Category Archives: Eurasia

Key Minister Resigns in Ukraine, Casts Doubt on Economic Reform Progress

Photo credit: Lithuania Ministry of Foreign Affairs, Flickr https://www.flickr.com/photos/mfa_lithuania/20063595149

Photo credit: Lithuania Ministry of Foreign Affairs, Flickr

By Eric Hontz and Marc Schleifer

In a stunning announcement in Kyiv on February 3, Ukraine’s Minister of Economic Development and Trade Aivaras Abromavicius submitted his resignation to President Poroshenko). The Lithuanian-born Abromavicius cited several factors contributing to his resignation, including pressure to appoint questionable individuals to his team or to key positions in state-owned enterprises. In particular, he named Igor Kononenko, considered a Poroshenko ally in parliament. President Poroshenko has reportedly urged Minister Abromavicius to stay on, and has promised that the National Anti-Corruption Bureau would investigate his claims against Kononeko.

A public statement signed by10 ambassadors to Ukraine, including from the United States, the United Kingdom, Germany, and France, released hours after the resignation, emphasized deep disappointment and noted the importance of Ukraine’s leaders setting aside parochial differences and the necessity of putting the vested interests that have hindered progress for decades in the past. Minister Abromavicius had gotten several key elements of deregulation and economic reform moving during his time in the Ministry. He and his staff were encouraged by the International Monetary Fund, the European Union, and other leaders to institute far reaching reforms, including the transparent privatization of thousands of state-owned enterprises that weigh down Ukraine’s budget. Specifically, Minister Abromavicius sought to undertake reforms in state-owned enterprises to ensure transparency, impose corporate governance standards, and enlist professional managers in an effort to restrain rent seeking and back-channel arrangements that enriched a politically-chosen few, while depriving Ukraine of valuable budget income and distorting local economies. In his resignation letter, Minister Abromavicius noted that losses in state-owned enterprises were 100 billion hryvnias less in 2015 than in 2014.

At the same time, for the past several months, many of CIPE’s partners in the small and medium-sized enterprise (SME) sector in Ukraine have complained of the slow pace of reform, particularly in terms of fighting corruption and installing a clean judiciary, among other factors. The business community had been broadly supportive of the Minister’s agenda but felt that more could be done. Minister Abromavicius and his staff hold decades of experience in investment banking and asset management, yet the highly-qualified team still hit road blocks to reform so great that they have been forced to resign.

The resignation shines a light on challenges facing this important Ministry for Ukraine’s reform effort. Abromavicius is the second Economic Development Minster to step down following the EuroMaidan two years ago; his predecessor, Pavlo Sheremeta, lasted just six months, from February to August of 2014. In the past year, the Ministry has been restructured several times and has faced numerous staff layoffs. Moreover, a range of key deputy ministers also announced that they would leave, including Yulia Klymenko, who covered SME issues and entrepreneurship development. Many of CIPE’s partners have stressed that the Economic Development and Trade Ministry’s Department of Entrepreneurship Development and Regulatory Policycould have done more to support SMEs, such as approving a national plan for SME development.

The resignation has also touched off a storm of political intrigue and turmoil in Ukraine, as former Georgian President, now Governor of Ukraine’s Odesa region, Mikheil Saakashvili  voiced his support for Minister Abromavicius, saying that he too has clashed with corrupt forces in Ukraine. There is now open speculation in Kyiv on a range of topics including how Saakashvili might be aiming to create a new political party; he is growing his own popularity by traveling around the country hosting anti-corruption fora and criticizing the government Prime Minister Yatseniuk. Some say Saakashvili has an eye on becoming the country’s Prime Minister; that he has the support of Sheremeta, and wants to recruit Abromavicius to join him for a run in rumored snap parliamentary elections later this year. Even before Abromavicius stepped down, the “Samopomoch” party pulled one of its members of the government, Agriculture Minister Aleksei Pavlenko. Last year, another Deputy Economic Development Minister, Alexander Borovik, who had extensive private sector experience, left his post to join Saakashvili’s team, but has now reportedly joined the “Power of the People” party, a new economically-liberal bloc. This kind of political speculation is a further blow for the country’s stability, at a time when its economy is slowly starting to turn around, but it is still dealing with an ongoing military conflict with Russia in the East.

