July 11—17, 2016 Ukraine: Weekly Highlights

Ukrainian Weekly Highlights July 11—17, 2016 from Digests & Analytics Ukraine

Ukraine is waiting for an early parliamentary election – Corruption vs. the next IMF tranche – Growing terrorist threat in Europe and the "visa-free regime" for Ukraine – Minsk negotiations in a deadlock – The second anniversary of the MH17 crash – Ukraine is taking a step towards Canada – The aftermaths of the Turkish coup for Ukraine

Ukraine is waiting for an early parliamentary election

The steps taken by Yatsenyuk's and Groisman's governments have led to a catastrophic decline in the living standards. The country has dropped to the last line in the life quality ratings. The level of corruption remains one of the highest in the world, and the economic stratification of the population is increasing rapidly. Ukrainian authorities, using the war with Russia as a scarecrow, consider the state budget to be their own wallet. All of these factors have lead to the growth of protest moods in the Ukrainian society. Therefore, the opposition parties have a wide field for rocking the situation and improving their rankings. The multi-party system does not provide a damper to smooth the differences between the government and the society, since most of the parties are sponsored  by the oligarchs, and their main purpose is the conservation of the oligarchic government system.

The authorities that are not used to tighten the belts have decided to fill in the gaping hole in the budget by raising utility tariffs, simultaneous increasing the penalties for non-payment. According to media reports, after the hike in utility and service prices, population’s debts started to accumulate rapidly. Starting in November 2016, after the population receives new bills that will be more than twice higher than before, the situation will be strained to the limit.

According to all opinion polls, public confidence in the leadership of the country has fallen below 20%, which deprives the actions of the government of any legitimacy. Therefore, the early parliamentary election is becoming more real. The results of opinion polls conducted by various agencies are published weekly. All of them show that the early election is possible, despite the statements of the president and leaders of the parliamentary majority. The President's party Petro Poroshenko Bloc "Solidarity", which in 2014 took almost a quarter of the votes, will now get less than 15%, and the second party of the parliamentary majority, the People’s Front, will not get into the Verkhovna Rada at all. Batkivshchyna, the Opposition Bloc, the Radical Party, Petro Poroshenko Bloc and Samopomich lead in the ratings. They are likely to be supported by 8-13% of the voters.

In the case of early election, the People’s Front has no chance to enter the Parliament. Therefore, its MPs hold on to their seats, trying to demonstrate their usefulness to the President. The Radical Party and Batkivshchyna, whose ratings are steadily growing, "rock" the issue of high utility charges for the population and block the work of the Parliament in order to create conditions for its dissolution. The People’s Front, under the slogan of "fighting against populists," unblocks the podium of the Parliament over and over. In the moments when work of the Parliament is unblocked, some laws are adopted, including those that are essential to the President and his entourage.

The votes available in the "parliamentary coalition" are not sufficient, so Petro Poroshenko Bloc hopes to receive additional parliamentary seats following the by-elections to the Parliament. Apparently, this is why the members of the Central Election Commission (CEC), including its head Okhendovsky, have not been fired, and no new members of the CEC have been approved. The mandate of most of the CEC members expired in June 2014, and the Parliament had not approved the new candidates.

Rather than extending the current session until the fall and continueing the legislative process, the MPs went on vacation for the first time since Russia invaded Ukraine. Thereafter, the People’s Front steps began to look like a cheap farce, and it became clear that the main purpose of the faction is to stay in the Parliament at any cost.

Currently, MPs have no control over the government's actions, and the country is ruled manually by the President and the Cabinet. Such situation cannot continue for a long time, so most analysts believe the early parliamentary election this fall or in the spring of 2017 to be  almost inevitable.

Corruption vs. the next IMF tranche

The government strongly demonstrates that it has achieved positive results in adopting the updated memorandum with the IMF.  Almost all of the laws on which the IMF experts insisted have been successfully adopted. The Cabinet has demonstrated how it plans to balance the budget by sharply raising utility charges. The National Bank keeps the national currency, hryvnia (UAH) FX rate stable, even though it has almost completely stopped purchasing surplus currency  at auctions from commercial banks. Finance Minister Danylyuk says that the IMF experts are not scared by the huge hole in the budget of the Pension Fund, and the Government’s successes in the budget process offer a hope that the next tranche will be received before the end of July.
The Government introduced to the Parliament the draft budget resolution for 2017 with more than three months delay. The document provides for the GDP growth of up to 3% and the reduction of inflation rate to 8.1%. The draft was made based on the annual average currency FX rate of 27.2 UAH/$.

As it was previously announced by Prime Minister Groisman, the resolution introduces medium-term budget planning and targeted provision of social services and benefits.

Although the Ministry of Finance announced innovations in the tax policy, the resolution makes no mention of what this policy will be like and how it will be implemented. In addition, the document does not contain a plan of customs reform.

