Ukraine Quarterly Digest: October–December 2019

BY ANDRIAN PROKIP

The end of the 2019 was an intense period in Ukraine. On the one hand, political scandals cast a shadow on the new administration’s efforts to move forward on its campaign promises. On the other hand, President Zelenskyy and his team achieved some progress on war-related issues and in Ukraine-Russia relations. This has somewhat eased the situation in the Donbas. A second prisoner exchange took place, and a new gas war was prevented through a last-minute agreement with Russia.

1. INTERNATIONAL AFFAIRS

International Court of Justice Decision Regarding Ukraine’s Claim Against Russia

On November 8, the International Court of Justice (ICJ) reached an important decision in favor  of Ukraine. Taking into consideration all of Ukraine’s arguments regarding Russia’s violations of bilateral treaties in annexing Crimea and supporting warfare in the Donbas, the ICJ agreed to hear claims lodged by Ukraine. Russia had earlier raised five objections, all of which the ICJ had rejected.

In particular, Ukraine claims that Russia violated two international treaties on terrorism financing and racial discrimination. Specifically, Ukraine alleges that Russia supported, financed, and trained terrorists; supported the downing of Malaysia Airlines Flight MH17; and discriminated against Crimean Tatars and ethnic Ukrainian communities in Crimea.

Now the court can proceed with investigating the case. The decision is not expected for a couple of years.

U.S.-Ukraine Relations

In late September, impeachment proceedings got under way against U.S. president Donald Trump. On November 15 the White House published a memo of President Trump’s conversation with his Ukrainian counterpart. The Trump-Zelenskyy conversations gave momentum to the impeachment proceedings and focused attention on Ukraine.

Ukraine’s role in the events on which Trump’s impeachment is based has been assessed differently by different U.S. leaders. For example, though President Trump expressed his opinion that Ukraine interfered in the U.S. 2016 elections, FBI director Christopher Wray said there was no reason to believe that was the case.

Inside Ukraine this issue was not a major focus of public attention. Ukrainian politicians and expert communities do understand the risks of the current discussion in Washington, but the country faces so many other domestic political scandals that the impeachment case—and Ukraine’s role in the events—is just one among many. However, the situation was used by President Zelenskyy’s opponents to underline his lack of political experience in the dialogue with Washington.

Ukrainian Military Vessels Released

On November 18, Russia returned to Ukraine three navy vessels it had seized, along with servicemen, during the Kerch Strait incident almost a year ago. Ukrainian officials inspecting the repatriated vessels reported that some weapons and equipment had been stolen from the ships before their return.

In May 2019, a UN court obligated Russia to release the servicemen and return the vessels, but Russia introduced delays, returning the servicemen only in September as part of a broader prisoner exchange, from which Russia benefited more than Ukraine. (See more in the prisoner swamp below.)

Gas Transit Contract with Gazprom

On December 20, Ukrainian officials announced they had reached an agreement with Russia’s Gazprom on a gas transit deal. The agreement had been preceded by more than a year of trilateral negotiations involving Ukraine, Russia, and representatives of the European Commission. Had the talks not succeeded, a new gas war in Europe could have started (the geopolitical implications of a fresh gas war were discussed in an earlier Focus Ukraine post). The deal overcomes Gazprom’s refusal to pay almost $3 billion in fees awarded to Ukraine by a decision of the Stockholm Arbitration Institute and Russia’s wish to have just a short-term contract, until the Nordstream 2 and TurkStream pipelines come on-line. The agreement also abridges Ukraine’s Naftogaz’s demand to have a ten-year contract for transiting Russian gas.

Progress in negotiations appears to have been the result of the Normandy Format summit in Paris on December 10, during which the Ukrainian and Russian presidents and their energy teams discussed the future of the transit situation off the record.

On December 29, the Ukrainian government reached a settlement of financial claims: Gazprom paid $2.9 billion to Ukraine in compensation for the Russian company’s failure to deliver the agreed-on volumes of gas, while Ukraine agreed to withdraw its recent suit seeking $12 billion from Gazprom for refusing to accept market-based tariffs in 2018 and 2019, and also agreed to refrain from seeking to collect the approximately $7.2 billion penalty levied against Gazprom by the Ukrainian Antitrust Committee.

On December 30, Ukrainian companies (Naftogaz and the newly established operator of the Ukrainian gas transmission system) and Gazprom signed a five-year gas transit agreement. Under the agreement, Gazprom is obligated to transit not less than 65 billion cubic meters during the first year and not less than 40 bcm annually over the next four years. Earlier, the European Commission had approved the Ukrainian operator’s functioning in accordance with EU energy legislation.

