Location: Ukraine

Ukraine’s Integration into the EU’s Digital Single Market

Posted on February 15, 2021 | Policy Brief

Blue EU flags in front of European Commission representing Ukraine’s integration into the single market

This brief is based on a study that investigates how Ukraine’s integration into the EU Digital Single Market (DSM) could affect EU-Ukraine bilateral trade as well as Ukraine’s GDP growth.  The major benefits of integration are expected to come from 1) reduction of cross-border regulatory barriers and restrictions to EU-Ukraine digital trade 2) acceleration of the development of Ukraine’s digital economy in line with EU standards. According to the results, enhanced regulatory and digital connectivity between Ukraine and the EU is expected to increase Ukraine’s exports of goods and services to the EU by 11.8-17% and 7.6-12.2% respectively. At the same time, the acceleration of the digital transformation of the Ukrainian economy and society will produce a positive effect on its productivity and economic growth – a 1%-increase in the digitalization of the Ukrainian economy and society may lead to an increase in its GDP by 0.42%.

Background

Integration into the EU has been one of the key topics on Ukraine’s political agenda for a number of years. Recently, more emphasis has been put on an essential component of issue – integration into the EU’s Digital Single Market (DSM). The DSM is a strategy aimed at uniting and enhancing digital markets and applying common approaches and standards in the digital sphere across the EU. The Ukraine-EU Summit, held on October 6, 2020, stressed the paramount importance of the digital sector in boosting its economic integration and regulatory approximation under the EU-Ukraine Association Agreement. Implementation of the provisions of this agreement, in particular the updated Annex XVII-3, would introduce the latest EU standards in the field of electronic communications in Ukraine. The country is also gradually approximating its regulations with regard to other components of the EU DSM – electronic identification, electronic payments and e-payment systems, e-commerce, protection of intellectual property rights on the Internet, cybersecurity, protection of personal data, e-government, postal services, etc. These steps will, in turn, ensure Ukraine’s gradual integration into the EU’s Digital Single Market, which will facilitate digital transformations within the country and open a new window of opportunity for individuals and businesses.

This brief summarizes the results of our recent work (Iavorskyi, P., et al., 2020), in which we estimate the effect that Ukraine’s integration into DSM could have on EU-Ukraine bilateral trade as well as Ukraine’s GDP growth.

Benefits of Integration into the EU DSM

The EU DSM strategy comprises three pillars: (1) better access for consumers and businesses to digital goods and services across Europe; (2) creating the right conditions and a level playing field for digital networks and innovative services to flourish; (3) maximizing the growth potential of the digital economy (EC, 2021).

These goals suggest that the major benefits of Ukraine’s integration into the DSM are likely to come from 1) reduction of cross-border regulatory barriers and restrictions to EU-Ukraine trade, 2) acceleration of the development of Ukraine’s digital economy in line with EU standards.

Indeed, the trade of goods and services is increasingly becoming “digital” – i.e., involving “digitally enabled transactions in goods and services that can be either digitally or physically delivered” (OECD, 2019). Trade digitalization (e.g., electronic contracts, electronic payments, e-customs, etc.) simplifies export and import procedures, reduces trade costs for exporters, and creates new opportunities for trade with the EU, in particular for SMEs. Therefore, the reduction of regulatory restrictions on cross-border digital trade reduces the overall level of restrictiveness of trade in goods and services.

Thus, digitalization is expected to facilitate and intensify the total EU-Ukraine trade in goods and services. It is also anticipated to increase the productivity of Ukraine’s economy which will have a positive impact on the country’s economic growth.

Major benefits include lower prices and greater access to EU online markets for Ukrainian consumers and business, digital innovative products and services, greater online consumer protection, lower transaction costs for businesses, improved quality and transparency of public digital services and e-government as well as an intensification of innovation development in Ukraine.

At the same time, Ukraine’s integration into the DSM entails several obligations: to align national legislation and standards with EU legislation and standards; to ensure institutional and technical capacity as well as interoperability of digital systems. For businesses in Ukraine, this means facing new EU requirements aimed at improving consumer and personal data protection, as well as increased competition from European companies in digital markets. However, these changes are necessary if the country wants to build a common economic space with the EU, especially given the growing impact of digital technologies on international trade and economy.

Ukraine in International Digital Rankings

Many international digital development rankings show that Ukraine lags behind EU countries, including its neighbors that recently joined the EU.

According to the UN e-Government Development Index (EGDI) for 2020, Ukraine ranks 69th among 193 countries and is included in the group of countries with high levels of e-government development. It received the lowest scores for Telecommunications Infrastructure and Online Services, and the highest for Human Capital. Nevertheless, Ukraine is lagging behind its neighboring EU members, – Poland, Hungary, Slovakia, Romania, Bulgaria, Lithuania, etc., – which belong to the group of countries with very high levels of e-government development (UN, 2020).

In the Network Readiness Index (NRI) ranking for 2019, Ukraine ranked 67th among 121 countries. As for the components of the index, Ukraine ranks worst in the following indicators: Future technologies (82nd out of 121), ICT Use by Government and Online Government Services (87th), and Regulatory Environment (72nd). Neighboring EU countries have higher rankings (Poland – 37, Latvia – 39, Czech Republic – 30, Croatia – 44). Other neighboring countries do somewhat better than Ukraine (Turkey is ranked 51st, Russia – 48th) or occupy positions close to Ukraine (Belarus – 61, Moldova – 66, Georgia – 68) (Portulans Institute, 2019).

In 2019, the country ranked 60th among 63 countries included in the World Digital Competitiveness Ranking (WDCR) rating. Just as in the other rankings, Ukraine scored well in the Knowledge component (40th among 63 countries), while in terms of Technology and Future Readiness it was at the bottom (61st and 62nd position respectively) (IMD, 2019).

Hence, it is primarily the technological and regulatory issues, that need to be addressed in order to improve Ukraine’s digital position in the region and the world.

Methodology

Measuring Ukraine’s Digitalization level

In order to estimate the impact of digitalization, a Composite Digitalization Index is calculated for Ukraine, the EU, and other countries included in the model. This index is based on 11 digital indicators, combined into five components that characterize different areas of the digital economy and society – Connectivity, Use of the Internet by citizens, Human capital, Integration of digital technology by businesses, and Digital public services.

Our results confirm that the level of digital development in Ukraine is far below the EU average. It also lags behind the new EU Member States, which have a lower level of digital development compared to the other EU countries. As of 2018, the widest gaps between Ukraine and the EU average are found in Digital Public Services, Connectivity and Use of Internet by citizens. At the same time, Ukraine performed better in Human Capital and Integration of digital technology by businesses.

Measuring Digital Services Trade Restrictiveness in Ukraine

To assess the impact of digital regulatory barriers on trade, we use the Digital Services Trade Restrictiveness Index (Digital STRI) (OECD, 2020). It quantifies the regulatory barriers in five different policy areas (communication infrastructure, electronic transactions, electronic payments, intellectual property, other restrictions) that affect trade in digital services (Ferencz, J., 2019). OECD calculates Digital STRI for OECD countries and some non-OECD countries. As Ukraine is not included in this index, we estimate it for 2016-2018 using the OECD methodology.

Our estimations show that the level of digital services trade restrictiveness in Ukraine is much higher than the EU average. The regulatory differences in the digital sphere between Ukraine and the EU increase the cost of cross-border digital transactions between countries.

For Ukraine, most barriers are related to cross-border electronic payments and settlements, protection of intellectual property rights on the internet, cross-border electronic transactions (for example, the divergence of the national requirements for foreign trade agreements, including electronic ones, from international practices and standards, lack of practical mechanisms for the application of the electronic digital signature in foreign trade contracts, lack of mutual recognition of electronic identification and electronic trust services between Ukraine and major trading partners, etc.), other barriers (requirements for the use of local software and cryptography, etc.). These regulatory restrictions significantly hinder the development of cross-border cooperation and Ukraine’s integration into the European and global digital space.

Ukraine’s integration scenarios

In the event of Ukraine’s integration into the EU DSM, the country’s regulatory environment and digital development are expected to gradually approach the EU averages. We model it through assuming that the regulatory differences between Ukraine and the EU (captured by the Digital STRI Heterogeneity Indices – see OECD, 2020) will be decreasing, and level of digitalization in the country (captured by the Digitalization Index – OECD, 2020) will converge towards that of EU-DSM members.

We considered three integration scenarios that imply high, medium, and low levels of Ukraine’s approximation to the regulatory environment and digital development of the EU. For instance, the high scenario implies the highest level of Ukraine’s digital development and the lowest level of regulatory differences between Ukraine and the EU.

Models

We study the effect of reduced regulatory differences in the digital sphere on Ukraine-EU trade using a gravity model – one of the traditional approaches in the international trade literature. A gravity model predicts bilateral trade flows based on the size of the economy and trade costs between countries (affected by distance, cultural differences, FTAs, tariffs, etc.)

The study uses the following specification of the model for exports of goods and services in 2016-2018:

• Dependent variable – the total export flow of goods and services from country into country j (all possible pairs of countries).

• Independent variables – distance between countries and common characteristics (borders, language, law), existence of a free trade agreement, level of tariff protection (for goods), level of regulatory heterogeneity in the digital sphere between the two countries, and a set of fixed effects for each country.

We also estimate how digital development affects technical modernization, productivity, and economic growth. Technically, we use a Cobb-Douglas production function to describe each country’s output and model its total factor productivity component as a function of digital development (captured by the Digitalization index).

Results

The results suggest that Ukraine’s integration into the EU DSM will be beneficial for both Ukraine and the EU. Under all integration scenarios, bilateral trade between Ukraine and the EU is expected to intensify considerably due to enhanced regulatory and digital connectivity between the two.

Ukraine’s total exports of goods and services to the EU are estimated to grow by 11.8-17% ($2.4-3.4 billion) and 7.6-12.2% ($302.5-485.5 million), respectively – a cumulative increase throughout the period of implementation of reforms aimed at regulatory and digital approximation of Ukraine to the EU.

 Figure 1. The impact of Ukraine’s integration into the EU’s DSM on the exports of services from Ukraine to the EU*: three integration scenarios

Source: Authors’ own calculations. The current level of Ukraine’s exports of services to the EU – as of 2018

Figure 2. The impact of Ukraine’s integration into the EU’s DSM on exports of goods from Ukraine to the EU*: three integration scenarios

Source: Authors’ own calculations. The current level of exports of Ukrainian goods to the EU as of 2018

The EU would increase its exports of goods and services to Ukraine by 17.7-21.7% ($4.1-5 billion) and 5.7-9.1% ($191-305 million), respectively.

The acceleration of Ukraine’s digital development will bring productivity gains that would transform into higher GDP growth. It is estimated that a 1% increase in Ukraine’s digitalization level is expected to raise its GDP by 0.42%. As a result, the country’s gradual approximation to EU levels of digitalization would result in additional Ukraines GDP growth of 2.4-12.1% ($3.1-15.8 billion), depending on the scenario.  

Figure 3. Impact of digitalization on Ukraine’s GDP growth: three digitalization increase scenarios

Source: own calculations. The left axis – GDP growth (%), the right axis – the level of digitalization. The current level of digitalization of Ukraine as of 2018.

Conclusion

According to our estimations, improved digitalization and reduction of regulatory barriers in the digital sphere between Ukraine and the EU will have a positive effect on trade for both Ukraine and the EU. There is also a significant potential for economic growth to be attained in Ukraine by increasing digitalization and productivity of various spheres of the economy and society.

Realization of this potential would, however, require a substantial regulatory approximation on the Ukrainian side to achieve alignment with the EU DSM. The main emphasis needs to be put on electronic identification and transactions, payment systems and electronic payments, protection of intellectual property rights on the internet, cybersecurity, and personal data protection.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Do Condominiums Pay Less for Heating?

Posted on November 1, 2020 | Policy Brief

Kiev in snow during. the winter with condominiums under heating

In Ukraine, a widely shared perception is that housing utility costs are too high. In this policy brief, we study if these costs can be alleviated by introducing a modern form of housing management practice, condominiums. We find that condominiums in old houses (built before 1991) pay 22% less for heating compared to old non-condominiums. Among new houses (built after 1991), we find that condominiums pay 29% less for heating.  Considering the dynamics of condominium formation in 2018-2020, old houses do not show any significant immediate effect of condominium formation on heating costs relative to that of non-condominiums. However, condominium formation among new houses leads to a relative 18% decrease in heating costs. In addition, among condominiums in old houses, participation in an overhaul co-financing program is associated with a 15% lower heating bill. The immediate effect of the program in 2018-2020 is a 16% relative decrease in heating costs for old condominiums and 37% – for new ones.

Heating Costs and Condominiums

In recent years, the cost of housing utilities has been a common concern among Ukrainians. According to a recent survey, 80% of Ukrainians believe that tariffs on utilities are too high.

The form of housing management is a factor that could affect utility costs. Experiences from Slovakia, Hungary, Poland, and Romania in the 1990s suggest that state-owned housing maintenance companies are often associated with inefficient management. Residential buildings that are owned and managed collectively by its dwellers (hereafter referred to as condominiums) are more likely to choose a more efficient private housing maintenance company (Banks, O’Leary et. al., 1996). For instance, in Slovakia’s second-largest city, Kosice, one-third of houses that were privatized in the 1990s chose private maintenance companies with competitive prices. Residents perceived the services as “far more effective” (ibid).

