Weekly Analytical Review №101, Jan. 31, 2021

Domestic Policy

Briefly:

The main domestic events of the week were the letter of the G7 ambassadors with the demands on the legal system reform, the story with the attempt to exclude the parliament member Alexander Dubinski from the faction “The Servant of the People,” the continuing decline of the ruling part’s rating, the protests against the increased tariffs, and the adoption by the parliament of the law on the national referendum, the law on the Economic Security Bureau and the bill on the Security Bureau of Ukraine (SBU).
All these events continue the following trends such as the attempts of the Western governments to increase their influence on the domestic policies of Ukraine via taking over the legal branch of Ukraine, the President Office’s striving to take over the Constitutional Court of Ukraine, reforming the law enforcement structure, the ruling party’s rating going down due to growing tariffs and unfulfilled promises that the ruling party is trying to compensate with the adopting the law on the national referendum and the attempts of the political opposition to “pick up” the electorate that has already lost its faith in the ruling party by encouraging the protests.

 

  1. The letter of the G7 ambassadors and the legal system reform in Ukraine.

This week the G7 ambassadors to Ukraine introduced a roadmap on the legal system reform in Ukraine. This roadmap touches on the reform of the Constitutional Court of Ukraine (CCU). Namely, the G7 ambassadors advise to temporarily increase the quorum for making decisions by the CCU, to postpone the procedure of enrolling the new justices of the CCU until the new enrollment rules are in place, and to provide a significant role of the international experts in checking the candidates to becoming judges. The G7 ambassadors recommend reforming the Supreme Court of Ukraine, the High Council of Justice, and the specialized courts. The G7 ambassadors obviously take advantage of the tension between the President and the part of the legal system to spread their influence in Ukraine.

The G7 ambassadors plan to take over the legal system by participating in the enrollment process of the international experts that will in turn check the candidates to justices. These international experts can be foreigners or employees of Ukrainian NGOs that get funded from the West.

Amid the tension between the Office of the President and the justices of the CCU, aimed at taking over the legal system and thus the future decisions of the Constitutional Court, President Zelenski recalled the bill on restoring the public trust to the Constitutional Court. The Office of the President still fears the possible retaliation of the CCU regarding the recently adopted bill on the national referendum that is necessary for beefing up Presidential rating. The CCU has already managed to strike down five legislative initiatives of President Zelenski.

All in all, the legal system reform in Ukraine reflects two major trends such as the President’s striving to take over the “excessively independent” CCU by rewriting the legislation accordingly. This is the primary goal of the Office of the President within the legal system reform. The second major trend is the intention of G7 to take over the enrollment procedure of the new justices via allocating the experts that would participate in the new enrollment of new justices of the CCU.

  1. US sanctions against the parliament member Alexander Dubinsky. The current state of the ruling party “The Servant of the People.”

Since the parliament member and the member of the ruling party “The Servant of the People,” Alexander Dubinsky got under US sanctions (he was accused of colluding with parliament member Andriy Derkach that published “Biden tapes”), President Zelenski asked Dubinsky to leave the faction. Dubinsky refused.

The situation of Dubinsky can further affect the state of the ruling party and the Office of the President. If Dubinsky stays in the party, it will deteriorate the relations of Ukraine and the Biden administration. If Dubinsky voluntarily left the faction, it would not cause further tension within the faction itself. A situation on excluding Dubinsky can decisively ruin the relations between the so-called “group Privat” (a group that incorporates Dubinsky) and other interest groups within the ruling party. The Office of the President can lose part of its financial resources and loyalty of some mainstream media, namely the “1+1” TV channel. The decision on excluding Dubinsky will inflict accusations on Ukraine losing its sovereignty and the President is under control of the West.

After the conflict regarding Dubinsky, the parliament members affiliated with the “group Privat” did not vote for Yuri Vitrenko to become the Minister of Energy. Hence, the parliament of Ukraine failed to vote for Vitrenko for the second time despite President’s personal request to vote for him.