Electricity Imports from Russia

In September, the Ukrainian government amended legislation to allow direct trading agreements between Ukrainian and Russian companies for importing electricity. Beginning October 1, private companies started importing electricity from Belarus and Russia. Neither country is a member of the European Energy Community, and for this reason, direct trading agreements were not allowed initially. Energy import was allowed only through special market exchange platforms (the day-ahead market).

The new ruling raised concern that it could undermine Ukraine’s future energy integration with the EU. The Russian supplier of electricity to Ukraine in the direct bilateral deals became InterRAO. The company’s board is chaired by Igor Sechin, who is a close ally of Vladimir Putin and has been under U.S. sanctions since 2014. Consequently, in late December 2019 this decision was revised: direct electricity import from Russia was prohibited again, but not from Belarus.

2. INTERNAL POLITICS

Hard Times for the Ruling Party

Immediately after coming to power, the new ruling party, Servant of the People (SN), was hit with a series of public scandals that decreased its popularity. Some MPs from the ruling majority, including members of the Finance Committee, were suspected of taking bribes to refrain from voting (some members have been expelled for that reason). There was also a sex scandal involving the MP heading the International Relations Committee. Whether bribes were accepted remains to be determined; however, the alleged behaviors seem to have been exaggerated and in some cases made up out of whole cloth in a “war of kompromat“ by anonymous posters on internet and Telegram channels.

Facing pressure because of these matters, the head of the parliamentary SN faction threw out the idea that if parliament loses the voters’ trust, it could be dissolved in advance of 2020’s planned local elections. Apparently this was done to test the waters and gauge the opposition’s reaction, though the sudden dissolution of the Central Election Commission earlier in 2019 keeps the question alive. Even as President Zelenskyy faces difficult negotiations with the United States, Russia, and the EU, he must work to keep his own party and administration free of scandal.

Prisoner Swap

At the Normandy Four summit in Paris on December 9, the leaders of Germany, France, Russia, and Ukraine agreed on a prisoner swap in the format of “all identified in exchange for all identified.” The swap was held on December 29. From the noncontrolled part of the Donbas, twelve imprisoned servicemen and sixty-four civilians were released to Kyiv; the Russia-backed separatists got in exchange 124 ex-captives.

Though the swap had been announced as an “all-for-all” exchange, at least 300 persons remain in the Donbas as prisoners of the separatists, and the operation did not include prisoners taken in Crimea. From the part of the Donbas controlled by Ukraine, 124 persons were released who then left for noncontrolled territory (the list is available here).

A Stronger Hryvnia

In the last quarter of 2019, the Ukrainian national currency strengthened at record speed. This is a positive sign, but it also carries a caution for the future economy. A stronger currency makes exports less attractive, while imported goods become cheaper, which promotes substitution of domestic production with imports and a resultant decrease in GDP. The expected follow-on effect is a serious imbalance in the balance of trade (the difference between exports and imports) and the balance of payments (the difference between inflow and outflow of foreign exchange), leading, potentially, to an economic recession and a devaluation of the national currency.

The stronger hryvnia was the result of discordant policies pursued by the National Bank of Ukraine and the Ministry of Finance. As the central bank was executing policies intended to contain inflation, the Ministry of Finance was selling state bonds, mostly to foreigners, to try to cover government expenses. This brought about a strengthening of the national currency. Should a decrease in domestic production follow, government spending cuts may be expected.

As a result of the stronger hryvnia, inflation in Ukraine (as measured by the country’s Consumer Price Index) in 2019 was only 4.1 percent, a five-year low. (It was 43.3 percent in 2015, 13.7 percent in 2017, and 9.8 percent in 2018.)

The Fight Against Corruption

Chief of NABU found guilty of corruption. On December 13 the Rivne Court of Appeals upheld the decision that Artem Sytnyk, head of the National Anti-Corruption Bureau, had violated the anticorruption law. Sytnyk was found guilty of having his vacation--including accommodations, food, and entertainment—paid for by the businessman Mykola Nedilko. Accordingly, Sytnyk had to pay a fine of $144 and was enrolled in a registry of persons involved in corruption. The decision is grounds for him to be fired from his position and to be barred from serving on anticorruption bodies in the future. So far, however, he remains in his post.

Reset of law-enforcing agencies. On October 3, President Zelenskyy signed a law “resetting” the National Agency for Preventing Corruption. This law changes the way in which the agency will be managed: instead of five members, it will be headed by one chairperson. The same law stipulates that security service officers’ and presidential administration staffers’ asset declarations are to become public (previously the asset declarations were in the registry, but without public access to them).

