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Ukrainian children looking for food. Photo supplied

Aid to Ukraine: Barrel without a bottom

The failed state of Kiev: How corruption makes Ukraine a dysfunctional entity

Published: January 1, 2019, 5:11 am

    Before Christmas the International Monetary Fund (IMF) approved a new loan to Ukraine for 3,9 billion dollars. This loan was, according to repeated statements in the media by Ukrainian authorities, absolutely needed and long-awaited as the country faces huge external debts, hostilities at the Eastern front and rising levels of poverty.

    Therefore, anyone trying to understand the situation in Ukraine might have had an idea that a new IMF loan would be used by the Ukrainian leadership for at least minimal efforts on stabilizing of the dire sociо-economic situation in the country.

    But the Ukrainian leadership itself evidently had other plans for the IMF money.

    Ukrainian media exploded with the news announced by the Ukrainian Ministry of Information Policy, when the Ministry ordered advertising videos on the US CNN channel for 15.4 million Hryvnia (around $550 000) right away. But neither the message that the video is supposed to convey, nor the target audience are very clear.

    At the same time the Ukrainian government announced hikes in gas prices as well as increasing heating tariffs for the population.

    These price hikes beg the question of how exactly funding by the state in Ukraine is managed, especially in the light of the following couple of brief facts: Ukraine occupies the 130th place on the Corruption Perceptions Index, research provided by Transparency International shows, and 150th place on the Index of Economic Freedom, according to The Heritage Foundation and The Wall Street Journal.

    One of the biggest corruption scandals of Ukraine in recent years that has been stirring up resentment in Ukrainian society, has been the so-called “Rotterdam-plus” scheme. Rotterdam-plus is the method of pricing the fuel component – coal – in the production of electricity at plants in Ukraine.

    The scheme started in May 2016, as a result of Ukraine’s loss of control over part of the Donetsk coal basin following the conflict in Donbass. Since Donbass coal was previously almost completely under control of the rebels, the Ukrainian government decided to ensure energy independence and to buy coal on the international stock exchange in Netherlands. The actual coal comes from South Africa and South America.

    The cost of fuel, according to the Rotterdam-plus formula, is determined by the price of coal in the ports of either Amsterdam, Rotterdam or Antwerp, plus the cost of its delivery to Ukraine.

    So, according to this formula, Ukrainian electricity plants had to conclude contracts with foreign counterparties to buy coal priced on the basis of this formula. But in reality most of electricity plants – which are mostly tate enterprises anyway – were still buying coal in the Donbass region at the price of around 700 hryvnias (around 25 dollars) per ton.

    Onto the price of coal – the main component of the cost price of 1800-2000 hryvnias (around 64.5-71.7 dollars) per ton – the tariff was nevertheless added.

    And the fact remains that from January to November 2016, the price of electricity in Ukraine doubled while the coal for the electricity plants was still delivered from Donbass, and not from foreign countries.

    Also, the price keeps getting higher with each passing year. Clearly, “Rotterdam-plus” has become a golden goose for certain state structures while being an additional burden for the population, since it is costing about 15 billion hryvnias (around 500 million dollars) extra per year.

    Other recent corruption scandals include the so-called “September stories”. On September 13 2018, three Ukrainian top officials, namely the deputy head of the Security Service of Ukraine (SSU) Pavel Demchina, the Minister of Justice Pavel Petrenko and the Minister of Infrastructure Vladimir Omelyan were linked to corruption.

    Demchina and Omelyan were suspected of illegal enrichment, while Petrenko was suspected of submitting false information in a tax declaration.

    Thus, in the pre-election period in Ukraine, chances are that massive corruption and fraud details will soon be leaked. That obviously does not mean that there was less corruption cases before the election campaign started.

    Actually, Ukraine has been climbing on the corruption index with every passing year – at least according to Transparency International.

    The pre-election period in Ukraine may prove to be a boon to those who like to share interesting facts about corrupt officials in order to gain some political capital by denouncing their electoral rivals.

    Despite a growing wave of corruption-revealing information, American partners of Ukraine seem unfazed since the IMF is still providing financial help to Ukraine and not actually demanding reports on how this help is spent. The situation with European donors to Ukraine is different.

    On Wednesday the European Commissioner for Migration, Internal Affairs and Citizenship Dimitris Avramopulus stated that Ukraine “should take immediate steps to overcome corruption in order to preserve the existing procedure for visa-free travel of Ukrainian citizens to EU countries”.

    German MP Markus Frohnmaier is another European official who has raised the issue of the German government’s responsibility towards its taxpayers in the framework of German–Ukrainian “common projects”.

    “After a request from Frohnmaier about financing projects with Ukraine against the backdrop of rampant corruption there, the response of the federal government was surprising: The German government described the development of cooperation with Ukraine as “successful”.

    Considering the extremely high position of Ukraine on the index of corruption, such an answer from the Merkel-government raises lots of other issues, including reducing or even cutting financial aid to Ukraine. Halting German funds altogether is the only possible way to prevent the squandering of German taxpayers’ money by Ukrainian authorities.”

    ksenia.medvedeva@freewestmedia.com

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