Besides, it provides for an increase in social standards, which should grow faster than the inflation, and increased funding for regional programs.
The sources for increasing budget revenues are unclear. It might be achieved by the unshadowing of the economy, pension system reform, reform of the unified social contribution, privatization, or by performing of a whole set of measures.

According to the Budget Code, any changes to taxation must be adopted six months before they take effect. Therefore, the legal grounds for introducing the new Tax Code in the beginning of 2017 look doubtful.

Insiders at the IMF are not yet certain that the next tranche of the loan to Ukraine will be extended in July. It is highly probable that the decision of the Fund's Board of Directors will be postponed until late August. The experts believe the main reason for the negotiations with the Fund to last so long to be the lack of any tangible results of the fight against corruption. The delegation of the US Customs, which was invited by Prime Minister Groisman, also stated rampant corruption at the Ukrainian Customs Service. Businessmen and the public concluded that the work of the State Fiscal Service is absolutely non-transparent. The Government had to unlock by force the VAT refund, which was forbidden earlier by the Head of GFS Nasyrov. Prime Minister Groisman expressed his dissatisfaction with the work of the State Fiscal Service. Finance Minister Danylyuk promised to eliminate the tax police, which had paralyzed the work of many businesses, in the near future.

IMF requires Ukraine to show constant progress in the fight against corruption in order to allocate the next tranche. Therefore, the state agencies for combating corruption, the National Anti-Corruption Bureau and the Special Anti-Corruption Prosecutor's Office, are trying to show the increased effectiveness of their work. SAP and NABU executives report that dozens of criminal cases have been investigated, billions of hryvnias involved in the corruption turnover unhided, but until now no person involved in corruption has been punished, including those from the entourage of President Poroshenko. Some observers believe that these agencies are being used by the President to put pressure on his business rivals and to force the sponsors of political parties to adopt the necessary decisions.

Moreover, the appointment of SBU general Demchyna, a protege of Kononenko, the President’s business partner, to the post of the first deputy head of the SBU for fighting corruption, was a symbolic move.

Experts believe that the IMF tranche will still be allocated as an advance for the Ukrainian Government, but there are no chances of several tranches being merged together..

The growing terrorist threat in Europe and the "visa-free regime" for Ukraine

After Paris, Brussels and Istanbul, a large-scale terrorist attack took place in the resort French town of Nice. Tunisian-born French citizen with dual citizenship, who was not previously connected with terrorists, rammed a crowd of people with a truck, and then shot them with a machine gun. Police killed the terrorist, but 84 people were killed and more than 100 injured. One Ukrainian citizen died, and two others were wounded. The "Islamic State" took the responsibility for the tragedy.
The attack showed that Europe is becoming a zone of instability. Intelligence agencies failed to prevent the attack, and security failed to quickly detect and neutralize the suicide terrorist. German Chancellor Merkel still says that millions of migrants from North Africa and the Middle East could become a reserve of low-wage labor for Europe. However, the spread of terrorism risks may exceed the benefits of cheap workforce.

European officials insist that the decision to grant the "visa-free" regime for Ukrainians will be adopted in early fall. A number of experts have expressed concern that the visa liberalization would lead to a mass exodus of  Ukrainians looking for work to Europe. Of course, the Ukrainian labor immigration does not pose any threat to the growth of terrorism in Europe, but can further increase the competition in the European labor market, where unemployment among the "white-collar" and "blue-collar" workers has already exceeded 10%.

Minsk negotiations at a deadlock

The situation in the Donbass region remains volatile. Every day brings new reports of deaths and injuries of Ukrainian soldiers. Local citizens suffer during shelling as well. The talks in Minsk with the participation of the representatives of the pro-Russian militants have not reduced the degree of tensions at the frontline and have not unlocked the implementation of the "Minsk agreements." Intensive consultations between the leaders of Ukraine, France, Germany, the United States and Russia haven't led anywhere, despite the cheerful statements of the parties. Apparently, the process will be frozen until the announcement of the US presidential election results.

The next round of talks also brought no results. Ukrainian delegation stated that prior to regain control over the state border, discussing other political issues is impossible. Press secretary of Kuchma, the head of the Ukrainian delegation at Minsk talks, stressed that the elections in "certain areas of the Donetsk and Luhansk regions" (ORDLO) will not be impossible without security guarantees. She said that the issue of returning the hostages has not been resolved, despite Ukraine's willingness to compromise. Russia showed no interest in the return of its soldiers that were captured during the battle with a subversive group near Troyitske. Russian representatives at the negotiations stated that the  Russian troops were absent in Donbas.
OSCE Special Representative Saydik said that the parties to the negotiations were going to sign an agreement on the withdrawal of the military units in the three areas of conflict. However, he stated that the parties still could not agree on the mechanism of the withdrawal. Most experts believe this initiative to be futile.

