Ukraine 2017

Total score

52.27 change: 1.47

Score and comments

Political Freedom
Free and Fair Elections

Elections in Ukraine are executed in a free and fair manner, with some minor irregularities in the electoral process which cannot influence the outcome. Large degree of funding political parties by wealthy oligarchs could influence fairness of the process, although government adopted measures which sought to raise transparency of campaign financing. After resignation of the Cabinet of Ministers of Ukraine in April 2016, the new government was formed and Prime Minister Volodymyr Groysman managed to stabilize political situation in the country. Under a mixed electoral system, whose efficiency and need for change was discussed in public throughout the observed period, one half of the Ukrainian parliament Verkhovna Rada has been chosen through proportional representation while

another half via single mandate constituencies. Due to inability to conduct elections in several occupied and conflict affected constituencies, some seats in the parliament remained empty. Changes in the electoral law at the beginning of 2016 allowed political parties to remove candidates from their list after the elections and before Central Elections Commission verified their mandate. On the ground that it incited hatred, Communist Party has been restricted from operating and running at elections. During the last year, by-elections in 7 constituencies and local elections in 185 newly merged territories were held.

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Absence of Unconstitutional Veto Players

Ukrainian elected authorities have effective power to govern the country, although there are several possible threats to the country`s democracy, rule of law and sovereignty. Government doesn’t have control over some of its territory, due to Russian occupation of Crimea and conflicts in the Donbas region. Despite that executive authorities are shared between Prime Minister and President, the latter one, namely Petro Poroshenko, allegedly started to enjoy significant influence and control over executive and legislative branch. Shift of Prime Ministers in 2016 and appointing his close ally for the leader of Government was a move largely perceived as Poroshenko’s intention to strengthen the power. Undermining threat to democracy is also coming from number of wealthy oligarchs

and their close ties to political elites, whose relations can influence decision making process on some issues. Also, corruption among public officials is widespread. It remains one of the most serious problems in Ukrainian society.

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Freedom of Press

Freedom of the press is granted by Ukrainian legislation, but this freedom is only partly upheld in practice. Traditional and online media landscape is pluralistic and diverse, offering citizens wide range of views. However, this diversity is rather a result of different interests of wealthy owners and businessmen who dominate on the media market than of independent and objective journalism. Politicians often seek to influence reporting on certain issues in public media, such as on corruption, but likewise in the private outlets through their connections with the owners. Also, journalists increasingly practice “patriotic” reporting on the sensitive issues and publishing of fake news for money. Both trends seriously threaten objectivity of media reporting. Physical or verbal

violence against journalists is not rare, whereby political journalist Pavel Sheremet was murdered by a car-bomb in July 2016. Therefore, an environment of fear made self-censorship present among reporters as well. Russian channels remained restricted in Ukraine due to its animosity towards the “pro-Russian propaganda”, in the light of recent conflicts. A positive move towards more freedom of the press was a government decision as of November 2016 to privatize a number of printing media outlets, as a part of broader reforms.

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Rule of Law
Independence of the Judiciary

Lack of rule of law - especially poor performance of judiciary and persistent corruption - is the most serious shortcoming of the Ukrainian post-Maidan democratization process. Citizens perceive this as exhausting for the economy and for their living standards, more than the war in the east. In judiciary, the improvements have been meager. In September 2016, constitutional changes and new legislation, adopted in June, went into effect, providing for a comprehensive reform of the judiciary system, promising more independent and competitive selection of judges to various courts, merger and rationalization of some courts, higher remuneration of judges, broader evaluation of their work and better control of their (and their families`)

assets so as to decrease corruption in courts. Longer term effects of those changes are yet to be monitored. As for public prosecutors, situation is more complex and their dependency on political power is still huge and hardly even touched.

