Inside Ukraine # 57

Inside Ukraine 20 April, 2016 â„–57

20 April, 2016

Сontent THE GOVERNMENT POLICY................................................................ 1 MINISTRY FOR THE OCCUPIED TERRITORIES AND INTER-REGIONAL TERRITORIAL AMALGAMATION OF DONBAS: SEARCH FOR THE WAYS TO REINTEGRATE UNCONTROLLED TERRITORIES.................................................................................................................. 1

ECONOMIC SITUATION........................................................................ 5 UKRAINE’S EXPORT: RESULTS OF 2015 AND TRENDS OF 2016.......................... 5 ANNIVERSARY OF THE CHERNOBYL NUCLEAR POWER PLANT ACCIDENT FUTURE OF CHERNOBYL – HOW TO COPE WITH THE CONSEQUENCES.............. 7

POLITICAL COMPETITION................................................................. 10 POLITICAL PROSPECTS OF THE NEW GOVERNMENT............................................ 10

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THE GOVERNMENT POLICY

MINISTRY FOR THE OCCUPIED TERRITORIES AND INTER-REGIONAL TERRITORIAL AMALGAMATION OF DONBAS: SEARCH FOR THE WAYS TO REINTEGRATE UNCONTROLLED TERRITORIES The establishment of the Ministry for the Occupied Territories and Internally Displaced Persons on the basis of the State Agency for Donbas Restoration and the resubmission of the draft law “On the peculiarities of governance over the certain areas of Donetsk and Luhansk regions” Inside Ukraine 57

indicates that the stakeholders are interested in the search for the ways to reintegrate the uncontrolled areas of Donetsk and Luhansk regions.

There will be two officials in the newly-appointed Cabinet of Ministers responsible for the uncontrolled territories: Volodymyr Kistion is appointed as Vice Prime Minister, and Vadym Chernysh, who previously headed the State Agency for Donbas Restoration, is appointed as Minister for the temporarily occupied territories and IDPs. For the first time the issue of occupied territories was raised at the institutional level of the Cabinet of Ministers

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The appointment of Volodymyr Kistion and Vadym Chernysh, who will be in charge of the occupied territories of Donbas and Crimea, has not been agreed either with the local authorities of liberated areas, or IDPs, or volunteers engaged in similar issues, or with the Mejlis of the Crimean Tatars.

EPA

The fact that after two years of occupation, the issue of uncontrolled territories was risen at the level of the Cabinet of Ministers is a positive thing that testifies the continuing search for the solutions to the abovementioned problems. From the other hand, there is a number of concerns regarding these appointments that at the very beginning cause some doubts about the future effectiveness of such decisions.

The division of responsibilities between Vice Prime Minister and Minister for the temporarily occupied territories and IDPs remain unclear. The appointment of two officials who will be responsible for similar issues in the new Cabinet of Ministers can be explained by the intentions to satisfy the appetites of various political groups within the BPP. Thus, Volodymyr Kistion is considered as an ally of PM Groysman and Vadym Chernysh – as a protégé of influential businessman and member of BPP faction Oleksandr Tretiakov.

During the negotiations on the composition of new Cabinet, it was expected that Volodymyr Kistion will be appointed as Vice PM for the ATO issues. Instead, in a final version of the resolution of the Verkhovna Rada “On the formation of the Cabinet of Ministers”, a statement which should outline the area of responsibilities for V. Kistion as Vice PM has been dropped.

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There are some doubts as regards the capabilities of the newly appointed officials to resolve the issues on the occupied territories

There are also doubts about the ability of appointees effectively implement objectives of the recently established institutions. Thus, V.Kistion did not get both professional education (by education he is a plumber) and previous experience in the area of ATO and on issues of the occupied territories as well. V.Chernysh, who headed in June 2015 the State Agency on restoration of Donbass, had significant achievements on this position. Further, the Agency’s activities were of extremely private nature, which made it impossible to properly monitor its activities.

