Anti-corruption backtracking in Ukraine – has Ze reform moment passed?

The Constitutional Court in October cancelled key anti-corruption measures in a ruling opposed by President Volodymr Zelenskiy – marking the most significant episode of backtracking on reforms under Zelenskiy’s watch so far. We examine the state of the reform agenda given Zelenskiy’s weakened position, and the prospect of genuine changes in the business environment in the coming months.

• The backtracking on anti-corruption achievements underscores the continuing influence of vested interests on public institutions, as well as the persistence of high-level corruption.
• Zelenskiy’s attempt to block the court ruling has triggered a constitutional crisis that is unlikely to be resolved in 2020. If not reversed, these changes will exacerbate integrity risks by helping to decriminalise corruption by government officials.
• As a result, Ukraine is highly unlikely to receive a scheduled IMF loan tranche this year. The future of the country’s IMF loan is increasingly precarious.
• While Zelenskiy’s momentum has not yet completely waned, his ability to spearhead anti-corruption reforms will likely further weaken in the coming months. The business environment will remain opaque and challenging for foreign investors.

Critical juncture

Zelenskiy’s pledge to tackle corruption is facing its worst moment since he took office in May 2019. The country’s public institutions have been struggling – or rather have been unwilling – to break their links with vested interests, which benefit from the status quo of corruption and cronyism. The Constitutional Court on 27 October ruled that the National Agency for Prevention of Corruption (NAPC) could not punish government officials and judges for filing incorrect information in asset declarations. The government in 2016 introduced the mandatory electronic asset register to fight corruption by public servants, but the court’s 2020 ruling essentially eliminated the e-declarations, which are no longer available to the public. The ruling threatens to undermine progress made on tackling corruption since the 2014 popular uprising that toppled then-president Viktor Yanukovych.

Meanwhile, Ukraine is struggling to suppress COVID-19, and a continued increase in new daily infections threatens to overwhelm the healthcare system. According to Johns Hopkins University, Ukraine on 27 November had the 16th highest COVID-19 mortality rate in the world at around 27 deaths per 100,000 inhabitants. Regional governments have largely defied orders from the central government in the capital Kyiv to restrict movement and economic activity, making the central government look weak and complicating virus suppression.

Constitutional Court crisis

Corruption across many sectors and a weak judiciary remain some of the greatest obstacles to investors in the country. The two problems are intertwined. The court’s decision was almost certainly driven by conflicts of interest among the judges as much as it was driven by their likely ties to vested interests.

At least four of the 15 judges on the bench are facing probes for discrepancies in asset declaration forms, and the reversal of these regulations would certainly help their cases. The legislators who appealed the legality of these regulations are widely believed to be backed by oligarchs and other vested interests – powerful, well-connected business figures with an interest in preserving cronyism and preventing transparency in governance. This points to increasingly bold moves by these interest groups not only to obstruct, but also reverse anti-corruption reforms.

Zelenskiy was quick to condemn the court’s ruling. He has reiterated his commitment to anti-corruption reforms, and on 30 October presented a bill to parliament on dismissing and replacing all constitutional judges by a special selection committee. The French government and local anti-corruption watchdog Antac have voiced support for this proposal. However, the situation has since reached the scale of a constitutional crisis, as neither Zelenskiy nor the parliament has the power to replace the judges. Meanwhile, parliament has not yet backed Zelenskiy’s bill, which lacks support even within his own Servant of the People (SoP) party, and to which all four opposition parties are opposed. The court has been largely closed due to COVID-19 cases among the judges and is unlikely to reopen until early January. Consequently, the deadlock is unlikely to be resolved by the end of 2020.

One exit from this crisis would be the resignation of the judges, but vested interests pressuring them to stay makes this unlikely. A more likely outcome sees parliament vote to restore some of the anti-corruption provisions, but this would be a temporary solution as the court would label them unconstitutional. The court’s susceptibility to vested interests means that attempts to unravel the anti-corruption agenda will continue, as will attempts to decriminalise corruption by government officials. This will constitute a major setback for the anti-corruption agenda.

IMF funding under threat

Both Zelenskiy’s predecessors, Yanukovych and Petro Poroshenko, left office having exacerbated corruption or failing to address it. Former actor and comedian Zelenskiy – who had played a reform-minded president in a popular TV series – won the presidency in 2019 by a landslide. His campaign message resonated with millions of Ukrainians: eradicate corruption, raise living standards, and end the conflict in the east. With the SoP’s unprecedented majority in parliament, the administration made significant strides in late 2019 and early 2020 by lifting a nearly two-decade-long ban on the sale of agricultural land to Ukrainian buyers (foreign buyers are still banned) and setting the stage for the privatisation of large state-owned companies.

The recent backtracking on anti-corruption reforms – and a questionable government reshuffle in April – will almost certainly lead to Ukraine not receiving its second IMF loan tranche worth USD 3.5bn, which had been due in late 2020. The IMF’s USD 5bn loan announced in June is conditional on several issues, including the government’s continued commitment to and progress on anti-corruption reforms and keeping oligarchic interests at bay. Failure to secure the second tranche would constitute a clear sign of the IMF’s waning faith in the government’s commitment to reforms.

The standoff between the president and the court will likely continue in the coming months, leading to more setbacks in the reform agenda. The future of the IMF loan is increasingly precarious. Nonetheless, we continue to believe that Zelenskiy is genuinely keen to maintain the country’s relationship with the IMF – Ukraine’s main source of external financing since 2008. This is especially critical as government expenses have soared in 2020 due to COVID-19 – and because an additional USD 1.2bn in macroeconomic assistance from the EU is contingent on the IMF loan.

Is Ze reform moment gone?

Zelenskiy’s public approval ratings are likewise weakening. In September, they had reached an all-time low of 35%, according to credible local agency Rating Group – down from 70% in September 2019. Public opposition to open-market reforms and the government’s national COVID-19-related lockdown measures in March-May likely caused the drop.

While Zelenskiy has not yet lost his momentum entirely, his ability to spearhead the reforms will likely weaken further in the coming months. He remains the most popular figure for presidential office – the survey in September showed that more citizens would back him for president than any other politician if an election were to take place now. However, it takes more than a president to clean up the government. His party remains in control of parliament and likely will continue to do so in the coming months, but internal party divisions and opposition parties’ resistance to reforms are likely to grow more pronounced.

Zelenskiy’s political inexperience and the genuinely difficult task of reforming entrenched connections between vested interests and political institutions will also slow down the pace of reforms. The refusal by various regions in the past few months to follow central government orders relating to COVID-19 is a case in point. These centre-region tensions shed light on the nature of challenges to implementing reforms across regions. Central government orders were legally binding, but local governments populated by longstanding candidates not affiliated with Zelenskiy’s party were powerful enough to defy them. Meanwhile, the SoP in the nationwide local elections in October-November lost ground to the Russia-friendly Opposition Platform – For Life Party, whose MPs have resisted anti-corruption reforms, which will likely exacerbate the centre-region tensions.

The business environment will remain opaque and challenging for foreign investors. Substantial reforms in the business environment are unlikely in the next six months at least, especially as the government will remain focused on suppressing COVID-19 and economic recovery.