Ukraine Quarterly Digest: January–March 2021

BY ANDRIAN PROKIP

The first quarter of 2021 saw Ukraine at the epicenter of sanctions politics. The United States imposed sanctions against some Ukrainian MPs connected with attempts to influence the 2020 U.S. elections, as well as the oligarch Ihor Kolomoisky, while the Russian government expanded its list of sanctioned Ukrainian companies. The Ukrainian government itself imposed sanctions against some Ukrainian citizens, mainly pro-Russia opposition politicians and their families, and also against the Chinese investors who bought the Motor Sich company, an airplane and helicopter engine manufacturer that is of strategic defense importance to Ukraine. The general political context was influenced by a new wave, the worst so far, of COVID-19 infections and the slow-footed rollout of a vaccination program.

1. INTERNATIONAL AFFAIRS

International “Crimean Platform” for Deoccupation of the Peninsula
In late February, President Volodymyr Zelensky signed a decree establishing the Crimean Platform, an initiative aimed at uniting and coordinating international efforts to aid deoccupation of the Crimean Peninsula, which previously had been conducted on an ad hoc basis. Predictably, Russia called the initiative a “threat of aggression” against “its regions.” The first international summit of the platform is scheduled for August 23, 2021, the day before Ukraine celebrates the thirtieth anniversary of its independence.

On January 14, the European Court of Human Rights recognized Ukraine’s complaints against Russia over violations in Crimea as partly admissible. It may take a couple of years for the court to reach a final decision.

U.S. Sanctions against Ukrainian Citizens
In early January, the United States imposed sanctions against seven Ukrainian citizens and four media outlets the U.S. administration considered to be Russia-linked and allegedly associated with Andrii Derkach, the Ukrainian MP suspected by the U.S. government of being a Russian agent. The United States imposed sanctions against Derkach in September 2020 for his attempt to influence the 2020 U.S. presidential election. The sanctioned Ukrainians also include Oleksandr Dubinsky, an MP from Zelensky’s party, and several former government officials.

In March 2021 the United States sanctioned Ihor Kolomoisky, a powerful Ukrainian oligarch and an ex-owner of PrivatBank. According to a State Department press release, Kolomoisky was involved in “significant corruption” while serving as governor of Dnipropetrovsk in 2014–2015. The U.S. government has also accused Kolomoisky and his partner, Gennadiy Boholiubov, of using funds misappropriated from PrivatBank.

Motor Sich Nationalization and Relations with China
The Ukrainian company Motor Sich is among the world’s largest manufacturers of airplane and helicopter engines and gas turbines. It went private in the mid-1990s, and the Ukrainian owners subsequently approved sale of a majority of shares to Chinese investors in late 2019. The U.S. government opposed the deal out of concern that it would give Beijing vital defense technologies.

In mid-2020, President Zelensky demanded a review of the economic and security implications of selling Motor Sich. Based on the security services’ analysis, the president sanctioned the Chinese company Skyrizon, the buyer of Motor Sich. A few days before that the U.S. Department of Commerce had added Skyrizon to its Military End User list because it is a manufacturing conglomerate with significant ties to the PRC and the People’s Liberation Army.

In March 2021, Ukraine’s National Security and Defense Council announced it intended to nationalize the company, claiming that its earlier privatization had been illegal. In response, China demanded that Ukraine take the company’s investors into consideration when deciding on nationalization. Skyrizon plans new arbitration against Ukraine, which adds legal pressure on Ukraine since Skyrizon had already launched a $3.5 billion international arbitration case against Kyiv in 2020. Despite these pressures, on March 24, 2021, President Zelensky issued a decree to put the decision on nationalization into force.

These developments will assuredly affect bilateral Ukraine–China relations. As part of the Chinese response, representatives of Chinese businesses visited Crimea to assess the tourism potential of the peninsula in March 2021. Later, the Chinese Foreign Ministry called on Ukraine not to politicize the cooperation of Chinese companies with Crimean businesses.

Russia-Ukraine Tit-for-Tat Sanctions
In February the Russian government expanded the list of goods that may not be imported from Ukraine. The new items mostly are railway wheels and some other railway carriage parts. Russia also added nine new Ukrainian companies to the sanctions list, which now comprises eighty-four Ukrainian entities.

In turn, the Ukrainian government updated documents that sanction Russian citizens and companies, adding several new Russian media outlets and officials to the list.

Sanctions against Russia have only recently become a major instrument in President Zelensky's toolkit for ensuring national security. Please read a separate Kennan Focus Ukraine piece on Ukraine’s sanction policy.

Iran’s Report on the Downing of a Ukrainian Aircraft
On December 31, 2020, the government of Iran sent Kyiv a report on its investigation into the downing of a civilian aircraft on January 8, 2020. Ukrainian officials described the report as a “cynical attempt” to hide the real causes of the crash. They found that the report sought to shift blame, not to investigate the facts of the accident, and that Iranian authorities had violated the rules of investigation as stipulated by the Convention on International Civil Aviation. Representatives of the U.S. State Department said the United States would help bring Iran to justice for the incident.