On the other hand, introduction of the draft law №4297 “On peculiarities of certain territories of Donetsk and Lugansk regions» (so called ITA Donbas) into the Verkhovna Rada on March 24, 2016 indicates promotion by other groups of stakeholders their own strategies for reintegration of the occupied territories.

This draft law was introduced by six people’s deputies of the opposition bloc, which is associated with Rinat Akhmetov and Viktor Medvedchuk.

This is the second attempt to submit a bill to the parliament. On March 19, 2015, the same

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composition of deputies made the first related attempt in the form of the draft law №2435.

According to the summary of the Major Expert Office of the Verkhovna Rada of Ukraine, the above mentioned draft law contained provisions which are contrary to the current Constitution. In this regard, it was recommended to decline the draft law and, upon the Rules of Parliament it was not included to the agenda.

Implementation of the proposals for establishing ITA Donbas by legal means seems to be impossible for a number of reasons.

The idea of establishing ITA Donbas is unconstitutional. Under the Constitution, a special law can determine peculiarities of the executive and local authorities exclusively in Kyiv and Sevastopol. Instead, the Constitution of Ukraine does not include possibility for creating any features for separate areas of Donetsk or Lugansk regions. According to the legal stance of the Constitutional Court of Ukraine, exceptions to the constitutional provisions are determined by the Constitution itself rather than other regulations.

The system of public authorities provided for in Articles 7, 8, 9, 10, 11, 12, 13 of the draft law also is unconstitutional, that implies establishment of a Representative Assembly of ITA Donbas, the Executive Committee of ITA Donbas, the election of the Head of ITA Donbas for 5 years by universal, equal and direct voting. In fact, the project attempts to build a system of public authorities and local governments of ITA Donbas, which is not a structural component of Ukraine’s public authorities.

The structure of ITA Donbas seems to be a quasi-territorial entity. Neither this project nor any other applicable legislative regulation does not determine a procedure on abolition

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of acts of ITA Donbas by the state authorities of Ukraine, and therefore public authorities of Ukraine in terms of the project has no impact on their potential illegal activity. Thus, it is planned to establish a quasi-territorial entity beyond control of the public authorities of Ukraine.

The falsity of statement on temporary nature of ITA Donbass. The structure of authorities of ITA Donbass, characteristic of their powers, criteria, mechanisms and terms of the officials election evidence an attempt to build legislative authority, executive authority with the presence of a controlled system of internal affairs bodies, security service and prosecutor’s office, with the ability to enter into agreements with other states. This all may not be consistent with the provisions of the draft law on its temporary nature.

Lack of the mechanism for the restoration of authorities’ activity. The preamble of the draft law contains contradictions. In particular, one of the goals declared in the draft law is “restoration of the activity of the state authorities and local self-government bodies” in the territory “where the activity of the state authorities of Ukraine is temporarily not being carried out or not being carried out in full”. It is unclear, what mechanisms laid down in the draft law may result in restoration of activity of the state authorities (the draft law does not even provide for that it should be the authorities of Ukraine) in the territory where this activity is not being carried out.

Corruption risks of creating ITA Donbass.

The draft law does not comply with the requirements of anti-corruption legislation. In particular, its adoption may create corruption risks of the power abuse by the subjects of authority of ITA Donbass and by higher state officials as it enables to address issues spec3

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ified in the draft law differently. These issues include appointment of heads of law enforcement agencies, determination of the structure and the number of police units etc.

Persons interested in creating ITA Donbass the most are the Russian side and R.Akhmetov

The Russian side and Rinat Akhmetov are those interested in adoption and further implementation of the draft law provisions the most. It will allow the Russian side hold the elections in the occupied territories under the Minsk format de facto preserving the Russian presence. Herewith the Russian side is to ensure preservation of assets of R.Akhmetov in the occupied territories for promoting this legislative initiative. It will subsequently let R.Akhmetov get broader powers in the economic field in the territory of concentration of his business interests and avoid possible deoligarchisation after assisting in the

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formal return of the occupied region into the legal field Ukraine.

