How to help Ukraine's Economy Reform and Grow

Brussels, 15 April 2015

Johannes Hahn, Speech at Bertelsmann Stiftung event

Distinguished guests, ladies and gentlemen,

The title we have been given today is " How to help Ukraine's Economy Reform and Grow" – which correctly identifies that a better future for Ukraine can only be achieved through bold and urgent change.

Those who devised our programme have added in the title that this is "A test case for the European Union". Well, maybe. The challenges in our Eastern neighbourhood are a test of Europe's unity and resolve. But as in all such cases, it is above all Ukraine itself that must find the will and the courage to reform and reinvent itself.

In any case, the EU will be the key player supporting the necessary changes, and I'm delighted to have the opportunity to speak to you today about how the EU is supporting Ukraine's transition. 

The challenge of economic recovery

Like the authors of the study that is being presented today, I have always asked myself why Ukraine is not more like Poland, or other Eastern European nations.

We know that in 1991, Ukraine and Poland had a similar GDP per head.  Now Polish GDP per head is three times higher than in Ukraine.

Change in Poland required political will and tough choices, and cooperation between political parties, Government and Parliament. It required technical capacity and teams able to work over sustained periods on seeing work through.   It required wide support throughout society. 

We know that Ukraine has taken a different path. But the conditions have never been as favourable as they are today, despite the massive pressures on the economy, and the fragile situation in the east. 

We count on the current pro-reform and pro-EU government, and majority in the Rada to act now and seize the moment. Reforms are tough, and public opposition to some necessary but painful changes has to be faced. This requires courage and leadership.  

The EU will try to play its part in ensuring that Ukraine does not lack the means to change, if it has the will.

EU support for fundamental reforms

We're supporting our Ukrainian partners in every way possible, together with our Member States and our partners at the IFIs, and the IMF.   We have already quickly mobilized a broad – I might say  unprecedented - range of instruments in response to the country`s needs.

Since Maidan we have mobilised around € 6 billion taking together macro financial assistance, grant aid and support from European financial institutions.

The majority of this funding effort is tied to reform conditions, which we seek to co-ordinate with others in the donor and investor community.  

The EU and Ukraine have agreed on 10 reform priorities under the joint Association Agenda and our conditionalities help to ensure the reform process is driven forward on: constitutional and electoral reforms; combatting corruption; judicial reform; public administration reform; deregulation; public procurement reform; tax reform; audit; and energy sector reform.  

Our financial support thus helps to bridge the budget shortfall – but also provides momentum for the changes needed to boost Ukraine's economic performance and attract foreign direct investment.

And, alongside the financial support, we offer expertise and advice, through the EU Delegation and an EU Advisory Mission in Kiev, and a dedicated Support Group for Ukraine based in Brussels.

Our experts help provide technical assistance on the drafting of new legislation, and supporting ministers in the development of reform strategies in key sectors like energy and agriculture.   

To take an example: in order to become less vulnerable to external pressures, and return to economic health,  Ukraine needs to build a robust modern state underpinned by the rule of law. 

The EU has fielded a number of experts to the President's Judicial Reform Council.  With this support Ukraine now has a justice reform strategy in place. A new law on the judiciary and the status of judges was adopted in February. It sets out clear rules for the selection, appointment, and dismissal of judges.  A new law on public prosecutors is expected to come into effect shortly. We are ready to identify EU specialists to advise on the implementation of the new legislation, and on the training of a new generation of judges and lawyers. 

Above all, if Ukraine wants an investment-led recovery and to send a clear signal to its friends, it has to get to grips with corruption.   A new National Anti-Corruption Bureau is being established with EU support, to investigate high level corruption cases.

Corruption must be punished, but more important still, it must be prevented and a new professional culture of openness and transparency created.  Member States and the Support Group are helping establish electronic databases for a truly transparent asset disclosure and verification system.

The litmus test of the fight against corruption will be public procurement and the privatisation of State Owned Enterprises.  The Support Group will be advising on how e-procurement - simple, open and transparent procedures online – can combine with effective oversight to prevent abuse.

Energy has been a major source of corruption, and a major drain on the state budget.  Therefore, beyond brokering a gas deal between Ukraine and Russia, the  EU has provided expertise on gas sector reform and much more – but I will return to this later in my speech. 

The situation in the East is the greatest deterrent to investors, but there are other important challenges to  business and investment.   

The new Minister for Economic Development and Trade is working to make a bonfire of obsolete regulations and licensing requirements – in line with the European Union Association Agenda. That is very welcome.

As part of a wider effort to rebalance the Ukrainian economy away from its current dependence on big business in the hands of the few, the relevant Rada Committee has consulted the Commission on the development of a new law in support of Small and Medium-sized Enterprises.  Later this year we expect to commit significant funding to a joint programme with the European Bank for Reconstruction and Development EBRD, and the European Investment Bank, to support SMEs and entrepreneurship across the regions of Ukraine.

To implement and sustain all these reforms, Ukraine needs a modern civil service.  Through the Organisation for Economic Co operation and Development Support for Improvement in Governance and Management, (OECD SIGMA) and our own Support Group, we closely advised on a new civil service law, and are now engaged in the formulation of a broader public administration reform plan to reduce overstaffing, and attract appropriately qualified and motivated staff.  

