Ukraine Quarterly Digest: April – June 2017

The second quarter of 2017 was rather quiet in Ukraine: good news prevailed over bad. Ukrainians obtained the long-awaited visa-free regime with the most of the EU member states, Kyiv successfully hosted the European song competition Eurovision, and the International Monetary Fund agreed to provide another loan tranche. However, little progress was made in the Donbas negotiations and the peacemaking process, and military crises affected the economy.

Read the previous issue on the main events in Ukraine in the first quarter of 2017.

1. Foreign Policy Issues

Ukraine’s Suit against Russia in the International Court of Justice in The Hague

On March 6–9, the International Court of Justice (ICJ) in The Hague, the UN’s principal judicial body, held hearings in Ukraine’s suit against Russia. Ukraine has charged Russia with unlawfully annexing Crimea, involving itself in the war in the eastern part of Ukraine, and violating Crimean Tatars’ rights. Ukraine was seeking “full reparations for … acts of terrorism the Russian Federation has caused, facilitated or supported.”

On April 19, the ICJ returned its verdict. It recognized that Russia had to respond to charges of violating human rights, ensure the rights of Crimean populations, and allow study in school in the Crimean Tatar and Ukrainian languages, as well as respect Tatars’ organizations, including their executive body, the Mejlis.'

However, the Court was not able to recognize Russia’s role in backing and financing terrorism in Ukraine’s Donbas region because of the lack of inculpatory evidence provided by Ukraine.

However, the Court was not able to recognize Russia’s role in backing and financing terrorism in Ukraine’s Donbas region because of the lack of inculpatory evidence provided by Ukraine. Thereafter the court did not support Ukrainian demands to force Russia, which de facto controls the border between the two countries in the area of conflict in the Donbas, to stop supplying funding, arms, and militants to illegal military groups, also called terrorists. At the same time, the ICJ recognized its own legitimacy (prima facie) to hear suits regarding Russia’s guilt in not adhering to conventions on preventing terrorism and racial discrimination. The ICJ further appealed to both Russia and Ukraine to meet their obligations under the Minsk agreements.

On May 20, the ICJ in coordination with agents of Ukraine and Russia, set the schedule for the next phases of the suit. Ukraine is to submit its memorandum of charges against Russia on June 12, 2018, and Russia has the same amount of time to submit its response—its counter-memorandum—on July 12, 2019. Those memoranda must represent each party’s arguments and evidence. Thus the case is expected to continue a couple of years more.

On May 31, the Arbitration Institute of the Stockholm Chamber of Commerce announced its preliminary decision on the suits between the Ukrainian Naftogaz and Russia’s Gazprom. The arbitration panel rejected Gazprom’s claim that the take-or-pay clause in its contract with Naftogaz should apply. Under the contract, Ukraine had to consume or simply pay for 52 billion cubic meters of gas. However, Ukraine’s current gas demand is much lower, and Naftogaz appealed the legality of the take-or-pay formula. The court postponed announcing its final decision a few times. At the end of 2017, Naftogaz said that it expected a decision on February 28, 2018, regarding the ship-or-pay and take-or-pay provisions in the contract.

Visa-Free Regime: The Final Point

On June 11, Ukrainian citizens acquired the right to visit all the Schengen Zone countries for short-term stays without obtaining visas if they hold a biometric passport. Participation in the visa-free regime had long been promised by Ukrainian authorities and the EU as part of Ukraine’s European integration strategy. The EU officially stipulated that Ukraine had fulfilled all obligations and commitments necessary to participate in the visa-free regime, and it was granted effective June 11, 2017.

U.S.-Ukraine Relations

On May 9, U.S. president Donald Trump signed the spending bill for the 2017 finance year, the Consolidated Appropriations Act of 2017. The act stipulates assigning $150 million to the Ukraine Security Assistance Initiative and more than $450 million in other forms of assistance to Ukraine. The act mentions the importance of the territorial integrity of Ukraine and Georgia, both of which have suffered from Russian illegal actions.

