Assessing the importance of reforming Ukraine

Ukrainian President Volodymyr Zelensky (Copyright;, CC BY 4.0 , via Wikimedia Commons )

On Monday, EU foreign ministers agreed to impose new economic sanctions on Moscow in case of a Russian aggression against Ukraine.

Western sanctions against Russia are already in place since July 2014, targeting Russia’s energy, banking and defence sectors. New sanctions would be gradually increased and range from possible travel bans and asset freezes on Russian politicians to outright financial and banking restrictions on trade with Russia.

Reportedly, there could also be specific Russian corporate targets, with the Russian state-owned defence, energy companies or cancellation natural gas contracts.

The most-high profile victim could be the Nord Stream 2 gas pipeline between Russia and Germany, which still needs to become operational.

Even if EU High Representative Josep Borrell stressed that any action would be coordinated “together with the U.S. and the UK”, decisions on Nord Stream 2 are obviously the preserve of the German government.

On this issue, Germany’s new Foreign Minister Annalena Baerbock has stated that the pipeline from Russia will not be allowed to operate in the event of any new “escalation” in Ukraine, following an agreement between Germany and Washington.

Still, this stance does not signify a shift of policy as compared to the one taken by the previous government, led by Angela Merkel.

Last month, Germany’s energy regulator also suspended the certification procedure for Nord Stream 2, requiring the Swiss-based consortium in charge of its operation to create a company under German law. This is not something that should be hard to do.

The new German Chancellor, Olaf Scholz, has stated that Germany is committed to safeguarding Ukraine’s role as a transit route for gas into Europe. He thereby repeats Merkel’s stance that the political basis for operating Nord Stream 2 was Russia’s commitment to continue to use Ukraine as a gas transit route.

In October, Russian President Vladimir Putin, seized upon this, arguing that to use modern gas pumping equipment “cannot be done using the gas transport system of Ukraine, which has not been repaired for decades and something there can burst there at any moment, with unfavourable consequences for everyone: both for the transit side and for the consumer.” He added: “It would be possible to increase, indeed, supplies via the Ukrainian gas transport system. Only for Gazprom, this would be at a loss.”

This was denied by Sergiy Makogon, CEO of Gas TSO of Ukraine (GTSOU), who argued that the Russian gas transport system “leaks” much more than the one in Ukraine and “it was the gas infrastructure accidents in Russia that contributed to the European gas crunch.”

“Russia B”

In any case, those in charge in the Kremlin never miss an opportunity to describe Ukraine as a basket case that can’t be trusted, as some kind of B-version of Russia. Unfortunately, according to Transparency International’s Corruption Perceptions Index (CPI), there are some ongoing challenges in Ukraine. It has listed the country as Europe’s most corrupt country. Perhaps describing Ukraine as the B-version of Russia isn’t accurate, given that Russia still tops Transparency International’s list.

Ukrainian President Volodymyr Zelensky, a native Russian speaker who was elected to lead the bilingual nation in 2019, has embarked on a reform drive, appointing the successful corruption fighter from Georgia, its former President Mikheil Saakashvili, as a top advisor in 2020, and signing a law abolishing a 20-year-old list of more than 1000 state-owned companies earmarked as exempt from private ownership, following the successful Georgian formula of fighting corruption by not merely prosecuting wrongdoers but by simply removing assets out of the control of the State, given how private investors tend to care more about their assets than public entities.

As Zelensky, aims to do this in the context of “deoligarchisation”, he has banned oligarchs from taking part in the privatisation process. The backstory here is that in the post-Soviet sphere, the process of privatisation itself has unfortunately not always been done in a proper manner, to put it politely.  

Unfortunately, Zelensky’s popularity seems to have taken a dive, to less than 30%. This may have to do with the Covid crisis, but also with how hard it is to reform Ukraine.  

The rule of law

One area where Ukraine’s struggle with the rule of law is visible is smuggling. Europol has listed Ukraine as the main transit port of illicit tobacco in Europe. Illegal smuggling not only erodes tax revenue – global losses here are estimated to amount to 40 to 50 billion euro, but also undermine public health, given the questionable quality of the illegal albeit cheaper products. Smuggling also represents a security issue, given how organised crime and sometimes terrorists profit from it.

This is of course an important topic in the cooperation between Ukraine and the EU, but the EU’s influence here hasn’t always been positive. The plan adopted by Ukraine in 2017 to increase excise duties to meet EU standards by 2025 has ended up fueling Ukraine’s illegal tobacco market, causing it to increase five-fold in only five years. That’s no surprise. According to estimates, average illegal trade tends to grow by 7% when tobacco becomes 10% more expensive relative to incomes.

Ukrainian President Zelensky did meanwhile push through legislation to increase penalties for smuggling, while also vetoing legislation that may have increased taxes on cigarettes, something which, perhaps counterintuitively, would have benefited the criminal sector.

Unfortunately, however, stories on large scale smuggling continue to pop up. In February, a Ukrainian diplomat was caught, together with some other officials, trying to smuggle, in a minibus, 8800 boxes of cigarettes across the border into Poland, along with gold and a large amount of money. Another story reveals large-scale smuggling of Chinese cigarettes which involves a well-connected former border protection official with close ties to President Zelensky.


Let’s give the benefit of the doubt to Zelensky, but in order to serve as a template for reform to Russians, the rule of law in Ukraine must be strengthened first.

It is hard to see what Russia has to gain from a direct military clash with Ukraine, certainly given how Ukraine’s military has strengthened since 2014. For what it’s worth, most analysts seem to agree that the main purpose of the Kremlin amassing troops alongside Ukraine’s border is to intimidate the country, apart from of course signaling Russia’s ability to the West to cause trouble, meaning it’s best to take Russia’s opinion into account.

It’s always tricky to predict what’s going to happen, but so far this analysis is correct. This really is not much different from how Russia has behaved in the past.

However, the fact that in 2019, Ukrainian voters elected a comedian who’s actually quite popular in Russia itself, may hurt the Kremlin’s strategy of depicting Ukraine as a “basket case” version of Russia. What if that comedian turns Ukraine around, thereby serving as inspiration for change in Russia? For that to happen, however, Zelensky will need to deliver.