This brief summarizes our analysis of the relationship between heating costs and the form of housing management in Ukraine. Analyzing a large sample of houses in Kyiv, we show that condominiums are associated with lower heating costs, both among the older houses, built before Ukrainian independence in 1991, and among newer houses.

Types of Housing Management Practices in Ukraine

The different housing management practices in Ukraine can be roughly divided into three types. The most commonly used practice is when housing maintenance is carried out by a municipally owned company (commonly referred to as ZhEK – “zhilischno-eksplotazionnaja kontora”, housing maintenance office). Usually, houses that have the ZhEK-type management were built before Ukrainian independence and have kept this practice since Soviet times. The second practice is when housing maintenance is done by a private company affiliated with the building developer. This management type is usually used by houses built after Ukrainian independence that did not form condominiums. These two practices are similar in the sense that dwellers are not directly involved in the decision-making, all decisions are made by the municipal or private company, respectively.

The third type of housing management practice, relatively new for Ukraine, is condominium ownership (the Ukrainian term for it is ОСББ, translated as “Association of Co-owners of Multi-Apartment House”). In a condominium, unlike in the previous two types, the house is managed collectively by the dwellers; in particular, they have the freedom to choose and/or change utility providers, invest in major overhaul, and participate in co-financing programs.

Houses with Condominiums Pay Less for Heating

In our analysis, we use monthly data on housing costs between 2018 and 2020 collected from the Ukrainian municipal enterprise Kyivteploenergo. The data covers more than 70% of residential buildings in Kyiv and includes information on heating costs per square meter, whether or not the house is a condominium, and other house-characteristics (including the source of heating production; the presence of the meter; type of the meter number of service days per month; and share of heat consumption by legal entities).

In addition, we have information on the year of building construction retrieved from the real estate portal LUN, and condominium formation date between 2018-2020, as well as data on house participation in overhaul co-financing programs obtained from the Kyiv state administration.

Our final sample contains 7957 houses. Since we only are interested in apartment housing, we exclude residential buildings with an area below 500 m2, which would normally correspond to a small private house (these constitute only a small part of our sample). The share of condominiums in the sample is 11%, the share of houses with ZhEK is 81% and the share of houses managed by private companies is 8%.

Figure 1. Median costs for heating per m2 across housing management types and house age.

Source: Authors’ calculations. Old houses are those built before 1991, the year of Ukrainian independence, and new houses are built after 1991.

Figure 1 provides preliminary evidence towards our hypothesis, showing that the median heating costs are lower in condominiums, independent of the year of construction.

In our first econometric model, we use an OLS-approach to compare utility costs across different types of housing and management models, while controlling for a number of observable characteristics.  We find that condominiums in old houses pay 22% less for heating than old non-condominium. Similarly, we find that condominiums in new houses pay 29% less for heating compared to new non-condominiums.

The lower heating costs observed in condominiums may have several explanations:

  • First, condominium-type management could be more flexible in its response to weather conditions. Considering that they are profit-maximizing, heating providers in Ukraine tend to overheat houses during the heating season; it could be that condominiums reduce consumption of heating on the warmer days to a greater extent than other houses. In other words, condominiums could increase the efficiency of heating use.
  • Second, it could be that condominiums have lower heating costs because they improve energy efficiency, for example, by installing individual heating points (an automatized unit transferring heat energy from external heat networks to the house heating, hot water supply, ventilation, etc.), new windows, or even insulating the house.

Is There an Immediate Effect?

The next step in our econometric analysis is to study the effect of condominium formation during 2018-2020. Here, we investigate whether non-condominium houses that became condominiums experienced changes in heating costs by utilizing a fixed-effects regression model. This approach not only allows us to assess the immediate effect of condominium formation but also controls for unobservable house-specific characteristics that are constant over time, such as differences in building materials.

For new houses, we find that condominium formation decreases heating costs by 18% compared to other new houses. For old houses, we find that the corresponding effect is statistically insignificant.

This estimation only evaluates the effect of condominium formation in a relatively short timeframe, between 2018 and 2020. While the data coverage does not allow us to give a precise quantitative assessment for a long-run effect, we argue that the positive impact of condominium formation on heating costs could potentially be higher in the longer-run. Indeed, our previous OLS estimation assesses the average utility costs for all condominiums in the sample (including those formed prior to 2018).  It shows that the gap in heating costs between all condominiums and non-condominiums is higher than the corresponding gap derived from our fixed-effects estimation (22% for the old houses and 29% – for the new ones). While this difference in results can be driven by several reasons (e.g., fixed effect estimation taking into account unobservable house-specific characteristics), a stronger long-term effect could be among them.

Concerning the results for new vs. old houses, it might be the case that new houses are technically equipped to be more flexible when it comes to adjusting costs (e.g., are able to switch the heating on/off), while old houses might be inferior in this regard. If this is the case, old houses would only experience lower costs after some thermo-modernization, such as installing individual heating points.

Heating Costs and the Co-financing Program

Since 2015, the Kyiv city council offers a program that helps condominiums to finance major overhauls with the intent to improve the energy efficiency of the residential sector. Applicants compete in planning thermo-modernization projects where winning condominiums are awarded financing covering 70% of the overhaul cost.

Our results show that for old houses with condominiums, those who at some point participated in the co-financing program pay on average 15% less for heating compared to non-participants. The corresponding effect for new houses with condominiums is not significantly different from zero.

However, the immediate effect of program participation is present in both new and old houses with condominiums. Old and new condominiums that took part in the program in 2018-2019 experienced an immediate reduction in heating costs by 16% and 37% respectively.

Figure 2. The number of houses participating in the 70/30 co-financing program across the years.

Authors’ calculations.

There are several potential explanations as to why we observe an immediate effect but no effect of ever participating in the program for the new houses with condominiums.

First, it could be that new houses with condominiums that are not participating in the program are investing in overhaul anyway, although somewhat delayed compared to investments made by participating new condominiums. The average difference in heating costs between participants and non-participants would then be visible in the short-run and fade away after a few years. If this is the case, the program is financing houses that would have invested in overhaul anyway, even without co-financing. This explanation is partly supported by the fact that the share of the new houses condominiums among participants is 32%, while the corresponding share is 15% among all houses. In other words, old houses with condominiums, that are usually in a worse condition, are underrepresented in the program.

If this is the case, the share of old houses with condominiums among participants should be increased.  Given that the purpose of the program is to improve the energy efficiency of residential buildings, its efficient implementation implies encouraging overhauls in houses that are otherwise unable to fund it. In other words, the program should incentivize people living in energy-inefficient housing to form condominiums and undertake overhauls to improve their energy efficiency, rather than finance houses who are already doing well in that regard. To improve on such selection issues, the program could change the co-financing proportions, making participation more beneficial to old houses with condominiums, e.g.  80/20 – for old and 60/40 – for new condominiums.

Second, the new houses with condominiums that participate in the program might be in a much worse state before participation than those that do not. Program part-taking could make participants catch up to the average level of energy-efficiency (or perhaps do slightly better). If this is the case, the program fulfills its function in the sense that it targets the most energy-inefficient houses.

Government Policies That Should Be Changed

Above, we argue that the formation of condominiums leads to efficiency gains in energy use and cuts utility costs for dwellers. Given the design of the overhaul co-financing program, the Kyiv city council seems to recognize these benefits as well. However, there is a range of government policies currently in place that discourage people from condominium formation.

For example, there are cases when the government finances 100% of overhaul costs using a subvention (“subvention for socio-economic development”). In 2020, 17 houses in Kyiv got overhaul expenses funded by this type of subvention. At the same time, 85 houses that participated in the co-financing competition did not receive any state funding (there were 100 winners among 185 participants).

Considering that this type of subvention predominantly finances non-condominiums, we argue that this policy creates the wrong incentives.  Dwellers will likely refrain from forming condominiums in the hope of eventually being selected for an overhaul fully financed by the state, instead of forming condominium and getting only part of overhauls expenses covered (70% of the overhaul funding if winning co-finance program competition, and no funding otherwise).

In addition, this subvention typically has a “pork-barrel” nature since it is often allocated to the constituencies of the ruling party’s MPs. State financed overhauls are often used as an advertisement tool to get popular support. This creates an additional problem in the sense that subvention is targeted to politically loyal regions and not necessarily to regions in need of support.

Along this line of reasoning, we suggest that this pork-barrel subvention should be cancelled and housing-overhauls should instead be funded through co-financing programs. The government should implement programs similar to the “70/30” and further encourage people to adopt condominium ownership.

Conclusion

Motivated by the common perception that utility costs are excessively high, we study one possible way of reducing the utility bill – condominium housing management.

Our analysis shows that old houses with condominiums pay 22% less for heating compared to old non-condominiums. For new houses, we find that condominiums pay 29% less in heating costs than non-condominiums. In addition, old houses with condominiums that participate in Kyiv’s co-financing program pay 15% less than other old condominiums. That is, condominium formation combined with the co-financing program could save more than one-third of a resident’s heating costs.

Our analysis suggests the following policy implications:

  • Condominiums have a positive effect on energy efficiency, and utility cost savings, and should thus be promoted to the population as a preferable form of house management practice.
  • State and municipal governments should provide incentives for condominium formation through, e.g., overhaul co-financing programs. Other state-provided forms of overhaul financing, such as pork-barrel subvention, should be cancelled.
  • Co-financing programs should combine better targeting (e.g., to those houses that are in greater need of overhaul) with sufficient incentives for condominium formation.

References

  • Hamaniuk, Oleksii; and Andrii Doschyn, 2020.  “Let’s reduce the cost of heating by a third!” – ACMH and co-financing program for buildings”, https://voxukraine.org/en/let-s-reduce-the-cost-of-heating-by-a-third-acmh-and-co-financing-program-for-buildings/
  • Banks, Christopher, Sheila O’Leary, and Carol Rabenhorst, 1996.  Review of urban & regional development studies, vol. 8, issue 2. https://doi.org/10.1111/j.1467-940X.1996.tb00114.x

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

A Decade of Russian Cross-Domain Coercion Towards Ukraine: Letting the Data Speak

Posted on February 17, 2020 | Policy Brief

20200217 A Decade of Russian Cross-Domain Coercion FREE Network Policy Brief Image 01

Russia’s coercion towards Ukraine has been a topic of major international events, meetings and conferences. It regularly makes the headlines of influential news outlets. But the question remains open – do we really understand it? We diligently collect and analyze data to make informed decisions in practically all domestic issues but is the same done for international relations? This research paper introduces a number of tools and methods that could be used to study Russia’s coercion towards Ukraine beyond its most visible manifestation, looking into latent trends and relations that could reveal more.

Introduction

For the past decade, Ukraine has been in the headlines of the major world news outlets more frequently than ever before. Ukrainian-Russian relations have been and still remain the topic of international summits and other events. The occupation of a part of Ukraine’s territory has been denounced and Russia’s coercion towards Ukraine is now generally accepted as a fact. But what do we really know about the underlying empirics and dynamics and how can this multi-domain assertiveness be measured and tracked? This paper presents a number of data-driven approaches that allow looking beyond the headline stories to identify and track various dimensions of Russia’s coercion towards Ukraine and the dynamics of its development.

Academic Interest

Mapping the landscape of scholarly literature reveals a number of interesting results. First, the body of works studying Russia’s coercion towards Ukraine remains relatively modest. It quintupled in 2014 but afterwards the interest started tapering off. A search for papers on this topic in Scopus and Web of Science with a very precise query (to increase the accuracy of search) and publication time of 2009-2019 returned 155 papers most of which were published in or after 2014.

Figure 1. Scholarly publications on Russian-Ukrainian relations.

Source: WoS and Scopus, 2009-2019

A closer look at the content of these works with the use of a bibliometric software called CiteSpace shows that the majority of papers focus on Putin, once again emphasizing the significant role of his personality in Russia’s coercion towards Ukraine. The second largest cluster has the “great power identity” as its main theme and presumably looks beyond actions of Russia to identify its ideological grounds. Another group of publications is devoted to sanctions, pointing to their important role in studying Russian-Ukrainian relations.

Figure 2. The landscape of topics in scholarly publications on Russian-Ukrainian Relations.

Expressions of Coercion

The “practical” side of Russia’s coercion towards Ukraine is also frequently associated with the personality of Vladimir Putin and his attitudes towards Ukraine. To analyze this perception further, we created a corpus of speeches of Russian presidents published on the Kremlin website, filtered them to keep only those that mention Ukraine, divided them into pre-2014 and 2014 and after, and then analyzed them using an LDA topic modeling algorithm. This algorithm is based on the assumption that documents on similar topics use similar words. So, the latent topics that a certain document covers can be identified on the basis of probability distributions over words. Each document covers a number of topics that are derived by analyzing the words that are used in it. In simple terms, the model assigns each word from the document a probabilistic score of the most probable topic that this word could belong to and then groups the documents accordingly.

Figure 3. Speeches of Russian presidents before 2014, LDA topic modeling.

