Reforms in Ukraine

'Someone Had to Clean Things Up'

Ukrainian Prime Minister Arseniy Yatsenyuk
Ukrainian premier Yatsenyuk needs Germany's economic and political support to continue reforms in his country.
  • Why it matters

    Why it matters

    • Amid a serious economic crisis, Ukrainians voted in local elections on October 25. The polls, the results of which are expected by November 20, are seen as an important test for the country’s new pro-Western leadership.
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  • Facts

    Facts

    • According to Mr. Yatsenyuk, whose approval ratings plummeted after he implemented harsh austerity measures, the power of Ukraine’s oligarchies has been greatly diminished under his leadership.
    • Ukraine is seeking to restructure its debts with private creditors and Russia.
    • Mr. Yatsenyuk claims that Russia is trying to further destabilize his country.
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    Audio

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Ukrainian Prime Minister Arseniy Yatsenyuk and German Chancellor Angela Merkel presented a unified front in Berlin on Friday to a large conference of investors, attended by about 600 German and Russian business representatives.

The 41-year-old premier, who took office in early 2014 after the revolution that toppled Viktor Yanukovych, sought to drum up interest among German business owners. Ukraine has seen economic improvements in recent months, he said, but requires further investment to continue its recovery.

Germany is Ukraine’s third-largest trading partner, and Ms. Merkel said that the country’s well-qualified workers and more developed sectors like energy and transport make it an appealing place to do business. Still, she said, the country must continue to make reforms and fight corruption.

While the event did not appear to yield any major results, the two leaders signed a treaty on the German-Ukrainian Chamber of Commerce, which Merkel called a “qualitative leap, because now there is an institution that can explore the different business possibilities.” The measure is a “cautious signal” that Ukraine’s situation is improving, Berlin said.

In an interview with Handelsblatt after the conference, Mr. Yatsenyuk elaborated on the difficult situation in his country and what Germany has done to help.

Handelsblatt: Prime Minister Yatsenyuk, almost two years after the Euromaidan revolution in Kiev, the Ukrainian economy is in pieces, the country is in open confrontation with Russia and many are complaining about reform deadlock. Do you see a light at the end of the tunnel?

Mr. Yatsenyuk: When I became prime minister in February 2014, we had a national debt of $73 billion (€66 billion) and only $10,000 left in our government account with the central bank. After the illegal annexation of Crimea and Russia’s invasion of eastern Ukraine, we lost 20 percent of the Ukrainian economy. We also face massive political, social and military challenges. But at least we have managed to stabilize our economy and adopt three tough consolidation packages.

What have been the consequences?

It’s very unpopular, mostly because our austerity programs were 10 times as harsh as those in Greece. People are suffering. But someone had to clean things up. In return, we introduced many deregulation measures, which also enabled us to fight corruption. For the first time in 10 years, we have fundamentally reformed our energy sector, which was completely over-subsidized and a cornucopia for tycoons.

 

Poverty in Ukraine
“People are suffering,” says the Ukrainian prime minister. Here, an elderly woman begs for money in Kiev.

 

But the oligarchies still exist!

There are no longer any oligarchs in the natural gas business, nor are bribes being paid anymore. Dmytro Firtash no longer dominates our gas company, Naftogaz. And instead of a shadow economy made up of middlemen, we now have direct agreements with RWE, E.ON, Gaz de France and Statoil, as well as a trilateral agreement with the European Union and Russia over Gazprom’s gas deliveries to Ukraine. Ihor Kolomoyskyi was once effectively in control of the oil company Ukrnafta, even though the state holds a majority stake in the company.

But the government has now appointed a new CEO, Briton Mark Rollin. And steel baron Rinat Akhmetov is no longer able to secure control of companies through dubious privatizations, and is now required to pay high taxes on his iron ore business. Big business no longer has any influence over the government, nor does it have any representatives in the cabinet.

In an interview with Handelsblatt, IMF Deputy Managing Director David Lipton said he was very satisfied with the reforms, but he was also very concerned about growing public frustrations over economic problems.

If Mr. Lipton is concerned, then so am I, of course. But after freezing pensions and salaries for government employees, we raised the pensions by 13 percent and salaries by 19 percent as of September 1. This isn’t much, of course, at 55 percent inflation. But at least it removes a little of the severity of the reforms for Ukrainians. Russia and the opposition are trying to exploit social dissatisfaction and encourage protests, because they want things to return to business as usual. President Putin is trying to dismantle Ukraine with political and economic means. We cannot allow that to happen, which is one of the reasons I came to Germany. We need investors. It’s the only way we can return to growth.