These actions demonstrate the ongoing bargaining between the stakeholders on conditions of reintegration of the occupied territories

Creation of new institutions designed to deal with issues of uncontrolled territories, and submission of identical draft law after its rejection last year demonstrates the ongoing bargaining between the stakeholders as regards the conditions of reintegration of the occupied territories of Donetsk and Lugansk regions. The main problems in this process are the absolute lack of transparency for the public and absence of the civil society’s alternative proposals for strategies or draft laws focusing on the complex resolution of issues of the occupied territories.

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ECONOMIC SITUATION

УНИАН

UKRAINE’S EXPORT: RESULTS OF 2015 AND TRENDS OF 2016

although it has significantly reduced in absolute terms. The primary external reason for a fall in foreign currency earnings from exports is a drop in raw materials prices on world markets.

In 2015, Ukraine exported goods worth 29.3% less than in 2014. Likewise, Ukraine’s imports fell by 30% and Ukraine’s foreign trade became surplus. Exports dropped in key sectors - metal, chemical, coal and agricultural industries. Major trends of 2015 continue this year but there is a considerable difference – a sharp increase in foreign trade deficit. Despite the significant decline in trade due to the military conflict and trade war, Russia is still the principal trading partner of Ukraine. Besides, Ukraine has reduced exports to the EU countries, although the European region’s share of exports is growing.

Metal industry remains a staple export sector

In 2015, exports totalled 38134.8 million USD and total imports were valued at 37502.3 million USD. Compared to 2014, exports fell by 29.3% (15766.9 million USD) and imports by 31.1% (16926.4 million USD). The surplus amounted to 632.5 million USD (in 2014, the deficit amounted to 527 million USD).

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Geographically, Russia led with an index of 12.7% of total experts, Turkey stood at 7.3% and China was in third place with an index of 6.3%. Ukraine’s exports to Russia fell by almost 70% but Russia is still the principal export partner of Ukraine. Besides the top three, 5

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Ukraine exported widely to Egypt (5.5%), Italy (5.2%), Poland (5.2%), India (3.8%), and Germany (3.5%).

Asian markets assume growing importance for Ukraine’s exports. In 2015, Ukrainian producers opened up new markets in Thailand, Bangladesh, Lebanon, Malaysia, and even North Korea and South Sudan. However, export performance is not strong yet.

Asian markets assume growing importance for Ukraine’s exports

In 2015, the share of metal exports accounted for 21.2%, which was the first place among Ukrainian exports. However, the total revenue from metal exports fell. Ukraine earned 14 billion USD in 2013 and 8 billion USD in 2015. A substantial drop in metal prices after the collapse of oil prices (the impact of the situation in Donbas as well) led to a fall of absolute indicators.

Metal industry remains a staple export sector although it significantly reduced in absolute terms.

Foreign currency earnings from grain exports amounted to 6 billion USD, which accounted for 16% of all Ukrainian exports. Sunflower oil is the third most important export commodity. In 2015, sunflower oil exports were valued at 3 billion USD, which accounted for 9% of Ukraine’s total exports.

In May 2014, the EU unilaterally cancelled the duty on most Ukrainian goods, aiming at boosting the export of Ukrainian goods to the EU. Contrariwise, exports from Ukraine

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to the EU dropped, apart from Malta, Denmark, Portugal and Slovenia. However, these countries were not the main trading partners of Ukraine in the EU. Poland, Italy and Germany were the major export markets for Ukraine.

Exports from Ukraine to the EU fell, apart from Malta, Denmark, Portugal and Slovenia

In 2015, exports to the EU totalled 13017.5 million USD and compared with 2014, fell by 23.4% (3985.4 million USD); imports totalled 15343.8 million USD and fell by 27.2% (5725.3 million USD). The deficit amounted to 2326.3 million USD (in 2014 – 4066.2 million USD).