  1. Sociology. The ruling party’s rating declines.

On January 26, 2021, the Kyiv International Institute of Sociology published a survey, according to which the rating of the President was 19.8 percent (from those who made up their minds for who to vote for). At the beginning of January, the presidential rating was 26.2 percent. The ruling party “The Servant of the People” had only 11.2 percent of public approval, but this percentage did not allow the party to be even Top-3 of the most popular parties in Ukraine. At the beginning of January, the rating of the ruling party was 21.6 percent. The meltdown of the ruling party’s rating within one month took place because of increasing tariffs on utilities in January. Most citizens of Ukraine consider these tariffs to be excessive.

The ratings of the President and the ruling party keep falling down within the whole year. The presidential rating went down from 38.4 percent in February 2020 down to 18.6 percent in January 2021. The rating of the ruling party went down from 36 percent in February 2020 down to 24.8 percent in January 2021.

The meltdown of the ratings of the President and the ruling party has been caused by unfulfilled promises. The president and the ruling party promised to restore peace, foster economic growth, and decrease tariffs on utilities, but these promises remain unfulfilled.

  1. Increases of tariffs and consequent protests.

Since January 1 2021 the prices for electricity and central heating went 50 percent up, and the price for natural gas went 14 percent up. There are 55 natural gas suppliers in Ukraine. Their offerings vary from 7 to 10.8 hryvnas per cubic meter of natural gas (average price is 9.04 hryvnas per cubic meter). If comparing these prices with those of December 2020, the price went 1 hryvna up. The cost of transporting natural gas also went up (the consumers have to pay for transportation separately from the natural gas itself). On average across the nation, the cost of the transportation of natural gas reached 2 hryvnas instead of 1.2 hryvnas per cubic meter as it used to be the previous year. Average tariff on central heating is 1,121 hryvnas per one gigacalory. Cabinet of Ministers increased the tariff on electricity and nullified preferential prices such as 0.9 hryvna per kW-h within the first 100 kW-h. Now, the cost of electricity for residents, despite the volume of consumption is 1.68 kW-h and higher.

The tariffs’ increase caused mass protests across the nation, including the regions of Kharkiv, Chernigiv, Poltava, as well as the cities of Mykolaiv and Kryvyi Rig. The Cabinet of Ministers replied they were ready on systematic decisions on building a balance on the energy market, as well as they introduced a preliminary plan on “significant decrease of tariffs on natural gas and setting a ‘just’ price for consumers (in reality, the price for natural gas has been set by the Cabinet of Ministers at the level of 6.9 hryvnas per cubic meter, but this price is still higher than it used to be in December 2020). The Cabinet of MInisters negotiated with the Association of Ukraine’s Cities, the stated-own oil and gas corporation “Naftogaz” and local authorities. The parties agreed on freezing the prices on the central heating and hot water within the winter season. The Antitrust Committee of Ukraine started investigating six cases of natural gas suppliers that excessively raised prices.

First protests against growing tariffs were spontaneous and sporadic, but later on, some political parties such as the political party of Yulia Tymoshenko and the Opposition Block joined the protests. The political opposition to increasing their own rating by supporting the protests. However, these protests do not unite too many people.

 

  1. The Verkhovna Rada adopted a law on an all-Ukrainian referendum.

On January 26, the Verkhovna Rada approved in the second reading the law on an all-Ukrainian referendum. The document makes it possible to hold all-Ukrainian referendums, which can bring up issues related to social and political life. A referendum can be held on the initiative of the parliament, the president, or on a popular initiative. The subject of an all-Ukrainian referendum may be questions on the approval of amendments to sections I (General Provisions), III (Elections. Referendum), XIII (Amendments to the Constitution) of the Constitution; solving an issue of national importance; approval of the law on the ratification of an international treaty providing for the change in the territory of Ukraine; termination of the law of Ukraine or its individual provisions.

The following questions cannot be the subject of the All-Ukrainian referendum:

- contradicting the provisions of the Constitution of Ukraine, generally recognized principles and norms of international law, enshrined in the first place by the Universal Declaration of Human Rights, the Convention for the Protection of Human Rights and Fundamental Freedoms, and protocols thereto.

