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Abstract
This paper argues that in the absence of a strong membership incentive within the European Neighbourhood Policy (ENP), a top‐down institutional convergence of CIS (Commonwealth of Independent States) countries towards European standards is unlikely to be successful. However, due to enlargement fatigue within the EU, the membership incentive is off the agenda for the CIS. The ENP must therefore either initiate or hasten a bottom‐up institutional convergence by identifying bottom‐up domestic forces that are willing and able to drive the convergence in a particular country. Ukraine, whose oligarchic clans are the main bottom‐up forces behind institution‐building, is a case in point. Having supported the first wave of institutional reforms during the Orange Revolution, these bottom‐up forces are now facing great difficulties in forming sustainable coalitions for further institutional reforms. The paper shows that the EU, by providing economic incentives rather than the membership incentive, could exploit the strong business interests of the oligarchic clans in the EU markets and EU investment to motivate them to jointly drive institutional convergence from the bottom up.
Acknowledgements
This paper is an output of the ENEPO (EU Eastern Neighbourhood: Economic Potential and Future Development) project financed by the EU in the Sixth Framework Program. The authors thank the participants of the workshop entitled ‘Europe’s Unfinished Political and Economic Transitions? The Convergence–Divergence Debate Revisited’, which was organized by the European Studies Centre (ESC) at the University of Oxford and the South East European Studies at Oxford (SEESOX), and supported by the Economic and Social Research Council in Oxford on 24–25 January 2008, for helpful comments on an earlier draft. We would like to thank George Georgiadis for useful comments on earlier drafts of this article and Paul Kramer for excellent editorial support.
Notes
1. Europeanization is ‘a process in which states adopt EU rules’ (Schimmelfennig and Sedelmeier Citation2005).
2. A growing empirical literature stresses that ‘institutions matter’ for sustainable economic growth (Rodrik Citation2003; Kaufmann, Kraay, and Mastruzzi Citation2005; Chhibber, Peters, and Yale Citation2006; Acemoglu and Johnson Citation2003).
3. Apart from economic incentives, regional security may be an additional – or even increasingly important – incentive for institutional building. Thus, NATO membership also provides incentives. Empirical results confirm that apart from EU incentives, NATO membership has a positive impact on institution‐building in transition countries (Drautzburg, Melnykovska, and Schweickert Citation2008).
4. Although it is difficult to measure the extent to which a civil society exists, the number of registered organizations and associations, and the percentage of citizens who are members of voluntary organizations and associations, are commonly used as a yardstick.
5. The rankings of the most influential persons in Ukraine’s politics and economy are periodically published by a few national journals and newspapers. Representatives of business groups have held the leading position in these ratings since before the Orange Revolution. See Ranking of The Most Influential People of the Country. Hvardiya, Halytski Kontrakty, 2002–2005; Rating of the 200 Most Influential Ukrainians 2007, in Focus 51, no. 64 (21 December 2007).
6. Relatives could be included in a clan, but such relationships play a secondary role.
7. The patronage relationship between Pavlo Lazarenko, the former prime minister of Ukraine, and Yulia Tymoshenko, the former president of the United Energy Systems of Ukraine (UESU), ensured the monopoly position of this company on Ukraine’s gas market.
8. Defective democracies are political regimes, also categorized as ‘semi‐authoritarian regimes’ or ‘electoral authoritarian regimes’ (Olcott and Ottaway Citation1999), in which limited forms of pluralism (i.e. elections, civil society) exist, but in which the other elements of democracy (i.e. accountability, checks and balances between state branches) do not function properly.
9. The judicial branch cannot be considered an independent branch of state power, because it is strongly influenced by the executive.
10. In Ukraine, the position of presidential advisor was held for a long time by oligarchs Vadym Volkov and Oleksandr Rabynovich. Businessman Andriy Derkach is also an example. In 1996, he was appointed presidential advisor on foreign trade; two years later, he became the manager of Kuchma’s election team,
11. According to Kerstin Zimmer (Citation2006), in the late 1990s, Ukrainian enterprises bought legislative laws (44% of total), presidential decrees (37% of total), credits and preferences of the National Bank (approx. 37% of total) and adjudications (21–26% of total).
