Ukraine Politics: Prioritizing Reforms

The pro-European parties that will make up a strong majority in parliament have announced an extensive package of reforms that will also form the basis of the future government's work. Ukrainian politicians seem to recognize the urgent need to move forward with real reforms. On Sunday Germany's foreign minister made further integration into Euro-Atlantic structures conditional on the implementation of those reforms. The reform program set out in the coalition agreement is extremely ambitious; as always in Ukraine, plans on paper look great, but actions will speak volumes. In this week's politics piece, we take a look at what reforms the coalition is aiming to implement.
Pro-European parties present extensive reform program
Following last week's G20 Summit and the deepening isolation of Putin's Russia, the spotlight with regards to Ukraine turned back to domestic matters. Over the weekend the country commemorated the 1st anniversary of the Euromaidan and 5 parliamentary parties announced a long-awaited coalition agreement. 
On Saturday – symbolically the anniversary of the start of the Euromaidan – 5 of the 6 political parties in the new parliament presented a draft agreement establishing a parliamentary coalition (the actual agreement is expected to be signed November 27 in the first session of parliament). More than simply an agreement that defines the mechanisms of cooperation among the parliamentary parties, the document is a declaration of the reforms the pro-European coalition intends to pursue. 
Risk of friction between President and Prime Minister remains low, for now
And while many MPs-elect, especially the young reformers, have stressed that the war with Russia and Ukraine's economic troubles are no excuse for not conducting deep and lasting reforms, the political will of the newly formed coalition will surely be tested frequently in the coming months. 
This is especially true because the coalition is comprised of 5 political forces whose differences (domestic political agendas and business interests) are greater and more specific than their broad similarities (pro-EU, pro-reform, anti-Yanukovych). Clearly, there is a risk of a political divorce (as happened after the Orange Revolution with President Yushchenko and PM Tymoshenko), with all the negative consequences for the reform agenda that would entail. However, we stress that at the moment we believe that risk is low.
While there is some popular discontent with the president's and government's perceived inaction, the results of a poll conducted Nov 6-13 show the president's support ratings roughly level over the past three months, while PM Yatseniuk's support has risen slightly since August.
Opposition Bloc and pro-Dictatorship MPs barred from coalition
Citing irreconcilable political differences the coalition agreement bans the Opposition Bloc (successor to the Party of Regions) from participating in the coalition and it bans individual MPs that voted for the Dictatorship Laws of January 16, 2014 in the last sitting of parliament. An estimated 64 MPs that voted for the laws have been elected to parliament, mainly from the Opposition Bloc and self-nominated candidates.
NATO accession will be a foreign policy priority
Notably, the coalition plans to make NATO accession a foreign policy priority once again after parliament under ex-President Yanukovych legislated Ukraine's neutrality. The day after the document was presented, however, German Foreign Minister Frank-Walter Steinmeier nixed Ukraine's NATO aspirations and said it's still too early to speak of the future prospect of EU membership for Ukraine. Steinmeier's message was clear: any discussion of deeper integration into Euro-Atlantic structures will depend on Ukraine's success in implementing reforms. 
Ambitious, far-reaching reform plans
The coalition agreement outlines far-reaching reforms in 17 areas: national security and defense, constitutional reform, the renewal of government and anti-corruption initiatives, judicial reform, law enforcement, electoral legislation, decentralization and public administration, regulatory frameworks, business development, and competition, the financial sector, the agricultural sector, energy and energy independence, infrastructure and transportation, utilities and housing, social initiatives, healthcare, and the environment. Below we highlight the most important initiatives.