- aimed at eliminating the independence of Ukraine, violating the state sovereignty and territorial integrity of Ukraine, creating a threat to the national security of Ukraine, inciting interethnic, racial, and religious enmity.

- regarding bills on taxes, budget, amnesty.

- attributed by the Constitution of Ukraine and the laws of Ukraine to the jurisdiction of law enforcement agencies, the prosecutor's office or the court.

Potentially, topics of Donbass, language, the Constitution can be brought up, but, like the impeachment law, it will be very difficult to apply in practice. It is practically impossible to implement the law on popular initiative, because the Constitutional Court and the CEC must participate in the implementation of this right. If any of these structures are against, then the referendum will not be held. In order to hold a referendum on a popular initiative, a demand of at least three million citizens is needed. At the same time, signatures for its holding must be collected in at least two-thirds of the administrative-territorial units of our state and at least one hundred thousand signatures in each of them.

The law on democracy and referendum is a PR move of the authorities. Its adoption is one of the election promises of Vladimir Zelensky, which was relatively easy to fulfill. Its adoption right now is conditioned by the desire to keep the presidential and party ratings from further falling. However, this is unlikely to succeed, since the topic of referendums, in contrast to the theme of establishing peace in Donbass, raising wages and reducing tariffs, does not occupy a leading position in the rating of problems of state importance in the opinion of citizen.

  1. New architecture of the power bloc: the law on the Bureau of Economic Security and the bill on the SBU.

Recently, a bitter struggle for a new architecture of power structures continues in Ukraine. This week, the Bureau of Economic Security (BES) was created, which will take part in ensuring the economic security of the state. The new structure was created on the model of NABU, only in the field of economics (work in the structure of foreign experts, council of integrity, etc.) At the same time, the Bureau of Economic Security takes away the powers to investigate economic crimes from all other law enforcement agencies (SBU, Ministry of Internal Affairs and the State Security Service), except for NABU (there remain those cases that relate to corruption). It should be noted that over 6 years the state has spent more than UAH 12.5 billion on the maintenance of new anti-corruption bodies. As a result, not a single top official was punished, and insignificant amounts were returned to the treasury.

At the same time, the European Business Association16 looks with apprehension at the creation of the BEB and says that in the proposed format this structure can increase the distrust of business and investors in law enforcement agencies. The tax militia will simply "change the signboard" and become the Bureau of Economic Security, but in fact will not be renewed. Among other things, the association points to an overly bloated staff of BEB detectives and an imperfect mechanism for the competitive selection of the head of the Bureau. As a result, these decisions may not reduce the pressure on business, as expected, but, on the contrary, increase it.

Also, in the first reading, the law on the Security Service of Ukraine17 was adopted, which may deprive it of all key functions. The reform provides for the transformation of the SBU from a law enforcement to a counterintelligence body. In particular, the SBU will lose its powers in the field of the economy and the fight against corruption, and after 2024 it will completely lose its functions of pre-trial investigation. It also provides for a significant reduction in the number of services and its demilitarization - employees of most units will have special ranks, not military ones. The SBU only has a counterintelligence function. In turn, the SBU resists these innovations. But so far the law has been adopted in the first reading, which is a victory for NABU and the Bureau of Economic Security (BEB), which will receive a significant part of these powers. The president, in turn, runs the risk of losing the only body that was oriented towards him.

In this context, the situation with the assassination attempt on the head of the Main Directorate of Internal Security of the SBU Andrei Naumov, which, according to the investigation, was organized by the ex-first deputy head of the Security Service of Ukraine, Dmitry Neskoromny, becomes clear18. This story is actively promoted by part of the media and discredits the SBU, including from the standpoint of justifying the fact that it is necessary to take away part of the powers of the SBU.

FOREIGN POLICY.

Briefly:

The main foreign policy events of the outgoing week were the agreement between the United States and the Russian Federation on extending the START-3 treaty, protests by Navalny's supporters in Russia, the resumption of construction of Nord Stream 2, and Xi Jinping's statements about the inadmissibility of continuing trade wars with the United States, made at the Davos Economic Forum. ...