On December 3, parliament approved a law amending regulations governing the activity of the State Bureau of Investigation. The amendment makes the SBI accountable to the president instead of the government. It also gives the president the authority to fire the SBI chief and his deputies.

The bureau was established in late 2017 and began work one year ago. Its writ is to prevent and expose corruption, and to investigate crimes committed by top government officials and employees of law enforcement agencies. Before reform, these functions were carried out by the prosecutor general’s office.

Roman Truba, the former head of the bureau, was fired on December 27 after anonymous leaks of recordings of talks between Truba and Andriy Bohdan, head of the presidential administration, regarding investigations into the activities of former president Petro Poroshenko and former acting health care minister Uliana Suprun. President Zelenskyy appointed MP Iryna Venedyktova, his former adviser on legal affairs, acting head of the bureau, replacing Truba.

New Membership of the Central Election Commission

On October 4, the Verkhovna Rada approved new members of the Central Election Commission. The previous commission was dissolved in September at the request of President Zelenskyy. Many experts considered Zelenskyy’s decision to have been politically motivated, aimed at removing from the commission pro-Poroshenko officials, whom Zelenskyy had accused of showing bias during the recent presidential election campaign.

3. PROGRESS IN REFORMS AND SUCCESS STORIES

In 2019 Ukraine improved its position in the World Bank’s Doing Business 2020 ranking, moving up seven positions to 64th place. The new ranking, a composite score, resulted mainly from improvements made to protect minority investors’ interests (shift from 72nd place to 45th place on that indicator), improving procedures to connect to the electricity grid while maintaining the electricity supply (from 135th place to 128th), and simplifying procedures, time, and costs while maintaining quality control in construction permitting (from 30th place to 20th).

The report estimated the ease of doing business in Ukraine at 70.2 points out of a possible 100. Ukraine made it into the top 100 of this rating in 2015. (During the period 2006–2012 the country’s ranking had consistently worsened.) Even with this progress, however, Ukraine ranks below some other post-Soviet states, including Georgia, Lithuania, Estonia, Latvia, Russia, Azerbaijan, Moldova, and Belarus.

At the same time, Ukraine fell a couple of positions in the World Economic Forum’s Global Competitiveness Index and is now in 85th place. In the last year Ukraine saw declines in its financial and health care system subrankings of this composite index, though it also improved on macroeconomic stability, infrastructure, labor market, and labor skills subrankings.

Legislation to Prevent Money Laundering

Despite reforms in the banking sphere, money laundering remains a challenge for Ukraine’s banking system. To address it, the Verkhovna Rada approved a new law that stipulates a number of positive changes. The new rules are expected to simplify life for law-abiding citizens by eliminating certain restrictions while devoting more attention to those potentially involved in money laundering.

Illegal Enrichment Criminal Liability

In October the Verkhovna Rada amended the Criminal Code to affirm that suspicion of illegal enrichment (as determined by the possession of unexplainable assets) is a precondition for criminal investigation. The paragraph in question now stipulates that in the event a civil servant cannot explain the source of wealth and it is more than the official’s official income, the discrepancy provides law enforcement agencies with ground for launching an investigation.

This decision rectifies the situation in Ukraine’s fight with corruption after a Constitutional Court decision that the older definition of illegal enrichment in Ukraine’s Criminal Code violated the constitutional principle of the presumption of innocence. Now a norm concerning illegal enrichment is again encoded in Ukrainian legislation.

Judicial Reform

On November 4, President Zelenskyy signed a judicial reform bill into law, despite EU and Canadian ambassadors expressing concern regarding the amendments. Western diplomats criticized the broadening of the prosecutor general’s power and a reduction in the number of Supreme Court judges. After Zelenskyy signed the bill, the Venice Commission, an advisory body of the Council of Europe in the field of constitutional law, criticized the amendments, saying they threatened the stability and independence of the judiciary.

Cancellation of MPs’ Immunity

On December 18, the Ukrainian parliament approved the necessary amendments to the Criminal Code to lift the prosecutorial immunity of MPs. This was the final step in a process that began with amending the constitution in September and removing the paragraph on MPs’ immunity.

For many years, different politicians had promised to take this step after being elected, including Petro Poroshenko and Arseniy Yatsenyuk during the 2014 campaign. However, Zelenskyy and the SN are the first to actually do so.

Reducing MPs’ indemnity is a risky step in the context of post-Soviet political culture, however. In particular, critics are concerned about the unchecked right of the prosecutor general to start investigations into MPs, which may decrease the legislature’s independence overall.

