A New Reformist Offensive in Ukraine

December 10, 2014 4:15 PM

Ukraine is on the brink of a financial meltdown, but its newly formed government appears to be prepared to do what it takes to turn the situation around. Prime Minister Arseniy Yatsenyuk's speech to parliament on December 9 laid out one the boldest and most impressive reform agendas that Ukraine has seen in its recent history.

The events leading up to the speech are important to understand first. On October 26, Ukraine held parliamentary elections. Five democratic and pro-Western parties formed a coalition with two-thirds majority. They produced a 66-page coalition agreement, which was a laundry list of good proposals without a clear policy declaration.

On December 2, a new government was appointed under Prime Minister Yatsenyuk. In stark contrast to previous Ukrainian governments, the new government consists of young professionals, the cream of Kiev's financial professionals, with an average age of 43. Only five of the 20 ministers have been ministers before and have been members of Yatsenyuk's previous government since February. Apart from the prime minister, they are the ministers of interior, defense, foreign affairs, and education. Most remarkably, the government contains three foreign nationals, who were awarded Ukrainian citizenship the same day they became ministers. Natalia Jaresko, a US citizen, became finance minister, Lithuanian Aivaras Abromavicius economy minister, and Aleksandre Kvitashvili of Georgia minister of healthcare. All but two of the 20 ministers speak English, while only two ministers spoke English in President Viktor Yanukovych's last government. The ability to speak English is an important indicator of education and modernity.

In his speech on December 9, Prime Minister Yatsenyuk offered nearly everything a reformer could have asked for, and he backed it up with a strong narrative to appeal to Ukrainians. He presented Europe as the anchor, aim, and means of Ukraine's reforms: "Our basic course is a European course.... Our final aim is Ukraine's membership of the European Union. But to achieve that goal it is necessary to go through a serious test, to carry out radical changes and to make Ukraine European." He justified his radical course with the external threat to Ukraine's sovereignty and the "internal aggression" that corruption has created. To meet the security threat in 2015, Ukraine will raise its military expenditures to 5 percent of GDP.

Yatsenyuk's key slogans were "decentralization, deregulation, and de-bureaucratization." The old Soviet technical standards are to be abandoned for European standards in line with the Association Agreement with the European Union. The state administration has been cut by 10 percent this year, and another 10 percent will be cut next year. Anticorruption policy is a major emphasis. Finally, Ukraine is to adopt a public register of all property and all enterprises with their beneficiary owners named. The entire law enforcement system will be reformed, and all judges examined. All changes are supposed to take place in the course of two years, 2015–16. How much is to be done each year is mostly not specified.

On economic policy, three points stand out as a litmus test of Ukraine's intentions. First, public expenditures are to be cut by 10 percent of GDP. Second, "we will raise all energy prices and tariffs to the market level at the same time as we offer benefits and subsidies to those who should receive them, that is, all poor people in Ukraine." The main source of corruption, through buying and selling of energy at regulated prices, would finally be eliminated. Third, Yatsenyuk has promised to adopt a law on the agricultural land market.

The speech contains dozens of other reform proposals. The number of enterprises that cannot be privatized will be reduced from 1,500 to 300. The others will be sold off as the market allows. All state corporations will be subject to international audit. The labor market will be liberalized. All medicines that are certified in Western countries will be allowed in Ukraine without the current cumbersome certifications. Ukraine intends to introduce comprehensive health care insurance. Education financing will be based on achievements. Wherever possible, EU standards or assistance are being called for.

The Ukrainian government is rushing to avoid the precipice, but time is running out. The nation's international reserves are likely to fall to merely $7 billion at the end of 2014, corresponding to about one month of imports. The government needs to cut public expenditures fast, offering the nation an austerity budget as a Christmas gift. The International Monetary Fund (IMF) mission is visiting Ukraine for the next week, and it might stay longer. The IMF warns that to avoid default Ukraine needs $15 billion in the next year on top of the IMF funding.

Yet, Ukraine can still escape a financial meltdown. The government took a giant step forward through Yatsenyuk's speech. Now it needs to turn its pronouncements into actions to impress potential Western donors so that Ukraine can raise the extra $15 billion that it needs for next year.

Anders Åslund, senior fellow at the Peterson Institute for International Economics, is author of the forthcoming book Ukraine: What Went Wrong and How to Fix It, to be published in 2015.