Speech delidered by George Soros at Conference "Reforms: Tiding Over the "Old" Ukraine (13 Novebner 2015, Kyiv, Ukraine)
Speech delidered by George Soros at Conference “Reforms: Tiding Over the “Old” Ukraine (13 Novebner 2015, Kyiv, Ukraine)
I have been in Ukraine for a week and I have come to realize that the situation is not as promising as I had thought from the outside. The new Ukraine performed miraculously when it was unified by an outside threat, Putin’s implacable hostility. After years of hardship and sacrifice, people are eager to relax and pursue their personal or political interests. This is opening up fault lines that were previously held together by the pressure emanating from Russia. I see a real possibility that the objective that Putin could not achieve by military means may fall into his lap as a result of a lasting cease-fire.
The ruling coalition has very little choice. The country cannot afford either new national elections or a change in the composition of the coalition. Both would disrupt the Ukrainian government for several months and the country faces a fiscal emergency if does not meet the conditions imposed by the IMF by the end of the year.
Let me now comment on the reform process in some detail, taking economic reforms first. Clearly the most important project, the linchpin of economic reforms is the reorganization of the energy sector and particularly the gas sector. It is in very good hands with the current leadership of Naftogaz. The key is to move the price of natural gas closer to the market prices prevailing in Europe. This is necessary to stop the enormous drain on the national budget represented by the hidden subsidies provided to the public by Naftogaz but this poses a serious political challenge.
The government introduced a substantial increase in gas tariffs but many millions of households simply cannot pay on top of all other hardships they have had to absorb. They will need direct subsidies. This requires a massive operation and, although the government is fully committed to making it a success, many things can go wrong. Think of all the things that went wrong with the introduction of Obamacare in the United States. The government has recognized that the best way to guard against a possible breakdown is to promise households that their application for a subsidy will be easily approved for this winter current heating season. This will give the authorities nearly a year to correct any errors.
But that is only the first half of the necessary gas sector reform. As things stand now, households are required to pay not only for the gas they consume but also for the gas that is lost in transmission. This should be corrected. Starting in 2016, the companies that supply the consumers like the pipeline oligopoly controlled by Dmytro Firtash, should be responsible for the losses they incur. If they fail to do so, they should go bankrupt and their businesses taken over by more competent operators.
The privatization of the gas and electricity sectors will also be full of pitfalls. There are many rumors about various oligarchs obtaining or reestablishing oligopolies but, paradoxically, I find these rumors reassuring. If I heard them, so did others and there are enough genuine reformers in the Rada and the government and eventually in the anti-corruption agencies to stop this from happening.
There is one major area of economic reform where little progress has been made: tax reform. This is now at the top of the finance minister, Natalie Jaresko’s agenda and, since I regard her as one of the true reformers, it has become my top priority as well. People need to have some certainty about their future tax liabilities in order to make long-term investments. A tax reform package that removes uncertainty, ensures fairness and reduces corrupt practices is imperative.
Currently there are several different tax reform measures being debated in the Rada. I strongly endorse the finance minister’s plan because it is the only one that meets the requirements of the IMF. It introduces a uniform flat tax of 20% to replace a tax code that is so complex that it breeds corruption. But the plan faces an uphill battle.
It will add a significant additional burden to the budget of 60 billion hryvnia (about $3 billion) because the IMF will not recognize the additional revenues it will produce until they materialize. Even the IMF advises against introducing the plan at this late stage but the finance minister insists because she recognizes the public clamor for meaningful reforms.
Civil service reform is second only to tax reform. The first reading of comprehensive legislation was already passed in April. Both President and Prime Minister must ensure that the final legislation scheduled for November 24, will be passed. The European Commission has reserved considerable funds to top up government salaries but predicated it on the bill’s passage and a strategy and action plan adopted by the government. As the EU Ambassador to Ukraine noted, the EU will support and give assistance “to get the new Ukrainian civil service on its feet.” But the amount of money they allocated, which was just mentioned by Mr. Berend de Grood as 160 million dollars, is not enough and there is a fatal flaw in the current design: the salaries of members of the government and members of the Rada are limited to about 200 euros. This is an invitation for corruption.
Judiciary reform is another priority. An important event occurred on October 23rd when the Council of Europe’s Venice Commission rejected the corrupt Ukrainian judiciary’s appeal against wrongful dismissal and modified its hitherto rigid insistence on judicial independence which allowed a corrupt judiciary to perpetuate itself.
Impressively, two fundamental components of judicial reform were recently introduced by the National Reform Council: requalification procedures and a wholesale reorganization of the judicial system whereby current judges will be able to reapply. This amounts to a breakthrough and I look for more rapid progress from now on.
I believe that the Prime Minister and President are close to agreeing on some necessary personnel changes in the Cabinet. This will remove the currently prevailing uncertainties and give the reform process new momentum.
Time is running out. The sooner the ruling coalition commits itself to the only course that is open to it, the better the chances that the country can avoid a fiscal calamity that could destroy it. That is what happened earlier this year and it worked.
Both the people and the supporters of the new Ukraine abroad are looking to the President to take charge of the reform process for which the public is clamoring. I am convinced that he is ready to do so and the moment he does, the country will follow him.