12. The agrarian oligarchic clans had already existed in Soviet times and still influenced Ukraine’s politics through its own ‘Agrarian Party’ (Selyanska Partiya Ukrainy). The coal‐mining oligarchic clans obtained subsidies and blocked restructuring reforms of the mining sector by means of networking with the executive. In the 1990s, the coal ministry and government were strongholds of the Donbas‐based oligarchic clan. Its position was supported by the miners’ strikes and by the coal enterprise directors and the Donbas regional elites. However, the influence of the agrarian and coal mining clans began to diminish already in Kuchma’s era. Cross‐sector oligarchic clans took over the agrarian and coal clans’ influence in politics.
13. Such inner regional rivalry is exemplified by the rise and fall of the United Energy Systems of Ukraine (UESU), Tymoshenko’s clan stemming from the Dnipropetrovsk region. Flourishing during the period that Lazarenko was the prime minister, the company lost its monopoly in the Ukrainian gas market and its wealth after a new prime minister, Valeriy Pustovoitenko, a representative of another oligarchic clan that also came from the Dnipropetrovsk region, was appointed in 1997. The same regional origin of Pystovoitenko’s and Tymoshenko’s clans did not secure the financial empires of UESU. Tymoshenko and the members of the executive board were accused of smuggling currency and natural gas, bribing, and the large‐scale misappropriation of state property.
14. Coming to power in 1994, president Kuchma awarded the presidential administration with governmental powers. Correspondently, the value of the position in this state body increased for the oligarchic clans radically. The positions in the presidential administration (as well as in the government) offered opportunities to obtain information about privatization plans, to negotiate subsidies for enterprises and to obtain credits and licenses. The presidential administration, or ‘shadow government’ as it was since then called, had wide executive powers and competed with the government. The offices of the head of the presidential administration and prime minister were objects to exchange between the Kyiv, the Kharkov, the Doneck, and the Dnipropetrovsk clans. During Kuchma’s presidency the governmental positions were filled by the representatives of the Dnipropetrovsk and the Doneck clans. The chieftains of the Kharkov (Jevheniy Kusnaryov) and the Kyiv (Viktor Medvedchuk) clans often became the heads of the presidential administration
15. Channel 5 and Era, the broadcasting companies loyal to the Orange forces media, were owned by the Ukrainian oligarchs.
16. The first ‘orange’ coalition was created in the aftermath of the Orange Revolution in 2005 and consisted of Our Ukraine Party, Bloc Yulia Tymoshenko, and the Socialist Party. The first ‘orange’ government of Tymoshenko was charged with corruption and dissolved in the autumn of 2005.
17. Institutional convergence can be considered an institutional adjustment to certain institutional standards.
18. By ‘globalization’ we mean trade in goods, financial flows, and global harmonization of rules and norms.
19. The type of rent might be another conditional variable. Connecting the ideas of Olson and Havrylyshyn implies that opening up a country may have different implications for rent‐seekers, depending on the types of rents. Unlike non‐renewable resources in isolated mining sectors, opening up has a direct impact on rents to be extracted from monopoly situations in the case of renewable resources or production sectors in general. The scarcity and worldwide demand for non‐renewable resources limit the positive effects of globalization by pushing domestic rent‐seekers to support institutional convergence towards global standards. In trade with non‐renewable resources, openness has lost its power.
20. The end prices were also lower than the world prices because compensation for transit charges was included in the payment for energy resources.
21. The financial crisis in 1998 also marked the end of IMF ‘soft’ credits. At the request of the IMF, and because the Ukrainian government wanted to avoid financial full‐fledge default, it undertook some market reforms and cancelled ‘soft budget constraints’. Thus, the most conservative part of the Ukrainian elite – the ‘red directors’ – lost its rents in terms of subsidies and donations, and subsequently left the political stage. ‘Red directors’ were the former Communist party apparatchiks or directors of the Soviet state enterprises who actually ran state enterprises on a day‐to‐day basis. As products of the old system, these individuals kept control over their enterprises in the years of transition and were likely to attempt to frustrate any reform effort that limited their power. The external shock following the crisis of 1998 transmitted into successful economic and political reforms that squeezed their rent‐seeking possibilities.