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Corruption

Russia and Ukraine are still the most corruption-struck countries in Europe. In the world, they share the place 131 (of 176 countries ranked by the Transparency International`s Corruption Perceptions Index 2016), with Iran, Kazakhstan and Nepal. According to Global Corruption Barometer 2016, the bribery rate in Ukraine averages 38% (highest in Europe). An example of extension of corruption in universities or elsewhere in education was provided by Kyiv sociologists: 49% people surveyed said they had offered bribes, while 57% education workers said they had been offered. There was little improvement during the past year, whereby Ukrainian CPI score rose from 27 to 29. During 2015 and 2016, the newly created anti-corruption bureau NABU

has brought 50 cases to courts and had 12 decisions implemented. Changes in the public procurement system, introduction of e-government in various fields (especially e-declarations by public officials, or opportunities to monitor much of the public spending online), as well as abolition of various subsidies (such as in the energy tariff system), might bring down corruption, because economic liberalization has in similar countries (e.g. Georgia, Estonia, or even post-2000 Serbia) already proved as key to narrowing the ground for high level corruption. Former President of Georgia Mikheil Saakashvili - upon his adoption to Ukrainian citizenship - had tried to help fighting high level corruption and misuse of power, by transferring some of his past experience, but in November 2016 he resigned his post in Odessa region over the lack of support by national authorities.

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Protection of Human Rights

Respect and awareness of human rights are the field of rule law which has most advanced after the Euromaidan. As Freedom House noted, “civil society remains the strongest element in Ukraine`s democratic transition”. It is mainly based on massive volunteering. It “plays a crucial role in driving reforms” aimed at establishing and strengthening of the rule of law. It also plays a vital role in implementing reforms - in countering corruption, reforming the administration, decentralization, etc. As FNF has found out through our own field research, the role of CSOs is also vital in organizing and running independent, on-the-spot, efficient and informative media, in humanitarian aid to the refugees and in community building in the

spirit of democratic values as opposed to the hybrid war launched from the east. However it is suspicious or hostile towards some critical media, the government mainly allows civil society to function autonomously, while being aware of its vital role in the post-2014 democratic development. Newly gained pluralism includes also some far right or ultranationalist groups, while also the organized crime is still present on the public scene. Thus, attacks on journalists are numerous. In July 2016, a journalist was murdered in Kyiv. LGBT rallies, tolerated and protected by the police, are occasionally attacked by extremist groups, such as in Lviv in March 2016, while otherwise police managed to keep the events uninterrupted, such as in Kyiv in June 2016 and 2017, and Odessa in August 2016. In two eastern regions held by Russia-backed separatists, Luhansk and Donetsk, human rights are in the worst shape. Disappearances are common, local elections are rigged and there are no free media or critical NGOs at all. Human Rights Watch accused both the Ukrainian government and the rebels in the east of arbitrary detention and degrading and cruel treatment of the detained political opponents (or suspected agents of the other side), noting that Ukrainian secret services held a secret detention center in Kharkiv, while local security forces in rebel-held territories held several scattered ones which operated completely outside the rule of law.

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Economic Freedom
Security of Property Rights

Private property rights in Ukraine are not sufficiently protected. The most serious problems are in functioning of the judiciary, which is connected to political parties or could be under influence of vested interest groups such as oligarchs. Therefore, judicial independence and impartiality is not guaranteed. Enforcement of contracts is obstructed also through very high costs. However, there are specialized commercial courts and cases are assigned to judges automatically. Recent changes allowed court fees to be paid electronically. Insolvency procedures are extremely long, lasting up to 3 years on average, with low recovery rates of just 7.5%. Registering property in the country is a long process, due to inefficient land cadastre but also because of complicated valuation rules

for determining the transfer tax. Although restrictions on foreign investment are mostly lifted, mandatory state registration of foreign investments was only recently abolished, i.e. in June 2016. Foreign nationals still cannot own land, but they could lease it or acquire it through locally registered companies. The privatization process has been plagued with different problems and is not considered transparent, nor fair, while Russian and off shore companies are banned from participation in it, due to political concerns.