Figure 4. Speeches of Russian presidents in 2014 and after, LDA topic modeling.

Quite surprisingly, we discovered that the overall rhetoric of speeches is very similar for the two periods. Although some speeches do differ and the later corpus includes new vocabulary to reflect some changes (i.e “Crimea”, “war”) the most common words remain practically the same. Thus, regardless of the apparent shift in relations between the two countries, Russian leadership still relies on the same notions of collaboration, interaction, joint activities, etc. The narrative of “brotherhood” between the nations persists despite and beyond the obvious narrative of conflict.

To include a broader circle of Russia’s leadership we also looked at the surveys of the Russian elite conducted regularly by a group of researchers led by William Zimmerman and supported by various funders over the years (in 2016 – the National Science Foundation and the Arthur Levitt Public Affairs Center at Hamilton College). Seven waves of the survey already took place; the most recent one in 2016. The respondents were the representatives of several elite groups (government, including executive and legislative branches, security institutions, such as federal security service, army, militia, private business and state-owned enterprises, media, science and education; for practical reasons from Moscow only).

The survey revealed a number of interesting observations. For instance, while the prevailing Russian opinion on Russia’s occupation of Crimea had been that it was not a violation of international law, a closer look at the demographic characteristics of respondents shows that they were not as coherent as it might seem from the outside. While the “green” answers from respondents with backgrounds such as media or private business may have been anticipated, the number of members of the legislative and especially executive branch and the military that had at least some doubt on the legality was surprisingly quite sizable, and they even demonstrated some support of the “violation of law” interpretation.

Figure 5. Elite and public opinion on Russia’s annexation of Crimea.

Comparing these elite opinions to the public opinion poll by Levada Center conducted in the same year shows that even the general public is slightly more likely to choose the most extreme “full legality” option than the respondents from the executive branch.

Beyond the elite or general opinion polls, we tried to develop a metric that might allow us to track Russian sensitivities towards Ukraine. For that, we examined two different ways of expressing “in Ukraine” in Russian language: ‘на Украине’ (the ‘official’ Russian expression) vs. ‘в Украине’ (the version preferred by Ukrainians). [In English, this can be compared so saying ‘Ukraine’ vs ‘the Ukraine’.]

Our first visual plots how many search queries were done on Google Search with both versions over the last decade.

Figure 6. Search queries for “в Украине” (green) versus “на Украине” (red), Google Trends, 2009-2019.

We can clearly observe that during less turbulent times the more politically sensitive version is much more common. This however drastically changes during the peaks of Russia’s coercion towards Ukraine when the number of searches with the less politically correct term increases significantly.

A different trend can be observed if we look at official media publications stored in the Factiva database. We estimated the ratio of search volumes for each term and observed that until the beginning of 2013, about a third of articles and news reports used “in Ukraine”. This changed around January 2013 when the ratio starts to decrease for “in Ukraine” searches and plummets to a mere 10% of outlets still preferring this term.

Figure 7. The ratio of “в Украине” to “на Украине” occurrences in large Russia media (2009 – 2019), Factiva.

Tracking Coercion Itself

What is the track record of Russia’s actual coercion over this decade? For this, we turn to a few recent datasets that try to systematically capture verbal and material actions (words and deeds): the automated event datasets. The largest one of those, called GDELT (Global Database of Events, Language, and Tone), covers the period from 1979 to the present, and contains over three quarters of a billion events. It is updated every fifteen minutes to include all “events” reported in the world’s various news outlets. To exclude multiple mentions of the same event by one newswire, the events are “internally” deduplicated. The events are not compared across newswires.

An event consists of a “triple” coded automatically to represent the actor (who?), the action (what?) and the target (to whom?) as well as a number of other parameters such as type (verbal or material; conflict or cooperation; diplomatic, informational, security, military, economic), degree of conflict vs cooperation etc. Other similar datasets include ICEWS (Integrated Crisis Early Warning System) and TERRIER (Temporally Extended, Regular, Reproducible International Events Records). For this analysis, we filtered out only those events in which Russia was the source actor and Ukraine was the target country. We present two metrics: (1) the percentage of all world events that this subset of events represents and (2) the monthly averages of the Goldstein score, which captures the degree of cooperation or conflict of an event and can take a value from -10 (most conflict) to +10 (most cooperation). Also, to add a broader temporal perspective, we looked beyond the last decade. It can be clearly seen that the number of events before 2013 was significantly lower, especially in “material” domains. Some verbal assertions from Russia towards Ukraine happened during the Orange Revolution and so-called “gas wars”.

The situation changes radically starting from 2013. The proportion of events increases with some especially evident peaks (i.e. during the occupation of Crimea). The verbal events remain quite neutral while the actions towards Ukraine move from some fluctuations to steadily conflictual.

Figure 8. Russia’s negative assertiveness towards Ukraine, 2000-2019.

Measuring Influence

We have seen that the past decade was exceptional in the scale of Russian assertiveness towards Ukraine. But what do we know about Russia’s influence on Ukraine and Ukraine’s dependence on Russia? Influence measures the capacity of one actor to change the behavior of the other actor in a desired direction. In an international context this often concerns the relations between countries. Influence can be achieved by various means, one of which is to increase the dependence of the target country upon the coercive one. This strategy is frequently employed by Russia willing to regain and/or increase control over the former post-Soviet countries. The Formal Bilateral Influence Capacity (FBIC) Index developed by Frederick S. Pardee (Center for International Future) looks at several diplomatic (i.e. intergovernmental membership), economic (trade, aid) and security (military alliances, arms import) indicators allowing to identify the level of dependence of one country upon another. This is especially interesting from a comparative perspective. Figure 9 shows that countries such as Armenia and Belarus remain highly dependent on Russia. For half of the decade, Ukraine was number three on this list. Today the situation has changed. Ukraine’s dependence on Russia has gradually decreased and has become even smaller than Moldova’s, moving closer to the steadily low level of dependence of Georgia. This may signify a positive trend and a break of a decade-long relationship of dependence.

Figure 9. Dependence of post-Soviet countries on Russia, FBIC.

Conclusion

Consequently, Russia and Ukraine have become much more visible in the international academic and policy research efforts. This can be measured through a number of instruments, including a comprehensive mapping of the academic landscape itself with regard to salience and topics that are being studied, analysis of the word choice (that could be represented by the use of the terms to describe events in Ukraine by the government media and Google search users (“на Украине” versus “в Украине”); speeches of Russian presidents that use the same rhetoric of collaboration when talking about Ukraine despite the obvious change in relationships) and material coercion (significant increase in number of assertive conflictual Russia’s actions towards Ukraine). Some findings do give hope for change: the opinions of the Russian elite on recent Russian actions towards Ukraine while remaining generally unfavourable are not as cohesive as it might appear and Ukraine’s dependence on Russia has decreased significantly.

Disclaimer

This research is a part of a larger research effort titled RuBase funded by the Carnegie Foundation of New York and implemented jointly by The Hague Centre for Strategic Studies and Georgia Tech with the help of the Kyiv School of Economics StratBase team in Ukraine. The ‘Ru’ part of the title stands for Russia; and ‘base’ has a double meaning – both the knowledge base built during the project, and the (aspirationally) foundational nature of this effort. The project intends to look beyond the often-shallow traditional understanding of coercion and apply innovative tools and instruments to study coercion in its multifaceted form. This is only a small selection of the tools that have been successfully tested in the course of this (ongoing) research project and applied to the study of Russia’s coercion in different domains. The prospects of any progress in resolving the Russian-Ukrainian conflict are currently slim, thus further work that would allow identifying patterns and trends that the human eye may oversee to understand Russia better and develop an informed foreign policy strategy both for Ukraine and the West is crucially important.

References

Indexation Formula for Natural Gas Procurement in Ukraine

Posted on February 10, 2020 | Policy Brief

Natural Gas power plant

Due to the high volatility of natural gas market prices, it is almost impossible to adequately plan the purchases for the year ahead, so contract prices need to be regularly updated. This fact creates uncertainty for the contracting authorities, as well as room for unfair competition and corruption. We offer an indexation formula which uses the European gas prices as a benchmark for procurement prices and calculate the potential economic effect of this formula on the Ukrainian gas procurement market.

Problems with the Public Procurement of Natural Gas

Natural gas procurement poses a number of challenges for the contracting authorities (CAs), suppliers and controllers. Due to price volatility it is almost impossible to adequately plan the purchases for the year ahead, so prices need to be regularly adjusted. After the heating season starts, CAs find themselves in a weak position in price negotiations since they almost never have storage for accumulating stocks, and if the contract is cancelled the new procurement would take at least one month due to the existing public procurement regulations. The new version of the Law on Public Procurement, which was recently adopted by the Ukrainian parliament, addresses this problem by allowing CAs to have a new contract fast in case the previous contact was cancelled because of the supplier.

CAs often lack reliable data on market dynamics. There are cases when unreliable price references are provided by specialized agencies to support higher price claims of suppliers. As a result, CAs bear administrative responsibility if they do not have proper justification for changing contract prices when controlling agencies initiate an audit.

Natural gas suppliers may also find themselves in a situation of unfair competition. Since it is possible to win an open auction (i.e. by quoting a considerably lower than market price) and later raise the price to the market level with an additional contract, honest businesses might feel demotivated to participate in the procurement process. They cannot be sure if the contract price can be changed later because there is no proper legal mechanism to assess the need of such an adjustment.

Previous research shows that every third contract of natural gas purchase was amended with an additional contract at least once, usually raising the price for the customer (Shapoval, Memetova, 2017). Additional contracts are indeed used 1) as a tool for price overstatement by the supplier, 2) as a loophole for corruption, and 3) as a way to get a market price for a supplier who used dumping to win the auction (Gribanovsky, Memetova, 2017).

International Drivers of Gas Prices in Ukraine

Since 2016, the EU has been the only official exporter of natural gas to Ukraine. According to PwC, Ukraine imported 14.1 billion m3 in 2017, which is 44% of total gas consumption – the remaining 56% are extracted locally. In Ukraine, the prices for industrial consumers are not regulated, while the household prices are set by the government. Today, the average price on the unregulated gas market is in line with the prices in neighbouring countries – the Baltic states, Poland, Slovakia and Hungary (PricewaterhouseCoopers Advisory LLC, 2018).

European prices are formed on the large marketplaces. The two biggest hubs, Dutch TTF and British NBP, by far outweigh their competitors (ACER Market Monitoring Report, 2017). However, the third-biggest hub, German NCG, is the closest to the Ukrainian border, so its prices often become the benchmark for private traders. In some cases, NCG is the official benchmark for gas price – for instance, the purchase parity import price in Ukraine in 2017-2018 was based on this hub’s index.

In order to assess the impact of the European natural gas prices on procurement prices in Ukraine, we used the Month+1 futures hub prices from TTF, NCG and Austrian VTP CEGH. Procurement prices were extracted from the analytical module of ProZorro (the Ukrainian e-procurement system which CAs are obliged to use at all levels). We excluded irrelevant procurements and selected the contracts which had information on the volume procured. We calculated the average daily prices weighted by volume. Our dataset covers the time period from January 1, 2017 to December 31, 2018.

Figure 1: Natural gas prices at ProZorro and European hubs

Source: ProZorro data, hubs data

As one can see in Figure 1, hubs prices are highly correlated, so they cannot be used as independent variables within a single model. Thus, we decided to take the NCG Month+1 price as a benchmark for explaining the relation between internal procurement prices and international market prices.

NCG Impact on Procurement Prices in ProZorro

In the period of low business activity on natural gas markets, especially in summer, few contracts are awarded. One might have noticed from Figure 1 that this leads to higher variance in daily prices caused by random factors. Therefore, in our model we decided to use the weighted average of weekly prices instead.

Figure 2: Weekly gas price fluctuations in ProZorro and NCG

Source: ProZorro data, Pegas (https://www.powernext.com/futures-market-data)

Our econometric estimation shows that the NCG Month+1 price influences procurement prices with a lag of 7 weeks. In other words, the price at the German hub becomes relevant for the Ukrainian procurement market after almost 2 months on average.

Figure 3: Correlations between procurement prices and NCG Month+1 with different lags

According to the model, the weighted average gas price in ProZorro is more dependent on the NCG Month+1 gas price than on the reservation price in ProZorro. Thus, a UAH 1 increase in the reservation price adds UAH 0.41 to the final price, while each additional hryvnia of the NCG price leads raises the final price by UAH 0.63 in 7 weeks if the price growth trend is not taken into account.

Potential Cost-Saving Using the Price Indexation Formula

The Price Indexation Formula

As European gas prices strongly influence prices on the internal Ukrainian market, it is obvious that they should be included into the indexation formula, as well as exchange rate fluctuations. After consultations with stakeholders, the Ministry of Economic Development and Trade of Ukraine (MEDT) decided to adjust the initial formula proposed by the KSE and included price fluctuations on the Ukrainian Energy Exchange (UEEx) with a small weight into the formula in order to stimulate UEEx development.