These events fit into the following trends: Joe Biden's consistent orientation from the very beginning of his career towards the establishment of an international system of arms limitation (so as not to slide into a "hot" war); the desire of the "collective West" to sway the political situation in the Russian Federation and the solidarity with this desire of a part of the Russian elites who count on strengthening their own positions; objective economic interests of Germany and Russia in cooperation in the field of export and import of energy resources and the desire of Germany to become a "gas hub of Europe"; and also - the American-Chinese confrontation in all spheres of public life, due to the competition for world economic and technological leadership.

All these trends remain relevant and will develop in the future.

 

  1. Extension of the START-3 treaty and a telephone conversation between Putin and Biden.

On January 27, US and Russian Presidents Joe Biden and Vladimir Putin had a telephone conversation. Its main topic was the extension of the START-3 treaty, on which the parties came to a common position.

Russia expects to notify the United States of the completion of internal procedures for the extension of the Treaty on Measures to Further Reduce and Limit Strategic Offensive Arms (START, START-3) before its expiration date 5 February. The new American administration also intends to extend the agreement.

The treaty limits the total number of deployed nuclear warheads to 1,550 for both sides. The number of deployed intercontinental ballistic missiles, deployed submarine ballistic missiles and deployed strategic missile-carrying bombers for Russia and the United States will not exceed 700 units. The number of deployed and non-deployed launchers of ICBMs, deployed and non-deployed launchers of SLBMs, and deployed and non-deployed heavy bombers will not exceed 800 units. Thus, the parties have the opportunity to store another 100 media in an undeveloped state. To calculate the total maximum number of warheads, each deployed and undeveloped heavy bomber is counted as one unit by accounting rules, while, for example, a Tu-160 aircraft is capable of carrying up to 12 Kh-55 nuclear cruise missiles with a range of 2500 km. The deployment of strategic offensive weapons outside the national territory of each side is prohibited.

Analyzing this news, it is worth noting that the team of the new American President Joseph Biden in building foreign policy already at the first steps seeks to restore the policy of the former Democratic President Barack Obama. In particular, the United States returned to the World Health Organization, the Paris Climate Agreement, the state of emergency on the border with Mexico was canceled and the ban on the entry of residents of a number of Muslim countries into the country was lifted.

At the same time, the main content of security policy for Biden remains the Strategic Offensive Arms Agreement (START-3). Recall that the Strategic Offensive Arms Treaty was signed by the presidents of the United States and the Russian Federation, Barack Obama and Dmitry Medvedev in 2010, and provided for the reduction of deployed nuclear warheads and ballistic missiles on submarines and heavy bombers.

This agreement was one of the key elements of strategic arms control and made a significant contribution to ensuring global security. However, the team of former US President Donald Trump took an extremely negative position on this treaty, believing that it limits the military capabilities of the United States and upholding the interests of the "arms lobby" within the United States.

START 3 expired on February 5 this year, so it is not surprising that its extension was the key focus of Biden's first telephone conversation with Russian President Vladimir Putin this week. Earlier, Secretary of the Russian Security Council Nikolai Patrushev and Assistant to the American President for National Security Jacob Sullivan had previously agreed on the extension of the Treaty, and Putin and Biden finally agreed on the extension of START III on a parity basis. After negotiations between the presidents, the State Duma of the Russian Federation promptly ratified the agreement on the extension of START III.

At the same time, the Russian expert community has a rather cautious attitude towards the extension of START III on an equal footing. It is noted that this is primarily beneficial to the United States. In turn, Russia did not gain anything from the extension of START III without any additional conditions.

In addition, the agreement does not affect hypersonic weapons, which are the most serious promising threat for both countries. Based on this, it is possible to predict the continuation of the arms race, but in those areas that have not yet been regulated by global agreements: hypersound, information space, etc.

For Joe Biden, the topic of disarmament and strategic arms control has been a "crown" theme since the beginning of his political career. In this regard, one should not see in the return of the United States under the new president to START-3 as signs of a "detente" in the US-Russian confrontation. Rather, it reflects the desire of the American side to establish some framework beyond which this confrontation should not go, in order to avoid sliding into a direct military confrontation.

