1 9,3 9,5 9,0 8,5 8,0 Real retail trade, apc -9,6 -19,8 4,5 6,0 4,0 3,5 3,0 PRICES               Consumer price index, apc  24,9 43,3 12,4 13,7 10,0  6,8 6,0 Producer price index, apc 31,7 25,5 35,7 16,5 16,0 10,0 9,0 Construction price index, apc 15,7 22,7 9,9 15,5 22,0 8,0 8,0 FOREIGN ECONOMIC ACTIVITY               Exports of goods and services, apc -19,9 -26,9 -3,9 17,1 10,0 4,5 4,3 Imports of goods and services, apc -28,1 -29,3 4,5 19,2 14,5 2,8 3,4 Current account balance, % GDP -3,5 1,8 -1,4 -2,2 -4,3 -3,8 -3,5 Net FDI, millions USD 299 3 012 3 268 2 593 2 300 2 500 2 500 FINANCIAL INDICATORS               Monetary base, apc 8,5 0,8 13,6  4,6 6,0 5,0 4,0 М3, apc 4,9 3,9 10,8 9,5 8,0 7,0 6,0 NBU gold/forex reserves, millions USD 7 533 13 300 15 539 18 808 19 000 18 000 17 000 Official exchange rate, average annual, UAH/USD 11,89 21,84 25,55 26,60 27,30 29,50 31,00 UAH loan interest, last month of the year, % 16,6 20,4 15,2 17,5 22,0 20,0 18,0   Source: "Economic Analysis and Current Trends: Forecast for 2018-2020", ICPS, 2018 • Energy aspect. In general, the issue of the strategy for achieving the energy security remains one of the most important challenges for Ukraine's national interests. The Ukrainian government has announced the plans to achieve the country's energy independence and sustainable development, however the path remains blurred. Realization of Russian projects of alternative gas pipelines may leave Ukraine on the sideways of such an important element of economic activity as transit of gas, while leading to significant financial losses. In particular, a contract between Gazprom and Naftogaz for the transit of gas ends on December 31, 2019. At the same time, Gazprom filed a lawsuit regarding the termination of the transit contract through Ukraine. The arbitration institute of the Chamber of Commerce of Stockholm united the above-mentioned lawsuit with the Naftogaz's claim to revise the tariff by $ 12 billion in one case. • International finance. Due to trade wars and capital outflows from developing countries, Ukraine may have lower foreign currency earnings. In addition, the loan market will become more expensive. Partially, the new tranche of the IMF may help Ukraine, however, given that the next year Ukraine needs to pay $ 5.88 billion of external debt and $ 14.8 billion of internal debt, while the gold and foreign exchange reserves are projected to be at the same level, its volumes will be not enough to solve all the problems of Ukrainian economy. The government will need to search for the ways to get out of the situation. In the absence of the state's strategy of managing the external and internal debt, the country will face additional challenges for development.  In addition, there was no final decision of the London High Court on "Yanukovych's debt", amounting up to $ 3 billion. Theoretically it can be adopted in 2019.   Main scenarios and recommendations Thus, the Ukrainian economy did not achieve significant results in 2018 and remains vulnerable to external shocks of the following years. There is an urgent need to minimize the listed risks to economic development of the country. On the background of less optimistic governmental predictions regarding the year 2019, the problem of a vicious circle "maintaining stability - the lack of economic prospects" becomes apparent, and the issues how to escape out of it and what to do next rise. In this regard, the introduction of effective medium-term planning could theoretically add "predictability" to the development of the Ukrainian economy. On the other hand, applying of such an approach practically in the realities of Ukraine is quite complicated while its vulnerability to internal and external shocks. Accordingly, any plans can be easily "spoiled" under turbulence conditions. In addition, the biggest part of the indicators of Ukrainian plans are set manually, while depending on the "mood" of the government, and are usually static rather than dynamic. They do not change automatically, while based on the formula calculations depending on the situation, and they do not guarantee the promptness of updating the plans or their relevance and independence from the government decisions. The final result is blurred. Thus, it is important how the "reboot" of the government after the elections in the next year will take place. Taking into account the above stated, it is necessary to maintain stability in the mid-election period. In general, the positive scenario of the Ukrainian economy's development in 2019 is unlikely to happen and is not feasible for consideration. Therefore, there is a need to distinguish the following scenarios: • The basic scenario seems to be more credible. According to it, the transitional government will not risk making significant changes and implementing reforms. The Ukrainian economy will continue its stagnant development trend. On the other hand, this will not cause any resistance from the interested stakeholders and the government will be able to fulfill its functions.  • In the case of a negative scenario, the post-election period will be characterized by blocked decisions of the transitional government, uncertainty and lack of time for maneuver. Ukraine risks not getting a tranche of the IMF and will not be able to pay off its debts. This will result in the country's technical default. Accordingly, while "rebooting" period, making changes will be inappropriate and difficult. However, after the formation of the government, it will be important to rethink economic development, because otherwise Ukraine will change the stagnant trend. Nevertheless, Ukraine gains experience with every year and 2019 may be extremely fruitful.  