Status of the Agricultural Land Market Law

On November 13, the Verkhovna Rada voted to introduce an agricultural land market on first reading of the proposed act. The MPs had intended to finalize the law by the end of the year but did not manage to meet this deadline. Many in Ukraine are opposed to an agricultural land market, fearing speculative purchases by foreigners and wealthy businessmen of Ukraine’s farmland, which is held to be part of Ukraine’s national heritage. Despite sizable demonstrations in front of the Rada and in fifteen regions of Ukraine by farmers and others opposed to the land market, the government expects the act to be approved in January 2020 and the market to start functioning by the end of the year.

For many years, launch of a land market was among the major conditions the IMF had imposed for continued cooperation. The Rada’s decision reflects a compromise among the demands of the IMF, the government, and the opposition: the amount (acreage) of land that can be owned by one person is capped, and a decision regarding land ownership by foreigners is deferred until a referendum on the matter can take place.

Bankruptcy Code of Ukraine

The Bankruptcy Code of Ukraine entered into force on October 21, 2019. It simplifies the previously long-drawn-out and ineffective procedure for declaring bankruptcy.

4. THE SITUATION IN THE DONBAS

The last quarter of 2019 saw continuation of the dialogue between Kyiv and Moscow regarding the war in the Donbas.

On October 1, parties to the Minsk Protocol agreed on a schedule to withdrawn front-line troops from specified areas. The force pullback was planned to begin October 7 but was postponed since the firing did not stop in the designated areas. Some residents of the conflict zone and patriotic groups from the heartland demanded that President Zelenskyy not withdraw troops. Zelenskyy traveled to the area and talked with the protesters, registering their concerns. Later, Ukrainian foreign affairs minister Vadym Prystaiko said that the situation had deescalated, and the pullback started on October 29.

The troop withdrawal is to occur in two stages: first military forces are to be withdrawn, followed by the deinstallation of defense infrastructure and land mine clearance. Ukrainian military forces moved back to the positions they had occupied in 2016. The second stage is expected to start when both sides are assured the first stage was properly implemented. Currently, the parties are looking for more areas where troop pullback might be possible.

Normandy Four Meeting

On December 9, the leaders of Germany, France, Russia, and Ukraine held a meeting in the Normandy Format to try to move toward resolving the conflict in the Donbas. In addition, President Zelenskyy held bilateral meetings with the three other heads of state.

During the principal meeting of leaders, there was a discussion on interpreting the Minsk Protocols and the so-called Steinmeier formula, which maps out how Ukraine is to regain control of the noncontrolled territory in the Donbas and calls for elections in those areas. Ukraine insisted that elections in the noncontrolled territory of the Donbas be held only after Ukraine has gained control of the entire border between the Donbas and Russia. Russia said that the Minsk Agreements stipulate that elections are to be held first. Earlier, James Gilbert, the U.S. ambassador to the OSCE, had said that elections should be held in the Donbas only after Ukraine regained control of the territory. Thus the stalemate between the conflicting parties over elections and border control remains.

Despite a mutually agreed-on final communiqué, the parties did not make any serious strategic progress toward resolving the crisis and ending the hot war. The biggest achievement was agreeing to the “all-for-all” prisoner exchange, which was conducted on December 29. The parties also agreed to hold another meeting in three months, by which time a new force pullback is expected to be completed on three more sections of the front lines and the OSCE’s special monitoring mission’s mandate will be expanded.

Donbas Regulation Extended

On December 12 the Verkhovna Rada once again extended the law on the special status of and specific conditions for local governance of the noncontrolled parts of Donetsk and Luhansk oblasts for 2020. This act is based on the Minsk Agreements. It has been in effect since 2014 and is extended annually by the Rada.

The original 2014 act stipulated the following: (1) Ukraine guaranteed that participants in the conflict in the Donbas would not be criminally prosecuted; (2) specific procedures were established for appointing judges and prosecutors in the noncontrolled regions; and (3) the act established people’s militias to maintain control and provide law and order within the Ukrainian legal framework. However, the extension acts stipulate that full implementation of the 2014 law is to begin only after the complete exit of illegal military forces and troops from the region.

In sum, though renewed talks in the Normandy Format are promising—they had been in hiatus for three years—only small progress was made in addressing geopolitical ruptures affecting Ukraine’s East, and no real political advances were achieved. President Zelenskyy’s campaign promise to end the war “at any cost” have left many uneasy that the cost may amount to ceding Ukraine’s tenuous grip on the conflict zone. Reform efforts seem to be taking one step back for every two steps forward, with both legislative and judicial independence now coming under increased scrutiny. While Ukraine has made important progress on measures of improved governance and a better climate for doing business in the country, an uncertain future clouds the economic picture.