The final formula was officially published in December 2018. This formula is not compulsory for any contract authorities, though it is recommended for use by the smaller public entities who do not have the in-house analytical capacity to make a realistic price assessment during negotiations with the suppliers.

where:

  • CP – new price in UAH for 1000 m3 of natural gas (including value-added tax, VAT)
  • PCP – current price in UAH for 1000 m3 of natural gas (including VAT) before adjustment
  • K(cur) – average National Bank of Ukraine (NBU) UAH/EUR exchange rate for 5 days before the price change
  • K(base) – average NBU UAH/EUR exchange rate on the day of the previous price adjustment (contract signed)
  • NCG(avg) – average of daily NCG Month+1 index during 20 previous trading days before the day of price amendment, EUR per MW-hour
  • NCG(base) – NCG Month+1 index on the day of the previous price amendment (contract signed), EUR per MW-hour
  • VAT – rate of value-added tax, which is currently 20% in Ukraine
  • CV – heating value of natural gas in MW-hour/1000 m3 on the date of the price adjustment
  • UEEx(avg) – weighted monthly average natural gas price of UEEx (including VAT) on the day of price amendment
  • UEEx(base) – weighted monthly average natural gas price on the UEEx (including VAT) on the day of the previous price amendment (contract was signed)

Thus, the formula includes current gas price, exchange rate changes, changes in NCG index and UEEx index.

Estimation of Potential Cost-Saving for Contract Authorities

The simplest yet time-efficient way to empirically verify the hypothesis of potential cost-saving after the introduction of the price indexation formula in the gas market is a retrospective analysis of the contracts which had already been signed.

The basic principle of estimation is comparing actual prices with the potential prices calculated based on the price indexation formula. For this, we collected a dataset of natural gas procurement contracts covering the time period from August 2017 to the end of August 2018. This period includes both short-term contracts signed for the heating season or its part (usually signed in August-September, sometimes in January-February) and middle-term contracts which are active for at least one year (usually signed in December-March). We took into account all the additional contracts to these contracts signed before January 1, 2019.

Supply schedules and prices of additional contracts are not readily available in a machine-readable format, so we kept only contracts with the total value higher than UAH 1 million. These are 27.5% of all contracts but they cover 79.3% of the total value of natural gas procurement in Ukraine. The final dataset contains prices of additional contracts and monthly supply schedules.

Our earlier analysis of all the contracts on the shorter time scale showed no correlation between prices and volumes in gas procurement contracts (Shapoval, Memetova et al., 2017), therefore our results can be extrapolated to all the gas contracts.

The biggest gap between actual and indexation prices would be in November 2017, averaging UAH 623. However, until the end of the year the gap reduced threefold to UAH 170.

Figure 4: Monthly increase of gas procurement prices

Source: bipro.ProZorro, ProZorro API

We combined the supply schedules with the prices found in the additional contracts in order to estimate potential savings. Obviously, the highest savings were observed during the heating season. However, in September they were negative (see Figure 6). Thus, while the market prices of natural gas started rising in August, actual procurement prices lagged behind until the end of September-October.

Figure 5: Monthly cost savings in case of applying price indexation formula

Source: bipro.ProZorro, ProZorro API

In total, for contracts of over UAH 1 million, potential cost savings from applying the price indexation formula would have been equal to UAH 120.25 million. If these estimations are extrapolated to all the contracts, this figure would reach UAH151.6 million. This is a rather modest sum in relative terms – only 2.7% of the total contract value. However, using the formula is expected to assist smaller CAs who often lack the knowledge of market dynamics to negotiate the optimal price more effectively and limit their dependence on the suppliers’ estimates.

Besides, the parties concluded the contracts without taking into account the opportunity of using the indexation formula. Therefore, actual cost savings might be lower, first of all because the suppliers’ auction strategy would be different. In particular, the dumping strategy with subsequent price increase through additional contracts would become useless. If the formula is used, a lower starting price would mean a lower increase in absolute terms (UAH per 1000 m3), because the formula calculates the change in relative terms (in per cent). For example, if the market price grows by 15% during the indexation period, the starting price can also be raised by only 15%.

Conclusion

The application of the price indexation formula for natural gas procurement may have a positive impact on the public procurement market. We recommend taking into account the prices of the European hubs adjusted by exchange rate fluctuations.

Had the price indexation formula been used for additional contracts in gas procurement in 2017-2018, the average price would have declined by UAH 623, potentially allowing CAs to save UAH 151.6 million.

Formula pricing would raise the negotiation power of customers (CAs) before the start of the heating season. This is especially true for the smaller ones which are not able to professionalize procurement processes. Natural gas price indexation within clearly defined boundaries will create more favourable conditions for fair competition by eliminating the stimuli for dumping at the auction stage.

References

Data Sources

The Political Economics of Long Run Development in Eastern Europe: Insights from the 2019 SITE Academic Conference

Posted on January 20, 2020 | Policy Brief

Roller coaster photographed from below symbolising Eastern Europe transition

Thirty years after the fall of communism, many assume that the economic transition of Eastern Europe and the former Soviet States towards a system of market economy is complete. But the region faces new challenges, of both economic and political kind, which renders a thorough understanding the past even more important. This policy brief is based on the scientific contributions presented at the 7th SITE Academic Conference held at the Stockholm School of Economics from December 16th to December 17th, 2019. Organized by the Stockholm Institute of Transition Economics (SITE), the conference brought together academics from all over Europe and the United States to share and discuss their research on economic and political development in Eastern Europe.

The Imperial and Soviet Periods

In the first section of the conference, papers with a focus on the long-term history of Eastern Europe and its implications for more recent events were presented. Marvin Suesse presented his research on how the Russian State Bank financed Tsarist Russia´s belated industrialization, a question that had been discussed by historians, but never thoroughly analyzed quantitatively. By geo-coding historical manufacturing censuses around the turn of the century and using distance between bank branches and factory location, the causal impact of the expansion of the State Bank is estimated, revealing large effects on firm revenues and productivity. These effects are largest in areas where alternative means of financing were least available and where human capital was more abundant.

Natalya Naumenko presented her findings on the economic consequences of the 1933 Soviet famine, which in terms of casualties was extremely devastating. She uses the meteorological conditions a year earlier as an instrumental variable and finds that the famine, which was mostly a rural phenomenon, had a persistent negative effect on the urban population while the rural population recovered relatively quickly.

Gerhard Toews discussed the long-term consequences on regional development of the displacement of an estimated 3 million “enemies of the people”, political prisoners typically belonging to the elite of the society, into the gulags in the early years of the Soviet Union. Using archival data, he has constructed a large database describing the gulag population in terms of the shares of “enemies” relative to other prisoners and taking into account their socio-economic characteristics i.e. the much higher levels of education of the former group. Exploiting variation within gulags, the results suggest that a historically higher density of “enemies” means higher economic prosperity today as measured by nightlight intensity.

Taking another angle, Christian Ochsner investigated the effects of the Red Army´s occupation on post-war Europe, using the demarcation line crossing the Austrian state of Styria as a natural experiment. His conclusion is that even the temporary occupation affected the region’s long-term development, the main channel being age-specific migration.

Finally, Andreas Stegman offered an analysis of the effects of the 1972 East German Extended Visitors Program. The program reduced travel restrictions for West German visitors traveling to certain districts of East Germany. Using a geographic regression discontinuity design comparing similar districts with and without the program, he shows that included districts indeed received much more visits from West Germany and that their citizens were more likely to protest against the Communist government and less likely to vote for the ruling party. This suggests that face-to-face interaction can influence beliefs and attitudes in non-democratic regimes, in turn influencing individual behavior and societal outcomes during transition.

Corruption, Conflict and Public Institutions

Another topic of the conference was the current role of corruption, conflict, electoral fraud and public sector effectiveness for the region. Scott Gehlbach presented his most recent research on the ownership patterns and strategies of Ukrainian oligarchs before and after the Orange revolution. By mapping oligarchs to changing political leadership, he shows how firm owners in Ukraine take actions to protect their property depending on their connections with the current government. He finds that obfuscation of ownership behind holding companies and complicated structures is a potentially valuable strategy in this environment in general but becomes particularly important when an oligarch loses direct connections to the ruling regime.

Likewise, Timothy Frye analyzed election subversion by employers in Russia, Argentina, Venezuela, Turkey and Nigeria. He finds that in Russia, public sector employers and especially state-owned firms are more likely to influence their employees’ decision to vote than private companies. Furthermore, work place mobilization by employers in Russia is clearly negatively associated with the freedom of the press. Election subversion is more likely to be successful when the degree of dependence of the employee is high and the employer’s potential threats are credible. Among Russian firm officials, the most frequently named motivations for them to practice election subversion are the desire to improve their relationship with the authority and the intention to help their party.

Michal Myck studied the impact of the transition experience on economic development around the Polish-German border. Polish communities close to the border were economically backward at the beginning of the transition but could potentially benefit from trade opportunities with an opening towards the West. Using similar methods to those of Stegman above, and nightlight intensity as a measure of economic activity as for instance Toews, Myck finds significant evidence for economic convergence both between Germany and Poland, and between Polish border regions and the rest of Poland.

Vasily Korovkin presented his research on the impact of the conflict in Eastern Ukraine on trade in non-conflict areas in Ukraine, hypothesizing that the conflict may cause a trade diversion away from Russia, particularly so in areas with many ethnic Ukrainians. Using variation in the share of the Russian speaking population at the county level as well as detailed firm level export and import data, he finds that the decrease in trade with Russia is negatively correlated with the share of the Russian speaking population. Potential mechanisms include a decline in trust at the firm level and changes in local attitudes including consumer boycotts.

Finally, Tetyana Tyshchuk analyzed the effects of a Ukrainian public sector reform on civil servants’ capacity and autonomy. The reform created public policy directorates parallel to the regular bureaucracy in 10 ministries. Members of the directorates were hired based on a different procedure and different merits relative to regular public servants and received significantly higher salaries.  Tyshchuk finds that the better paid civil servants indeed score higher on many, though not all, indicators of capacity and autonomy.

Information, Populism and Authoritarianism Today

The final important theme of the conference was the role of information and media, old and new, in today’s politics. In the event´s first keynote speech, Ruben Enikolopov analyzed the political effects of the Internet and social media whose low entry barriers and reliance on user-generated content make them decisively different from traditional media channels. On the one hand, this represents a chance for opposition leaders and whistleblowers to make their voice heard and may improve government accountability. On the other, these media may also become a platform for extremists. Enikolopov presented some of his work analyzing to what extent social media has contributed to fighting corruption in Russia. Using the timings of blog posts by the famous Russian opposition leader Alexei Navalny on corporate governance violations in state-owned companies, he shows that revelations resulted in an immediate drop in the price of the traded shares of the respective companies. He also finds evidence suggesting that Navalny´s blog posts resulted in management changes in these companies. In related papers, he exploits the spread of VKontakte (VK), the Russian version of Facebook, to better understand the influence of social networks on political activism, voting and the occurrence of hate crime. He finds that the spread of VK is indeed causally related to political protests, though not because it nurtures opposition to the government, but rather because it facilitates protest co-ordination. With respect to hate crime, he finds that social media only has an effect in areas where it falls on fertile grounds and where there already are high levels of nationalism. The tentative conclusion is that in Russia – as in Western countries – social media seems to have increased political polarization.

On a similar topic but taking a more theoretical approach, Galina Zudenkova investigated the link between information and communication technologies (ICT), regime contestation and censorship. In a game theoretical framework, where citizens use ICT both to learn about the  competency of the government and to coordinate protests, governments can use different tools to censor information to increase their chances of survival. Zudenkova finds that less competent regimes are more likely to censor coordination, whereas intermediate regimes are more likely to focus on censoring content. These theoretical predictions are then tested using country level data.

The targeted use of information has also played a key role in Putin’s Russia according to Daniel Treisman. In his keynote speech, he argued that while the 20th century dictatorships were mainly based on violence and ideology, the 21st century has been characterized by a sizeable shift towards what he calls “informational autocracy”. Constructing a dataset on the methods used by authoritarian regimes to maintain power between 1946 and 2015, he shows that the use of torture and violence peaked among those dictators who took power in the 1980s and has declined since. Furthermore, he highlights a remarkable shift from topics of violence towards topics of economic competency in dictators’ speeches. However, Treisman finds that by instrumentalizing information, dictators fool the public “but not the elite”. In democratic regimes, those with tertiary education tend to rate their political leaders higher than people without tertiary education. In the new informational authoritarian regime, the opposite seems to be the case. According to Treisman, this is because the “informed elite” has a better understanding of the political reality in places where the media is censored, Putin’s Russia being a good example. Treisman concluded that this new model of authoritarianism has become the prevalent model outside of Europe and today also has its advocates inside the European Union.

The conference ended with a final keynote speech by Sergei Guriev on the political economy of populism. Using existing definitions, he first confirmed that Europe has seen a rise in right-wing populism in the last 20 years. Secular trends, such as globalization and new communication technology, but also the recent global financial crisis, are driving factors behind the rise of populist parties. For instance, analyzing regional variation in voting patterns suggests that the Brexit vote was primarily driven by economic motives rather than by anti-immigrant sentiments. Ironically, though, most evidence suggests that populist governments have a below-average economic performance once in office, the US and Poland being notable exceptions. A key point of Guriev’s presentation was that populism seems to be a good method to obtain power, but, once in power, populists tend to be less successful in promoting citizen welfare. These findings seem to be of high importance given the increasing public support for populist parties around the world and in parts of Eastern Europe

The conference was very well received and on behalf of SITE, the authors would like to express their appreciation to all speakers and participants for sharing their knowledge and to Riksbankens Jubileumsfond for financial support. For those interested to learn more about the papers summarized very briefly above, please visit the conference website and the presenters’ websites as indicated in the text and here below.