  1. Protests by supporters of Navalny in Russia.

The main event in Russia, influencing both the country's domestic policy and the international situation, remains the protests initiated by the opposition leader Alexei Navalny. They began on January 23, and took place in more than 120 cities of the Russian Federation. As a result of the protests, 3.5 thousand people were detained throughout the country.

As a reminder, after being poisoned by Novichok and treated in Germany, Alexei Navalny returned to Russia, where he was arrested for 30 days for violating the requirements for serving a suspended sentence. While already in jail, the oppositionist (and in fact, his team) released an investigation film about "Putin's palace" on the Black Sea, which by the time this material was published had gained more than 100 million views. The protests that followed drew in Moscow, according to various estimates, from 20 to 40 thousand people and were marked by the intensification of the confrontation between the protesters and the police.

The authorities retaliated and arrested the organizers of the protest, in particular, Alexei Navalny's brother Oleg, lawyer of the Anti-Corruption Foundation Lyubov Sobol, and others. The most active bloggers were also arrested, inciting their audience to participate in unauthorized protests and disobeying police officers.

The reaction of Western politicians has become natural. In particular, the foreign ministries of France, the Czech Republic and some other countries called for new sanctions against Russia due to the arrest of Navalny and the dispersal of the rallies of his associates. At the same time, Germany, although it also called for the release of the oppositionist, refused to impose sanctions against the Russian Federation, appealing, in particular, to the fact that the situation with the oppositionist has nothing to do with Nord Stream 2.

The new US presidential administration has also taken a rather cautious stance. As a result of the telephone conversation between Putin and Biden, information appeared on the White House website that during the conversation the American leader raised the issue of Navalny, and the press secretary Jane Psaki said that the United States would continue "a discussion about Navalny with Russia." At the same time, there is no talk of introducing new sanctions against Russia. Most likely, this is caused both by the desire of the new American president not to spoil relations with the Kremlin, and by the obvious continuation of the rocking of the situation in Russia closer to the parliamentary elections.

According to our estimates, the protests taking place in the Russian Federation are aimed not so much at the release of Navalny as at preparing the opposition to participate in the elections to the State Duma, scheduled for September this year. Parliament will become an important component of the coming transition of power in Russia, and that is why the opposition is striving to prepare for autumn.

At the same time, it is very likely that the liberal opposition does not seek to achieve a certain result in the elections, given the extremely low level of its support in Russia, their entry into parliament seems impossible. Rather, we are talking about the swinging of the situation, the aggravation of the socio-political situation, the delegitimization of the new convocation of the State Duma and Putin in the eyes of a part of Russian society and the West.

There is also reason to believe that the interests of the "family", those who come from the inner circle of the first President of the Russian Federation Boris Yeltsin, are interested in the return of the positions lost under Putin, are behind what is happening. By fueling the protests, the "family" is strengthening its bargaining power as it prepares for the transition of power in Russia. Another internal interest in the protests is the Isolationist Party and the pro-Chinese party of the Russian elite, who are interested in maximizing Russia's distance from the West and its reorientation towards an alliance with China.

In the future, two more waves of protests can be expected, caused by the refusal to register opposition candidates and the opposition’s rejection of the parliamentary election results. Apparently, even then one should expect tougher confrontations on the streets of Russian cities, and tougher Western sanctions. In the meantime, it is purely about reviewing the forces and working out the tactics of protests and their suppression by the opposition and the authorities, respectively. It is also worth noting that the current protest of Navalny's supporters is likely to become iterative (protests will take place every weekend for some time).

  1. Resumption of construction of the Nord Stream 2.

On January 23, Reuters reported that a pipe-laying vessel named Fortuna had resumed work on the Nord Stream 2 gas pipeline in Danish waters3. The construction of the pipeline, which will double the capacity of the existing Nord Stream branch from Russia to Germany, was suspended in December 2019 due to the threat of US sanctions and the withdrawal of pipe-laying company Allseas from the project.