The next round of talks is scheduled to be held on July, 27. This day, a "religious procession" organized by the Ukrainian Orthodox Church of the Moscow Patriarchate, is to be staged in Kyiv. Observers discovered fighters who participated in the events in Donbas in 2014 among "pilgrims." The "Religious Procession" can serve as a background for the Russian security service (FSB) provocations and act as a catalyst to "protect the Russian population in Ukraine" by Russian troops, despite Ukrainian special services' claims of their full control over the situation.

The second anniversary of the MH17 crash

July, 17 was the second anniversary of the accident with Malaysian airliner MH17 flight shot down by a rocket in the sky over Donbas.

For this date, investigators team Bellingcat published a new extensive report. Reporters analyzed the vast array of information from open sources. They claim that the plane with 298 passengers and crew members onboard was shot by a missile launched from the Russian air defense systems "Buk-M1". The air defense complex was transferred to Donbas from Russia and brought back after the attack. According to the conclusion provided by the Bellingcat, the Russian "experts" tried to forge the evidence in favor of the version according to which MH17 was shot down by a Ukrainian fighter aircraft.

Over the past year, there have been several media materials aimed at whitening the Russian participation in the tragedy, including the BBC TV documentary aired this spring. However, they did not change the general attitude of the world community to the aggressive actions of the "pro-Russian militants" and the Russian army suspected of a crime.

The Prosecutor's Office of the Netherlands, which investigates the case, plans to publish the results this fall. The countries affected by the tragedy plan to create a special tribunal on the issue, because of Russia's blocking a UN Security Council decision to establish an international tribunal. Russia will not be able to interfere in the process in such case.

Ukraine is taking a step towards Canada

An official delegation from Canada visited Ukraine. Minister of Economic Development of Ukraine and Canadian Minister of Trade signed an agreement on establishing a free trade area. Ukrainian Parliament Speaker Parubiy promised the Canadian Prime Minister Trudeau to ratify the agreement as soon as possible. Sources in the Canadian government believe that Canada's Parliament will ratify the agreement not earlier than in a year. According to the Head of Canadian Cabinet Trudeau and President Poroshenko, the agreement will remove almost all  trade barriers between the two countries. The amount of bilateral trade dropped  to $8 million this year, although it exceeded $280 million in the past years. Based on the fact that Canadian imports exceed $500 billion, the possibility of entering the huge North American market  looks like a great incentive for the Ukrainian businesses.

In addition, Canada and Ukraine launched negotiations on the liberalization of the visa regime. Reduction in the number of refusals to obtain Canadian visas for Ukrainians will be a first step in this direction.

According to Canadian observers, local media paid almost no attention to the visit of Prime Minister Trudeau in Ukraine, although the general attitude to Ukraine is positive.

The aftermaths of the Turkish coup for Ukraine

A military coup was attempted in Turkey. A few hundred military attempted to seize power in the country and depose the president. During the armed clashes in the Turkish capital Ankara and in Istanbul, more than 200 people were killed. President Erdogan successfully avoided the danger and organized resistance that led to disarm the rebels. Several organizers of the coup flew to Greece, where they asked for political asylum.

Erdogan immediately began purges among the opponents of his regime. More than 6,000 people were arrested, including almost 3,000 military personnel and more than 2,000 judges. Some political observers in Turkey believe that the coup was organized by the President Erdogan himself to finally break the resistance of the Army to Islamization.  According to some versions, the coup was really planned, but was discovered, and the officers were  forced to start it without the due preparations.

Turkish media said that Erdogan wants to introduce the death penalty for the rebels. This would allow him to gain absolute power. MPs deprived of immunity and headless judiciary, prosecutor's office and the army would not be able to really oppose him.

The army has always been the pillar of the secular regime since the first President of Turkey Ataturk, and overthrew the governments that tried to build an Islamic state. Erdogan is gradually purging the army leadership step by step and putting his own people in key positions. However, the consolidation of personal power goes against the strengthening of the army. Civil war in the neighboring Syria is raging, and strong armed forces are the guarantee of the sovereignty of the state.

The leaders of most countries, including Ukraine, have spoken out against the military coup. However, the strong endorsement of Erdogan's actions by Russian President Putin and the almost immediate resumption of close negotiations between him and the Turkish president  looks suspicious.

A headless army can reduce the country's combat capability that is critical for NATO, and is capable of changing the balance of power in the region. Russia  needed the unhindered passage of military and civilian ships through the Bosporus and the weakening of Turkey's support for the rebels in Syria opposing the regime of President Assad.

Ukraine is interested in a strong partner in the Black Sea region. In the case of strengthening of the authoritarian regime of Erdogan, Ukraine will receive a powerful opponent, despite the good personal relations between the presidents of the two countries.