  • Abolish Ukraine's foreign policy neutrality and make NATO integration a priority
  • Amend Ukraine's national security strategy and its military doctrine. In a clear nod to Russia, the document sets out the coalition's plan to "define in the military doctrine the term ‘probable enemy' and clearly outline the criteria for recognizing a state (or a group of states) as a probable enemy"
  • Re-establish control over the Autonomous Republic of Crimea
  • Enact constitutional amendments (no specifics provided)
  • Create a National Anti-Corruption Bureau in 1Q15 and a National Agency for the Prevention of Corruption in 2Q15 (the dual functionality and overlap is unclear)
  • Eliminate public sector corruption
Judicial, Police, and Electoral Reforms
  • General and extensive reforms aimed at weeding out corruption in the judicial branch
  • A full restructuring of the Interior Ministry's police forces, including the option of establishing municipal police forces in place of the Soviet-era national police force
  • Adopt a proportional electoral system with open party lists in place of the current proportional-majoritarian mixed system (1Q15)
  • Amend anti-corruption legislation to improve the transparency of political party and election campaign financing (based on recommendations from the Council of Europe's Group of States Against Corruption – GRECO)
Business Environment
  • Decrease the number of state-owned assets exempt from privatization
  • Eliminate the requirement for a mandatory sale on a stock exchange of a 5-10% equity stake prior to a privatization auction
  • Incorporate all state enterprises (except crown corporations)
  • Ensure a material improvement in Ukraine's business environment as reflected in the World Bank's annual Doing Business survey, with the ultimate goal of getting Ukraine into the top-20Taxes
  • Cut the total number of taxes to 9: corporate income tax, VAT, personal income tax, excise tax, royalties, real estate tax (including land tax), environmental tax, Fixed Agricultural Tax, and customs duty (1Q15)
  • Improve the functioning of the VAT framework, including timely and guaranteed reimbursements to exporters
The Financial Sector, Capital Markets, and Corporate Governance
  • Bring M&A legislation into accordance with EU standards to allow faster consolidation and streamlined legal and operational processes
  • Liberalize currency regulation and currency controls by eliminating outdated regulatory acts and removing "unjustified" restrictions on cross-border capital flows
  • Simplify procedures for foreign investment into Ukraine and the repatriation of profits and simplify procedures for foreign investment for Ukrainians (starting in 2016)
  • Allow for the development of new market instruments by adopting a law on derivatives 
  • Improve legislation on corporate bonds and on the taxation of income from operations with financial instruments
  • Improve corporate governance standards, notably by improving the protection of minority shareholder rights by establishing a shareholder derivative suit practice and other measures
  • Establish a modern stock exchange with the participation of leading international exchange operators and improve settlement structures to reduce risks and to allow market participants to conduct currency, derivatives, equity, bond, and other financial instrument trading activities through a market-based institution
  • Improve legislation governing the functioning of a commodities exchange to ensure price transparency
Agricultural Sector
  • Complete the inventory of agricultural land plots (state, communal, and private ownership) by January 1, 2016
  • Maintain the current tax framework, including the export VAT condition, for agricultural producers until January 1, 2018. Develop a new tax framework that will stimulate the sector's development by June 1, 2017
Energy Sector
  • Complete a full restructuring of Naftogaz in 4Q15, with the goal of separating the extraction, transportation, storage, and distribution of natural gas 
  • Gradually eliminate cross-subsidization for all consumers and introduce targeted subsidies for the socially vulnerable (2015-2017). Ban the introduction of new preferential prices and tariffs for particular industries and consumers of electricity and natural gas.
  • Reduce the quorum requirement for general shareholders' meetings to 50%+1 (4Q14). This norm is first and foremost aimed at unblocking the state's full control over Ukrnafta, Naftogaz' subsidiary. Currently, Naftogaz controls 50% + 1 share in the subsidiary and minorities, who need to be present at AGM/EGMs for a quorum of 60%, often block important decisions by not participating.
  • Privatize all coal mines in 2015-2016 and close all mines that were not sold (2015-2019)
  • Diversify sources of energy imports and nuclear fuel
  • Increase natural gas imports from the EU
  • Mid-term goal: any single source of natural gas, crude oil, or coal import can account for no more than 30% of Ukraine's total annual imports
The reform program set out in the coalition agreement is ambitious. It is also non-binding, with no consequences for non-implementation. And as is typical for Ukraine, paper plans and legislation are often impeccable; implementation and action are always the primary concern. The political will to move forward with reforms will be crucial. In that regard, conditionality by IFIs and Euro-Atlantic structures on future funding can help spur the engines of reform.