Speakers at the Conference

Andreas Stegman, briq – Institute on Behavior and Inequality

Christian Ochsner, CERGE-EI and University of Zurich

Daniel Treisman, University of California, Los Angeles

Galina Zudenkova, TU Dortmund University

Gerhard Toews, New Economic School Moscow

Marvin Suesse, Trinity College

Michal Myck, CenEA

Natalya Naumenko, George Mason University

Ruben Enikolopov, New Economic School Moscow

Scott Gehlbach, University of Chicago

Sergei Guriev, Sciences Po Paris

Tetyana Tyshchuk, Kyiv School of Economics

Timothy Frye, Columbia University

Vasily Korovkin, CERGE-EI

The Long Shadow of Transition: The State of Democracy in Eastern Europe

Posted on November 25, 2019 | Policy Brief

Dark hill on the right side of the image with a shadow of a man holding his bicycle on the right side

In many parts of Eastern Europe, the transition towards stronger political institutions and democratic deepening has been slow and uneven. Weak political checks and balances, corruption and authoritarianism have threatened democracy, economic and social development and adversely impacted peace and stability in Europe at large. This policy brief summarizes the insights from Development Day 2019, a full-day conference organized by SITE at the Stockholm School of Economics on November 12th. The presentations were centred around the current political and business climate in the Eastern European region, throwing light on new developments in the past few years, strides towards and away from democracy, and the challenges as well as possible policy solutions emanating from those.

The State of Democracy in the Region

From a regional perspective, Eastern Europe has seen mixed democratic success over the years with hybrid systems that combine some elements of democracy and autocracy. Based on the V-Dem liberal democracy index, ten transition countries that have joined the EU saw rapid early progress after transition. In comparison, the democratic development in twelve nations of the FSU still outside of the EU has been largely stagnant.

In recent years, however, democracy in some of those EU countries, such as Bulgaria, the Czech Republic, Hungary, Poland and Romania have been in decline. Poland, one of the region’s top performers in terms of GDP growth and life expectancy, has experienced a sharp decline in democracy since 2015. Backlashes have often occurred after elections in which corruption and economic mismanagement have led to the downfall of incumbent governments and a general distrust of the political system. Together with low voter turnout, this created fertile ground for more autocratic forces to gain power helped by demand for strong leadership.

An example from Ukraine illustrated the role of media, both traditional and social, for policy-making. In some countries of the region, traditional media is strictly state-controlled with obvious concerns for democracy. This is less the case in Ukraine, where also social media plays an important role in forming political opinions. The concern is that, as elsewhere, opinions that gain traction on social media may not be impartial or well informed, affecting public perception about policy-making. A recent case showing the popular reaction to an attack on the former governor of the Central Bank suggests that those implementing important reforms may not get due credit when biased and partial information dominates the political discourse on social media.

Another case is the South Caucasian region: Armenia, Georgia and Azerbaijan. The political situation there has been characterized as a “government by day, government by night” dichotomy, implying that the real political power largely lies outside the official political institutions. In Georgia, the situation can be described as a competition between autocracy and democracy, with a feudalistic system in which powerful groups replace one another across time. As a result, trust in political institutions is low, as well as citizens’ political participation.

In the case of Azerbaijan, there is an elected presidency, but in reality, power has been passed on hereditarily, becoming a de facto patrimonial system. Lastly, in Armenia, the new government possesses democratic credentials, but the tensions with neighbouring Azerbaijan and Turkey have given increasing power to the military and important economic powers. Overall, democratisation in these countries has been hindered by a trend for powerful politicians to form parties around themselves and to retain power after the end of their mandates. Also, the historical focus on nation-building in these countries has led to a marked exclusion of minorities and a conflict of national identities.

The last country case in this part of the conference focused on the current political situation in Russia and on the likely outcomes after 2024. The social framework in Russia appears constellated by fears – a fear of a world war, of regime tightening and mass repressions, and of lawlessness – all of them on the rise. Similarly, the economy is suffering, in particular from low business activity, somewhat offset by a boost in social payments. Nonetheless, it was argued that it is not economic concerns, but rather political frustration, that has recently led citizens to take to the street. Despite this, survey data shows that trust in Putin is still over 60%, and that most people would vote for him again. However, survey data also points out that the most likely determinant of this trust is the lack of another reference figure, and that citizens are not averse to the idea of political change in itself. Lastly, Putin will most likely retain some political power after 2024, transiting “from father to grandfather of the nation”.

Voices from the civil society in the region also emphasized the importance of a free media and an active civil society to prevent the backsliding of democracy. With examples from Georgia and Ukraine, it was argued that maintaining the independence of the judiciary, as well as the public prosecutor’s office, can go a long way in building credibility both among citizens and the international community. The European Union can leverage the high trust and hopeful attitudes it benefits from in the region to push crucial reforms more strongly. For example, more than 70% of Georgians would vote for joining the EU if a referendum was held on the topic and the European Union is widely regarded as Georgia’s most important foreign supporter.

Weak Institutions and Business Development

The quality of political and legal institutions strongly affects the business environment, in particular with regards to the protection of property rights, rule of law, regulation and corruption. Research from the European Bank for Reconstruction and Development (EBRD) highlights that the governance gap between Eastern Europe and Central Asia and most advanced economies is still large, even though progress in this area has actually been faster than for other emerging economies since the mid-‘90s. This is measured through enterprise surveys as well as individual surveys. In Albania, for instance, a perception of lower corruption was linked to a decrease in the intention to emigrate equivalent to earning 400$ more per month. Another point concerned the complexity of measuring the business environment and the benefits of firm-level surveys asking firms directly about their own actual experience of regular enforcement. For example, in countries such as Poland, Latvia and Romania the actual experience of business regulation measured via the EBRD’s Business Environment Enterprise Performance Survey, is far worse than one would expect from the World Bank’s well known Doing Business rating.

From the perspective of Swedish firms, trade between Sweden and the region has remained rather flat in the past years, as the complexity and risks of these markets especially discourage SMEs. Business Sweden explained that Swedish firms considering an expansion in these markets are concerned with issues of exchange rate stability, and the institutional-driven presence of unfair competition and of excessive bureaucracy. Moreover, inadequate infrastructure and the presence of bribery and corruption make everyday business operations risky and costly. It was generally emphasized that countries have to create a safe investment environment by reducing corruption, establishing a clear and well enacted regulatory environment, having dependable courts and strengthening domestic resource mobilization. Swedish aid can play a part, but there is a need to develop new ways of delivering aid to make it more effective.

An interesting example is Belarus, that has seen more economic and political stability than most neighbours, but at the same time a lack of both economic and political reforms towards market economy and democracy. Gradually the preference towards private ownership, as opposed to public, has increased in recent years and the country has seen a rising share of the private sector, even without specific privatization reforms. Nonetheless, international businesses are still reluctant to invest due to high taxes, a lack of access to finance as well as to a qualified workforce, but most importantly due to the weak legal system. An exception has been China, and Belarus has looked at the One Belt One Road Initiative as a promising bridge to the EU. Scandals connected with the two main Chinese-invested projects have damped the enthusiasm recently, though.

The economic and political risks of extensively relying on badly diversified energy sources, as is the case with natural gas imports from Russia in many transition states were also discussed. It was shown how some countries such as Ukraine, Poland and Lithuania have improved their energy security by either benefitting from reverse-flow technology and the EU’s bargaining power or building their own LNG terminals to diversify supply sources. However, either of these, as well as other energy security improving solutions are likely to come with an economic cost, though, that not all countries in the region can afford.

A Government Perspective

The main focus of this section was the Swedish government’s new inspiring foreign policy initiative, “Drive for Democracy”. Drawing from a definition of democracy by Kerstin Hesselgren, an early Swedish female parliamentarian, democracy enables countries to realize and utilize the forces of the individual and draw them into a life-giving, value-creating society. It was emphasized that the values of democracy are objectives by themselves (e.g. freedom of expression, respect for human rights) but also that democracy has important positive effects in other areas of human welfare. The Swedish government views democracy as the best foundation for a sustainable society, equality of opportunity and absence of gender or racial bias.

The “Drive for Democracy” specifically identifies Eastern Europe as one of the main frontiers between democracy and autocracy, and the Swedish government promotes human rights and stability through various bilateral programmes through the Swedish International Development Cooperation Agency, Sida, and multilateral initiatives within the EU, such as the Eastern Partnership. It was also emphasized that democracy is a continuous process that can always be improved, as indeed experienced by Sweden. Political rights were granted to women only in 1919 followed by convicts and prisoners in 1933 and to the Roma people only in 1950. Political and democratic rights are thus never once and for all given, and it is crucial that the dividends from democracy are carried forward to the younger generation.

Conclusion

In sum, the day illustrated clearly how democracy engages all segments of society, from the business sector to civil society, and the potential for but also challenges involved for democratic deepening in Eastern Europe. To get more information about the presentations during the day, please visit our website.

Participants at the Conference

  • PER OLSSON FRIDH, State Secretary, Ministry for Foreign Affairs.
  • ALEXANDER PLEKHANOV, Director for Transition Impact and Global Economics at EBRD.
  • TORBJÖRN BECKER, Director, SITE.
  • CHLOÉ LE COQ, Associate Professor, SITE and Professor of Economics, University of Paris II Panthéon-Assas.
  • THOMAS DE WAAL, Senior Fellow at Carnegie Endowment for International Peace.
  • NATALIIA SHAPOVAL, Vice President for Policy Research at Kyiv School of Economics.
  • ILONA SOLOGUB, Scientific Editor at VoxUkraine and Director for Policy Research at Kyiv School of Economics.
  • KETEVAN VASHAKIDZE, President at Europe Foundation, Georgia.
  • MARIA BISTER, Senior Policy Specialist, Sida.
  • HENRIK NORBERG, Deputy Director, Ministry for Foreign Affairs.
  • YLVA BERG, CEO and President, Business Sweden.
  • LARS ANELL, Ambassador and formerly Volvo’s Senior Vice President.
  • ERIK BERGLÖF, Professor in Practice and Director of the Institute of Global Affairs, London School of Economics and Political Science.
  • KATERYNA BORNUKOVA, Academic Director, BEROC, Minsk.
  • ANDREI KOLESNIKOV, Senior Fellow, Carnegie Moscow Center.

How to Intensify and Diversify Ukrainian Exports? The Case of Bilateral Trade with Germany

Policy Brief

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This policy brief focuses on trade relations between Ukraine and Germany. In particular, it analyses bilateral trade in goods and examines the possibilities for increasing Ukrainian exports to Germany, in both the extensive and the intensive margins. The brief identifies prospective product groups for such increases and discusses potential obstacles to trade intensification. Finally, it provides recommendations for the further trade development.

German-Ukrainian Trade

Germany has recently become one of the most important trading partners for Ukraine. In 2018, Germany was fifth in terms of Ukrainian export destinations and third in terms of its import source countries.  While Ukraine, not surprisingly, is less important for German international trade (in 2018, Ukraine ranked 42nd in terms of Germany’s export and 45th in terms of its import), bilateral trade between Ukraine and Germany showed positive dynamics over the last five years.

Since Germany is a member of the European Union, its trade relations with Ukraine are regulated by legislation common for all EU member states. The EU’s political and economic cooperation with Ukraine is stipulated by the Association Agreement (AA). The AA is a comprehensive agreement provisioning the Deep and Comprehensive Free Trade Area (DCFTA) between Ukraine and the EU. While the provisional application of the AA began in the fall of 2014, the document fully entered into force on September 1, 2017. The abovementioned intensification of trade relations between Ukraine and Germany was to a significant extent driven by the signing of the DCFTA and a loss of a significant share of the Russian market.

The main Ukrainian exports to Germany include ignition wiring sets used in vehicles, aircraft and ships; low erucic acid, rape or colza seeds, iron ores agglomerated, maize, electrical switches etc. (see Table 1). Together, the top-15 product groups at a 6-digit level of the Harmonised System (HS) give 57% of the total exports from Ukraine to Germany.

Table 1. Top-15 Ukrainian product groups by export to Germany as of 2018

Source: UN Comtrade

This brief argues that both countries are likely to gain additional benefits from further intensifying bilateral trade relations. It summarizes the results of the research (Iavorskyi P. at al., 2019) on how to further expand and diversify Ukrainian exports to Germany, it identifies the prospective product groups and obstacles to their exports, and provides policy recommendations for trade development.

Promising Products

In order to find the most promising ways for increasing Ukrainian exports to Germany, this study employs a two-step approach. First, using a normalized revealed comparative advantage (NRCA) index (Run Yu et al, 2009) we distinguish goods, which Ukraine has world-wide comparative advantage in and Germany does not. A positive (negative) NRCA indicates that country’s actual share of a product in national exports is higher (lower) than the world average, – so that the country has a comparative advantage (disadvantage) in this commodity. According to this criterion, product groups with a negative NRCA for Germany and a positive NRCA for Ukraine were selected.