The EU share of foreign trade increased in comparison with 2014 and totalled 34.1% in export and 40.9% in import (in 2014, 31.5% and 38.7% respectively).

Primary exports to the EU were agriculture and food industry products – 31.2% of total exports, ferrous metals and products thereof – 22.2%, electrical and mechanical machinery – 13.8%.

The strongest export sales were in Italy and Poland – 15.2% of total exports to the EU, Germany – 10.2%, Spain – 8%, Hungary and the Netherlands – 7%. Compared with 2014, an increase in exports was only in Malta – 7.5 times as much, Denmark – 15%, Portugal – 3.3%, and Slovenia – 1.8%.

The strongest export sales were in Italy and Poland – 15.2% of total exports to the EU

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Regionally, Kyiv region was a leading exporter.

It accounted for 23% of total exports to foreign countries. It is explained by the fact that the largest companies of the country are registered in the capital. Dnipropetrovsk and Zaporizhia regions were large exporters as well. Donetsk region, even without some part of its territory and industrial capacities, managed to remain an export oriented region. It is second only to Kyiv and Dnipropetrovsk. The other region totalled less than 5%.

Exports from Ukraine decreased by 21.3% (4.722 billion USD) from January-February 2015 to January-February 2016, imports by 12.8% (5.453 billion USD).

Quantitatively, a decline in exports was not as dramatic as it was in value. Compared with the previous year, there was a quantitative growth in export of certain goods, namely wheat, corn, and ore. However, it did not bring additional revenue due to a fall in raw materials prices. A fall in raw materials prices was more rapid than a slump in sales. As a result, exporters earned less.

Similarly to 2015, the staple export industries are metals, agriculture and engineering. Given low raw materials prices on world markets, Ukrainian exporters’ revenues will keep going down even if a moderate increase in exports occurs.Therefore, the Ukrainian economy has to rise to the challenge of changing a qualitative structure of manufactured goods and creating technological products with more value added content. One of the most obvious directions is to replace agricultural produce export with foodstuffs.

The primary external reason for a fall in foreign currency earnings from exports is a drop in raw materials prices on world markets.

In general, trends of 2015 continue in the current year. By results of January-February, the EU share in total exports keeps growing but Russia still remains the principal trading partner of Ukraine, despite a further fall in exports.

The essential difference is a sharp increase in foreign trade deficit.

Ukraine’s foreign trade deficit amounted to 731 million USD in January-February 2016, which was 2.9 times as much as the deficit of the same period of 2015 (254.9 million USD).

The essential difference of the beginning of 2016 is a sharp increase in foreign trade deficit Inside Ukraine 57

Exports to the EU fell by 2.1% (2.098 billion USD over the same period the previous year) and totalled 44.4% of total exports. Imports from EU countries decreased by 1.9% (2.454 billion USD during this period) and accounted for 45% of total imports.

ANNIVERSARY OF THE CHERNOBYL NUCLEAR POWER PLANT ACCIDENT FUTURE OF CHERNOBYL – HOW TO COPE WITH THE CONSEQUENCES The Chernobyl disaster is a tragedy that cannot be ignored

April 26, 2016, will mark the 30th anniversary of the most dreadful man-made disaster of the 20th century – the Chernobyl accident. We still face its consequences that do not let us forget tens of thousands deaths, hundreds of thou7

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sands victims, and abandoned towns and villagers.

In Ukraine, there are more than 2.5 million of people, from 2218 villagers and towns, who were affected by the Chernobyl disaster. 105 thousandeventually became disabled. More than 5 million hectares of land are contaminated with radioactivity. There are more than 17 thousand families that receive benefits due to loss of breadwinner, whose death is related to the Chernobyl disaster. Total economic losses for Ukraine amounted to over 179 billion USD. Chernobyl aftermaths is a challenge to Ukrainian and international society

Peaceful atom has posed danger and threat to Ukraine and international community. Over all these years, our country has not managed to solve numerous social, environmental and 8

economic issues related to the accident. Anniversaries of the tragedy were often an occasion for hollow statements and promises, which did not get any political or financial support.