Earlier, the project, designed to increase Russian gas supplies to Europe bypassing Ukraine, met with resistance from Washington, which sought to sell its own liquefied natural gas to the European Union. At least, the idea of ​​supplying liquefied gas to EU countries was actively promoted by the Donald Trump administration, which is associated with American raw materials companies. And if the Americans lost their economic interest in stopping the project with the arrival of Biden in the White House, they are still politically interested in stopping the SP-2 in order to prevent the strengthening of Russian influence.

The construction of Nord Stream 2 is a confrontational issue not only for the United States and Russia, but also for the United States and Germany. The latter seeks to become a European gas hub by selling gas to its neighbors.

Last week, three high-ranking German officials at once spoke out in support of the continuation of the construction of Nord Stream 2 and against stopping it in connection with the situation with Navalny. Among them: the coordinator of the Ministry of Foreign Affairs of the Federal Republic of Germany for inter-public cooperation with Russia Johann Zaathoff4, the official representative of the German government Steffan Seibert, and the newly elected chairman of the ruling Christian Democratic Union party (the most likely future chancellor) Armin Laschet.

Meanwhile, on Thursday, EU lawmakers passed a resolution calling for a halt to the completion of Nord Stream 2 in response to the arrest of Alexei Navalny. This decision reflects the position of small European states that do not want to become dependent on Germany for gas supplies.

In Ukraine, Nord Stream 2 is traditionally considered a threat due to the reduction in the transit of Russian gas through the territory of our country after its launch. Despite the fact that, according to specialized experts, the time for concluding effective long-term transit contracts has long been lost, and the Ukrainian gas transportation system is rapidly deteriorating, Kiev is still trying to raise the issue of blocking the construction of Nord Stream 2 at international sites. True, judging by the news described above, success in this matter has not been achieved.

Undoubtedly, in the near future, the United States will continue to try to prevent Russia and Germany from completing the SP-2. However, the Biden administration has no chance of success in this matter. The project is close to completion, and the ruling German elites fully support its completion.

This means that Ukraine should shift the forces and resources aimed at stopping the SP-2 to prepare for a decrease in Russian transit and try to make this process as painful as possible for the domestic economy.

  1. Statements of Xi Jinping and Vladimir Putin at the Davos Economic Forum and the Prospects for the Continuation of the US-China Confrontation.

On January 26, during his speech at the World Economic Forum in Davos (which was held remotely due to the pandemic), Chinese President Xi Jinping called on the new American President Joe Biden not to continue the protectionist policies of his predecessor Donald Trump, making it clear that he would not allow Washington to dictate terms to Beijing 6.

In addition, he stated "the inadmissibility of threats and intimidation from some countries, interference in the affairs of others and the creation of closed blocs in the world community." According to him, "the beginning of a new cold war will only push the world towards a split."

In fact, this is a direct appeal to the United States to stop all-round attacks on China (ranging from economic and customs wars to building a belt of anti-Chinese states in Southeast Asia).

During the US presidential campaign, many politicians in China hoped that Biden would end the confrontation with the PRC by returning to Obama-era politics. However, today it is becoming clear that this will not happen.

On the eve and immediately after Biden's inauguration, key officials in his administration, including candidates for the posts of Secretary of State and Defense Secretary Anthony Blinken and Lloyd Austin, as well as White House Press Secretary Jen Psaki, announced their intention to continue pressure on China on all fronts.

In particular, it declared its intention to resist the PRC's attempts to undermine American technological leadership, the desire to "protect the American market", the desire to help the Uyghurs oppressed by Beijing in the struggle for their rights, and to continue supporting the countries of Southeast Asia in conflict with China.

In practice, this means that attempts to administratively "fight" against Chinese technology giants (in particular, Huawei) and protectionist measures, and support for separatism on a national and religious basis in the PRC, and the formation of anti-Chinese military-political alliances will continue under the Biden administration.

For the world, this means that the next four years will be a continuation and development of the all-round struggle between the United States and China. For Ukraine, this may result in another attempt by the Americans to put pressure on Kiev in order to stop cooperation with Beijing in the economic and industrial spheres, just as it was in the notorious case of the annulment of the deal on the Motor Sich plant.