At the second stage, for the goods identified during the first step, a gravity model was estimated. A gravity model predicts bilateral trade flows based on the size of the economy and trade costs between them (such as distance, cultural differences, free trade agreements, tariffs, etc.). Being a general equilibrium model, it captures not only immediate impact of economic and political changes on trade between two countries, but also how it influences trade with other countries. A gap between current and potential export volumes predicted by the model is a potential for exports increase (which we refer to as undertrade).

The gravity model estimates the total undertrade between Ukraine and Germany at $ 500 million in 2016, or 35% of the total exports from Ukraine to Germany in the same year. Moreover, Ukraine has the potential to increase trade in both goods already exported to Germany as well as goods not yet supplied by Ukrainian companies to this market.

As for the structure of our findings, agricultural and mining commodities, as well as products of traditional Ukrainian export industries, such as metallurgy, are widely represented on the top of the undertraded commodity list. For example, more than a half of the estimated undertrade falls on primary food and primary industrial supplies, such as soybeans, barley, tomatoes, grain sorghum, iron ore, zirconium ores, etc. These categories already account for a large share of the current exports composition, and production in these sectors provides for a significant share of employment. Foreign currency inflow stipulated by exporting these products is also important for the Ukrainian economy.

At the same time, the undertrade in categories of final consumption, capital goods and transport is much lower. However, these product groups are important for exports diversification. These, for example, include liquid dielectric transformers, refrigerator cabinets, telescopes, tugs and pusher craft in capital goods, rail locomotives, railway cars, gas turbine engines in transport; automatic washing machines, electric space heaters, fans, coffeemakers, synthetic curtains, and leather apparel in consumer goods. Despite the complex regulation and relatively small amount of estimated undertrade, export diversification from primary to manufactured goods is important for overcoming export instability and long-term economic growth (Cadot at al. 2013), which is why promotion of trade in such areas is important.

Figure 1. Estimated undertrade according to broad economic categories

Source: Own calculations based on UN Comtrade data

Obstacles to Trade

Following the abolition or reduction of EU import duties between Ukraine and the EU under the DCFTA, tariffs do not significantly restrict exports of Ukrainian goods to the EU. Instead, technical regulations, sanitary and phytosanitary measures, geographical indications, licensing, etc. create significant barriers to bilateral trade. Thus, “non-tradability” can be explained, for instance, by the negative effects of various non-tariff barriers (both at European and national levels) or other factors, such as low competitiveness (in terms of price or quality) of Ukrainian goods compared to similar goods supplied by other countries, taste preferences of German consumers, peculiarities of importers’ associations, specific requirements of retailers, etc. Thus, harmonization of Ukrainian regulations with those of the European Union in accordance with the AA will help reduce customs barriers and existing divergences in regulations, and thus simplify the export of Ukrainian goods to the EU and Germany in particular.

Policy Recommendations

Based on the findings of the qualitative and quantitative research carried out, Ukrainian policy makers are advised to:

  • Timely and effectively align Ukrainian legislation, standards and practices with those of the EU, in line with the Action Plan and Commitments undertaken by Ukraine under the DCFTA within the framework of the AA with the EU, in particular in such areas as technical barriers to trade, sanitary and phytosanitary measures, customs, and protection of intellectual property rights.
  • Accelerate preparations for the signing of the ACAA (the Agreement on Conformity Assessment and Acceptance for Industrial Products) for the top three priority sectors of Ukrainian industry, which Ukrainian authorities agreed with European side, namely in the areas of low-voltage equipment, electromagnetic compatibility and machine safety, which will boost industrial technological exports to the EU and other countries.
  • Conduct government level negotiations with the EU and Germany regarding the removal of those barriers to the single market faced by the promising Ukrainian goods that will not be lifted as a result of harmonization of regulations with the European ones.
  • Take advantage of the Regional Pan-Euro-Mediterranean Preferential Rules of Origin Convention (the Pan-Euro-Med Convention), which establishes identical rules of origin for goods between its member-states under free trade agreements, and will facilitate the opening of new production facilities and involvement in regional and international value chains.
  • Provide information and consulting support to local manufacturers and exporters regarding the most promising destination markets, help them find partners on such markets, advise on the best ways to penetrate such markets by organizing trade missions, etc.

Another push to the German-Ukrainian trade promotion may arise from facilitating German FDIs to Ukraine. German entrepreneurs and investors are interested in localizing German production facilities in Ukraine and establishing joint German-Ukrainian enterprises, STIs, in particular in such areas as agriculture, light industry (including textiles), civil engineering, renewable energy, and circular economy (GTAI 2018a, 2018b, 2018c). This form of cooperation also boosts Ukrainian exports, since such enterprises often produce intermediate inputs for German production. In order to promote joint enterprises setup Ukraine should:

  • Establish effective mechanisms for protecting foreign investments, including export-oriented ones.
  • Ensure the rule of law and effective protection of property rights.
  • Create favorable macroeconomic conditions to ensure access to financing for both Ukrainian and foreign businesses.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Effects of Civil Confrontation in Social Media

Posted on May 13, 2019 | Policy Brief

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This paper describes the practices of civil confrontation which can be found in social media (analyzing the cases of the Ukrainian segment of Facebook). The research shows that such practices can be used by interest groups to deliberately affect target audiences in certain ways and thus exacerbate civil confrontation or to expand its scope. Psychological effects of such practices for the society include monotony, ambivalence, desensitization and alertness. These effects can be used either to distract the attention from a certain issue or to enhance social mobilization, to reduce protest potential or to push large groups into impulsive actions, to impose contradictory ideas or to stimulate society to rethink values.

Civil Confrontation in Ukraine

Considering the warfare going on in Ukraine and the consequent state of society, it is important to clearly define what is going on between large social groups.

Figure 1. Continuum of Conflicting Sociopolitical Processes

A useful way to structure our thinking about these processes may be to use an approach to sociopolitical conflict presented in Iarovyi (2019), which suggests that the continuum of conflicting sociopolitical processes has 4 stages, as illustrated by Figure 1. In what follows we concentrate on the second stage, which is civil confrontation. Civil confrontation is defined as a form of intra-group confrontation in the society marked by a crystallization of value conflicts between opposing sides. It has the potential to escalate into other forms of conflict interaction as indicated by Figure 1. Unlike social tension, which is the earliest stage, the confrontation has an articulated ‘enemy’ image and identity. However, it is not as deep as a social conflict which has systematic and deep roots and exists in the framework of problems connected with values. It is also far from being a civil war since it does not include a military component and does not assume a dehumanization of the opponent.

Nevertheless, differences between the stages are rather vague. Within Ukraine one can observe social tensions between certain groups (such as civil servants of the “old generation” and new employees), social confrontation (e.g., between supporters of certain presidential nominees) and social conflict (e.g., between the believers of Russian and Ukrainian Orthodox Churches). The aggravation within this continuum occurs as a gradual buildup of the counteraction and change of the conflict gradient to a deeper one. For the society it might be beneficial to minimize the aggravation and identify the conflicts in their early stages. A simple way to identify conflicts is by studying communications in social media. In my dissertation, which is the basis for this policy brief, I perform this exercise.

Communication of Civil Confrontation

Sociopolitical conflicts are developing via communication, which is the linguistic representation of a conflict. The latter thrives via group polarization – transforming heterogeneous opinions of people into mutually exclusive opposing positions. To define the conflict of discourses in the Ukrainian segment of social media, it is necessary to consider both features of the modern Ukrainian political discourse in general and specific features of communication in social media.

Markers of Civil Confrontation in Ukraine

The overview of political conflicts in Ukraine allows me to define the general characteristics of Ukrainian political discourse which influence the growth of confrontation. They include (1) the exploitation of ethnic and civic identities; (2) the impact of the external (overseas) interest groups; (3) difficulties with defining the stage and type of the ongoing conflicts and (4) a lack of proactive work of the government on reducing the risks of conflict. These markers were taken into account during the research as the defining framework of the practices of civil confrontation, and they are attributed to a smaller or larger extent to the cases which were studied.

Characteristics of the Discourse in Social Media

In the context of competing discourses, communication in social media needs to be pragmatic and focused on broadcasting the own agenda of writers, otherwise a user who is overwhelmed with information from different sources will be distracted. Moreover, this communication should be interactive and cooperate with the audience in real-time to improve its impact (Westcott, 2008).

Communication in social media is often much more intense than in the real life. While people do not normally enter discussions in social media to “wage wars” (Whiting and Williams, 2013), the environment of the Internet itself is characterized by a weaker level of censorship and self-censorship, the absence of limits that restrict participants, quick responsiveness, scattering attention, a lack of real contact, interruption of public communication of two people by third parties, anonymity etc. Thus, communication in social media is less restricted for negative reactions of participants, less productive and at the same time more aggressive.

Psychological Practices of Civil Confrontation on Facebook

The psychological practices of civil confrontation are defined as a set of established methods and techniques within the community which allow an individual to engage in interactions of social institutions and change one’s own psychological states and processes. In the process of reproducing such practices in communication, the emotions, settings, stereotypes, and value orientations of the communicator are changed.

The research of such practices in Ukrainian social media used the critical discourse analysis (CDA) model by Norman Fairclough (1992), with the selection of 6 cases that differ in the intensity of verbal confrontation, the intensity of the discourses’ struggle in the virtual environment and the spread of discourses outside the virtual environment.

The source of empirical material are Facebook accounts of users who take active role in political life and communication in Ukraine. We select Facebook firstly since this platform in Ukraine is highly politicized and represents various views of political communicators who are often absent on YouTube, Twitter etc., and secondly, it publishes large texts, sometimes with a strong visual component, which allows to utilize the CDA comprehensively.

Effects of the Civil Confrontation

Monotony

The effect of monotony, or the reduction of motivation to control the activities and participate in social life, is reproduced due to excessive exploitation of some discourses in society.

The first case in which this effect is present is the story of Ukrainian boxer Oleksandr Usik who took part in a fight in Moscow, the capital of the aggressor state according to Ukrainian legislation. Some parts of the Ukrainian community met this event with strong condemnation. Sports and culture are traditionally considered the elements of “soft power”. Thus they are often used (or believed to be used) for political purposes. However, citizens who are less politically motivated often tend to doubt the political ideologies and put their personal sympathies to a certain person in the first place. The social media communication regarding this case was characterized by a segregation of community members depending on their belief in the statement “sport/art is outside of politics”, and caused numerous arguments between communicators. At the time, this very situation made more and more people voice their tiredness of the war (which is subconsciously perceived as the reason for the argument). It leads to the gradual implantation of the idea that “the war is the case of the politicians, and the peoples of Ukraine and Russia are friendly”, and could strengthen the position of pro-Russian politicians in Ukraine. The implantation of this idea is beneficial for Russia, as it lowers the loyalty of Ukrainians to their own state and discredits the authorities.

The second case relates to public protests of the Ukrainian opposition in 2017-2018 which never caused a really strong reaction of the ordinary citizens. Discursive instruments used to involve more people into protests (the famous phrase “Kyiv, get up!” which was used during Euromaidan in 2014) did not work since the society was tired of regular protests in 2016-2017 on every slightest occasion, each of them labelled “a Third Maidan” by the organizers. The monotony “filled” the public discourse with unnecessary information, people became tired of protests and manipulations, and the protests became marginalized. Thus, the monotony effect could be used for the diversion of attention, the reduction of the protest potential or the formation of the social “fatigue” (sharp decline of the ability and motivation to perform the social roles and functions or stand for the position). Getting out of this state is possible if the rhythm of the information supply changes and its foci are shifted, which will lead to new reactions and roll the discourse out, making it topical once again.

Ambivalence

The ambivalence, or the duality of the attitude of the same person to the same object/phenomenon, instead of monotony, leads to the production of public anxiety and nervousness. It was identified on the case of “derusification”, when one prominent Ukrainian official labelled Soviet and pre-Soviet poets and writers (V. Vysotskiy, V. Tsoi, M. Bulgakov) as the “tentacles of the Russian World” (i.e. Pax Russia).

The discussions over this case not only intensified contradictions among participants, they also led to the expansion of civil confrontation. While in the previous case with the boxer, the incitement of the hostility on the everyday level failed as the issues are rather unimportant, in case of famous poets and singers the incitement affects deeply rooted notions and nostalgia of the communicators and is much more efficient. With the growing hostility between communicators of opposing sides, it leads to disorganization of thoughts of hesitant people (e.g. those who have warm feelings about the Soviet culture and sub-culture despite supporting Ukraine in its war with Russia). As a result, communicators tend to be more nervous when making decisions and taking actions (physical actions or discursive). Thus the ambivalence effect could be used to push people to commit impulsive actions and diminish their rational thinking. Reducing its negative effects is possible via engaging the society into a dialogue, promoting compromise proposals and sticking to the principles of mutual respect in the process of communication.

