Category Archives: Eurasia

Ukrainian Business Community Comes Together to Develop Local Business Agendas

ukraine-BAs

By Bogdana Aleksandrova and Anastasiya Baklan

For the first time in Ukraine’s modern history regional business associations, in cooperation with Chambers of Commerce and Industry and think tanks, are developing and promoting local business agendas.

Historically Ukrainian business associations, chambers, and think tanks have not cooperated closely to form a single voice of business in advocacy efforts.  In view of this history, CIPE developed and delivered training programs to various business support organizations over the past several years, the latest of which occurred over the winter and spring.  The training, encouragement, and support from CIPE have helped to foster the development of coalitions of these organizations following the trainings in several regions around Ukraine (see CIPE’s Bogdana Aleksandrova speak about the advocacy campaigns – in Russian).

The most recent participants in CIPE’s training program will receive ongoing consultations from CIPE experts, including Sergiy Pancir, Head of the Center of Social Partnership and Lobbying under the National University of Kyiv-Mohyla Academy, Denis Bazilevich, Director of the Institute of Professional Lobbying and Advocacy and Ruslan Kraplich, business trainer of the Ostrog Princes Foundation. Now these coalitions are taking the next step, applying their training, and are developing local business agendas.

CIPE recently announced that five regional coalitions, from Sumy, Mykolaev, Ivano-Frankivsk, Kirovohrad, and the city of Kyiv, each consisting of business support organizations and regional think tanks, would receiving small grants and ongoing technical support to develop regional business agendas.

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Russia’s Rent-Seeking Downward Spiral

It is clear that if we do not start taking action today, including by carrying out structural reforms, we could end up going into a lengthy period of economic stagnation tomorrow. Our economy is still based primarily on natural resources rather than on manufacturing. Our economic system has changed little in essence. Where does most of our money come from? From oil, gas, metals and other raw materials.

– Vladimir Putin, Annual Address to the Federal Assembly, April 3, 2001

Fifteen years later, the Russian economy envisioned by that progressive speech by Putin in April 2001 seems to be a distant memory. Russia’s economy, and budget, are still largely dependent upon the sale of oil and the majority of Russian industry is still based on extractive industries. The modern vision of Russia in that speech, one deeply embedded into the international system, where property rights are protected by the undiscriminating rule of law, has been replaced by a cynical “managed” system of crony capitalism where profits are skimmed off by insiders while Russia has isolated itself by its actions on the international stage.

Since 2001, record-setting commodity prices have supported increased social benefits, military spending, and infrastructure investments, each of which has supported corruption schemes where insiders profit off of the state’s largess (see the cost of the Sochi Olympics as Exhibit A). High commodity prices also allowed the Russian government to slowly smother individual rights and free speech at home and, largely through key investments in media, buy the country a larger voice in affairs abroad.

Rather than pulling away from a resource-based economy, Russia’s entire economy appears to now be moving in near perfect correlation with energy prices (see chart below).

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Ukraine Needs to Privatize its State-Owned Companies — But Rushing It Would Repeat the Mistakes of the Past

Storied aviation company Antonov, makers of the world's largest cargo plane, is in no position to be privatized.

Storied aviation company Antonov, makers of the world’s largest cargo plane, is in no position to be privatized.

 

The stakes for reforming Ukraine’s state-owned companies are high: these companies are the lifeblood of a corrupt, sclerotic crony capitalist system that scares away potential investors, drives off international donors, and robs the Ukrainian government of legitimacy. But  privatizing them as quickly as possible is not the solution.

Even after mass privatization in Ukraine in the 1990s, the government still owns a large portfolio of companies in a variety of sectors – from heavy industry to banking — that employ over 900,000 employees, far more than any private firm.  Reforming these state-owned enterprises (SOEs) has been a slow process and remains incomplete due to weak corporate governance, unmotivated management, and a near-total lack of transparency. None of these problems will be solved by simply speeding up the process.

The demand for rapid privatization is a familiar tune. Western “expert” advice in the early 1990s led to a huge transfer of wealth from the former Soviet Union to a handful of connected insiders, particularly in Russia: first through voucher privatization and later through the disastrously corrupt loans-for-shares schemes in the run-up to Russia’s 1996 election.

To get an idea of the scale involved, a 1993 paper by several Western economists who worked directly on the voucher privatization program estimated that most of the Russian Federation’s civilian industrial base – nearly every plant, factory, and mine in the country – was effectively sold off to insiders for between $5 and $10 billion, less than it would have cost to buy a single mid-sized Fortune 500 company (and roughly equal to the market capitalization of Whole Foods today). Still, at the time they regarded this program as a great success.

Unfortunately, the corrupt and predatory “oligarch” elite, created practically overnight, proved to be more interested in asset-stripping than in transforming their new firms into firms that could compete on world markets. What followed was the largest peacetime economic collapse of any country in recorded history. The sheer volume of banditry surrounding state assets during the 1990s led many average citizens in post-Soviet countries to believe that lower standards of living and a complete lack of justice were a natural part of living under democracy.

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Building Sustainable Feedback into Ukraine’s Economic Reform Efforts

Expert Discussion of SURE Draft_April, 2015

(Photo: CIPE)

This past year has been filled with both positive and negative news regarding ongoing reforms in the Ukrainian economy. Ukraine entered into a historic free trade agreement with the European Union that went into effect on January 1, 2016, which was met with the predictable implementation of retaliatory tariffs on Ukrainian goods by Russia.

Additionally, and in spite of raucous parliamentary sessions and infighting among the parties, the Rada (Ukraine’s legislature) has adopted various pieces of pro-reform legislation, some of which were proposed by CIPE’s partners under a recently completed USAID-funded program Supporting Urgent Reforms to Better Ukraine’s Business Environment (SURE).

The support of USAID allowed CIPE and partners to build a sustainable institutional framework for business associations representing SMEs to have direct input into legislation that effects SME operations specifically, and to improve the environment for doing business in Ukraine more broadly.

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Russia’s Plan for Economic Recovery: Demolish Small Businesses

With shocking disregard for property rights, due process and the rule of law, overnight on February 9 the Moscow city government set out around city to raze hundreds of small businesses. The demolition took place in spite of the fact that many of these businesses had the proper paperwork to operate a business in that location, and in some cases court orders staying any proposed demolition. While the Moscow city government can rely on revenue from other sources, these kiosks and mini-malls supported hundreds of small shops that provided employment for over 2,000 Moscow residents according to the city’s own estimates.

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Key Minister Resigns in Ukraine, Casting 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 by 10 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.

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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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