ICPS Press
26.12.2018
Foreign Policy

Ukrainian Foreign Policy: Results of 2018 and Prospects for 2019

2018 has been another difficult year for Ukraine and in particular for its foreign policy. Lack of progress in reforming the country puts strict limitations on what can be achieved internationally. As a result, most significant problems on the agenda – a protracted conflict in Donbas, tense relations with neighbors, insufficient international support – remained unresolved or got worse. As in previous years, Ukraine remains in a grey zone of European security and finds its low levels of efficiency and democracy in a sharp contrast with rhetoric about EU/NATO membership. Things seem to get worse recently also due to changes in strategic environment. The world becomes more prone to hard power and less democratic, while international politics is much closer to zero-sum game than it used to be five years ago. These trends are not favorable for countries like Ukraine – middle powers with weak economies in a dangerous environment. Ukraine, on its part, is responsible for a number of important decisions is has taken. The country’s current international stance is far from the best. Key Outcomes of 2018 Along the main lines of Ukraine’s foreign and security policy there have been several important developments in 2018. Among them are: changes in military operation from ATO to operation of united forces to  in the East of the country in accordance with an adopted Law on the Peculiarities of State Policy on Ensuring Ukraine’s State Sovereignty over Temporarily Occupied Territories in Donetsk and Luhansk Regions (hereinafter referred as Law on Donbas), accompanied by the talks on possible peacekeeping mission; high tensions with Western neighbors;  further deterioration of relations with Russia, resulted in non-prolongation of the Ukrainian-Russian Treaty on Friendship, Cooperation, and Partnership (hereinafter referred to as Big Treaty) by Ukraine; Azov Crisis; and subsequent introduction of the martial law in Ukraine; beginning of lethal arms supplies from the USA; intensive rhetoric over cooperation with NATO and EU, resulted in Parliament’s voting for constitutional amendments stipulating Ukraine’s intentions to join both organizations. The Law on Donbas, which entered into force on February, 24th, was supposed to consolidate Ukraine’s efforts in areas of the-then anti-terrorist operation. The latter has been changed into United Forces Operation on April, 30th. The Law has been introduced to resolve legal issues related to the ongoing military operation and, as it soon became apparent, is unable to resolve the conflict. As times goes by, chances for quick and effective conflict resolution are diminishing. By the end of 2018 is has become clear that the idea of UN peacekeeping mission so much disputed a year ago, is more difficult to carry out than it initially seemed. Most likely, the conflict will follow the path of other post-Soviet frozen conflicts, allowing Russia tools for destabilization and partial control and undermining state efficiency in target countries. International environment of the conflict seems to remain quite stable, with Europeans and Americans aiming at minimizing risks of escalation and keeping the conflict at low intensity levels. Ongoing militarized conflict generates demand for a more “rally-around-the-flag” ideology, which has been more actively implemented in Ukraine in recent months. It has already impacted relations with Western neighbors, most evidently Hungary and Poland; and is likely to impact them further. The Law on Education, adopted by the Parliament in September, 5th, 2017, provoked negative reaction from Hungary, which has ever since effectively blocked Ukraine’s rapprochement with NATO. Further escalation of tensions has been triggered by issues of citizenship: Hungarian consulate in Berehove has been recorded issuing Hungarian passports for Ukrainian citizens. A diplomatic scandal followed, as well as it became evident that Ukraine needs a more coherent approach to issues of dual citizenship. Moreover, on February, 6th, the Ukrainian Parliament adopted an acclamation in reaction to adoption of amendments to a Law on the Institute of National Memory in Poland. It signaled another round of Polish-Ukrainian clashes over historical issues, which are currently promoted by a rising influence of right ideologies in both countries. The bottom line of these developments is deterioration in Ukraine’s bilateral relations with its Western neighbors. This trend seems to be long-term and damaging Ukraine’s European and Euro-Atlantic aspirations. In what concerns Ukraine’s relations with its Eastern neighbor, Russia, things are hardly getting better. The year has been marked by continued discussions over the fate of the Big Treaty. In April president Poroshenko was offering denunciation of specific articles of the Treaty, but already in September a decision was taken not to extend the Treaty for the next ten-year period (as envisaged in the Article 40). Additionally, the corresponding Law has been approved by the Parliament later in December. The Treaty was a part of a huge normative basis of bilateral relations, totaling more than 450 agreements. About 40 of them have been terminated since 2014. Together with sanctions, introduced by Ukraine against Russia, weakening of the normative basis remains one of the very few instruments Ukraine implies in attempts to make Russia change its policies. In 2018, just like in previous years, a lack of long-term strategy of dealing with Russia has made most of the steps Ukraine was taking ineffective, costly and risky. Risks have become especially evident in December, when the crisis around the Sea of Azov and the Kerch Strait broke out. Three Ukrainian ships with 24 sailors has been shot and captured by the Russian naval forces when attempting to get to the Sea of Azov through the Kerch Strait. Russian actions violated norms of international law, in particular the UN Charter and the Convention on the Law of the Sea, as well as the Treaty for Cooperation in Utilizing the Azov Sea and the Kerch Strait between Ukraine and Russia, singed in 2003. Ukraine’s reaction was more resolute than even in 2014 and involved introducing of a martial law, which however was accompanied by fierce political discussions at the Parliament. With the impact of the Martial Law unclear, it is evident, that the end of the year brought about another peak of escalation, capable to influence upcoming presidential elections. Relations with the United States have remained another priority of Ukraine’s foreign policy. The Crimea Declaration, issued by the State Department on July, 25th, was enthusiastically welcome in Ukraine. The document contains a notion that United States reaffirms as policy its refusal to recognize the Kremlin’s claims of sovereignty over territory of Crimea. It also refers to the Welles Declaration of 1940, framing similar position towards occupation of the Baltic States by the USSR. Administration of President Trump doesn’t seem to take a stance, which would be very different from the one of the Obama’s, but one difference has become apparent. On March, 1st, supplies of FGM-148 Javelin anti-tank missiles to Ukraine have been approved by the State Department. The long awaited move was taken in Kyiv as a sign of American support in Ukraine’s war against Russian-backed separatists in the East of the country. President Obama was reluctant to approve weapons supplies to Ukraine for various reasons, most notably out of fear of conflict’s escalation. Russia’s actions were contained rather by sanctions than by arming Ukraine. President Trump took a more resolute stance. $350 million for military assistance to Ukraine was allocated in the budget for 2018. A subsequent decision to approve a $47 million supply of FGM-148 Javelin missiles and a $41.5 million supply of Barret M107A1 sniper rifles in 2018 must have been uneasy. The numbers are not very high: the total value of exported American weapons worldwide was about $42 billion in 2017, while supplies to Israel, a top-receiver of American arms, surpassed $3 billion in total. But nevertheless that may be an important step forward. Providing Ukraine with Javelins would certainly signal some level of support from the US, but a much more effective strategy would rest on series of arms transfers, within a properly designed time framework or even without an expiry date. Unlike a single delivery of even a rather sophisticated and/or expensive weapon, systematic supplies are capable of becoming a powerful deterring instrument. If Ukraine is to receive American weapons continuously, the strength of deterring signal to Moscow would be maximized. Deterrence of Russia inevitably involves rhetoric about NATO and EU membership on the part of Ukrainian officials. As the rhetoric becomes more persistent, Ukraine is hardly getting closer to what has been declared its top foreign policy priority. Lack of reforms which would introduce sustainable democracy, rule of law, and economic efficiency puts limits on how close Ukraine can get to become a member of either EU or NATO. At the same time, the European and Euro-Atlantic discourse of Ukraine’s foreign policy has already become dominant and in 2018 got additional impetus through the process of making constitutional amendments, launched by the President. They are supposed to turn Ukraine’s aspiration for EU and NATO membership into a constitutional norm in an attempt to make this strategic course irreversible. To a certain extent, this step can be seen as a symbol of Ukrainian foreign policy in the recent years. Declarations of the country’s pro-European choice have been accompanied by deterioration in relations with neighbors to the West, deadlock in managing conflict in Donbas, and a growing apathy on the part of major powers. Will anything change in the year to come? Setting for 2019 Years of presidential elections are usually turbulent in Ukraine. Next year’s two election campaigns may make foreign and security policy a hostage to internal political struggle. Features, which surely will persist, no matter who wins the elections, are structural to Ukrainian foreign policy. They include the following. First, Ukraine will remain in a grey zone of regional security. Lack of allies and security guarantees has been a key feature of Ukraine’s strategic environment, and will most likely remain. About two dozens of states, claimed by Ukrainian presidents as the country’s “strategic partners” do not have any security guarantees extended to Ukraine. Second, Ukraine will face asymmetry in almost any bilateral relations. Long-term weakening, lasting periods of destabilization, incoherence of foreign policy made Ukraine vulnerable not only to superior powers, like Russia, but also to smaller neighbors, which are members to NATO and EU. Managing asymmetry requires special skills, including multilateral formats, and thus may require new approaches from Ukrainian diplomacy. Third, improving foreign policy decision making remains important. The Law on Diplomatic Service, adopted June, 07 and entering into force December, 12 is only one step in that direction. Ukraine’s foreign policy bureaucracy remains largely inefficient, subordinated to issues of internal political struggle. These problems are also to be addressed. More specifically, the foreign policy agenda will most likely be dominated by the attempts to resolve the conflict in Donbas. Much will depend on whether a new president will be able to change Russia’s position and strengthen international support for Ukraine, be it in Normandy, Budapest+ or any other format. Religious issues will most likely be affecting election campaigns as Ukrainian Orthodox Church will be moving towards autocephaly. But their influence on foreign policy in the upcoming year will remain limited. Exploitation of religious, language, and national issues may become a part of longer term strategy of dealing with Russia, but a question remains whether it will be a good strategy. Ukraine should do its best to get relations with Hungary and Poland back to normal. Prolongation of conflicts on historical and linguistic grounds plays against interests of all, but most of all against Ukrainian interests. Intentions to join EU and NATO will continue to be main foreign policy slogans under any president in Ukraine. The question is how fast Ukraine will get closer to real cooperation with both. This question seems to be fundamental for the country’s foreign policy. Possible Scenarios Elections in the upcoming year open up some space for guesses and predictions. Although it is still hard to say who would be the winner of presidential and parliamentary campaigns, a variety of results can be boiled down to three basic scenarios. Scenario with incumbent leadership. Under this scenario current president in office would win elections and retain power in Ukraine. His control over Parliament would most likely diminish, but generally he will be able to carry out foreign and security policy of his choice. This choice will resemble current strategy. The conflict in the East will be frozen, and the conflict with Russia further instutitionalized, also as a part of Ukraine’s internal political agenda. Further construction of national identity would keep conflicts with Western neighbors open. Ukraine’s intention to join EU and NATO will dominate foreign policy discourse; however remain unfulfilled in five years. Scenario with a president ready to negotiate with Russia. Such a president will find it very challenging to carry out a strategy, aimed at reaching consensus with the Kremlin, since a large part of Ukrainian society takes any negotiations as a sign of capitulation. But if such a strategy would be put into practice, peace in the East will be the most valuable outcome. Whether it will lead to a comprehensive conflict resolution is doubtful, since this conflict is a part of a broader clash of interests. However, regaining control over Ukrainian territory and the border would be possible. Finding modus operandi with Russia would be the central part of the foreign and security policy. Scenario with a victory of right-wing/radical forces. Although not a likely scenario, it is still possible. It is also possible that any elected president would tend to take a more radical and a more right-wing stance, as it often happens in countries which experience wars or protracted military conflicts. If that is the case, the most likely foreign policy outcome would be deterioration of relations with the West, series of crises in relations with Ukraine’s Western neighbors, and escalation in relations with Russia. Foreign policy of such a president would be more risk-prone and, most likely, more isolated. Much will depend on observing democratic standards and the day of elections. Possible frauds, non-recognition of results by competing parties, or violence would significantly undermine legitimacy of the future president, decrease support from the West, and thus make external challenges even harder for him. Conclusion Ukraine finds itself in a quite complicated international environment, which will remain so for at least several years. Vulnerable to numerous challenges, having no allies and long-term strategy on most pressing security issues, the country is de facto implementing and most likely will proceed with ad hoc foreign policy. Fighting for its statehood and independence Ukraine will need a much more creative, flexible, and strategic foreign policy. A protracted conflict with Russia, vague perspectives to further deepen relations with Western institutions, and deteriorating regional neighborhood will set the scene for the next president of Ukraine in 2019.      