On June 20–21, Ukrainian president Petro Poroshenko visited the United States and met with Donald Trump and other U.S. officials. The presidents discussed issues of security in Ukraine and military-technical cooperation, energy security, and battling corruption. The U.S. administration confirmed its permanent support for Ukrainian territorial integrity. The U.S. vice president Michael Pence highlighted continuing U.S. support for the Normandy format negotiations to implement the Minsk agreements and stressed the importance of continued reforms to fight corruption, improve Ukraine’s business climate, and keep Ukraine’s International Monetary Fund (IMF) program on track. During his meeting with the head of the U.S. Department of Energy, President Poroshenko discussed collaboration in the nuclear industry and the possibility of the United States supplying gas and coal to Ukraine. The United States is an important partner in the field of nuclear energy; however, its readiness to provide direct energy supplies to Ukraine is unclear

2. Internal Affairs

IMF Loan

In early April 2017 the IMF agreed to a new loan for Ukraine in the amount of $1 billion. The IMF acknowledged signs of Ukraine’s economic recovery and progress in reforming the country but also stated that structural and governance reforms had to be accelerated. Among its main recommendations (which were also conditions for further collaboration between the IMF and Ukraine) were launching pension and health care reforms, continuing the fight against corruption, changing the system for subsidizing households unable to pay for utilities, changing the gas pricing system for households in general, and establishing a land market. Later in the year the Ukrainian government started implementing most of these recommendations with the exception of the land market.

Russian Social Media under a Ban

On May 15, 2017, President Poroshenko issued a decree putting into force the April 28 decision of the National Security and Defense Council of Ukraine on sanctions against Russia. Beside other provisions, this decree restricted access to certain Russian websites and social media, including Yandex, VKontakte, and Odnoklassniki, and prohibited trading of the Russian accounting software 1C. The main reason for the prohibitions was to prevent what was viewed as the likely collection of data by Russian security services, Ukrainian foreign affairs minister Pavlo Klimkin said. His argument was that Russia uses the internet, including social media, in conducting a hybrid war against Ukraine, and the prohibitions against certain social media uses would improve Ukraine’s security. However, the opinion of the expert community was divided: some experts supported the government’s decision, while other saw it as a violation of human rights. The matter is somewhat confusing. Though social media accounts can be used for spearfishing and to launch cyberattacks or collect data, users still can access prohibited sites using anonymizers, such as VPN. Moreover, accessing those websites through alternative means is not prohibited and is not a crime. After the restriction of access to other online services, for example, Ukrainians’ use of Facebook jumped. Thus, evaluating banned social media usage and website visiting is complicated by the availability of workarounds and clouded by issues of rights.

Just Another Round of Cyberattacks

On June 27, Ukrainian IT infrastructure came under a massive cyberattack. The attack was mostly directed toward government and economic sites. However, private users were affected as well. Petya.A (similar to the WannaCry virus, which appeared in May and affected users worldwide), a virus-encrypting ransomware tool, attacked computers and demanded payments. Those responsible for the attack got access to accounting software widely used in Ukraine, M.E.Doc, and embedded the malware into the software’s update. Usage accounting software functioning as a gate made collecting private data possible. However, it was not clear whether the information collected was used after that. Secretary of the National Security and Defense Council of Ukraine Oleksandr Turchynov and the Security Service of Ukraine reported that Russia was responsible for the cyberattack (which, however, employed an exploit tool stolen from a U.S. National Security site).

3. Reforms and Success Stories

Reforms

Reform of the energy markets was on track in the second quarter of 2017. On April 13 the Verkhovna Rada adopted the law “On the Electricity Market of Ukraine,” which stipulates a wide range of new rules applicable to electricity trading and distribution. In the long run, these rules should make the market more competitive and liberalized. A new model of the electricity market is planned to take effect in 2019; it is based on European practices and norms and intended to be in compliance with the Energy Community Treaty and the “Third Energy Package” of the EU. No longer will a single state-owned enterprise buy all the electricity and resell it to other distributors. Rather, according to the provisions of the law, energy producers will themselves be able to sell on various submarkets, including the day-ahead, intraday, and balancing markets, which will be established for this purpose. The long-awaited liberalization of the electricity market was undertaken in response to the EU’s requirement that Ukraine unbundle the transmission and distribution of electricity. Several steps and decisions still must be undertaken during the transition period, however. If those are not done in timely fashion, implementation of the new market model will miss the provisional July 2019 deadline.

