Ukrainian President Petro Poroshenko. Photo: Reuters

The VoxUkraine Brief: Big Cleanup. War With Oligarchs and Arrests In the Cabinet

#VoxUkraine weekly selection of best articles on Ukraine.

By Ilona Sologub, VoxUkraine Editorial Board, and Zoya Mylovanova, VoxUkraine Law Editorial Board

produced by Kseniya Alekankina

Last week, the topics that dominated media discussion on Ukraine were the “six-day war” between the President of Ukraine Petro Poroshenko and the tycoon and the now ex-governor of the Dnipropetrovska oblast Kolomoiskiy, development prospects of the military conflict with Russia, restructuring of Ukrainian foreign debt and arrests of top Ukrainian officials accused of corruption.

Poroshenko versus Kolomoiskiy

In Ukraine, mass media interest focused on the conflict of the President of Ukraine Petro Poroshenko and the governor of the Dnipropetrovska oblast bordering Donbas Ihor Kolomoiskiy, which resulted in dismissal of the governor. The situation drew the attention of the world press.

Bloomberg and The Guardian provide brief neutral reports on it.

The Economist writes more extensively stating that “building a nation means putting plutocrats in their place”.

As a part of the discussion, there were renewed attacks on Ukrainian volunteer battalions, expressing fears that despite public show of unity made by Mr.Poroshenko and Mr.Kolomoiskiy, the latter, as well as other wealthy supporters of the volunteers battalions, could turn them against their private enemies, including the state.

A.Motyl argues that despite some problems popping up from time to time, these battalions, which were formed in April-May 2014 and were the first to stand firmly for Ukraine’s protection, are neither “ISIS-style fighters” nor ”private armies”. Practically all battalions from the very beginning have been integrated into either Ukrainian Army or National Guard structures, a few autonomous units are currently negotiating their merger with the government forces. Thus, they should be viewed as a continuation of wide volunteer movement that started with Maidan and now involves over a half of people in the country, rather than a threat to peace in Ukraine.

Military confrontation in Ukraine

Edward Walker argues that the chances the military conflict in Donbass evolving into the world war (meaning first of all Russia-US war, although on Ukrainian territory) are high.

The NYT article also shows the division of the West over the Russian matter and reluctance to make tough decisions.

In the recent interview the former Swedish Foreign Minister Carl Bildt talked about the mistakes made by the EU — one of the hardest ones being its sluggishness in admitting the threat that Russia posed, as well as slow and insufficient reaction to it by the EU.

I think we should have reacted more strongly towards Russia when they started to misbehave in the summer of 2013. Clearly, when they started the sanctions against Ukraine, we didn’t see clearly the implications of that, and I remember that [former Polish Foreign Minister] Radek [Sikorski] and myself were trying to alert Brussels and Brussels was more or less asleep. Would that have made a difference? I don’t know. But that is clearly a mistake.

To our view, the Western leaders continue to make this mistake. Last week, the US Congress has voted for supplying weapons to Ukraine, in addition to Senate voting earlier this year. However, President Obama, perhaps asked by his European allies, is reluctant to make this decision.

So far, Ukraine has seen the supplies of non-lethal weapons from US — e.g. last week $75 million worth of American army vehicles arrived with great publicity causing “Donbas rebels” to say that they would steal and use them.

Meanwhile, a Russian autonomous region Chechnya leader Ramzan Kadyrov threatened to arm Mexico to help it “regain control over seven US states”.

While the latter threats may seem ridiculous, and are already dismissed by Kremlin, the US probably should not underestimate Chechnya either.

Quite many Chechens are now fighting for ISIS and joining jihadists, for which US has always been the primary target.

The Voice of America reports from the town of Debaltseve seriously damaged as Russia backed troops were shelling it, trying to surround and win over Ukrainian forces there before and after Minsk II negotiations. People are returning to their homes (there may now be around 10,000 people living there out of 45,000 inhabitants prior to the conflict) and starting reconstruction. The majority of the people now living in Depaltseve support the “DNR” that controls the town.

Now the DNR promises to open banks and create a banking system to rearrange payments. We are patient because they are our people and we trust them.