Relations with the EU
The EU-Ukraine Association Council held a regularly scheduled meeting in Brussels on February 11. Ukrainian Prime Minister Denys Shmyhal attended and addressed Ukraine’s progress in implementing reforms according to the Association Agreement requirements. EU representatives Josep Borrel and Valdis Dombrovskis brought up the situation in Ukraine, urging Kyiv to do more to fight corruption and enforce the rule of law. The European Parliament passed a special resolution on Ukraine that folded in the same concerns.

Relations with Hungary
Hungarian Foreign Minister Peter Siyarto paid an official visit to Kyiv and met his Ukrainian counterpart in January 2021. This visit was put together to stop deteriorating relations between the two countries. The parties discussed creating a bilateral special working group to negotiate a just settlement of the Ukrainian-Hungarian dispute over each other’s educational and cultural policies. The ministers agreed that tension between the two countries stems from emotions and lack of trust, both of which can and should be overcome.

Relations with Moldova
On January 12, Maia Sandu, president of Moldova, paid an official visit to Ukraine, where she met with President Zelensky, Prime Minister Denys Shmyhal, and Foreign Minister Dmytro Kuleba. The parties discussed matters related to bilateral trade, the territorial integrity of both countries, modernization of border infrastructure, and water disputes on the Dnister river. The two heads of state agreed on further energy and infrastructure cooperation.

President Zelensky’s Official Visit to the UAE
President Zelensky visited the United Arab Emirates on February 14–15. The parties signed several agreements and memoranda of understanding related to investments and military cooperation. Also, several large private Ukrainian companies signed memoranda with the Mubadala, the Emirates state-owned investing company.

2. INTERNAL AFFAIRS

Sanctions and Other Actions against Some Pro-Russia Politicians in Ukraine
President Zelensky and the National Security and Defense Council imposed economic sanctions on two Ukrainian politicians in February 2021. Viktor Medvedchuk and Taras Kozak, MPs, are suspected of being pro-Russia politicians and financers of terrorism (by cooperating with the unrecognized republics in the Donbas). Medvedchuk is one of the leaders of the political party Opposition Platform—For Life and has close personal relations with Vladimir Putin. Since 2014, Medvedchuk has tried to act as a negotiator between Ukraine, on one side, and Russia and the unrecognized republics on the other, though he is not approved by Kyiv to act in this capacity.

The sanctions stipulate a ban of three TV channels formally owned by Kozak and a ban on trading shares in the gasoline business company allegedly owned by Medvedchuk. These companies are important players on the Ukrainian gasoline market, importing the gas from Russia. Ukraine’s Security and Defense Council has also raised the issue of nationalizing the gasoline pipeline delivering the fuel from Russia, claiming that it was privatized illegally. The Security Service of Ukraine started an investigation on suspicions that Kozak and Medvedchuk were preparing a coup and financing terrorism.

The Security and Defense Council also issued a number of sanctions against other companies and individuals, including Russian citizens, during February and March 2021.

Some prominent Ukrainian NGOs publicly supported sanctions against the TV channels, claiming that such sanctions did not amount to an attack on freedom of expression, as some have argued, but were a necessary step in the fight against foreign influence operations.

COVID-19 in Ukraine
A third wave of the COVID-19 pandemic struck Ukraine in the first quarter of 2021. In March the daily new infection rate reached the unprecedented figure of more than 18,000, with more than three hundred deaths per day. The cabinet tightened the quarantine restrictions once more beginning March 20.

Ukraine started a mass vaccination campaign on February 24. However, the campaign proceeded sluggishly: by the end of March, only 200,000 Ukrainians had received their first injection. Ukrainians, including medical personnel, do not trust the available vaccine, Covishield, an analogue of the Oxford-AstraZeneca that is produced in India. According to a UNDP study, low trust in vaccination is connected with disinformation on COVID-19 and related issues. Besides, Ukraine still lacks the necessary volumes of vaccine to organize a quick mass vaccination program.

The ongoing pandemic has seriously affected the Ukrainian economy. In 2020 trading turnover fell by 6.4 percent and the country’s GDP fell by 4 percent. FDI volume was the worst of the past twenty years. In the second quarter of 2021, the economy may start to rebound if the authorities ease restrictions in the regions.

Investigation into the Kharkiv Pact of 2010
Ukraine’s Security and Defense Council decided to investigate all decrees issued by the absconded former president Viktor Yanukovych to see whether they pose any threats to national security. In this context, on March 11, Oleksiy Danilov, secretary of the Security and Defense Council, announced an intention to investigate reasons for signing the Kharkiv Pactin 2010, when Ukraine approved extending the lease for Russia’s Black Sea fleet in Crimea from 2017 to 2042 in exchange for a $100 discount (from $330) per 1,000 m3 of Russian gas. Though Russia canceled the pact after annexing the Crimean Peninsula in 2014, the Security Service of Ukraine has said it would question deputies in the 2010 Vekhovna Rada about their vote to ratify the pact; the goal is to uncover possible treason against the state.

