The New Ukrainian Government Must Save the Country

November 19, 2014 9:45 AM

Ukraine is in a vicious financial crisis. Threatened constantly by Russian military aggression, the country faces a financial meltdown within the next four months. At the end of October, its international reserves fell to $12.6 billion, below the threshold considered critical for solvency. The hryvnia exchange rate is falling exponentially. As a consequence, most of Ukraine's banks are collapsing. The public debt is skyrocketing and is likely to double to about 80 percent of GDP this year. Inflation is set to rise to 24 percent this year and then surge further.

Fortunately, Ukraine held free and fair parliamentary elections on October 26. The three most reformist parties won. Now they must form a government fast. The Ukrainian government has to put an end to this crisis, but in order to do so it must come into existence as fast as possible.

But what are they doing? Instead, we are facing one of these useless parlor games. How many parties should there be in the coalition? How should the coalition make decisions? Who should get what portfolio? Enough! If the current Ukrainian leaders do not reach an agreement fast, there might no longer be any Ukraine to discuss. Just listen to President Vladimir Putin's rather clear statements!

The three leading reform parties should form a coalition government immediately. In every relevant regard, the Radical Party of Oleh Lyashko opposes the reformist programs, so it should be left out of the new government. The fewer parties that are in a coalition, the easier it will be to function. The three leading reform parties can form a sufficient majority in parliament.

In this profound crisis, Ukraine needs ministers who are young technocrats or professionals daring enough to do serious reforms, independent of vested interests. Such people understand the conundrum of the nation, and speak English so they can deal with foreign donors.

Three major reforms must be carried out quickly. Nobody who opposes them should be part of this government. First, energy prices have to be unified at an international market level. This is a financial necessity to cut harmful public expenditures and eliminate the main source of top-level corruption through privileged arbitrage between low state-controlled prices and market prices, which are 12 times higher. In the end, it is a matter of national security and sovereignty since the Kremlin controls this corrupt game.

The other, closely related reform is to cut public expenditures by about one-tenth of GDP in 2015. If that is not done, a financial meltdown as in Russia in August 1998 is likely. The cut in energy subsidies would do most of the job.

The third reform would be to finally legalize private sales of agricultural land. Otherwise, the current agricultural boom is not likely to continue but hit a ceiling. Amazingly, the proposed coalition agreement released on November 14 suggests that the harmful moratorium on private sales of agricultural land be prolonged until 2018. Such a postponement is madness. Do the Ukrainian politicians want Putin to take over Ukraine? Or are they just stuck in their old petty minds?

The draft coalition agreement at present contains no strategy and it focuses on no primary goals. It fails to mention that Ukraine is subject to an existential military threat from Russia, that its financial crisis can lead to a meltdown within a few months, and that it needs instant energy reforms, and it opposes badly needed agricultural reform.

The draft coalition agreement even reminded me of reading Leonid Brezhnev's speech at the 26th Party Congress of the Communist Party of the Soviet Union in 1981. This is not a reform program but an old-style bureaucratic Soviet document for the preservation of the old system. Such a conservative document will never bring reform. There is no declaration of will or strategy. The document does not even start with a set of goals but with a bureaucratic laundry list.

Ukraine is in its worst national and financial crisis in its brief history of independence, but the draft coalition agreement fails to mention both. No mention of either Russia or the financial crisis is to be found in its 66 pages, while Brezhnevite bureaucratic expressions such as "inventarization" and "strengthening of the control" abound.

Ukraine, wake up!

See also Policy Brief 14-24: An Economic Strategy to Save Ukraine.