Decentralization, Regionalization, Consolidation? Some Reflections

Rigid power vertical does not provide a safeguard from regionalization!?

The notion of Ukraine being an excessively centralized state with rigid executive power vertical closed-looped on the President has been propagated for many years within Ukraine and around Ukraine. From the formal point of view, it may appear to be the case, although in reality the situation was and is quite different.

Excessive centralization of Ukraine has proven to be a myth. If we look into the history of emergence of heads of executive bodies with general jurisdiction on regional and district level, we can see that this official position (formerly titled as President’s Representative) was introduced at the beginning of 1992, after the first Ukrainian presidential elections.

The pre-conditions for this move are related to the events of 1990-91. In spring of 1990, the Verkhovna Rada of Ukrainian Soviet Republic and local councils of people’s deputies (formerly bearing such title) were elected. As it turned out, in both the Verkhovna Rada and local councils there were quite a number of elected representatives who were not simply non-communists, but who were clearly marked as bearing anti-communism sentiment, oriented not on communism, but on democracy and the market. On the whole, initially it did not look catastrophic, but then the situation started to evolve following quite different scenario from the one foreseen by Gorbachov and Ukrainian communists. The Soviet Union and the Ukrainian Soviet Republic had their own Constitutions that enshrined the steering role of the Communist Party and embraced the principle of “omnipotence of councils”, while councils were “bodies of state power” embedded in a dual vertical – along the line of the Communist Party and along the line of councils.

In 1990, the newly elected Verkhovna Rada of Ukrainian Soviet Republic abolished the constitutional provision about the “steering and guiding role of the Communist Party of the Soviet Union”, and in December 1990 adopted the law on local and regional self-government. This law introduced the notion of “basic level” of local self-government – cities, villages and village councils, and district and regional councils became derivative of the basic level, which toppled the council vertical. The orderly communist-state council vertical did not just fall apart – points of antagonism emerged between councils with different political orientation and the system of power spiralled out of control. That is why, right after being elected as President, Kravchuk introduced to the Verkhovna Rada the bill that considerably limited capabilities of regional and district councils, as they were deprived of their executive committees whose functions were assumed by President’s Representatives. The institute of President’s Representatives survived only until 1994, when it was abolished by Parliament as a result of clash between Kravchuk and Plushch. Thus, executive committees of regional and district councils were restored and their top executive officials became elected by all voters of respective region and district. In this context, Kuchma inherited the anarchic system of power locally, that was not particularly inclined or willing to look up to Kyiv and used to ignore decisions of Ukraine’s central government. This had led to a new crisis, namely confrontation between President and the Verkhovna Rada, and in May 1995 regional and district councils again lost their executive committees, replaced by local state administrations whose heads again were appointed by President. This is the situation we still have today. All this was adding to the myth about omnipotence of Kyiv, embodied by President, and rigid centralization of power.

In reality, what was happening during 20 years was regionalization through the executive power! Instead of being representatives of the state, heads of local state administrations represented interests of local elites.

During all this time, there were probably two instances when the appointed head of regional administration was not native to the region – Moskal in Luhansk region under President Yushchenko, and Saakashvili in Odesa region under President Poroshenko. In the vast majority of cases, head of regional administration is appointed as a compromise between Kyiv and regional elites. Formally representing the state in a region, heads of regional administration in the first place represented interests of regional elites and were accountable to them.

It would be useful to recall the events of autumn 2004 and spring 2014. In both cases, the so-called governors behaved exactly as was dictated by sentiment expressed by local elites.

The absence of a robust government policy towards building of a consolidated Ukrainian landscape on the entire territory of the country led to the situation when different regions were pushing for their own agenda. Whereas in western, northern and central regions there was quite active reduction of schools with Russian language instruction, local TV channels adopted Ukrainian-only broadcasting, and Ukrainian festivals and holidays were becoming more and more widespread, heads of regional administrations in the eastern and southern regions were pursuing exactly the opposite agenda that only sharpened the tension and contradictions between the regions.

While heads of regional administrations and all regional elites in general formally pledged loyalty to Kyiv and President of Ukraine, in regions they were pursuing their own agenda, different from the official policy.    

 

Ukraine’s diversity. Ethnic factor in the consolidation of the Ukrainian landscape    

In Ukraine, like in most large European countries, there are multiple differences across regions. These differences are of different character, including political preferences.

However, unlike most large European countries, in Ukraine these internal, inter-regional diversity is sharpened by the excessive external influence of Russian Federation, which is quite determinant in causing inter-regional and inter-ethnic problems in the country.