Desensitization

The effect of desensitization, or diminishing the emotional responsiveness of the society to violent actions, arises from the practices of discourse discreditation and determining the boundaries of what is permitted, and is connected primarily with the loss of sensuality by the communicators. It was identified in the case of attacks on Roma people in Ukraine which were widely criticized on the official level but considered quite normal by a large amount of “ordinary people” in social media. The justification of the violence and lack of mass condemnation of the aggressive actions raise the threshold of sensuality in the society which leads to tolerating violence against certain groups (in this case – ethnic groups).

The toleration of violence could be further extended to other groups (such as political opponents). If this effect is implemented gradually, the negative consequences may not be visible until it is too late. Minimization of the negative impact is possible via disclosure of information about such practices, drawing attention to them and articulating the importance of preserving the universal human values.

Alertness

The effect of alertness, or the state of being highly aware and ready to face confrontation, arises as a result of communicators’ reaction to actions of their opponents. It was traced in the cases of “Euro-plates” (massive importation into Ukraine of not-cleared cars with European license plates) and “Night on Bankova” [the street where the Presidential Office is located] (demands of civic activists for investigation of the allegedly political murder). The first case demonstrates a self-organized non-political platform of owners of such cars, which without the support of any recognizable politician managed to effectively protect their economic interests through communication of their idea to the masses. The second case suggests that due to the use of moderate and non-violent methods of communication and action by civil activists, as well as the high authority and recognizability of communicators, their ideas are attractive: the public accepts them and the authorities demonstrate readiness for the dialogue. It works much better than pushing people to radical actions, as in the case of monotony of street protests. In both cases described above in the context of alertness, a minority conversion takes place, where the discursive impact of the self-organized group is being spread to a broader public. Due to reassessment of the values this effect can potentially be used by interest groups to achieve their political goals and mobilize groups of supporters.

Conclusion

The above described effects can be used to distract public attention, to change (increase or decrease) the level of protest potential, to push people towards impulsive actions, to impose contradictory ideas or to stimulate the society to rethink values – both in a positive or negative way. These effects can be utilized by interest groups to draft the agenda and establish domination of their own discourse in the public sphere.

Thus, the actions to be taken by governmental decision makers who want to deal with negative consequences of such effects are: (1) engaging in the dialogue with the society, (2) responding to the mobilization of large groups of people with policy actions, (3) drawing attention to the importance of human rights (and actually pursuing this policy on the state level instead of only declaring it). One of the major activities here is monitoring aimed at a timely detection of dangerous trends and handling communication in a proper way.

Further research in this direction could be focused on assessing the impact of psychological effects on various target groups in the society in the short- and long-term perspective.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

The Tragedies in the Soviet Countryside of the Early 1930s: Research Frontiers and Rival Interpretations of the Famines

Posted on April 1, 2019 | Policy Brief

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In November 2018, Viktor Kondrashin, expert historian on the Soviet famine in the early 1930s, organized a workshop at the Institute for Russian History of the Academy of Sciences (IRI RAN). Contributions by Russian and Ukrainian as well as British, Irish and Swedish historians summed up their research projects concerning the famines in Russia, Kazakhstan and Ukraine in 1929–1933. They highlighted the opposing interpretations of the causes of these famine-stricken regions. They also scrutinized the recent debates in the West of Anne Applebaum’s book Red Famine. Motivated by this enlightening discussion, this brief offers a short overview of the history, and contemporary state, of the Soviet famine debate.

In this brief, my purpose is to describe research frontiers concerning the Soviet famine in the early 1930s, based on my participation in the workshop at the Institute of Russian History of the Academy of Sciences in November 2018. Starting with a short historiographical background, I give examples of important archival contributions. Then I present contributions by individual scholars and their interpretations, concerning the causes of the 1929–33 famines in Soviet Russia and Ukraine. The separate famine in Kazakhstan 1929–30 was caused by forced sedentarisation and disbanding of the Kazakh people’s nomadic life; it claimed a proportionally higher number of deaths but would require quite a different analysis.

The collectivization of the peasantry was enforced in 1930–31. An initial abundant harvest 1930 seemed as a success for the kolkhoz system. It appeared to supply enough food for city dwellers and industrial workers as well as Red army soldiers. It also seemed to permit a large export of grain. This, and raw material exports in general, was crucial for the Soviet Union as hard currency generators for the import of machinery from the West. The five-year plan 1928–32 had overestimated how much these export commodities would generate. During the Great Depression, terms of trade turned dramatically against the Soviet export commodities. Likewise, the Soviet leadership had not foreseen how intensively collectivization would be resisted by peasants. Not only were many farming processes neglected in the new kolkhozes. Many peasants chose to slaughter horses, rather than giving them to the kolkhozy. The production of tractors could not yet substitute the loss of draught animals by ca. 15 per cent in 1930–31.

Weather conditions worsened and resulted in lower harvests in 1931 and 1932. A severe famine was imminent. Grain exports were cut. Rationing was severed. Although grain collection quotas were lowered in 1932, the greater famine severely hit the grain-producing regions in Ukraine, but also Kuban and Lower Volga regions and Northern Caucasus. The overall Soviet population losses by 1933 are estimated as 6–7 million, with approximately 3.5 million famine-related deaths in Ukraine.

This famine was a taboo topic in the Soviet era. The authorities managed to divert attention from the catastrophic consequences of collectivization and rapid industrialization. After World War Two numerous oral witnesses’ collections were gathered in the Ukrainian diaspora in Canada. In the late 1980s, the British historian Robert Conquest wrote his pioneering study Harvest of Sorrow. An accompanying TV documentary film made the general public in the West aware of the 1930s famine in the USSR.

Before that, during the “Thaw” in the early 1960s, established Russian historians had got Nikita Khrushchev’s directive to study primary sources concerning Stalin’s forced collectivization. However, their dramatic findings and frank book manuscript on the real costs of the collectivization was prohibited in 1965 by Khrushchev’s successors. Only during glasnost could these specialists, with Viktor Danilov (1925 – 2004) as one of the most visionary researchers, again analyze the agrarian history of the Soviet Union in the late 1920s and early 1930s.

Danilov’s primary concern was to make as many archival documents as possible available. He guided archivists and researchers to examine all relevant, central as well as regional, archives. Numerous documentary volumes, articles and monographs were produced, notably the 5-volume project The Tragedy of the Soviet Countryside, which showed both the excesses of the forced collectivization in 1930-33, and the famine conditions all over the USSR. Danilov also cooperated with other archivists to compile a documentary of how the secret police’s local officers in the countryside – often more accurately and frankly the communist party organs – did indeed describe the real situation in the villages. This project The Soviet Countryside as seen by VChK-OGPU-NKVD covers the whole interwar period 1918–39, and added unexpected perspectives on the dramatic period. In particular, it proves – contrary to what is sometimes believed – that Stalin and the leadership were very well informed of the dire situation that resulted from their policy decisions (see Samuelson 2007).

Today, we have not only oral history – eye-witnesses and relatives of the famine victims – but also a sufficiently reliable source base to describe all aspects of the transformation in the countryside. What remains however, is to set all this new empirical material into its context and to explain what caused the famine years 1929–1933? Which were its specific traits in different parts of the Soviet Union?

A most authoritative Russian expert on these topics is Viktor Kondrashin. He has continued the projects started by Danilov and published several archival documentary collections. The first is Famine in the USSR 1930 – 1934 with almost 200 facsimile archival documents. A larger archival publication by Kondrashin in four volumes (2011–13) expands the empirical basis for researchers. Of particular interest are those on the famine in various parts of the USSR. Kondrashin’s recent monograph The 1932-1933 Famine: The Tragedy of the Russian Countryside (2018) outlines his interpretation that the grand famine was the unexpected result of the collectivization. It struck in many regions of the Russian republic. It was not directed specifically against any ethnic group. Grain collection from the kolkhozes in 1931 and 1932 was brutally enforced. The Soviet leadership lacked information in 1932 concerning the real harvest. Only when the famine grew catastrophic in the winter of 1932/33, did the authorities change their policies: lowered grain requisition quotas, sent seed grain back to many regions, tried to evacuate suffering children from famine-struck regions. In short, that millions of people in Soviet Ukraine as well as in Russia died during the famine years was an unforeseen effect of a policy. In other words, it was not an intentional, genocidal policy directed towards the Ukrainian or any other people but a tragedy for all the peoples of the USSR.

In the West, major research on Soviet agriculture was done by Robert Davies and Stephen Wheatcroft. Their monograph The Years of Hunger (2004) is translated into Russian. It provides empirical data on all agricultural branches. Their conclusion is that “the Soviet leadership was struggling with a famine crisis which had been caused by their wrongheaded policies, but was unexpected and undesirable”. Davies and Wheatcroft emphasize that the changing policies in 1932/33 (lowering of grain collection, redistribution back to the peasant and shelter for famine-stricken youngsters) indicate that there was not any intention to “apply famine as a terror-weapon” as Conquest and many Ukrainian historians have stated. Stalin and other leaders made concessions to Ukraine in procurements, and were clearly trying to balance the subsistence needs of Ukraine and other regions. They cut down grain exports in 1932 to a minimum. But they did not acknowledge the famine to the West, asking for relief as Lenin had done in 1921–22, for fear of losing further in credibility worth. Also important to consider is that the Soviet leadership was particularly worried over a possible further Japanese expansion towards the Soviet Far East, after the takeover of Manchuria in 1931-32. This factor precluded any more use of the state reserves of grain (for the armed forces in case of war), to alleviate the situation in the starving areas.

Since the late 1990s, the Ukrainian historians have made different interpretations. The general famine all over the USSR is acknowledged as a consequence of Stalin’s policy. The climate as well as crop diseases led to shrinking harvests in 1931 and 1932. However, the famine that struck Ukraine in 1932/33 was essentially different. It is called Holodomor from holod – famine and morit’ – to kill. This interpretation presumes a genocidal intention of the Soviet leadership against the Ukrainian people, and its peasantry in particular. Since 2006, this interpretation is state law in the Ukraine and stresses that Holodomor was deliberately planned and executed by the Soviet regime in order to systematically destroy the Ukrainian people’s aspirations for a free and independent Ukraine, and subsequently caused the death of millions of Ukrainians in 1932 and 1933. The Ukrainian Rada adopted the law Pro Golodomor 1932 – 1933 rokiv v Ukraïni (Закон України: Про Голодомор 1932–1933 років в Україні) on 28 November 2006, which consequently set out the exact juridical terms that give the established framework for historiography in the Ukraine.

It is testimony of the high standards in the Russian academic tradition that Kondrashin invited the prominent Ukrainian historian Stanislav Kulchitskii and the Canadian-based Roman Serbyn, and others from Ukraine, to contribute to the anthology The Contemporary Russian-Ukrainian Historiography on the Famine 1932 – 1933 in the USSR. Here the reader himself can study and compare their argumentation for the Holodomor-interpretation. They present a different set of empirical data from each theme in this ongoing debate, concerning both agricultural and demographic figures, as well as the Soviet Communist party’s decisions versus Ukraine in late 1932 – early 1933.

The decisive question accordingly remains which of the rival interpretations is most solidly confirmed by traditional methods on history as science. In other words, whether there was an intention from Stalin, from central and/or regional leaders, to cause or to aggravate – as a terror-instrument – the famine in the Ukraine. In addition, it remains to be decided whether or not the concept of genocide, as defined in the 1948 United Nations Convention, is applicable to the famine in the Ukraine and other parts of the Soviet Union. The genocide interpretation is rooted in an academic tradition that stretches from Conquest’s above-mentioned Harvest of Sorrow to more recent works, such as by Timothy Snyder Bloodlands: Europe between Hitler and Stalin, Norman Naimark Stalin’s Genocides and numerous articles by Andrea Graziosi among other historians in the West.

Mention should finally be done of Anne Applebaum’s Red Famine: Stalin’s War on Ukraine (2017) as a most detailed and vivid description of the sufferings of the Ukraine people in the early 1930s. Her book was very positively reviewed not only in the mass media, but also by academic scholars like Sheila Fitzpatrick. However, Fitzpatrick had obviously misread the book and praised it for its refutation of the genocide interpretation. This forced Applebaum to clarify that precisely the opposite was her case: The famine in the Ukraine was intentional and foreseeable by the Soviet leadership, whose intention it was to subdue nationalist aspirations. In turn, this rejoinder forced Fitzpatrick in a commentary to withdraw all her praise for the book!

Given this hot debate, it is not surprising that, in the academic community, it was felt that matters could not be put to rest without thorough arguments. The editors of Contemporary European History organized a solid roundtable on Soviet famines, with written essays by leading historians and specialists (Volume 27, Issue 3, August 2018, pp. 432-434). These concise essays, by N. Naimark, N. Pianciola, T. Penter, J.A. Getty, A. Graziosi, S. Wheatcroft and others may serve as the best introduction to a thorny historical theme that can otherwise be difficult to grasp, not least because of the often politicized nature of the debates.