NYT writes about another town of Avdiivka, held by terrorists since summer 2014. Despite the shelling, the majority of workers of Avdiivka coke plant (still owned by a Ukrainian oligarch), the largest plant in the town, continue to work for if the plant stops, it will be for good.

A worker tended a furnace at Avdiivka Coke and Steel, a vital part of Ukraine’s economy. Thousands of people work at the plant each day despite grave risk. Credit Brendan Hoffman for The New York Times

Foreign debt restructuring

Another “frontline” for Ukraine is restructuring its foreign debt. The Guardian provides a report on the Minister of Finance speech at Chatham House in front of the investors.

Everybody in the free world should be doing more to help Ukraine. This is a country that has given its life for democracy and is protecting Europe from an aggressive neighbour,- Natalie Jaresko.

Ukraine wants at least $15 billion of debt relief from bond investors, including Russia, which should “probably involve a combination of maturity extensions, coupon reductions and principal reductions”.

Here, also Russia is holding a financial “weapon of mass destruction” in the form of $3 billion of Ukrainian Eurobonds issued at the end of 2013 and due at the end of 2015. So far, Russia has not called for their early repayment (to which it has the right since Ukrainian government debt now exceeds 60% of GDP), nor joined the negotiations Ukraine performs will other investors. As Bloomberg reports, Russia is likely to hold out.

Holding out can lead to two outcomes: Russia gets paid back in full after the notes mature in December, or Ukraine defaults. The former option is politically unacceptable in Kiev, according to Tim Ash, chief emerging-market economist at Standard Bank Group Plc, while the latter would likely start litigation and delay the borrower’s return to foreign capital markets, which Jaresko expects in 2017.

Jointly with Templeton, which now holds another $7 billion in Eurobonds, Russia could actively block restructuring. Reuters discusses an alternative strategy apparently now used by Moscow, which is to classify the Russian debt as bilateral sovereign debt, rather than a commercial paper. If so, the Russian bonds a are not subject to negotiations with private creditors that Ukrainian government is currently holding (the London club), but rather subject to the Paris Club of creditor governments, and should be negotiated there. The IMF appears to agree.The increased problem is that “default on the Russian-held bonds risks derailing the IMF’s own $17.5 billion loan to Ukraine”, due to limitations on lending to a state which is in default to an official bilateral lender.

Following start of the Ukraine’s discussions with the debtors, Moody cut Ukraine’s credit rating to second-lowest level, stating that “likelihood of a default is almost certain

Arrest of top officials and other anti-corruption and reform measures

Another war that Ukraine is fighting is the war with “old” Ukraine and its Soviet legacy. As NYT reports, international lenders are delaying financial help to Ukraine until they see some clear signs of reforms.

VoxUkraine regularly assesses the reform progress in its Monitoring Reform Index. This week A.Motyl has reviewed the Index showing that reforms are progressing, albeit slowly, given great opposition both by state bureaucracy and oligarchs (e.g. the story with Kolomoiskiy described above).

Apparently in an attempt to prove that it not only seeks reforms but is serious about fighting corruption, the Ukrainian government made a show of arresting two senior government officials during a televised cabinet meeting in Kiev.

Also on VoxUkraine

The IMF released details of its Extended Fund Facility (EFF) program for Ukraine. The program has a number of good elements. As VoxUkraine discussed before, the program provides much needed foreign currency so that the National Bank of Ukraine can tame the panic and stabilize the hryvnia. As a part of the deal, the Ukrainian government promised to do a significant fiscal consolidation.

Millions of Ukrainians now live abroad, and the majority of them have been born in the countries of residence. Multiple studies show that countries that can efficiently engage their emigrants into home affairs win in terms of economic growth and technological development.

The fundamental flaw in the current sanctions is that though they punish Russia they don’t help Ukraine survive the Russian attrition war. Ukraine is financially much weaker than Russia and the Russian attrition war makes the west reluctant to fund Ukraine, reinforcing the economic weakness of Ukraine.To balance this it drastically needs compensation to do infrastructure projects. These can be funded through the proceeds of this Russian Aggression Tax.

Have a great weekend!

VoxUkraine: Best Minds. Ukraine Analysis.

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