State programmes and massive investment have not produced the desired result. In particular, international community has spent nearly $2 billion to help Ukraine. Since ChNPP closure in 2000, Ukraine has spent $700 million to finance it.

A recently issued official document outlines the priority measures regarding ChNPP and adjacent areas. The President’s decree of 13.04.16 №141/2016 “On additional measures to transform the “Shelter” into ecologically safe system and revive the territories affected by radioactive contamination” highlights the need to: - adopt the strategies to cope with the consequences of Chernobyl accident and revive respective territories; Inside Ukraine 57

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- improve the radiological situation, radiation monitoring quality and radiation monitoring of contaminated territories; - launch the National Programme of decommissioning the Chernobyl NPP and transforming “Shelter” into ecologically safe system; - resume the formation of the State Radioactive Waste Management Fund (by collecting environmental tax from producers of radioactive waste and financing the National Environmental Programme of Radioactive Waste Management); - regulate the issue of compensation to the Pension Fund of Ukraine costs and delivery of pensions provided on preferential terms to employees of enterprises in the exclusion zone; - improve the system of radioactive waste management; - under the Council directive 2011/70/EURATOM of July 19, 2011, develop and adopt the state ecologic programme of managing nuclear waste of domestic nuclear power plants; - establish a fund to finance the third phase of the Shelter conversion strategy, jointly with EBRD and donor countries.

Effective institutions should develop and implement state policy

The construction of a new safe confinement (NSC), the launch of the project aimed at building a centralized repository for spent nuclear fuel (CSSNF) in the exclusion zone, the issue of decommissioning the undamaged station units, disposal of spent nuclear fuel and

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radioactive waste are of utmost importance.

Chernobyl victims’ status, targeting assistance, health care, and taxation of pensions are burning issues as well.

Obviously, to successfully promote public interests in this area, Energoatom, Ukraine’s State Agency for Management of the Exclusion Zone and the State Specialized Enterprise “Chernobyl NPP” require modernization. They are unable to formulate proposals and frame coherent public policy. Their institutional structure and coordination mechanisms need reviewing in order to increase the capacity for monitoring and control of financial resources, as well as to derive support from the concerned government institutions.

Needs and capacities of stakeholders should shape the approaches to issues

Viable strategies might be the following: - the coalition agreement stipulates political commitment to grapple with the consequences of the Chernobyl disaster, - a mechanism for accumulating necessary funds within the state budget by increasing the efficiency of the nuclear industry enterprises; - favourable climate for donor countries’ companies in Ukraine in order to stimulate their additional contributions to ChNPP ; - a legal framework to guarantee the rights of NGOs to protect affected by Chernobyl citizens of Ukraine - social protection of Chernobyl victims through state programmes of supporting their rights to employment, health care and social benefits.

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Political competition

POLITICAL PROSPECTS OF THE NEW GOVERNMENT The new government will freeze an ongoing political crisis for some period. The concentration of power in the hands of the President may accelerate the process of reform systemic implementation, European integration and the fight against corruption. If the government continues to tread water and redistribute state monopolies, the crisis will keep deepening.

A weak coalition, Hroysman political dependence, and quota distribution of government portfolios will delay further reforms

On April 14, the Verkhovna Rada illegitimately appointed Volodymyr Hroysman as Prime 10

Minister of Ukraine. Voting reveals that there is no coalition in the parliament. Totally, People’s Front and Bloc of Petro Poroshenko could obtain only 201 votes for the new government.

The rest was secured by parliamentary groups People’s Will (16 votes), Revival (23), and unaffiliated MPs (11).

The appointment of the new Prime Minister and the government update diminish the prospect of early election. The new Cabinet is unlikely to accelerate reforms because some important structural factors will not let ameliorate the situation.