ICPS Press
25.12.2018
Internal Policy

Internal policy of Ukraine: results of 2018 and forecast for 2019

2018 was accompanied by constant political turbulence, which in fact became a systemic phenomenon in Ukrainian politics. There was no serious breakthrough in structural reforms, but some point changes were managed to realize. 2019 will be marked by the elections. The parade of candidates will increase political uncertainty in the first half of the year. Structural reforms will go to the background, at least until the end of the entire election period. Any qualitative changes in all the hot issues of internal politics will be possible only after the parliamentary elections, but the vector of these changes is difficult to predict, as Ukraine once again finds itself at a crossroads. Achievements and failures of 2018 The achievements of the Ukrainian authorities in 2018 include: 1. Preservation of authorities` efficiency. Presidential Administration, BPP and NF managed to preserve the existing political structure and provide the opportunity to make decisions. However, the crisis in the relations between BPP and NF is deepened, and, besides finding allies for important voting, these parties spend a lot of time to coordinate positions between them. It is increasingly difficult for the president to keep his own agenda in parliament. Parliament, though with difficulty, but continues to adopt government laws, the government works without much shocks and stupor. The duality of the executive branch though intensifies the relationship between the president and the prime minister, but does not lead to catastrophic conflicts between them. 2. Continued implementation of reforms. In 2018, the implementation of decentralization, health-care and education reforms continued. The decentralization reform is the most successful, as evidenced by the dynamics of the creation of new UTCs and the increase of local budgets. As for the implementation of the health-care reform, the transition to a family doctor system has started and it has results in the form of millions of signed declarations of citizens with doctors, but real changes are still poorly felt. Some family doctors began to receive new wages. The reform of education system has more problems, in particular through realization at local level, but its implementation continues. In addition, Ukrainian politicians finally managed to adopt the law on the anti-corruption court, the formation of which will allow continuation of the implementation of anti-corruption reform. However, one should understand that its adoption is largely the merit of international partners of Ukraine and the public sector, rather than the representatives of the authorities themselves. It is also possible to note the adoption of the law on privatization, which, according to the people's deputies' plan, should create transparent and understandable conditions for privatization in Ukraine. However, the law has been adopted, but the privatization itself has not actually been carried out. Finally, the launch of the SBI, however, was accompanied by numerous scandals. 3. Preservation of cooperation between Ukraine and IMF. Given the high debt burden on the budget of Ukraine, as well as the fragile financial stability of Ukraine, it is important to conclude a new program of cooperation between Ukraine and IMF. Ukraine is planning to receive the first tranche in 2018, subject to a positive decision by the IMF Board of Directors on December 18 this year. It should also be emphasized that the conditions of cooperation between Ukraine and IMF act as a basis (main driver) for carrying out structural reforms. In addition, continued cooperation between Ukraine and IMF automatically expands the list of potential sources for attraction of funds on foreign markets by Ukraine. The failures of the Ukrainian authorities in 2018 include: 1. The low quality of democracy, the strengthening of anti-liberal tendencies. Despite a certain weakening of the president's position, he continues to monopolize the power in his hands. Formally, while not belonging to any of the branches of government, due to the exclusive influence on the GPU and the SSU, the informal mechanisms of personal commitments, as well as the largest faction in the parliament, president Poroshenko has an exclusive influence both on the government and parliament, and on the judicial branch, which, after judicial reform, actually came out under the influence of the Verkhovna Rada. Currently, there is practically no criticism of the president among the Ukrainian media, and the authorities' attacks on media have increased, which allow criticism of the current president. Pressure on journalists and representatives of civil society organizations (the use of physical violence against them) by law enforcement agencies and various “titushki”, as well as representatives of nationalist movements, became a common phenomenon. Against the background of increasing the role of representatives of the public sector in state-building processes, the opposition of the authorities to this trend increases proportionally. Representatives of the authorities continue to use fake or manual NGOs, which are members of the supervisory boards of state bodies. There were frequent cases of open hostility between government officials and civil organizations and activists. An apogee in 2018 was the murder of activist Kateryna Gandzyuk and the apparent sabotage of the crime investigation process by law enforcement agencies. There are numerous attacks on activists in the regions. 2. Critical politicization of the work of state authorities. In terms of the pre-election year, voting in the parliament was more like election campaigning than real legislative work. The pressure on political forces by opening criminal cases on separate deputies, holding dirty PR campaigns to discredit political opponents, etc., became merely common. All this has a very negative effect on the institutional capacity of the entire state machinery. The distrust of citizens towards state authorities is critical. The GPU, the SSU, the Ministry of Internal Affairs, and recently SAP and NABU are used in Ukraine as institutes of political competition; in most cases the law enforcement function is secondary to them. 3. Security situation. Today, the level of insecurity among Ukrainian citizens is the largest in the history of Ukraine's independence. The streets of the Ukrainian capital and other cities are no longer safe for politicians, businessmen, journalists, ordinary citizens. The security issue is being actualized not so much in the context of the war in the East, but in increasing the number of publicly commissioned murders, gang raids, terrorist attacks, and explosions of military warehouses in the deep rear. The level of security in Ukraine is approaching a threatening level, when the state actually becomes unable to meet the basic needs of society, which in the end can lead to the destruction of statehood. 4. The war in Donbas and Crimea. In 2018, the issue of de-occupation of non-controlled territories did not have any positive dynamics. This concerns not only the actual issue of the return of the temporarily occupied territories, but also the question of establishing a strategy for the gradual reintegration of these areas, ensuring the rights (in particular electoral) of IDPs and implementing their social guarantees. The authorities are actively using Russian aggression for internal political use in order to receive electoral dividends during future elections. 5. Lack of results in the fight against corruption. Despite the fact that almost all the necessary anti-corruption infrastructure was established before 2018, these authorities continue to demonstrate the lack of real results in the fight against corruption. The reason for this is, first of all, the political engagement of anti-corruption bodies, which increasingly play along with the authorities, in particular Presidential Administration and less engaged in a real fight against corruption. Also, the conflict between NABU and SAP, GPU, Security Service of Ukraine and Ministry of Internal Affairs, also has a negative impact on the actual result of the anti-corruption policy and law-enforcement system as a whole.In addition, the SSU has not lost its non-specific functions of combating corruption, which requires business,  public sector and international partners of Ukraine. Also at the stage of creation of the High Anti-Corruption Court there was a series of attempts on the part of the authorities to gain control over this anti-corruption institution.    