Developments around the Constitutional Court of Ukraine
President Zelensky continued his fight with the Constitutional Court of Ukraine (CCU) demanding the resignation of several of its members suspected of corruption. The latest episode kicked in after October 27, 2020, when the CCU issued a decision declaring certain legal norms on anticorruption procedures and institutions unconstitutional and undermining the independence of the judiciary. President Zelensky subsequently issued and reissued decrees to suspend the CCU chair. On March 27, President Zelensky canceled the decrees by which the two judges were appointed to the CCU in an attempt to fire them.

It is important to mention that these decisions of Zelensky are of doubtful legal and constitutional validity.

Protests against Utility Prices
In late 2020 the government decided to raise the price of electricity for households, which had remained unchanged since early 2017. With liberalization of the natural gas market for household gas supplies in 2020, prices in early 2021 became sensitive to market conditions. Consequently, in January and February, households received higher bills to pay than they expected. This led to a wave of protests around Ukraine. The Security Service of Ukraine said that the protests were inspired by Russia.

In response to the protests, the government decided to cap gas prices until the end of March, which many believe threatens a robust gas market getting off the ground. There is a risk in Ukraine that political leaders, driven by paternalistic and populistic sentiments, will undermine reforms; in particular, the IMF has urged a gas market as a condition for the release of additional loan tranches to Ukraine. (See a Kennan Focus Ukraine piece on the puzzle of addressing conflicting interests in regulating gas prices in Ukraine.)

3. PROGRESS IN REFORMS AND SUCCESS STORIES

S&P Global Ratings reaffirmed Ukraine’s “B, with stable outlook” rating for long-term and short-term liabilities in foreign and national currencies. However, in the first quarter of 2021, negotiations between the Ukrainian government and the IMF ended with no agreement. The IMF says that independence of the National Bank of Ukraine and the anticorruption agencies is the key condition for further cooperation.

In January, ambassadors of the G-7 countries with embassies in Ukraine proposed a roadmap for renewing trust in the justice system in Ukraine. The plan offers recommendations for improving the operation of the CCU and the selection of its judges, for reforming the High Council of Justice, for the future of the Supreme Court, for strengthening judges’ responsibility, for establishing transparent rules, and for criteria for the competitive selection of judges, as well as for the uninterruptable and independent operation of Ukraine’s anticorruption institutes. Later, President Zelensky publicly recognized problems with the justice system.

Advisers from the EU and the United States criticized the approach to restarting the work of the Supreme Qualification Commission of Judges in 2021; the outflow of judges from the current system without a solid mechanism for replacement is viewed as posing a barrier to accessing justice. A key concern is the proposal to vest more power in the commission. Also, critics are alarmed that those undertaking the new iteration of the commission are not embracing the recommendations of the Venice Commission in regard to the proposed new authorities of the commission and, in particular, adequate judicial representation on the commission. The goal is to avoid conflicts between the commission and the CCU in matters of legality.

In March, President Zelensky signed a law establishing the Bureau of Economic Security. This agency’s mission is to decrease pressure on businesses from arbitrary taxation and criminal interference in their activities. The new entity will use an analytic approach to protecting legitimate businesses and rooting out shadow economic organizations but is not intended to be heavy-handed. At the same time, the tax police will be shut down when the BES starts functioning.

In March, the president approved an updated Military Security Strategy of Ukraine. The strategy stipulates a comprehensive approach to the defense of Ukraine in the face of ongoing military threats and a hybrid war with Russia.

In late March, President Zelensky approved a National Human Rights Strategy for the next five years. The strategy identifies the key problems with human rights in Ukraine as being related to the occupation of Crimea and war in the Donbas, the rule of law, the administration of justice, women’s rights, freedom of expression, and hate crimes.

4. THE SITUATION IN THE DONBAS

During the first quarter of 2021, the situation in the Donbas worsened in comparison with the last six months of 2020. Both the number and intensity of the attacks and the number of victims have risen significantly.

UN General Assembly Resolution of March 26, supported by forty-seven countries, recognized Russia as a party to the conflict in eastern Ukraine, not a mediator. The Russian government continues backing armed separatists in the Donbas and supplying matériel to extend the war. According to the Ukrainian Defense Intelligence Directorate, in March alone, Russia sent to the Donbas antitank and antipersonnel mines, unmanned aerial vehicles, electronic warfare stations, and several dozen military off-road vehicles to mount a "rapid response," along with fuel to keep them running.

The Russia-backed armed separatists in Donbas blocked the access of the International Atomic Energy Agency’s representatives to locations containing nuclear materials in the non-government-controlled parts of Donetsk and Luhansk oblasts.

A representative of Zelensky’s administration reported that it plans to organize a summit in the Normandy Format. However, since Russia blocks this possibility, President Zelensky intends to talk personally with the leaders of Germany, France, and Russia in a separate communication. At this point the talks on the Donbas are stuck at the stage of a draft plan to resolve the conflict, and the way out of this impasse is clear to no one.

We will continue to monitor these events and report again at the end of the next quarter.

The opinions expressed in this article are those solely of the author and do not reflect the views of the Kennan Institute.