1. No coalition will adversely affect the efficiency of government. The President will have to negotiate every parliamentary decision not only with the People’s Front but also with some oligarchs, who will bargain for advantaInside Ukraine 57

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geous business conditions and monopoly privileges.

The President benefits from a weak parliament

Informal policy, monopoly conflicts of interest and clientelism will stand in the way of reform implementation. Despite opposition factions in parliament, carrying out legislative work will be challenging. There is a risk that parliament will be incompetent and weak. The situation is attractive for Petro Poroshenko because it enables him to tackle the current political issues with ultimate executive power in his hands.

Volodymyr Hroysman will be a loyal ally of Petro Poroshenko. The new Prime Minister is indebted to the President for a sharp political rise from Vinnytsia mayor to parliamentary speaker and head of government. There is every likelihood that Hroysman will pursue the policy of dependency and conformism as prime minister because he is a young player and yearns to be in politics. However, work in government and parliament differs markedly.

Therefore, personal conflicts between Poroshenko and Hroysman are unavoidable.

Volodymyr Hroysman is a politician who serves two masters

Hroysman’s flexibility and desire to foster cordial relations with various politicians and businessmen may falter. The President places quite intense pressure on political and business opponents. Therefore, he expects similar actions and decisions from his prime minister. It is unknown how Hroysman is going to react and behave in such situations. Before the appointment, he did not take political decisions that Inside Ukraine 57

could significantly affect the structure of government, business and oligarchs.

2. Reform implementation by government will ultimately depend on the President’s policy. As regards new Prime Minister’s initiatives, they will be oriented towards issues of power decentralization, local self-government and civil service.

Local self-government, civil service, and humanitarian issues will be a priority for Hroysman

The restoration of the institute of state secretaries is the central issue to be addressed by Volodymyr Hroysman in coordination with the Presidential Administration. It is important for Poroshenko to establish total control over political appointees – ministers. Hroysman is well versed in this field and has a strong team. Hroysman will not influence privatization, economy and finance since it is a prerogative of the President’s business environment.

As regards radical reforms in economy, monopolization, clamping down on oligarchism, privatization, Hroysman will be weak.

3. Quota and backstage formation of the government. On the same day, parliament voted for a new government that comprised 6 portfolios of deputy prime ministers. The new government was installed behind the scenes, without prior discussion and presentation of reform programmes.

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The situation undermines, on the one hand, the government’s credibility and, on the other, poses a lot of questions about professionalism and competence of new officials. As for the programme of the new government, it has not been presented to the public despite the fact that talks on Hroysman’s appointment started in February. A loose coalition let adopt a government programme, which gives one year immunity to Hroysman’s cabinet, only after the third attempt.

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4. As regards the political forecast, Hroysman’s government, with the support of the President and law enforcement agencies, has a unique opportunity to carry out systemic reforms and bring Ukraine into the EU. However, following old schemes and approaches to governance and business will bring about new political turmoil and instability. In this case, early elections will be delayed for at least one year.

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The aim of the publication is to provide objective information on current political events in Ukraine and thorough analysis of major tendencies in domestic politics. Such analysis will assist in setting priorities in the process of implementing reforms in Ukraine and in evaluating quality of state decisions from the viewpoint of their impact and sustainability. Special attention is paid to evaluation of political competition in Ukraine and ability of key political players to address challenges. Š 2016 International Centre for Policy Studies (ICPS) If citing please give reference on the ICPS Responsible for the project: Vladyslav Yasniuk Team of ICPS experts: Vasyl Filipchuk, Olena Zakharova, Vasyl Povoroznyk, Vadym Perebyinis, Anatoliy Oktysyuk.

International Centre for Policy Studies Telephone: +38 (044) 253-44-82 Fax: +38 (044) 253-44-82 Đ•-mail: office@icps.kiev.ua www.icps.com.ua