President Putin is trying to dismantle Ukraine with political and economic means.

But why should German companies invest in Ukraine, a country in crisis?

We have very smart people, very well-trained workers and the best farmland in Europe. And in addition to a strong agricultural sector, we have a well-positioned IT industry. There is also great potential in the energy sector and a well-developed infrastructure. We just hired a manager from Deutsche Bahn to work for the Ukrainian railroad. We want to introduce a reasonable leadership culture into our companies.

You are still negotiating a debt haircut. You have reached an agreement with your private creditors, but there is still no agreement with Moscow over the debt refinancing of a bond for $3 billion. Do you truly believe that Russia will forgive your debts?

Those $3 billion were in reality a bribe from Russia, so that then President Viktor Yanukovich would put an end to the association agreement with the European Union. Nevertheless, we do want an agreement with Russia. After difficult negotiations, we have agreed to a debt haircut with our private creditors, and we are offering exactly the same terms to Russia. The deadline for an agreement is October 29.

And if you fail to reach this agreement?

Then we will impose a debt moratorium and not service the credit. We cannot treat Russia differently from the other international creditors.

Mr. Putin has just stressed that it is now up to the government in Kiev to implement the Minsk peace agreement, which includes amending the constitution, an amnesty law and elections in the breakaway regions of Donetsk and Luhansk. Why is this taking so long?

Putin always blames other people. That’s why he sends his fighter jets to Syria, thereby triggering new waves of refugees and creating problems for Europe. He did the same thing in Donetsk and Luhansk. We are all well advised to abide by the Minsk agreement. We had and still have only two options. One is bad and the other is even worse. We chose the bad one.

 

Firemen battle a fire after shelling in the pro-Russian controlled Donetsk city this month. It is part of the two rebel-held regions that continue to cause unrest in the country. Source: DPA
Firemen battle a fire after shelling in the pro-Russian controlled Donetsk city this month. It is part of the two rebel-held regions that continue to cause unrest in the country. Source: DPA
Firemen battle a fire after shelling in the pro-Russian controlled Donetsk city this month. It is part of the two rebel-held regions that continue to cause unrest in the country. Source: DPA

 

But you are implementing it reluctantly.

No, we stand behind Minsk. The ceasefire is certainly flawed, but it does help to prevent even more Ukrainian deaths. This is partly because of Chancellor Angela Merkel’s efforts. She has saved many lives in Ukraine.

European governments are trying to get the refugee crisis under control. How great is the concern that the crisis in Ukraine will be forgotten because of the influx of refugees?

I can only caution against that. What is Russia’s plan? Putin doesn’t just want to capture Donetsk and Luhansk, but all of Ukraine. He has never abandoned his plan. He has realized, however, that he cannot launch any further military offensives in Ukraine. That would only lead to new sanctions. Instead, he is trying to destabilize Ukraine, politically, economically and socially. And he also wants to divide the European community, which is why he is sending troops to Syria. The more air strikes there are, the more refugees will leave the country.

Are Europe and the United States truly cooperating when it comes to Russia and Ukraine?

Yes, I am convinced they are. We cannot allow Putin to drive a wedge between Europe and the United States. That’s his goal, and he is speculating that it will happen.

In the end, the Europeans could be tempted to relax the sanctions if, in return, Mr. Putin agreed to a solution for Syria, thereby defusing the refugee crisis.

I cannot imagine a deal in which the Europeans would abandon their values. The issues at stake in Ukraine are freedom, democracy and the people’s right of self-determination.

Solidarity sounds good. But there has been criticism within the E.U. that President Petro Poroshenko is too pro-European, while you are a puppet of the United States.

There is one thing I am, most of all, and that is elected by the Ukrainian people.

Your approval ratings have plunged as a result of the reforms. Do you seriously believe that you will be reelected?

Any politician in the universe would hardly be in better shape after implementing reforms like the ones I put in place. Of course the tough reforms were unpopular. But I don’t care. I don’t care about my poll numbers, but I do care about my country. It’s clear that it was a political suicide mission. But we need these reforms. We need a new beginning, even if it’s difficult. Perhaps it will cost me my political career. But history will prove us right.

 

Mathias Brüggmann is the head of Handelsblatt’s foreign affairs desk, leading the coverage of the Ukraine crisis.  Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin and is deputy managing editor of Handelsblatt’s Berlin office. To contact the authors: brueggmann@handelsblatt.com and hildebrand@handelsblatt.com

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