Positions of the main political players The president has lost some of his influence, but continues to be a figure №1. Yulia Tymoshenko is gaining strength, who, with her political strength, is firmly entrenched in the first place in political ratings. Narodnyi Front is increasingly moving away from Poroshenko, trying to build his own game, looking for new allies and new playback formats in power.The white and blue camp ends the year with a split day of "Opposition bloc", where "gasovyky" and "akhmetivtsi" can not agree on the candidature of a single candidate for president. The liberal-democratic opposition was not able to unite and goes to elections in different columns, headed by Sadovy and Grytsenko.There was also no complete consolidation in the nationalist camp, from which Ruslan Koshulynsky and “Svoboda” and Andriy Biletsky “National Corps” run for the presidency. Yulia Tymoshenko and “Batkivshchyna”. Yulia Tymoshenko started her unofficial presidential campaign in the beginning of summer. She was the first who announced her intention to run for the presidency and introduced her program "New course". She and her political force are now the leaders of all sociological ratings According to the latest sociological research conducted by the Kyiv International Institute of Sociology among Ukrainians, who decided to vote,  21.2% are ready to vote for Yulia Tymoshenko, 23.4% - for the All-Ukrainian Association “Batkivshchyna”. Tymoshenko is always open to the search for new allies. Today, her allies include Valentyn Nalyvaichenko and his party “Spravedlyvist”, as well as Sergiy Taruta and his “Osnova” party. She establishes a dialogue with the leaders of the “Narodnyi Front”. And given not very attractive prospects for this party (its rating according to the latest results of social surveys is 0.2%), parliamentary deputies are often seen next to Tymoshenko's office. It's no secret that there is a good communication between Lady Yu and Arsen Avakov. His control of the security forces in the country can be useful while protecting election results. Friendship with the NF can be observed in her proposals for limiting the president's powers and turning Ukraine into a parliamentary republic, as previously stated by the "veterans". Also, recently, Yulia Tymoshenko stated that she is ready to cooperate with “Samopomich” party, Svyatoslav Vakarchuk, if he goes to politics and Anatoly Grytsenko. Petro Poroshenko and BPP. The current president, Petro Poroshenko, has not officially announced his intentions to run for presidency, and promised to do it after the start of the election campaign. And he has something to think about. Low electoral support and humiliating ratings still open up to him insignificant prospects and uncomfortable electoral position. Of course, now he can not state that he is not going to the next elections, because he will immediately lose all his influence on decision-making in the country. Therefore, he is now actively demonstrating full readiness and positioning himself the only possible candidate from the authorities. Also, Petro Poroshenko is attempting to postpone the presidential elections or even unite their holding with parliamentary elections, which could give him the opportunity to preserve immunity, if not presidential, then at least get a deputy one. The president builds his pre-election rhetoric with the slogans: “Army. Language. Faith.”, “We Go Our Way,” “Get Away From Moscow.” However, such a rhetoric does not receive a special response from the public, as evidenced by the latest sociological data that records the support of the current president at 11.6% (among those who have been decided to vote), and 11.2% of the country's population support his party. Despite the third place in the rating, Poroshenko has a chance to go to the second round, but it will be very difficult to win because according to sociological research, he will lose to all his possible opponents. Although not everything is so simple. Once the closest companion, “one`s” prime minister, Volodymyr Groysman, shows more independence. First, he has his own political ambitions, and secondly, after a long conversation and bidding, he didn't want to lead the presidential political force and sit in the same boat with the president's team, and thirdly, he establishes close ties and looks for partners with other political forces, including Arseniy Yatsenyuk and Narodnyi Front. All this leads to the thought that there may be a serious split within the authorities. “Narodnyy front”. The recent appearance of Arseniy Yatsenyuk on billboards showed that the former prime minister apparently had forgotten about his complete fiasco in the government and also dreams of returning to the political Olympus. The tensions in his relationship with the president became especially noticeable. After all, the BPP and the NF don’t have a particular ideological difference, so Yatsenyuk, albeit with a poor rating, will still take away the president's electorate. The NF leader is clearly going to take over the pre-election campaign agenda of Poroshenko because Yatsenyuk's new advertisement sarcastically interprets the main pre-election slogans of the president. At present, the disparity of the faction is intensifying, various groups of influence in the party are actively looking for ways to play in power, picking up allies. It is likely that the NF will participate in the elections as different columns within political organizations. As of today, the NF has a part of the administrative resources, which the main applicants for power in the country want to get. Liberal-Democratic Powers. The union of liberal-democratic forces, which their leaders have been talking for so long, didn’t happen. A few months ago, the most recognizable of them - the head of "Hromadyanska pozytsiya" Anatoliy Hrytsenko, mayor of Lviv and leader of the "Samopomich" Andriy Sadovy, as well as people's deputy and the head of “Narodnyy kontrol” party Dmytro Dobrodomov publicly called on to leave personal political ambitions and unite. The first one to leave “the ship” was Sadovyy. He announced that he would run for the presidency and united with the “Democratic Alliance” political party of Vasyl Gatsko. Dmytro Dobrodomov also announced the intention to strive for the presidential post. Grytsenko, after unsuccessful attempt to create a joint platform with Dobrodomov, united efforts on presidential and parliamentary elections with the leader of the "Hromadskyy rukh "Khvylya" Viktor Chumak, who headed his election headquarters. Mykola Tomenko, leader of the "Ridna krayina" party and leader of the "European Party" Mykola Katerenchuk also expressed support for Anatoliy Hrytsenko as a candidate for president of Ukraine. Anatoliy Hrytsenko has the highest rating in this camp, who are ready to support 8.2% (among those who already determined their choice) of voters, and 9.1% of Ukrainian citizens are ready to vote for his "Hromadyanska pozytsiya". 2.2% of voters are ready to vote for Andriy Sadovy, 3.6% for the "Samopomich" Association". 0.5% are ready to support Dmytro Dobrodomov, and 0.4% - his party “Narodnyy kontrol”. There will be no special differences in their programs, although they position themselves differently. According to Sadovy, key elements of his campaign will be "mobilization of young people, breaking the corruptive  esprit de corps in politics and technological modernization of the country". Grytsenko’s campaign will be based on several key statements: legality, order, responsibility, honesty. Dobrodomov positions himself as an outspoken fighter against corruption. “Opposition block”. In the white-and-blue camp, a very difficult situation arose - the split between the two main groups of the party's influence, which had previously been conflicting, but never brought the opposition into the public plane. As a result, Yuriy Boyko and Serhiy Lyovochkin were expelled from the OB faction in the Verkhovna Rada, while Vadym Novinsky became the head of the faction. After that, Boyko and Lyovochkin created a separate parliamentary group in the parliament - "Opposition platform - For life". That is, in this field, we have two main centres of influence: the first one is represented by the so-called "Akhmetovs" (Akhmetov, Novinsky, Kolesnikov), and the second by the so-called "gasmen" and "pro-Russian politicians" - Boyko, Levochkin, Firtash, Medvedchuk and Rabinovich. At the moment, these two groups are leading a struggle for control over the "Opposition block". This confrontation doesn’t give political dividends, but only leads to the dispersal of the electorate and obviously complicates the chances of passing their candidates to the second round of the presidential election. It is likely that, both in the presidential and parliamentary elections, these politicians will move as two, separate and quarrelling with each other, columns. Nationalist powers. Ukrainian nationalists failed to unite. "Natsionalnyy korpus" decided not to support a compromise figure from the rest of nationalist organizations Ruslan Koshulinsky, a representative of the "The All-Ukrainian Union "Svoboda". Thus, Andriy Biletsky announced his independent campaign for the presidential election. According to the latest sociological research, Ukrainian nationalists don't have much support among Ukrainians. As follows, currently, Koshulinsky can count on the support of 0.9% of Ukrainian voters, and Biletsky - of 0.4%. The political party "VO "Svoboda" today has support in 2.2% of voters, and "Natsionalnyy korpus" - 0.6%. Most likely, Ukrainian nationalists will