The United States of Sanctions
The Use and Abuse of Economic Coercion
At the recent G-7 summit, U.S. President Donald Trump was reported to have told fellow world leaders that “Ukraine is one of the most corrupt countries in the world.” Small wonder: for years, U.S. government officials and their European counterparts have publicly castigated Ukraine for dragging its feet on corruption. So too have Western media outlets, whose narrative often echoes the fictitious Russian talking point that Ukraine is a failing, if not failed, state.
Although corruption is a serious problem, the West’s obsession obscures the progress that Ukraine has made in dramatically reducing its scope. Many Western observers have also ignored the other enormous positive changes that Ukraine has experienced since the Euromaidan revolution of 2013–14, which ousted the corrupt, pro-Russian President Viktor Yanukovych, triggering Russia’s annexation of Crimea and its invasion of the Donbas in the country’s east. Since then, any hopes that the Kremlin had of keeping Kiev under its thumb have been lost, as Ukraine has set itself on a firm pro-Western, pro-reform course that is probably irreversible. It is no exaggeration to say that, contrary to its image, Ukraine has experienced more positive change and done more things right than any other European state in recent years.
In almost every sphere, there is evidence of remarkably successful reforms and development in Ukraine. For the first time since independence in 1991, Ukraine possesses a genuine army capable of defending the country. At the time of the Russian invasion in 2014, the country had some 6,000 battle-ready troops. Now it has one of the best armies in Europe, numbering over 200,000 volunteers and professionals. It has refurbished formerly out-of-service tanks and armored personnel carriers, developed new missiles, and produced new heavy artillery. Ukraine also possesses a combat-ready national guard of 60,000, a reformed police force, and a revamped security service that has successfully interdicted a number of Russian-financed efforts at promoting terrorism on Ukraine-controlled territory.
The country is also finally developing a functional state apparatus, both nationally and locally. The government has trimmed its bureaucracies, increased its salaries, and clearly defined various functional authorities. Ukraine’s ministries employ roughly as many civil servants per capita as do Germany’s and Poland’s. The days of a bloated apparatus prone only to bribe-taking and indolence are gone. Decentralization of authority has proceeded apace, and local budgets have doubled within the last two years, leading to improved roads, schools, and cultural centers.
The economy, which contracted by more than 20 percent in 2014–15, is finally growing this year at a respectable 3.5 percent clip. To be sure, Ukraine needs to grow at twice that rate to catch up with its neighbors to the west, but the important thing is that it has finally lifted itself up from the depression that followed the Russian invasion. The government has fixed the banking sector and—together with a burgeoning number of Chinese investors—is spending huge amounts to fix roads and railroads, modernize airports, dredge ports, build new highways and tunnels to the West, and invest in renewable energy. Ukraine’s IT sector is booming and has become one of the largest and most dynamic in the world. Its agricultural exports (grains and poultry, in particular) are growing steadily and, with large segments of productive land currently fallow, there is further huge upside potential. Next year should see a massive sell-off of remaining state-owned enterprises and, quite possibly, the privatization of land, which would immediately bring hundreds of millions of dollars into state coffers and further reduce the scope for corruption.
In contrast to Western criticism, Ukraine has made great strides in reining in corruption.
Indeed, in contrast to Western criticism, Ukraine has made great strides in reining in corruption. A series of gas pricing, procurement, banking, and tax system reforms have restored as much as $6 billion per annum in revenues formerly stolen from the state, according to a soon-to-be-released study by Ihor Burakovsky, an economist from Ukraine’s Institute for Economic Research and Policy Consulting, an independent think tank. The study points to the drastic reduction in corrupt gas price arbitrage, transparent online bidding for government contracts, the closing and tight control of allegedly corrupt banks, and a clampdown on money laundering, which the Yanukovych regime’s tax administration colluded companies to facilitate. Small wonder then that the black market’s share of the Ukrainian economy has dropped from an estimated 40–50 percent to around 33 percent. Ukrainians are also increasingly paying their taxes; the practice of getting paid under the table, although still widespread, has been significantly reduced in scope.
While all this change has been taking place, Ukraine has raised its military and security expenditures to approximately five percent of GDP, fought a war with Russia and its proxies to a standstill, introduced far-reaching reforms of its health, pension, and education systems, and still managed to remain democratic. The Ukrainian media are still free to harshly criticize the government, and the country’s opposition parties are vocal, vibrant, and well-funded. To be sure, Ukrainian democracy is imperfect. The parliament is frequently raucous and undisciplined. The government can be sluggish. The courts are unreliable. The president, although a supporter of new reforms and anti-corruption institutions, has resisted pressing for corruption prosecutions. Vigilantism and far-right groups do not pose a threat at present, but could if stability were to unravel. All in all, however, Kiev has stuck to the democratic rules of the game, despite the fact that war, rapid change, and economic penury often incline states toward authoritarianism. Ukraine’s commitment to democracy is especially striking in comparison to the significant backsliding that has taken place in Poland and Hungary, both EU members long touted as exemplars of irreversible democratic transitions.