Minister Abromavicius’ resignation brings up uncomfortable questions for both the international donor community and the Ukrainian people, serving to highlight the difficulty of enacting meaningful, market-oriented economic reform and reducing corruption in Ukraine, Eurasia, and emerging markets more generally. The European Union, the United States and Ukrainians themselves have invested immeasurable time and energy in supporting reforms, some of which have been painful and burdensome for the average households (and therefore deeply unpopular).

What happens next with economic reform in Ukraine will likely influence the economic and political trajectory of Ukraine, as well as its neighbors Moldova and Georgia – which also aspire to make difficult reforms – in the next several years. Importantly, if Ukraine were to backtrack or stall on reforms, it could prove difficult for other countries in the region to follow through on investments toward reform, and would thus embolden entrenched interests and anti-reform voices in the region.

Eric Hontz is a Program Officer for Eurasia and Marc Schleifer is Regional Director for Eurasia and South Asia. 

Gagauzia: Another Obstacle on Moldova’s Path to Europe?

Welcome_to_Gagauzia

In 2014, shortly before the Republic of Moldova signed its EU Association Agreement, nearly 99 percent of the electorate in the little-known, autonomous region of Gagauzia in southern Moldova voted in a referendum to reject closer links with Europe in favor of joining the Russian-led Eurasian Economic Union. Moldova’s central government first tried to block, and then declared unconstitutional, that referendum. Gagauzia’s separatist inclinations, weak economy, and deep ties with Moscow could pose as much of a threat to Chisinau’s hope of drawing closer to the European Union as the unresolved conflict in Transnistria.

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Will There Ever Be a Resolution in Eastern Ukraine?

frozen-conflicts-donbas

CIPE’s Frozen Conflicts blog series looks at the current situation in seven breakaway regions of the former Soviet Union, with a particular focus on the economic dimension. To learn more about frozen conflicts and what can be done about them read CIPE’s Economic Reform Feature Service article on the subject.

In May 2014, not long after the EuroMadian demonstrations toppled Ukraine’s former President Yanukovych, pro-Russian separatists in two Eastern Ukrainian regions, Donetsk and Luhansk, held referenda – unrecognized by Kyiv and the West – and declared their independence as “people’s republics.”

According to a September report from the UN, an estimated 8,000 people have been killed and almost 18,000 wounded in the ensuing war in Eastern Ukraine – the area known as the Donbas – as the new government in Kyiv has tried to regain control over its territory. The UN High Commission on Refugees (UNHCR) estimates that the conflict has created 1.5 million internally displaced persons. While the Kremlin long denied its military involvement, the Russian business magazine Delovaya Zhizn revealed the number of Russian casualties: 2,000 dead, 3,200 wounded.

Of the three million who are left in the region, about two million are children and pensioners. This leaves only one million working-age adults to support them and do the fighting. For around two months, between the beginning of September and November 2015, fighting in Donbas subsided, and some Ukrainian news outlets were speculating that the war could be coming to an end. But just as some IDPs were starting to return to the region, reports of ceasefire violations emerged. In September, UN agencies and a number of humanitarian NGOs were expelled from Luhansk by the forces in control of the area.

While the military aspect of the situation has been extensively covered, less well known is how the occupied region is managing economically. At first, the Kyiv government paid social benefits to the separatist region, despite not receiving any of its tax revenues. But since November 2014, when Kyiv cut the region off, the separatist authorities have been supporting residents with pensions paid out in rubles. They claim that these funds derive from tax collections, not support from Moscow, but this assertion seems questionable given a sharp economic decline. Interestingly, in June 2015 the authorities paid out pensions in U.S. dollars.

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Vested Interests Continue to Drive Conflict in Nagorno-Karabakh

frozen-conflicts-nagorno-karabakh

CIPE’s Frozen Conflicts blog series looks at the current situation in seven breakaway regions of the former Soviet Union, with a particular focus on the economic dimension. To learn more about frozen conflicts and what can be done about them read CIPE’s Economic Reform Feature Service article on the subject.

Unlike the situation in most of the other post-Soviet breakaway regions, the conflict in Nagorno-Karabakh is far from frozen. Indeed, there are some recent signs that a fresh shooting war could be brewing. Regular exchanges of fire along the line separating Nagorno-Karabakh from Azerbaijan proper are threatening a ceasefire that has been in place since 1994. This year has seen the highest number of casualties since 1994, due to the increasingly advanced weaponry being deployed.

