As Russia may be on the verge of an invasion of Ukraine, it is worth taking a closer look at Ukraine’s domestic challenges. Russia considers Ukraine to be ‘Russia B.’ Given the many cultural similarities between the two countries, the analogy makes sense. For this reason, a reformed Ukraine could be the most dangerous development imaginable for those in Moscow who would like to keep things the way they are. Ordinary Russians might become more critical when allowed to see what reforms are possible, and may account for increased Russian pressure on Ukraine.
The U.S. has accused Russia of being active on social media in order to destabilise Ukraine from within. According to Ukrainian President Volodymyr Zelensky, a plot to stage a coup has been uncovered in which Russians are said to be involved. The fact that Zelensky, a comedian-turned-politician, claiming Russia as his mother tongue, and enjoying a high degree of popularity among Russians was elected in 2019, seems to indicate that this strategy is not working. Russian-speaking Ukrainians voted for him in droves, although his popularity has now fallen to less than 30%, apparently as a result of disillusionment.
About 30% of Ukrainians speak Russian as their mother tongue. It is partly this shared identity that attracts Russian interest in the country. But it is also Ukraine’s habitual pattern of corruption that has created a crooked likeness between the two countries. In 2017, Ukraine was the most corrupt country in Europe after Russia, according to Transparency International’s Corruption Perceptions Index (CPI).
President Zelensky has implemented a number of reforms designed to fight corruption. One of the measures was the appointment of ex-President Saakashvili of Georgia as top advisor in 2020. Despite the current controversies surrounding Saakashvili, he succeeded in dramatically reducing corruption in Georgia simply by reducing the role of government in the economy.
Another anti-corruption reform Zelensky supported was large-scale privatisation. At the end of October, he signed a law abolishing a 20-year-old list of more than 1000 state-owned companies earmarked as exempt from private ownership. This move will bring obvious budgetary benefits. More importantly and despite the sometimes cumbersome process of ensuring that privatisation is done fairly, it would drastically reduce the likelihood of corruption, given that private investors tend to take care of their assets in a more responsible way than government bureaucrats. At least that is what Zelensky seemed to have learned from Georgia’s example. Zelensky also stipulated that oligarchs should not participate in the privatisation of large companies, a process called “deoligarchisation,” initiated by Zelensky’s predecessor, but which never really came to fruition.
Large-scale smuggling is also one of Ukraine’s problems. According to Europol, Ukraine is the main transit port of illicit tobacco in Europe. To be fair, the EU’s influence in this regard is not always positive. For example, in 2017, Ukraine adopted a plan to increase excise duties to meet the European standard by 2025, which immediately doubled their costs. However, this led to a five-fold increase in Ukraine’s illegal tobacco market in just five years. Average illegal trade is estimated to grow by 7% when tobacco becomes 10% more expensive relative to incomes.
That kind of illegal smuggling, yielding a global loss of tax revenue estimating 40-50 billion USD, also undermines public health, given the dubious quality of the illegal albeit cheaper products. Smuggling also compromises national security, since it funds organised crime and sometimes even terrorist activities.
Fighting a Losing Battle
For Ukraine, higher taxes lead to more criminal activity, but such a correlation flies under the EU’s radar, as the EU continues to advocate for increasing tobacco taxes. The Ukrainian President Zelensky, meanwhile, is committed to curbing large-scale smuggling, not only through legislation that increases penalties for smuggling, but also by avoiding excessively high taxes. Last year, for example, he vetoed EU legislation that threatened to increase taxes on cigarettes.
Reform in Ukraine appears tough to realise. Despite President Zelensky’s efforts, earlier this year a Ukrainian diplomat was caught with some other officials trying to smuggle 8,800 boxes of cigarettes across the border into Poland. This instance of large-scale smuggling involved a well-connected former border protection official with close ties to President Zelensky. Certainly, the optics here don’t look good, but such scandals are a good sign for the Kremlin. As long as Ukraine remains mired in unlawful activity, there is no need for Russia to change its ways. To pose any ideological threat to Russia, Ukrainian reform must be more than gestures and wishful thinking.