play the role of "violence traffickers", which will be used to pressure certain candidates or even to break the election in a particular district. The Jokers of Ukrainian politics. Ukrainian showman Vladimir Zelensky continues to increase his rating. According to the latest sociological research, he ranked second, 14.6% of voters (among those who already determined their choice) are ready to vote for him, and 13% for his political party "Servant of the people". And this despite the fact that Zelensky didn’t confirm his intention to participate. Interest in Zelensky as a presidential candidate was well-heated in the run-up to the election of a new part of the popular TV series "Servant of the people", where, according to the scenario, a simple teacher Vasyl Goloborodko, performed by Volodymyr Zelensky, receives the power in Ukraine. The series very successfully shows the real state of affairs in Ukrainian politics and prompts Ukrainians to vote for a non-systemic candidate - a simple guy from the people who is fed up with corruption, injustice, poverty, and who seeks to change everything by joining the struggle with the Ukrainian oligarchs. In fact, Ukrainians want to vote not so much for Zelensky, but for the image created by him in the series. His electorate is people, deeply disappointed with the classic politicians, who seek for the way to break the vicious circle of esprit de corps in Ukraine. However, when Zelensky will begin to speak political language, making the relevant statements and offering his options for solving the problems of our state, it's unlikely that his rating, will remain the same or will keep growing. Given the proximity of Zelensky to the oligarch Igor Kolomoisky, who in return supports Yulia Tymoshenko, there is a likelihood of Zelensky's refusal to take part in the presidential race. Nevertheless, we will most likely see his party in the election ballot at parliamentary elections. The rating of the musician Svyatoslav Vakarchuk "subsided" essentially: from the top three he moved to the 9th position with the assets of 3.8% of voters (among those who already determined their choice), essentially "subsided". Obviously, his electorate was tired of waiting for him to confirm his participation in the presidential election and began to consider alternative options. It is believed that Vakarchuk could become a reserve option for Poroshenko by “giving the way”, but at the same time he will solely run  for parliamentary elections within “Vakarchuk block”. But such a variant may be beneficial for the current president only in the case of simultaneous holding of presidential and parliamentary elections. Perhaps a military state will be able to help Poroshenko in this "special operation". It is also worth noting that so-called “Vakarchuk block” can count on only 4.1% of the support of Ukrainian voters. There is a high probability that the 2019 elections will be a battle of jokers. Under these conditions, we will have Vakarchuk and Zelensky in the second round, however, behind their backs one can see quite familiar oligarchic silhouettes. General forecast of the situation The defining trend for 2019 will be presidential elections and the further domestic development of Ukraine's political will depend on how they will be held. Accordingly, we distinguish three baseline scenarios. The first scenario (pessimistic). Failure of the election process, destabilization, Maidan 3.0. In this scenario, Ukraine faces great political instability, massive mass protests and a high probability of street violence. In such a situation, our country will be on the verge of entering the category of "failed state". There is a high probability that Russia will want to use such a state of affairs, and will be able to  at least expand its zone of effective control or even occupate; as a maximum, it will carry out a military sweep of the country and ultimately return Ukraine to its womb. The other side of this scenario could become an adoption of authoritarian power in Ukraine by the current authorities. Second scenario (basic). Presidential elections will take place, but they will be accompanied by an active use of violence and a debate on the recognition or non-recognition of their results both inside the country and abroad (other states). A similar situation will be repeated in parliamentary elections. The confidence in the state bodies thus formed will be low, the decision-making process is complicated, but in general, the institutional capacity of the state will be at a more or less acceptable level, although the implementation of structural reforms will be complicated by a high level of political conflict. The third scenario (optimistic). Presidential elections will take place in a civilized way. The transfer of power (or its preservation under the current president) will take place under all democratic procedures. Parliamentary elections will be held democratically and without systemic violations. And by the end of the year, Ukraine will have a legitimate president, a parliament and a government that can effectively carry out structural reforms and develop the country. Of course, political conflict will remain, but in such a scenario, it will be at a minimal level and will not constitute a serious threat. In any case, the results of the presidential election will have a decisive influence on parliamentary races. The latter will determine the political life in the second half of 2019. The situation is complicated by the fact that it is almost impossible to foresee parliamentary elections. First, because of the uncertainty of the election results of the head of state, and secondly, due to the large number of political forces and the small electoral gap between them. The results of the presidential elections structure the political field, promote the formation of new political alliances and the crystallization of political forces through the power opposition. Given the victory of Yulia Tymoshenko, there is an option to hold a constitutional assembly, which will turn Ukraine into a parliamentary republic of the chancellor type. For this, Tymoshenko will have to initiate an all-Ukrainian referendum, which legitimizes her plan and will launch a radical change in the system of public administration in the country. Under such a scenario, it is possible to postpone parliamentary elections at a later time after the referendum, and then the price of such elections will be very high, since the whole power of power in the country will stand on the horse. It should be noted that constitutional changes to simplify the president's position and the introduction of a parliamentary republic are supported by most of the NF. In addition, the transformation of Ukraine into a parliamentary republic may also be beneficial to the political forces of the white-and-blue camp. To prevent such a course of events may be a significant political turbulence, the economic crisis, as well as the peak period of payments for external borrowing. A separate issue that deserves attention is the relationship between the president (old / new) and the government in the period after the presidential and parliamentary elections. The fact is that, in accordance with the Constitution, the Cabinet of Ministers terminates its work in the following cases: the conferral of powers to the newly elected VRU; voluntary resignation of the prime minister; the Verkhovna Rada of Ukraine adopted a resolution of no confidence in the Cabinet of Ministers of Ukraine. That is, the election of a new president does not directly affect the resignation of the government, without the influence on which head of state is very difficult to promote their will. With the abandonment of the post of Petro Poroshenko, these special changes are unlikely to happen. However, in case the president will pick up a new person, there are still several options for his interaction with the government (see below). Option 1 - the new president will be able to reform the government and appoint a nominal prime minister to parliamentary elections. Option 2 - the current composition of the government and the newly elected president will find a common language, will consolidate areas of interest and in more or less consensus will reach the parliamentary elections. Option 3 - the president and the government will enter the clinch and will resist each other. In fact, Ukraine will burgeal in the times of the presidency of Viktor Yushchenko and Prime Minister Viktor Yanukovych and Yulia Tymoshenko. By the end of November, the process of formation of state-political institutes in Ukraine will be completed. It is also worth bearing in mind that in addition to the threats posed by the elections in Ukraine, there are other dangers that will in one or another way determine the agenda for domestic political discourse, namely aggression of the Russian Federation, the war in the Donbass, the occupation of the Crimea, the Azov crisis, the need for payments for external borrowing. Decisive influence on the outlined situation may be the introduction of martial law throughout the country.    