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Russia’s Quiet Annexation of South Ossetia

frozen-conflicts-south-ossetiaCIPE’s Frozen Conflicts blog series looks at the current situation in seven breakaway regions of the former Soviet Union, with a particular focus on the economic dimension. To learn more about frozen conflicts and what can be done about them read CIPE’s Economic Reform Feature Service article on the subject.

Often lost among coverage of Russia’s annexation of Ukraine’s Crimea, the ongoing crisis in Eastern Ukraine, and the general deterioration of the relationship between Russia and the West, is the quiet process through which the breakaway Georgian region of South Ossetia has been merged into Russia.

After Georgia declared its independence from the Soviet Union in 1991, Russian-backed separatists in South Ossetia in turn declared their own independence from Tbilisi. Fighting lasted until 1992, when Russia brokered a ceasefire agreement and placed peacekeeping troops in the region. South Ossetia voted for absorption by Russia, with no response from Moscow, while Georgia continued not to recognize the region’s independence. As a result, the conflict was frozen, and South Ossetia became a de facto state.

The situation remained such until August 2008 when, following several months of increasing tensions, Georgia and Russia fought a five-day, full-scale war in the region. That war marked a major turning point, as Russia decided to recognize South Ossetia as an independent state. The only other countries to do so were Nicaragua, Venezuela, and the Pacific island of Nauru.

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Fighting Informality in Albania

Street_shop_Albania

With reports showing a steady increase of the level of informality in Albania and recent World Bank reports that Albania’s informal sector is estimated to make up as much as 40 to 50 percent of the country’s economy, the issue of informality is integral to Albania’s development. Now especially, as the European Union has granted Albania conditional EU candidate status. The gesture indicates both a challenge and an opportunity – formal accession negotiations will not begin until Albania addresses several key priorities, particularly reforming the country’s finances and reducing corruption.

Over the last decade, the number of businesses around the world operating in the shadows has grown. Men and women who stand at cash registers and add up their profits at the end of the day are increasingly doing so outside the jurisdiction of the state. Profits derived from the informal economy represent a significant share of the global economy, both in terms of currency and workforce labor, accounting for between 25 and 40 percent of annual output.

In developing countries with large informal sectors, thousands of entrepreneurs are locked out of the formal legal economy by a maze of regulations, burdensome procedures, high tax rates, and other barriers. These entrepreneurs can neither thrive personally nor contribute to their economy. Further, these entrepreneurs, and their employees alike, lack legal protection, access to credit, and have no legal ground to push back against corruption.

Thus the concerted effort to reduce informality has taken a front and center role in Albania. Recognizing how the informal sector is a breeding ground for corruption, one of the country’s leading think tanks, the Albanian Center for Economic Research (ACER), began working on the issue with a group of reform-minded business organizations.

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Can Closer Economic Ties with Moldova Resolve the Transnistrian Frozen Conflict?

frozen-conflicts-transnistria

CIPE’s Frozen Conflicts blog series looks at the current situation in seven breakaway regions of the former Soviet Union, with a particular focus on the economic dimension. To learn more about frozen conflicts and what can be done about them read CIPE’s Economic Reform Feature Service article on the subject.

The conflict between Ukraine and Russia has set in motion events that could have major implications for the unrecognized Moldovan breakaway region of Transnistria. Wedged between Ukraine and Moldova, two countries that have taken a Western turn in their foreign policy, Transnistria is distant from its backers in Moscow.

In May 2015, the Ukrainian parliament suspended all military co-operation with Russia, including a 1995 agreement giving Russia transit rights across Ukraine to reach Transnistria. Losing access via Ukraine means that Russia must route supplies to Transnistria by air through Moldova’s capital Chisinau, but the Moldovan government has been turning back suspected military personnel, and Tiraspol — Transnistria’s capital and the second largest city in Moldova — has an runway unsuitable for cargo flights from Russia.

The loss of direct Russian access has limited the flow of aid, one Transnistria’s most important revenue sources, and put the economic squeeze on a region already weakened by the poor economic situation in Russia. Industries in Transnistria, such as they are, have been shutting down or decreasing production. Moldova’s signing of a key trade deal with the European Union will increase the pressure on Transnistria’s economy. The net result could be to push Transnistria back toward its Moldovan parent state, in the process resolving one of the oldest post-Soviet frozen conflicts.

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