Ukraine is also experiencing a breathtaking cultural revival. Its film industry is back, after being moribund for over twenty years. Publishing is booming and books are selling briskly, despite Ukrainians’ relatively low salaries. Music, art, theater, poetry, and prose are experiencing a renaissance, while Ukrainian identity is consolidating—without xenophobic consequences. A 2016 survey by the Pew Research Center, for instance, showed that Ukraine’s level of anti-Semitism was the lowest in all of central and eastern Europe.
Even the ongoing war in the Donbas has offered an unexpected boost for Ukraine, as it has galvanized Ukrainian identity and patriotism, moved the government to adopt needed reforms, and removed a reactionary, pro-Russian, anti-Western, and anti-reform electorate from the political calculus. The conflict has also reduced the power of billionaire oligarchs, who have lost key assets in Russian-occupied areas and seen state pressure increase against some of their rent-seeking schemes. Dmytro Firtash’s gas empire has been smashed, while Rinat Akhmetov’s and Igor Kolomoisky’s hold on their bailiwicks in southeastern Ukraine has been seriously weakened.
All of these changes have set Ukraine well on the way to meeting its strategic goal of decoupling from Russia and embracing the West. It is now able to defend itself against any Russian aggression short of a full-scale war, and has freed its economy from dependence on Russia’s, with the result that Ukraine will soon become a full-fledged member of the world economic system.
Of course, there is still work for Ukraine to do. This includes, first, coordinating its reforms better, so as to avoid duplication, contradictions, and the loss of stability that comes with too much changing too quickly. Second, the government obviously needs to tackle remaining corruption, especially in customs services and state enterprises. The way to do that is not to focus only on prosecuting individual wrongdoers but to increase efforts to address the structural and institutional sources of corruption. Officials take bribes and steal not because they are morally deficient but because they earn too little and control access to scarce resources. Continuing to raise salaries and reduce government control over key areas is thus the best policy prescription. Third, Ukraine needs to accelerate its annual economic growth to five or six percent in order to sustain necessary military expenditures, protect itself from Russian predations, and present itself to Europe as fiscally independent and worthy of closer integration.
If Ukraine’s reformist project fails, it won’t be for insufficiently tackling corruption. Rather, the two most immediate threats to the country’s continued positive development are the forthcoming parliamentary and presidential elections and Russia.
Petro Poroshenko is without doubt the best president that independent Ukraine has had. He’s hardly without flaws, but it has been under his watch, and in no small measure thanks to his initiative, that Ukraine has reformed as much as it has. Despite a strong record, his reelection next March is by no means guaranteed. Meanwhile, most alternatives to him, including Yulia Tymoshenko, Oleh Lyashko, Volodymyr Zelensky, and Yuri Boiko are populists, demagogues, untested outsiders, or politicians with close links to former President Yanukovych. Worse still, his party will likely lose its majority in parliament, leading to legislative fragmentation and possible paralysis. If a populist replaces Poroshenko and the Rada fragments, Ukraine’s reforms will stall and another popular rebellion will become more likely.
In their narrow focus on corruption, many experts in the West forget that rapid socioeconomic change of the kind Ukraine has experienced since 2014 can be destabilizing in the absence of strong and stable political elites and institutions. This insight, made forcefully by the late political scientist Samuel P. Huntington in the 1960s, holds true today. The very last thing a rapidly changing society needs is a political system that is being undermined from within, by internal critics of corruption, and from without, by a West that underestimates Ukraine’s rapid pace of change and a Russia that appreciates that, unless stopped soon, Ukraine will leave its orbit forever.
It is unfortunate that the demands the International Monetary Fund is making on Ukraine present the current leadership with serious dilemmas. The IMF is insisting on a strong anti-corruption court, which is a desirable end, but it is also pushing for an inflexible 40 percent one-time increase in gas tariffs, which would be politically ruinous for Poroshenko and the gradual reformists now in charge of government. Unfortunately, the IMF has a long record of focusing only on macroeconomic reforms without considering their effects on already impoverished populations able to express their discontent by voting or taking to the streets. A precipitous wage hike on the eve of the presidential campaign would propel public anger, strengthening outsiders and populists. An end to the IMF’s program of support could lead to currency devaluation and inflation as well as potential default on debt, which would only propel populist alternatives and set back current gains.
The most serious immediate threat remains Russia and its aggressive president, Vladimir Putin. Whereas corruption can reduce Ukraine’s long-term viability, only Russia can destroy Ukraine overnight. Will Putin increase internal subversion efforts, escalate the fighting in the Donbas, or invade some other part of Ukraine? The costs would be high, as Ukraine’s security forces are demonstrating effectiveness and the armed forces are a battle-hardened and professional force that would fight back fiercely. But Putin, facing the twilight of his career and sensing that NATO may have become a paper tiger, may just be tempted to initiate a “quick little war” in order to sustain his popularity. The consequences of such a misadventure could be disastrous for Ukraine—and for Russia as well as, ultimately, for Europe.
With a clear-eyed view of these threats, the lesson for the West should be obvious. Western governments and international financial institutions must abandon their nearly exclusive focus on corruption and broaden their view of Ukraine to include the many positive things happening in the country. The West needs to continue to support Ukraine economically, diplomatically, and militarily. This is so not only because Ukraine is the only thing standing between Europe and Putin’s Russia but because, as a rapidly Westernizing country that has made remarkable progress over the past four years, Ukraine simply deserves it.