In his speech at the Davos Forum, Vladimir Putin compared the current political situation in the world with the 1930s. In his opinion, today the world is just as unstable. In addition, the Russian president criticized the unequal distribution of global wealth, pointing out that the concentration of most of it in the countries of the "golden billion" is unfair. He also criticized the attempts of digital corporations to replace the state (in particular, in connection with the recent presidential elections in the United States. In terms of practical and tactical goals, from Vladimir Putin's speech at the Davos Economic Forum, it became clear that he wants to make peace with Europe and that's it. -So finish building Nord Stream 2, using the "window of opportunity" when the US is busy with elections and a change in the presidential administration. Since Biden does not defend the interests of the US shale industry, his motivation to fight Nord Stream 2 will be different from that of Trump (purely political ).

The content of Putin's speech suggests that he continues to adhere to a policy of developing a multipolar world, which has already become a reality. Like China, Russia continues to oppose US attempts to regain lost global dominance. Judging by the above-mentioned statement of the Russian president, he sees the “dispossession” of the countries of the “golden billion” (American satellites) and a more even distribution of global wealth as a priority goal on this path. In China, they reacted very positively to Putin's speech, which looks quite natural.

ECONOMY.

Briefly:

The main trend in the development of the economic policy of the current Ukrainian government, the prerequisites for a change of which have not yet been observed, is the desire to collect from citizens and businesses as much money as possible to patch up "holes" in the budget and pay off IMF debts. For this purpose, a policy of total fiscalization (explicit and implicit) and tariff increases are being implemented. For the same purpose, the parliament adopted a law on the creation of the Bureau of Economic Security, which will suppress the shadow activity of business, forcing it to pay taxes and fines.

In the world at this time, the crisis caused by the coronavirus pandemic continues to unfold. “Trade wars” between key players (primarily the United States and China) remain relevant.

 

  1. The Rada adopted in the second reading the law on the Bureau of Economic Security.

On January 28, the Verkhovna Rada adopted in the second reading and as a whole the bill No. 3087-d "On the Bureau of Economic Security", the creation of a law enforcement agency that will deal with criminal violations in the economic sphere and eliminate the tax police.

The Bureau of Economic Security will be the only law enforcement agency to investigate economic crimes. Except those who investigate NABU. This means that with the creation of the BEB, not only the tax police will disappear, but also the economic units in the National Police and the Security Service of Ukraine.

Finance Minister Sergei Marchenko suggested that instead of BEB transfer these functions to a separate service under the Ministry of Finance (Financial Investigation Service) 1. Since the very idea of ​​creating a BEB is being promoted by the IMF, Marchenko's proposal is different from the IMF's course, it may indicate that Marchenko defends the interests of Ukrainian business, given that he ran for BP from the party of ex-Prime Minister Vladimir Groisman.

On paper, BEB is vested with a wide range of powers in the field of, for example, investigating cases of bringing enterprises to bankruptcy or banks to insolvency2. Given the low efficiency of NABU over the past 5 years, BEB, the economic “twin brother” of NABU, will most likely simply find compromising evidence on entrepreneurs and bankers in order to further blackmail them and persuade them to loyalty and take away all the “extra” money from Ukrainian business.

The creation of the Bureau of Economic Security should be considered in connection with the general internal political tendency towards total fiscalization. It is caused by the need to find funds to wind up each new annual budget and return the IMF funds. It is for the latter reason that the creation of the BEB is so supported by our Western partners.

For Ukrainian entrepreneurs, BEB will become nightmares anyway. Even if we assume that it will work exclusively according to the rules, a business surviving due to shadow schemes (that is, almost any business in Ukraine) will suffer greatly from its activities. If we add to this the general propensity of domestic security officials to "nightmare" business for personal gain, it becomes clear that the situation for entrepreneurs will become even more complicated.

  1. JP Morgan's forecast for the IMF tranche for Ukraine.

This week, JP Morgan released its forecast for the IMF tranche for Ukraine. His main idea is that the IMF demands that the restrictions on gas prices be lifted by April 2021, and then a tranche from the fund is possible in the second quarter of this year.