ICPS Press
21.12.2018
Foreign Policy

Expert discussion on Ukraine-Slovakia relations. Webinar 2

The International centre for Policy Studies (ICPS) in partnership with the Institute for Economic and Social Reforms, INEKO (Slovakia) initiated the conduction of the expert webinar devoted to the analysis of key trends and future prospects of the relations between Ukraine and Slovakia. “Pragmatism” and “balance” – that is how the relations between Ukraine and Slovakia can be characterized. Unlike the situation with other western neighbors of Ukraine, relations with Slovakia are not burdened with historical and ideological speculations. At the same time, the partnership between the two countries is driven with complementary interests, first and foremost, in the security and energy spheres. However, prospects for the development of strategic partnership between Ukraine and Slovakia are often underestimated, as there is enormous potential for increasing and deepening bilateral trade, cooperation in the areas of energy, regional security and cross-border cooperation. Moreover, a bilateral mechanism for the protection of minority rights can serve as a model for solving this problem with other countries. The experts emphasized the importance for both countries to use rationally the existing potential for cooperation in order to strengthen the strategic partnership between Ukraine and Slovakia. The detailed analysis on the current state of play in Ukraine-Slovakia relations can be found in the webinar’s materials: ICPS presentation  UKRAINE-SLOVAKIA RELATIONS: DEVELOPING A TRUE STRATEGIC PARTNERSHIP? ICPS conducts a series of expert webinars devoted to the analysis of Ukraine’s relations with its Western neigbors as part of the project “Ukraine and V4 countries: promoting better understanding”. Considering potential negative consequences from the current tendencies, the main purpose of the ICPS expert discussions is to elaborate common, effective mechanisms for the normalization of relations and good-neighborliness between Ukraine and the member countries of the Visegrad Group. The project is implemented with the support of the International Visegrad Fund.