By its actions in 2014 Russia showed that it is very well cognizant of such inter-regional inter-regional differences and could apply pressure to weak spots. The invasion of Crimea, attempts to create Novorossia, and tragedy in Odesa – all these events were conditioned on the one hand by specific ethnic, linguistic and religious contexts in these regions, and on the other hand by the failure of Ukraine’s domestic policy, or to be more precise, by the absence of government’s regional policy as such.

Below are some illustrations of the regional situation in Ukraine in 2012-13.

Identity as key to consolidation of the state.

Figure 1. Identity of Ukrainian citizens, according to a sociological survey[1]

The survey revealed an interesting pattern: ethnic Ukrainians were most inclined to identify themselves as Ukrainian citizens – 65%, Russians – 40%, other minorities – less than 40%. At the same time, Russians and other minorities were much more inclined to adopt local identity. For other minorities it even played greater role than identification as Ukrainian citizen – 42% versus 38%. Thus, it is quite easy to find groups that could be used to rock the boat.

Then, it would be useful to look at the map of ethnic composition of Ukrainian regions:

Figure 2. Ethnic composition of Ukrainian regions

It is clearly seen from the map that in terms of ethnic composition Ukraine’s regions can be broadly divided into four groups: the largest group is the one shown in green colour plus Zakarpattia and Bukovyna, with share of ethnic Ukrainians higher than the national average; the second largest group comprises Kharkiv, Dnipropetrovsk, Zaporizhzhia, Kherson and Mykolaiv regions, with share of ethnic Ukrainians close the national average; the third group comprises Luhansk, Donetsk and Odesa regions where ethnic Ukrainians constitute more than half of the population but still significantly less than the national average; and the fourth group comprises Crimea where ethnic Ukrainians are in the minority.

Thus, it is quite understandable why the first victim was Crimea, with Donbas and Odesa becoming the next target.

However, it is important to note that the average regional numbers in ethnic compositions also show significant local differentiation within the regions. For example, in Odesa region, it is about its northern west rather than the entire region.

It is important to point out that compact settlement of minorities have always been employed by Kremlin to neutralize aspirations of a republic’s title ethnos to certain autonomy or independence.

This statement would be applicable to any republic of former Soviet Union as the pervasive practice was for a minority living in a certain republic to be integrated in the so-called ‘russkiy mir’ (Russian world) rather than the republican landscape.

Narva, Vyborg, Daugvapils, Tiraspol, Bender, South Ossetia, Hungarian villages in Zakarpattia, Romanian and Moldovan settlement in Zakarpattia, Bukovyna and Odesa region are example of places where the Russian language was dominant (apart from the language of the ethic minority group in compact settlement that constituted majority in a given location). In this way, right inside the republic, an element of opposition to national self-awareness of its title ethnos was created and supported.

This was the situation during the entire existence of the Soviet Union, which persisted even after its collapse.

It should be noted that Baltic republics resolved these issues (where entirely or not) by their radical decisions to restrict participation in political life for large population groups not belonging to the title ethnos. Kazakhstan has started to systemically dissolve minorities in the Kazakh ethnos. Ukraine, however, preferred to turn a blind eye to the problem, actually leaving ethnic minorities, especially those who have compact settlements, to further influence of various pro-Russian political projects.

This explains the fact that today we indeed have territories where political preferences are defined by voters’ ethnicity – whether they belong to the Ukrainian ethnos or not.

Figure 3. Language map of Odesa region and election map for Ukrainian presidential elections in 2014 by local communities. (Sources: Ukrainian Centre of Social Data)

As seen from the figure, there is very high correlation between voters’ language preferences (which is indeed an ethnicity factor) and their support of a corresponding candidate.

This correlation between ethnicity and support of a certain Russia-centred political orientation is incomprehensible for Ukrainians, and allows for radical nationalist-oriented political parties to state that ethnic minorities in Ukraine are against statehood.

The loop closes. Non-understanding between groups serves to continuously exacerbate inter-regional and inter-ethnic ‘problems’ and destabilization threats in regions with significant number of minorities or significant share of Russian-speaking population.

Fortunately, in Odesa region the conflict did not grow into a war, although dozens of people lost their lives in Odesa in the attempt to instigate war.

In Donbas, the situation developed into open Russian aggression and occupation of a considerable part of Luhansk and Donetsk regions. Comparison of the language/ethnic map of Donbas with the map of military actions also shows very high correlation. Separatists and Russian aggressors manage to keep those territories of Donbas where the Russian language and Russian ethnicity are dominant among local population. Even the Debaltseve march is fully correspondent with the penetration of the Ukrainian element in the landscape which is entirely Russianized.

Figure 4. Language and military maps of Donbas

As seen from the maps, the territory of occupation of part of Donbas is very closely correspondent with the territory of total dominance of the Russian language, signifying non-Ukrainian identity.