It is hard to overstate the amount of work still to do: but I would like to put it to you that change in Ukraine is possible; is happening; and is happening with indispensable EU support.

The role of trade in Ukraine's economic development

I'd like to say a few words about trade. Your study rightly recognises that integration with Russia and the EU 'are not in principle mutually exclusive'.

The study goes on to suggest that an at least partial restoration of trade links with Russia and the so-called Eurasian Economic Union will be important to Ukraine's economic recovery, and that Ukraine should aim to diversify its export markets and develop trade relations in many directions.

Let’s get this straight: the European Union is not looking for an exclusive economic relationship with Ukraine, and never has.  There is nothing in our new agreement that would stop Ukraine continuing to export products to Russia. The approximation with EU standards will not prevent Ukraine trading with Russia:  the EU itself remains a major trading partner for Russia. We are by far the biggest destination for Russia's exports, and nothing on our side stops Russia from exporting to and investing in Ukraine.

The Association Agreement, along with its trade part, with the European Union leaves Ukraine free to determine its own trade policy. Ukraine already has preferential trade relations with the members of the Eurasian Economic Union within the framework of the Commonwealth of Independent States Free Trade Area. These are perfectly compatible with the Deep and Comprehensive Free Trade Area and there is no reason why they should not be maintained.

So, the EU-Ukraine bilateral DCFTA does not impose a false choice on Kiev. Those who say so are wrong, and may have their own agenda.

What the DCFTA does do, is help Ukraine approximate to the EU's world class norms and standards – just as Poland did 20 years ago - in ways that will ultimately boost its competitiveness and foreign direct investment. AND, while the EU already unilaterally removed most tariffs in April 2014, Ukraine will benefit from some  transitional periods after the DCFTA enters into force, before it is obliged to match this completely.

Let me say that the European Union has been active and open to discussing potential Russian concerns.  We are convinced that any justified Russian concern can already be addressed within the flexibility offered by the DCFTA, as it stands. But, there is no possibility for renegotiating the agreement, which a large number of Member States have already ratified.

Energy sector reforms crucial for investments

My last point is energy, an area of clear mutual interest and in many ways the acid test of whether Ukraine can prove the pessimists wrong, beat corruption and attract inward investment.

A new gas law was approved in March, actually slightly ahead of schedule. There is agreement on how to restructure state energy company Naftogaz. It has taken political courage to adopt large price increases for gas, heating and electricity recently.  The Government is well aware of the need to increase transparency in the energy sector not least to fight corruption and increase revenues. I agree with your study, that this will require a comprehensive programme of metering in the municipal, industrial and consumer sectors, and we need to support Ukraine on this.. 

There is of course, plenty more work to do not least in the electricity sector where legislation is still under preparation; and on energy efficiency and renewables, where progress is urgently required.

Energy Efficiency is too often regarded as the soft end of the energy spectrum: but frankly, in Ukraine's case this is a matter of energy sovereignty – and the country's wider security.  

If Ukraine were to increase energy efficiency to the EU average level, annual energy savings would be about 34 billion cubic metres (bcm) of natural gas.  This is more than Spain's entire gas consumption.  And it would mean that Ukraine no longer had to import gas.  Just think what that would mean in terms of national security.

Ukraine uses three times more energy to produce a unit of GDP than the OECD average. Under these conditions it is very hard for business to be competitive, and the sorry state of the Ukrainian economy is partly due to its wasteful use of energy and the lack of investment in the sector. 

And yet, Ukraine lacks a National Energy Efficiency Action Plan

The Support Group has been providing intensive advice to the State Agency for Energy Efficiency and to the Rada on the introduction of energy efficiency legislation. Clearly the international community will need to help with the necessary up-front investments, and a number of EU Member States and International Financial Institutions are working on this.  

As I said at the start, we can and will offer support, but we will need to see a clear choice from the Ukrainian government itself to make this a priority area, and to take the actions necessary to bring the private sector on board.

Ladies and gentlemen,

There are many challenges that I have not been able to touch on today. First and foremost, of course, the vital need for implementation in their entirety of the Minsk arrangements with full respect for the ceasefire and withdrawal of heavy weapons. Constitutional reform. Decentralisation.  The holding of local elections later this year.

At the EU-Ukraine Summit later this month the EU will be discussing all these challenges with our Ukrainian partners at the highest level, and the following day we will be joining others from the international community in demonstrating our support for Ukraine at a reform conference hosted by the President.

I believe that Europe must take its responsibilities in its own neighbourhood even more proactively.  We should not count on others, from other continents, to solve our problems.   If we want to demonstrate that the EU matters in the world, surely it is in our own backyard that we must begin.

How to help Ukraine's economy reform and grow?   The answer is that we must show those who believe Ukraine incapable of change, doomed to corruption and oligarchy, that they are wrong. The EU is fully playing its part in this: Ukraine must also make its own, unprecedented, efforts.

European Commission

http://europa.eu/rapid/press-release_SPEECH-15-4786_en.htm