22. ‘Gazprom and Turkmenistan update Turkmen gas supply conditions for 2006’, Gazprom press release, 29 December 2006. The importance of two pipelines going through Ukraine as a ‘high‐value card’ in the bargaining position of Ukraine vis‐à‐vis Russia diminished. In 1999, the Yamal pipeline began to transport the Russian gas across Belarus and Poland, circumventing Ukraine. By 2010, Ukraine’s loss of geopolitical advantage in the transit of energy will be intensified by the completion of a pipeline running through the Baltic Sea and connecting Russia directly with Germany.
23. In 2004, Ukraine’s steel sector reached its highest level of capacity utilization: 95.4%, up from 52.1% in 1998.
24. The figure for FDI flows from the EU‐27 includes one very large off‐shore zone, Cyprus, which accounts for a substantial part of FDI into Ukraine.
25. From 1993 until 2000, the EU lodged 43 anti‐dumping cases against Ukrainian steel traders.
26. The decision whether the Ukrainian steel prices were ‘dumping’ prices or not was defined by comparing Ukrainian steel prices to the calculated unit production costs and steel prices in a third ‐country ‘surrogate’ that had the status of a full‐fledged market economy. The calculated costs and prices were typically higher than those in the Ukrainian. Thus, the EU introduced anti‐dumping customs duty equal to the difference between the production costs of the third country and the production costs of the Ukrainian producers.
27. The creation of any deep regional integration with Russia is both rather unlikely to occur and unlikely to be of great help. Ukraine’s trade regime is determined by both CIS‐wide arrangements and bilateral agreements. Numerous CIS‐wide agreements (like the CIS Economic Union, CIS Free Trade Zone, CIS Common Agricultural Market, etc.) have failed to be fully implemented. Were Ukraine to join the WTO, it seems that the feasibility of CIS agreements is rather low and likely any activities related to these agreements will be limited to an attempt to create a free trade area between CIS countries. In addition, Russia’s markets are still relevant for Ukraine, but, as the trade regime of the EU towards Russia is rather liberal, there is no contradiction between bilateral Ukraine–Russian trade and EU integration.
28. The same does not apply to achieving some sort of FTA with the EU: FTAs with the EU usually preceded both WTO entry and the official EU application membership by several years.
29. Andrew Rose (Citation2004) estimated that WTO accession has non‐significant trade‐creating effects, contrary to regional FTAs, which have strong significantly positive trade‐creating effects. That is probably the case due to the ‘lowest common denominator’ constraints of the WTO accession negotiation process, as opposed to regional/bilateral FTAs, which usually go much deeper towards liberalization amongst their members. The EU is perhaps the most obvious example of the latter case. Igor Eremenko and Ekaterina Lisenkova (Citation2004) share the same conclusion for Ukraine.
30. Press release, 2007, Press Office of the Cabinet of Ministers of Ukraine (CMU).
31. The calculations take into account all governmental measures in 2007. During this period, Ukraine had two governments: one of Yanukovych (September 2006 to December 2007) and the other of Tymoshenko (since December 2007). Thus, these achievements could not be attributed solely to Tymoshenko’s government.
32. Joint Evaluation Report EU–Ukraine Action Plan, December 2005, Brussel/Kiev; Joint Evaluation Report EU–Ukraine Action Plan, March 2008, Brussels/Kiev.
33. The ENP tools to enhance reforms stemmed from the PCA and were sporadically complemented by enlargement tools. Despite regime changes and the transformation of Ukraine into a parliamentary‐presidential republic, the EU institutional linkages are almost exclusively exercised through the presidency and the executive (Gawrich et al. Citation2008).
34. The FTA incentive has the same unique character.