The autumn 2018 seminar at IRI RAN in Moscow was one in a long row of similar events – conferences and workshops on the history of the collectivization of the peasantry, the dekulakization and repressions against peasant protests, and the famines in various Soviet republics in 1929 – 1934. Already in spring 2004, a landmark conference took place at IRI RAN, where Viktor Danilov and Stanislav Kulchitskii, as representatives of the Russian vs. the Ukrainian perspective, debated for a whole day (!), albeit without converging viewpoints. At that stage, they could sum up a decade of archival research and chisel out divergent points for further research. Over the last fifteen years, scholars in both countries have made great strides to deepen the empirical foundation, notably by detailed mapping of the harvests, demographic changes and other indicators even at the local level. This new level of knowledge was well reflected in the various contributions at the seminar and in the above-mentioned anthology Contemporary Russian-Ukrainian Historiography.

References

  • Applebaum, Anne, Red Famine: Stalin’s War on Ukraine, New York: Doubleday, 2017.
  • Applebaum, Anne, Reply to Sheila Fitzpatrick’s review of Red Famine, Facebook: https://www.facebook.com/anneapplebaumwp/posts/as-an-author-who-also-writes-reviews-i-generally-try-to-avoid-responding-to-revi/704110623118513/
  • Conquest, R., The Harvest of Sorrow: Soviet Collectivization and the Terror-Famine, Oxford University Press, 1986.
  • Danilov, V.P. et altere, eds., Tragediia Sovetskoi Derevni: Kollektivizatsiia i raskulachivanie, 1927 – 1939, (The Tragedy of the Soviet countryside: Collectivization and dekulakization), five volumes, Moscow: Rosspen, 1999–2004.
  • Danilov, V.P. et altere, eds. Sovetskaia derevnia glazami VChK-OGPU-NKVD, 1918 –1939, (The Soviet countryside as seen by VChK-OGPU-NKVD, 1918–1939), four volumes, Moscow: Rosspen, 1998–2005.
  • Davies, R.W. & Wheatcroft, S.G., The Years of Hunger: Soviet Agriculture, 1931–1933, Palgrave Macmillan, 2004; also as translation: Gody goloda: Sovetskoe selskoe khoziastvo, 1931–1933, Moscow: Rosspen, 2011.
  • Fitzpatrick, Sheila, “Red Famine by Anne Applebaum review – did Stalin deliberately let Ukraine starve?”, The Guardian, 25 August 2017, see 2019-03-26: https://www.theguardian.com/books/2017/aug/25/red-famine-stalins-war-on-ukraine-anne-applebaum-review
  • Golod v SSSR 1929 – 1934, (The Famine in the USSR, 1929–1934), Moscow: Mezhdunarodnyi Fond Demokratiia, 2011–2013.
  • Kondrashin, V.V. ed., Sovremennaia rossiisko-ukrainskaia istoriografiia goloda 1932–1933 gg. v. SSSR, (The Contemporary Russian-Ukrainian historiography of the famine 1932–1933 in the USSR), Moscow: Rosspen, 2011.
  • Kondrashin, V.V., Golod 1932–1933 godov: Tragediia rossiiskoi derevni, (The Famine in 1932–1933: The Tragedy of the Russian countryside), Moscow: Rosspen, 2018.
  • Kondrasjin, V.V., “Hungersnöden i Ryssland och Ukraina 1932–33, in Samuelson, L. (ed.), Bönder och bolsjeviker: Den ryska landsbygdens historia 1902–1939, EFI/HHS 2007, p. 140 – 173.
  • Kozlov, V.P., Golod v SSSR 1930–1934//Famine in the USSR 1930–1934, Moscow: Federalnoe Arkhivnoe Agentstvo, 2009.
  • Kulchitskii, S.V., “Obshchii i regionalnyi podkody k istorii velikoi tragedii narodov Rossii i Ukrainy”, (The General and regional approach to the great tragedy of the peoples of Russia and Ukraine), in Sovremennaia…istoriografiia, (above), pp. 107 – 206.
  • ”Roundtable on Soviet Famines”, Contemporary European History, vol. 27: 3, August 2018, see: https://doi.org/10.1017/S0960777318000279
  • Samuelson, L., “Gammal och ny historieskrivning om den sovjetiska landsbygden – “Arkivrevolutionens betydelse sedan 1990-talet”, in Bönder och bolsjeviker: Den ryska landsbygdens historia 1902–1939, EFI/HHS, 2007, p. 26–41.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Decentralization, E-Procurement and Efficiency of Public Procurement in Ukraine

Posted on March 11, 2019 | Policy Brief

20190311 Decentralization, E-Procurement and Efficiency Image 01

This brief is based on a research that investigates if there’s a synergy effect of procurement and decentralization reforms in Ukraine on procurement efficiency. The analysis shows the similarity between new and old administrative units procurement performance. Although the analysis does not provide evidence of a significant synergy effect, such a similarity could be considered as something positive (due to the lower market power and capacity of the newly created administrative units) that should be analyzed further.

Decentralization in Ukraine

In April 2014, the Ukrainian government launched a systemic decentralization reform – a delegation of a significant part of resources and responsibilities from oblast and raion-level executive branches of the government to the local self-government level. The key issue of the reform was the creation of a strong basic level of local self-government in line with the European Charter of Local Self-Government. This is done through the creation of amalgamated hromadas (AH), the merger of several settlements with a single administrative centre.

An AH is governed by a council of the amalgamated hromada (CAH), a representative body of a local self-government. It is elected by residents of territorial communities and is responsible to independently resolve local issues, develop and approve AH budgets. Particularly, the government redistributed tax revenues and expanded the system of state subsidies (medical and educational subvention, subvention on development of amalgamated hromadas etc.) that could be used according to AH decisions.

In 2015, 159 AH were established. As of September 2018, 831 AH made up by 3,796 hromadas with 7 million residents (decentralization.gov.ua).

Public E-Procurement

Contemporaneously, a reform of public procurement has been implemented. According to the Law on Public Procurement of Ukraine, since August 2016, public procurement must be announced and executed through ProZorro, a public procurement web portal administered by the state enterprise. The e-procurement system consists of a central database, an auction module and commercial marketplaces (Figure 1).

In order to participate in public tenders, bidders can choose one of 22 commercial marketplaces (7 companies that provided initial investment for the project became the first marketplaces). The commercial marketplaces are web resources managed by private companies that provide access to the electronic procurement system.

Figure 1. ProZorro Architecture

The electronic procurement system does not completely cover the procurement cycle. Actually, it only covers the tendering process while planning and contract execution are mostly out of the system (plans are published online). Moreover, the existing legislation provides opportunities to manipulate tendering process by switching between different procedures. Within the ProZorro system there are 6 main procurement procedures that can be used by procuring entities depending on the volume and specifications of their needs.

Selection of procedures is based on a Threshold principle. There are three thresholds (Figure 2):

  • Lower Threshold (LT). Contracting authorities are not obliged to report procurements in the electronic system if the total value of procurement is lower than UAH 50,000.
  • Higher Threshold (HT). Contracting authorities are not obliged to use open competitive procedures if the total value of tender is lower than a defined level. This level is equal to UAH 200,000 for goods and services and UAH 1.5 million for construction.
  • Euro Threshold (ET). The value of tender that requires applying the strictest competitive auction procedure. The euro threshold corresponds to thresholds used in EU public procurement legislation and is different for goods and services and construction works.

Transparency and efficiency indicators

Typically, a procurement process is divided into three stages: pre-tender stage, tender stage and post-tender stage. To measure efficiency and transparency of AH procurement, we constructed a system of eleven indicators that evaluate each stage of the procurement process (Table 1).

Table 1. Transparency and efficiency indicators used in the report

  • Avoiding ProZorro. Both this and the following indicator would be associated with a decreased transparency, and, while not necessarily evidential, raise suspicions about procurement done in a less efficient and more collusive/corrupt way. AH are not inclined to avoid the ProZorro system. The share of procurements outside of ProZorro per AH is smaller than the corresponding indicators for other administrative units (Raion State Administrations, RSA, and unamalgamated hromadas, UH).
  • Avoiding higher and euro thresholds. An analysis of ProZorro data shows that for AH, 84% and 11% of AH have at least one “suspicious” case for each corresponding threshold. For, RSA the indicators are 73% and 31% respectively.
  • Unanswered questions. Having a productive dialogue with suppliers is of crucial importance for the success of the procurement. It helps to adjust the tender documentation so that it does not include discriminatory demands. Analysis shows that this practice is not dominant: relatively small proportion of AH and UH uses it.
  • Level of competition. Higher competition is normally assumed to imply more efficient procurement deals. There is no difference in competition across administrative units and products (measured by the number of bidders per tender).
  • High disqualification rates can be a consequence of ill prepared tender documentation with unclear technical specification or it can be a consequence of suppliers’ inexperience. It can also be a sign of corruption, when a tender committee is trying to find any reason to disqualify ‘unwanted’ suppliers. The analysis shows that disqualification is not a significant problem and, in fact, there are no significant differences across administrative units and products.
  • Success rates. To successfully complete competitive procurement, the contracting authority has to determine the technical description of a good and its expected value based on their budget and market analysis. It also has to prepare and publish tender documentation and answer questions of potential suppliers. Finally, after the auction, the contracting authority has to evaluate documents of the auction winner and sign a contract. Failure in each of these steps will lead to unsuccessful or cancelled procurement. There is no significant difference across administrative unit groups in terms of procurement success rate
  • Abnormal saving rate. Generally, a high saving rate (the difference between tender expected and contracted values) is regarded as a positive indicator, however, a too high rate is suspicious. It can be a sign of an inadequate expected value or an abnormally low price (suspicious behavior on behalf of the supplier). For the purpose of this study, we consider a saving rate abnormal if it is greater or equal to 30%. The analysis shows that AH had a significantly lower share of tenders with abnormally high saving rate than RSA. On average, 0.6% (in terms of value) of AH tenders are suspicious, for RSA this indicator equals 6.1%
  • Contract termination. Frequent contract termination is a sign of significant inefficiencies in the procurement function of contracting authorities. The share of terminated contracts (as a percentage of the total contract value) is approximately similar for AH and RSA. On average, one AH has 5% of contract value terminated, while RSA indicator equals to 6%.
  • Fixing the price with additional agreements. Although the Ukrainian Law on Public Procurement gives the right to amend the price per unit indicated, this right can be misused. It could lead to significantly higher costs. RSA are strikingly different from the other two groups – on average 20% of the RSA contract value stems from contracts with amended prices. This difference is the consequence of the different structure of goods and services procured by AH and UH on the one hand and RSA on the other.
  • Share of largest supplier. Generally, it is considered to be a good practice, when contracting authorities are not overly dependent on one supplier. Approximately 30% of contract value of average AH and RSA belongs to one supplier. For UH this indicator is even higher (on average 48%) but it could be the consequence of the smaller number of contracts signed by UH.

Effect on prices

If contracts are successfully executed, the price of a good usually summarizes the efficiency of the procurement process.

There are many factors that affect the prices of goods in public procurements. On the one hand, AH (a) “realized” that they spent their own money and thus, they have more incentives to save and (b) have more power to choose where to spend. On the other hand, there are some factors that have the opposite effect: (a) because of low quantity demanded, the tenders announced are not interesting for large companies that could potentially provide lower price, and (b) the procurement officers could have insufficient capacity to negotiate lower price. Although, it is impossible to evaluate all these factors, we can assess their outcome – the contract price of a good.

For this analysis we looked at the prices on homogeneous goods such as food (potato, butter, eggs) and fuel (petrol A95, petrol A-92, diesel.

Table 2 summarizes the prices on the goods received by hromadas and compares it to the prices received by other types of entities (UHs and RSAs).

The data shows that for food products, AH average prices are lower or not different from UH, and slightly higher or not different from prices received by RSAs.

Even though there are some differences in prices of Petrol A-95 (partially due to inefficient planning and contracting at periods of higher prices), in general, the price level is very similar between all the entities.

In most cases, despite some warnings, there were no significant gaps between AH’s prices and UH or RSA. Moreover, the more competitive is the market of goods procured, the closer are prices received by different administrative units.

Table 2. Prices of goods by administrative units in 2017

Conclusion

The analysis shows the similarity between AH and RSA in terms of number of procurements, success and disqualification rates as well as competition level and share of terminated contracts. However, in cases when it is allowed by the Procurement Law, AH are more likely than RSA to choose direct selection of a supplier than a competitive procedure. Such behavior can be caused by a lack of professionalism (or even corruption), a desire to select a local trustworthy company or just because it is easier and faster to conduct uncompetitive procedure below the threshold.

On the other hand, AH are less inclined (in comparison to RSA) to avoid the ProZorro system (by using procurements below UAH 50 K) and to sign additional agreements that increase the price. Such behavior is potentially punishable by law. It can be suggested that procurement officers of AH only recently started to work with tenders above HT and are therefore more conscious of possible negative consequences of such actions.

The price per unit is the key indicator that summarizes information on procurement efficiency. Although AH show varying price efficiency, their prices of procured goods, in general, are not worse than in other administrative units’ groups. The more competitive the market, the closer are prices (especially in the case of fuels). Even if some gaps were observed, these differences are decreasing over time. Better planning can help to receive lower prices (better estimation of needs and choosing appropriate  periods for procurement).

Currently, the analysis does not provide an evidence on a significant synergy effect of decentralization and procurement reforms.  There are no significant differences between old and new administrative units. However, usually new communities have lower market power and capacity, and “no difference” could be considered as a positive sign that should be analyzed further.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.