In mid-December 2020, the Ukrainian government held successful negotiations with the IMF, counting on the liberalization of gas prices, but massive protests against price increases forced the government to backtrack. Zelensky and Shmygal found themselves in a zugzwang situation - to fulfill the requirements of the IMF and thus provoke mass protests, or to ignore the IMF and be left without a tranche. A possible way out of the situation would be to "hang all the dogs" on the premier Denis Shmygal. Force / persuade him to fully comply with the IMF's requirements, release gas prices, bringing them to the world level, face massive protests, dismiss Shmygal and try to calm the situation in this way, but the opposition forces from both flanks - both Poroshenko and OPSZ-Shary will definitely use this is a reason for putting pressure on the authorities.

  1. The US gross domestic product fell 3.5%, the worst since World War II.

In a fresh report by the Bureau of Economic Analysis of the US Department of Commerce, released this week, the US gross domestic product fell 3.5% last year, the worst since World War II.

However, in the 4th quarter of 2020, American GDP has already shown positive growth, including growth in exports4. Exports of goods have grown, as well as the volume of investments in the US economy by non-residents.

The US dollar money supply rose by $ 309 billion, while American incomes fell by $ 339 billion. Thus, in the last quarter of 2020, even under Trump, the United States began printing dollars to make up for the drop in citizens' incomes. Americans also began to spend more money from their personal savings, which is usually perceived as a positive phenomenon on the part of business, but on the other hand, this indicates a possible “strain” of many Americans who began to spend their last money, having lost their jobs in 2020, and were forced to spend savings for a rainy day.

Biden's more paternalistic domestic policies will inevitably lead to a more active foreign policy and higher US business activity outside the country. However, it will not be possible to reverse the negative economic tendencies associated with solving the problems of the American economy through “flooding” it with money in the near future.

CONCLUSION.

Summarizing the main domestic, foreign and economic events of the outgoing week, we note the following:

First, the pressure on the Ukrainian authorities from Western partners is increasing. Its goal at this stage is to bring the country's judicial system under control of the West through legislative consolidation of the participation of international experts in the selection of judges. The Ukrainian government, represented by the Office of the President, is interested in bringing the Constitutional Court under its control with the help of judicial reform, but is not interested in the "drain" of the entire judicial system under Western partners. In this regard, one should expect the authorities to resist pressure from the West by the method of tacit sabotage of the instructions of the ambassadors of the G7 and its other heralds. Another aspect of the pressure of Western partners on the Ukrainian authorities is active support for the creation of the Bureau of Economic Security and the curtailment of the powers of the Security Service of Ukraine.

Second, the ratings of President Volodymyr Zelenskiy and his Servant of the People party continue to fall. The main reasons for the fall are non-fulfillment of key election promises and an increase in utility tariffs. The result is electorate frustration. Taking advantage of the situation, political opponents of the authorities from different flanks (in particular, Batkivshchyna and OPSZ) are trying to “pick up” an electorate that is disillusioned with Servant of the People. To this end, the opposition actively criticizes the tariff hike and tries to spearhead “tariff” protests.

Thirdly, pragmatism is in vogue on the international stage. Germany does not intend to abandon plans to build Nord Stream 2 because of Navalny's political support or solidarity with American geopolitical interests. Likewise, the United States, despite Biden's previously announced plans to "return to the Obama-era policy," does not intend to abandon protectionist measures, trade and technological wars with China, as well as an all-encompassing confrontation with Beijing in various directions. None of the calls of the Chinese leader from the rostrum of the Davos economic forum can reverse this trend.

Fourthly, the main trend in the development of the economic policy of the current Ukrainian government, the prerequisites for a change of which have not yet been observed, is the desire to collect from citizens and businesses as much money as possible to patch up "holes" in the budget and pay off IMF debts. For this purpose, a policy of total fiscalization (explicit and implicit) and tariff increases are being implemented. For the same purpose, the parliament adopted a law on the creation of the Bureau of Economic Security, which will suppress the shadow activity of business, forcing it to pay taxes and fines.

The team of authors:

Ruslan Bortnik

Daniil Bogatyrev

Maxim Semyonov

Oksana Krasovskaya

Andrey Timchenko