ICPS Press
03.12.2018
Foreign Policy

The Azov Crisis and Martial Law in Ukraine

The essence of the Azov crisis lies in the fact that the developments demonstrated fragility of the current ceasefire between Ukraine and the Russian Federation, as well as a huge lack of trust from the Ukrainian society to the current country’s leadership. The situation which evolved in the Ukrainian-Russian conflict and the region in general continues to contain a huge explosive potential which, if combined with several circumstances, can lead to the restoration of a full-fledged conflict. The Ukrainian leadership not only failed to develop an effective defense system or a conflict settlement concept over the past five years, but lost a trust credit, which the society gave to it five years ago. Under these circumstances, any radical change either in the Ukraine-Russia relations, or in the Ukrainian internal politics can lead to destabilization which was possible to be observed on November 25-26, 2018. All the parties should adhere to maximum restraint in rhetoric and action, and the resumption of a peace settlement process or adoption of internal decisions in that regard is possible only after the reboot of power in March 2019. Introduction On November, 26th, the Ukrainian Parliament approved martial law, suggested by the President of Ukraine following the recommendations of the National Security and Defense Council. Initially recommendations of the NSDC and the President’s decree were about introducing martial law for the period of 60 days on the whole territory of Ukraine. The decree had to be approved by the Parliament, where a number of fractions expressed concerns over possible postponement of the presidential elections, scheduled for March, 31st, 2019. Tough negotiations over the issue resulted in a modified version of the Presidential decree, approved by the majority of 276 members of Parliament: martial law will be introduced starting November, 28th, for a period of 30 days in ten regions of Ukraine, bordering Russia and Trasnistrian part of Moldova. Presidential elections would be held on March, 31st, 2019. The Azov Crisis These events followed the incident near the Kerch Strait a day before, when Russia attacked and later seized three Ukrainian vessels, capturing 23 crew members; six of them have been wounded. Ukrainian ships have been heading to Mariupol from Odesa. The transfer has been reported to the Russian authorities beforehand to arrange the passing through the strait, currently dominated by the Crimean bridge recently constructed by the Russian side – of course, against the norms of international law. It should be noted, that back in September two Ukrainian ships have already passed through the Kerch Strait, staying at a distance of 12 miles from the shore according to Russian statements. During the transfer on November, 25th, Russia has blocked the movement of the ships; subsequently ‘Yany Kapu’ tugboat of the Ukrainian Navy has been rammed by the Russian sea tugboat ‘Don’. Later on Russian combat helicopters Alligator K-52 approached the Ukrainian ships, while the movement under the bridge has been blocked by a tanker. Russian side has demanded Ukrainian ships to stop further movement and warned of possible use of weapons. When Ukrainian ships left a 12-mile zone around Crimea heading back to Odesa, Russian ships opened fire, injuring crew members and damaging the ships; and eventually captured them. Legal Assessment By openly using weapons against Ukrainian ships Russia violated a number of international norms and agreements, in particular UN Charter and the Convention on the Law of the Sea. Given that according to international law, Crimea is a part of Ukrainian territory, in no way Ukraine violated anything: its ships have been moving in its territorial waters and/or exclusive economic zone. Russian claims that Ukrainian ships violated Russian border have no sense. According to international law, Russia has attacked Ukrainian ships in Ukrainian waters, which is an act of aggression. At the same time, there’s an obvious discrepancy between legal principles and situation at hand, caused by Russian occupation of Crimea. Formally Ukrainian ships have an unquestionable right to move in Ukraine’s sovereign waters, but in fact these waters are under Russian control. The same applies to Ukrainian army units if they decide to travel to Donetsk. One can’t just follow formal procedure, since the risk of escalation is unacceptably high. Moreover, situation in Donbas has been regulated by the UN SC Resolution 2202, which framed the Minsk-2 agreement and limits Ukrainian Army’s freedom to maneuver. Anything like this is absent for Crimea and Kerch Strait. Thus only Russia violated the norms of international law, but while we will be accusing Moscow in violating international law, Moscow will be accusing us in violating its territory. There’s a bilateral Treaty for Cooperation in Utilizing the Azov Sea and the Kerch Strait between Ukraine and Russia, singed in 2003 – another Treaty violated by Russia. Free passage of the Kerch Strait is guaranteed by this Agreement, according to which the Azov Sea and the Kerch Strait are shared territorial waters. The Treaty is still valid, although it has lost most of its sense following the occupation of the Crimea and non-prolongation of the “Big Treaty” between Ukraine and Russia. International Reaction A meeting of the UN Security Council has been convened on November, 26th. Agenda offered by Russia has been rejected, as was the Russia’s arguments about Ukrainian ships violating Russia’s state border. The US, the Great Britain, France, Germany, Poland, Sweden, and the Netherlands expressed their support for Ukraine. At the same time China, Cote-d’Ivoire, Kazakhstan, Bolivia, Peru, Kuwait, Ethiopia, and Equatorial Guinea refrained from putting blame on Russian and called for both parties to avoid escalation. Before the attack on Ukrainian vessels Lithuanian Foreign Ministry strongly condemned blocking of the Kerch Strait by Russia and ramming the Ukrainian ships, calling it the act of aggression. Later Estonia joined the condemnation of Russia’s attack on Ukrainian ships and called on release of the ships. Latvian Foreign Ministry called for international community to condemn the attack. NATO urged Russia to open access to Ukrainian ports and called for restraint. The EU also demanded Russia to restore freedom of passage at the Kerch Strait and urged both countries to act with utmost restraint – a phrase which raised so many questions and critical remarks in Ukraine. Secretary General of the Council of Europe outlined the importance of avoiding escalation. Canada and Poland also condemned Russia’s aggressive actions. Implications The crisis indicated constant presence of a high risk of possible escalation around the Kerch Strait. Legal and political implications of occupation of Crimea by Russia are going to accumulate and generate regional instability even in relatively simple cases. Politically Ukraine has got a better position: Russia is responsible according to international law. However, opportunities to hold Moscow responsible are not huge. The issue is most likely going to get back to possible expansion of the sanctions, which would hardly be an effective measure. A better political position of Ukraine is still to be converted into bargaining power. Ukraine will also face some questions, for instance the one about the aim of sending military ships to waters heavily controlled by an aggressive neighbor. International support will largely depend on the level of trust to Ukraine. If Ukraine fails to provide its Western partners with clear and understandable explanations on the purposes and plans of the Ukrainian military, it will not play in favour of Ukraine in terms of its perception as a predictable partner. That is why the Ukrainian leadership now has to make good efforts to ensure that both international partners and Ukrainians believe that the recent decisions are not political intrigues, but indeed a part of a well-developed strategy of defending the Ukrainian sovereignty. If such arguments are not provided, it will be extremely complicated to keep the trust, and the suspicions on internal political motives will only intensify. Introduction of martial law in Ukraine triggered fears of significant limitations of freedoms and possible postponement of presidential elections. Partly they’ve been dismissed by amendments into Presidential order, but it still remains to be seen how the provisions of the Law will be used. Economic aspect The approval of the martial law has become a precedent for Ukraine and the Ukrainian economy. Therefore, it is very difficult to predict the economic consequences under current realities. In general, it is possible to say that such situation has an internal and external aspect. The government can somehow influence the situation inside the country and may try to assure that the economy will not "suffer" (the main idea is to prevent panic), however it will not be able to influence the external factors. They may include the following: 1) Investment attractiveness will decrease: none of the investors will risk investing in a country that will give preferences only to military priorities, where there is a risk of alienation of property and deepening the relation problems of with our neighbor. However, the level of investments was not so high. The credit rating will fall with all the consequences. 2) Regarding the relations with the IMF, the martial law may, on the contrary, push the Fund to a more substantial support of Ukraine. Under positive scenario, it may lead to the Stand-by program. However, this program will show that the country really has serious problems with the economy. That will shake expectations of investors. 3) The attitude of the Russian Federation. Russia can "ignore" the situation, or may increase the pressure on Ukraine. In particular, after the official announcement of a martial law, restrictions on the movement of capital from Russia (and vice versa) may occur, the Azov ports may be blocked (under negative scenario): if the conflict intensifies, this may be reflected on the economic activity in the waters of the Azov Sea. Under full blockade, ports will lose up to $ 2 billion. The problem is that in case the martial law is introduced declaratively ("verbally"), then the economy will not be endangered. In case it is not declarative, then the economy can suffer from losses: the feasibility of such measures is doubtful, especially now. First and foremost, the government and the country must be economically prepared and ready to introduce such a law, rather than "it somehow will happen." Over the past four years, the government has not been able to lobby the interests, negotiate with Western partners and create an airbag that could minimize negative consequences in the event of a further deterioration of the situation. This implies Ukraine's dependence on mineral fertilizers and nuclear fuel for the NPP from Russia (30-40%): in case of the worst case scenario, the Russian Federation can stop the exports of these commodities and eventually our raw material economy will collapse. Ukraine did not establish the import substitution from our European partners. The martial law in the adopted form (some kind of hybrid version: it seems that nothing is limited according to official rhetoric) causes a lot of questions. It is not clear what exactly it changes and why it was adopted. It seems that the main goal, apart from checking the political "ability" to push the decisions, while changing them “on the go”, can still shield an attempt to attract the attention of the world community and the additional “transferring” of all the economic problems to external factors. Conclusion The developments with the Ukrainian ships in the Kerch Strait and the following consideration of the martial law introduction in the Ukrainian parliament demonstrated: huge level of distrust of the Ukrainian society to the current authorities. The idea on martial law introduction was perceived as a step for achieving political or business goals of the current country’s leadership, but not as a step towards the country’s defence. Martial law became synonymous to a direct threat of authoritarianism and human rights violation for various groups of political establishment, experts, media and the society. The country’s leadership has repeatedly used a threat of Russian attack to cover their illicit acts and the martial law initiative was perceived as a new game element, but not as a real step on protecting the national interests. Such initiatives are possible only if there is a significant level of trust to the authorities, thus, are possible only after the conduction of elections, i.e. the reboot of power is the only legitimate solution to the current crisis. demonstration of helplessness. From a legal point of view, the Ukrainian side has not violated anything and acted according to the law. But the decision to plan and conduct such an operation in the Kerch Strait on the fifth year of de-facto war without consideration of all risks and threats raises additional questions. The crisis demonstrated helplessness in front of a real challenge, for which the Ukrainian military have to ‘pay off’ now. lack of a strategic planning and systemic vision of the conflict settlement. Unfortunately, now one can observe only tactical calculations with short-term goals without any effective proposals on leading the country out of the current conflict deadlock. The introduction of martial law and shifting the economy and state governance into ‘military mode’ had to be done back in 2014 as nowadays it is unlikely to significantly contribute to improving the current situation.