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Size of Government: Expenditures, Taxes, and Enterprises

The scope of government in Ukraine is comparable to other European countries, with government expenditures reaching 40% of GDP in 2016. High public deficits since 2012, as well as the recession and political turmoil, led to an elevated public debt of more than 80% of GDP, which is dangerously high for a country on such a level of development. Ukraine exited the recession in 2016, with a modest growth of 2.3% amidst tight fiscal and monetary policies, which put public finances on a more sustainable path and inflation within the National bank’s target. However, unreformed and unsustainable pension fund will continue to pose a drain on public expenditures. Inflation is still in double digits. High level of corruption remains a significant problem for the functioning of government

institutions. Reforms regarding this have been limited, apart from electronic government procurement becoming mandatory in August 2016, through the ProZorro platform. State owned enterprises (SOE) in Ukraine are numerous and active in many fields - from utilities to transport, energy, infrastructure and machine building. Their operation is mostly inefficient, leading to high losses and subsequent state subsidies. Recently, the government made significant changes in the energy sector prices in order to reach full cost recovery and lower the sector’s reliance on subsidies. The bad management practices were tackled through the setting of new corporate management standards and making independent advisory boards mandatory, but SOEs are still considered to be under political influence, serving as a tool for corruption and political financing. Privatization has been very slow, due to different political obstacles, e.g. there were delays in transferring SOEs from respective Ministries to State Property Fund that is in charge of privatization. The reorganization of SOEs is slow. Both corporate and personal income tax rates in Ukraine are set at moderate 18%. VAT rates are 20% (general) and 7% (preferential).    

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Regulation of Credit, Labour, and Business

Business environment in Ukraine has been rapidly changing, but still it is not conducive to entrepreneurial activities. Regulation is often complex and outright contradictory, while corruption and vested interest groups are present in many areas and industries. Broad deregulation policies are currently being implemented, but their reach is not always satisfactory or deep enough to deliver good results in a limited time. The new Action Plan for Deregulation of Business Activities lists more than 100 measures to improve business environment by introducing international standards. Starting a business is easy and quick, done within a couple of days, and without a paid-in minimum capital. On the other hand, this is not true for getting electricity, which is a process plagued with

slow procedures and high costs stemming from inefficiencies within the public utility company. Obtaining a construction permit is very costly, although not time consuming. Tax regulations are complicated, although there are just a few annual payments which are usually done electronically. Most burdening tax regulations are those regarding VAT, so the Ministry of Finance finally launched an electronic VAT refund registry in April 2017, which was expected to bring transparency and efficiency to the refund system. Corruption, policy instability and inefficient bureaucracy are considered as the biggest obstacles to a more business friendly environment in the country. Labour regulations are a mixture of flexible and inflexible solutions: fixed-term contracts are prohibited for permanent tasks, but their length is not limited. Redundancy and reassignment rules pose stringency in determining staffing, but severance payments and notice periods are flat and do not rise with years in tenure. Collective bargaining agreements are numerous, covering numerous industries across the economy. Trade unions, which are included in the social dialogue, are connected to political parties and use their influence as a bargaining chip for dealings other than worker rights. The minimum wage was sharply increased in January 2017, almost doubling and now reaching 50% of the average wage.    

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Freedom to Trade Internationally

Freedom to trade internationally in Ukraine is generally upheld. Ukraine has been a member of the World Trade Organization (WTO) since 2008, which supported trade liberalization. Trade questions have always been politically relevant, especially as regards the relationship with the Russian Federation. Ukrainian government declined the offer to join the Eurasian Economic Union and signed a trade agreement with the EU, under implementation since 2016. The Russian ban on imports of agricultural products from Ukraine and transit ban for other products following the political clashes severely hit the economy, but trade flows shifted towards the EU. In March 2017, the government of Ukraine banned commercial trade with eastern regions controlled by the separatist forces, which again hit

the economy, as imports of coal for energy and heavy industry sectors plummeted, which translated to lower exports. Low quality of transport infrastructure provides hurdles to international trade, increasing costs and time; quality of roads is especially worrisome. Custom procedures are slow and demand long hours in document processing, both for import and export. The National Bank of Ukraine has recently been carefully easing some of its capital controls that were put to action after the 2014 crisis in which the national currency, the hryvnia (UAH), had plummeted. However, those controls are still widespread even though the national currency is stable. Mandatory foreign currency sales to the National Bank were decreased from 65% to 50% in February 2017. Ukraine became member of the WTO Government Procurement Agreement in June 2016, further liberalizing the sector for foreign competition. Main Ukrainian trade partners are the EU, Russia, China and Turkey, followed by other CIS countries.

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