Eurovision

In April Kyiv hosted the international Eurovision Song Contest 2017. Ukraine won the right to host it as a result of the first-place performance of the Ukrainian singer-songwriter Jamala in 2016. Kyiv hosted more than 60,000 tourists in association with this event.

However, preparations for the event were clouded by Ukraine-Russia tensions. The hosting country did not allow the Russian singer and contestant Yulia Samoilova to enter Ukraine (or participate in Eurovision 2017) because of her earlier visit to Crimea, in violation of official Ukrainian procedure (visitors desiring to visit Crimea must inform Ukrainian authorities of their interest and obtain permission).

The European Broadcasting Union, organizer of Eurovision, criticized both Ukraine and Russia. However, neither of the parties altered its decision. Ukraine did not permit Samoilova to enter Ukraine, and Russia did not select another contestant.

Ukraine-Canada Free Trade Agreement

In April, President Poroshenko signed the Canada-Ukraine Free Trade Agreement (which had been approved by the Verkhovna Rada on March 15). Negotiations on a free trade agreement between Ukraine and Canada had started in 2009 but were suspended later by Canada. After the Euromaidan, those negotiations were resumed by both parties, which led to the successful conclusion of the free trade agreement.

4.The Situation in the Donbas

Life after the Donbas Blockade

After the official decision on suspending cargo transport with the noncontrolled territories of the Donbas entered into force on the Ukrainian government-controlled side, separatist militants blocked deliveries of coal from that part of the Donbas in response. This created a situation in which Ukrainian electric power stations faced a lack of anthracite coal; metallurgical plants suffered as well. On February 15 the Ukrainian government announced a state of emergency in the energy sector, which it subsequently extended to the end of spring. By that time most of the power stations that used this type of coal had stopped operating in order to limit their anthracite consumption and avoid blackouts. Ukraine managed to get through the period without energy shortages by using other sources of energy.

Simultaneously, separatist militants started selling their coal to Russia. Such trade is illegal. Furthermore, the separatist regimes had earlier announced the expropriation of assets owned by Ukrainian businessmen. Also, the militants tried to sell coal to Turkey and Spain at reduced prices. Later, it emerged that some coal had been shipped to Poland. To prevent such smuggling of coal from the Donbas and the inadvertent purchase of own coal from Russia, the Ukrainian government opted to refuse all coal deliveries from Russia. Instead, Ukrainian companies started buying coal from South Africa and the United States. In such complicated circumstances, the Ukrainian energy sector proved strong and resilient. Russia actually admitted supporting enterprises located in the noncontrolled areas of the Donbas when the blockade began. This acknowledgment can be understood as a demonstration of Russia’s interest in the Donbas and a reason for the continued conflict in the region.

The disruption of economic ties with the noncontrolled part the Donbas and the expropriation of eastern Donbas enterprises by militants had a negative impact on the Ukrainian economy: the country’s GDP decreased, while its dependency on imports increased. 

The disruption of economic ties with the noncontrolled part the Donbas and the expropriation of eastern Donbas enterprises by militants had a negative impact on the Ukrainian economy: the country’s GDP decreased, while its dependency on imports increased. According to an assessment of the National Bank of Ukraine, the blockade cost   $1.8 billion in 2017 and is expected to cost $0.5 billion more in 2018.

U.S. OSCE Mission Officer Killed in Explosion

On April 23, an OSCE vehicle being used by the Special Monitoring Mission (SMM) to Ukraine exploded in Luhansk oblast more than a mile from the line of fire. One member of the mission, the paramedic Joseph Stone, a U.S. citizen, died in the explosion, and two more SMM members were injured. An investigation showed the patrol vehicle had driven over a mine. This incident provoked strong criticism of the situation by German chancellor Angela Merkel and a U.S. State Department spokesperson. The Ukrainian government approached the incident as an act of terrorism.