ICPS Press
28.11.2018
Foreign Policy

Sea of Azov: Ticking Timebomb?

After a period of relatively consistent, low-intensity fighting in eastern Ukraine, 2018 has brought new developments with the opening of the Kerch Strait Bridge in the Sea of Azov. With the additional maritime element in Russia’s strategy, further destabilization of the region can be expected. Kerch Strait Bridge The ongoing armed conflict between Ukraine and the Russian Federation has undergone several developments in 2018 – important among them being the newly added maritime element to the conflict with Russia’s recent activities in the Sea of Azov off the coast of the Crimean Peninsula. Officially opening on 16 May, Moscow successfully constructed a bridge across the Kerch Strait, connecting Crimea to mainland Russia. Being the only waterway through which the sea’s maritime shipping may navigate to and from the Black Sea, Russia has begun restricting the movement of foreign vessels, among them mainly Ukrainian, to and from the Sea of Azov. Part of a larger strategy of economic warfare, as of June 2018, over 144 container ships have been restricted from passing under the bridge to the ports of Mariupol and Berdyansk, becoming subject to search by Russian naval vessels. With search times upwards of 24 hours or more, maritime traffic has been severely hamstrung to Ukraine’s fifth and eighth largest ports in terms of volume of trans-shipped goods, respectively. Linking the Land to the Sea From the very beginning of this new maritime addition to Russia’s so-called hybrid warfare approach, Moscow has displayed how it may be used to link such activities with its preexisting land campaign. For example, just one week after the bridge was opened across the Kerch Strait, on 22 May Russian-separatist forces launched an artillery strike on Talakovka, located in the Donetsk region near Mariupol. As the Ukrainian military is limited on resources, in comparison to the Russian Federation, any choices between defending against separatist forces in Donbas and buttressing against an impending naval build-up would happen against the backdrop of a zero-sum game. Recent Developments On 17 October, the city of Kerch experienced an attack on a local polytechnic college for teenagers. Carried out by an 18-year-old, fourth-year student at the school, 20 people were killed and over 50 injured in the gunfire and explosives which were detonated in the school’s cafeteria. A terrible event in and of itself, this should be analyzed within the larger context of recent events in Crimea and within the Sea of Azov. From the beginning, Russian security officials cited the restriction of movement through the Kerch Strait as a response to fears of terrorist activities – namely from Ukraine – against the newly constructed bridge. The initial naval build-up in the Sea of Azov, including Russia deploying their Caspian Sea flotilla to the region occurred under the guise of this narrative. Now with a real example of danger in the region, regardless of its source, expect the Kremlin to push this narrative to support further militarization. Unclear as of yet, immediate ramifications may include greater security presence in the area in addition to increased restriction regarding passage through the Kerch Strait. Anticipated Risks Such activities, efforts to augment Russia’s economic war and support separatist militias against Ukraine, will further depress Ukraine’s economy vis a vis maritime trade and investors’ confidence. Militarily, any increased activity on the part of the Russian Navy may additionally warrant concern of westward expansion into the Black Sea, denying Ukraine of much needed economic resources – with the Black Sea representing 80% of Ukraine’s exports. A preexisting example to showcase the likelihood of such an event could be seen when Russia illegally seized oil derricks near Odessa using naval special operations forces and has subsequently been guarding them with several small warships. Conclusion The Kremlin has set a precedent for activities such as this. One might recall bombings and terrorist attacks in Moscow, Chechnya, Beslan, and other areas of the Russian Federation which have been used to incite fear into people and pave the way for heightened security measures. While circumventing the question as to whether the attacker was a lone wolf, or part of a larger conspiracy, there is a likely risk that Moscow will attempt to form a narrative around such a tragedy, with a mix of both available and fabricated evidence and claims in order to push their political and military agenda in the region. Preliminary actions toward this end have been seen with Crimean Parliamentary officials placing blame for the attacks on Kyiv, and Putin stating that the killing was “the result of globalization.” Further reasoning for such a conclusion comes from the Ukrainian presidential campaign season in full swing, with elections taking place next March. The Kremlin may continuously use such events as an excuse to bolster their position in the region, thereby pressuring Kyiv in future discussions such as the resumption of water supply from the Dnipro River to the Crimean Peninsula – where they are dangerously close to experiencing a drought, as well as to, in general, weaken the position of their Ukrainian interlocutors within the framework of the Minsk agreements. With Moscow’s strongest option thus far being a frozen conflict akin to Transnistria, further destabilization in the Sea of Azov – and Black Sea writ large – will remain an attractive option for Putin.  Author: Jonathan Hall

ICPS Press
13.11.2018