However, it should be noted that apart from the ethnic and language factor which is very observable, there is also the economic factor. These are the territories that are least inclined to favour market relations, even though they gave rise to major Ukrainian oligarchs and the largest enterprises in Donbas are private.

 Figure 5. Acceptance of centrally planned and market economy by regions (based on a survey)    

Donbas essentially faces several tightly interwoven problems: predominance of local identity over national identity, total domination of the Russian language and consequently Russian information products; psychological non-readiness of people to live under market economy and take responsibility for their own future.

Speaking about Crimea, during the entire period of being part of Ukraine Crimea has never identified with the Ukrainian landscape, and the Ukrainian government handed over Crimea’s internal policy to Crimean politicians who were by nature Russian politician and, using Ukrainian posts and salaries, were preparing invasion of Crimea.

Therefore, today it is even more important than ever that Ukraine develops a new policy towards ethnicities within compact settlements, which should equally benefit the state and the correspondent ethnos. This policy should gradually lead ethnicities out of the influence of ‘russkiy mir’ and provide maximum integration in the Ukrainian landscape while preserving their own ethnic identity.

The attempts of ethnic minority leaders to block integration in the Ukrainian landscape do not only create problems for the Ukrainian society and Ukrainian state, but also aggravate future prospects of people who find themselves locked within their compact settlements without chances for significant growth and are deprived of opportunities to use social lifts in Ukraine. Non-proficiency in the Ukrainian language limits their chances in gaining education, access to public service and entrepreneurship in the overall national context.

Obviously, by preserving closed ethnic environments, such ‘leaders’ guarantee for themselves repeated election to the Ukrainian Parliament, and their constant ‘struggle’ to preserve ethnic locality and language rights only dooms such territories to deeper and deeper degradation, delayed development versus other territories, which strengthens local egotism and shapes the sentiment of “we are not heard”, “we are being hurt”.

The new policy on the territories of compact settlements of ethnic minorities should focus on better learning of the Ukrainian language, improvement of general level of education and promotion of understanding that integration in the Ukrainian landscape while preserving their own ethnic identity provides better opportunities in the competitive, rapidly changing world.

Local identity preserved in different aspects of local life could be used to boost income of families, which should not necessarily or exclusively be confined to ethno-tourism. People originating from such localities who have integrated in the Ukrainian landscape could serve as important communicators between Ukrainian agents and agents from the countries of origin of correspondent ethnos.

Such approach to ethnic groups living in compact settlements in Ukraine should in mid-term perspective mitigate the destabilization threat in the regions Kremlin is counting on, and at the same time achieve harmony between the Ukrainian statehood and local ethnic identity.

It is of paramount importance today to make systemic efforts to apply this approach in the districts of north-western Odesa region and in north-western Zakarpattia.

In its hybrid war against Ukraine, Russia takes advantage of certain disintegration of the Ukrainian landscape and considerable inter-regional differences – primarily in terms of language and psychological frames. Non-integration of ethnic minorities in compact settlements into the general Ukrainian landscape could potentially become a new launching ground in this war.

Therefore, consolidation of the Ukrainian landscape should become key in the country’s domestic policy and correspondent regional policy.

 

Ensuring well-balanced regional development of Ukraine as a factor to minimize detrimental effect of populists and the external aggressor   

The emergent hot confrontation between candidates in the 2004 presidential elections from forces with divergent political orientation (pro-European and pro-Russian) marked the introduction of a concept about division of Ukraine into ‘grades’ in order to carry out campaign against rather than for something. It was the time when the issue of disintegration of the Ukrainian landscape became part of the political battleground, and divergent language situation in the regions together with their different development level caused severe political fallout – in 2004 and more catastrophically in 2013-14.

Unequal economic development across regions is typical for any relatively large country, and Ukraine is not an exception. However, the absence of an adequate government’s regional policy intended to forge a common and consolidated Ukrainian landscape led to heightened regional self-indulgence and gave rise to myths about “who is feeding whom”. The myth that “Donbas is feeding everyone” became a cornerstone for emergence of Donbas separatism, which with Russia’s backing had led to a war.

Indeed, it was only in 2014-15 that the first attempts were made to draw attention to the need to change approaches to regional development, and the issue of forging a common and consolidated Ukrainian landscape was for the first time reflected in a strategic document – the National Strategy for Regional Development up to 2020[2].

The adoption of a new Law on Principles of National Regional Policy and amendment of the Budget Code by adding Article 24-1 on setting up of a budget programme “State Fund for Regional Development” within the Ukrainian State Budget aimed to provide financing for regional development projects created the opportunity for Ukraine to elaborate a coherent set of planning and financial documents for regional development as part of the country’s domestic policy.

Among positive developments that was supposed, to some extent, to help mitigate the risks of regionalism that borders on separatism was the reform of local self-government and territorial organization of administrative authority that was launched by the adoption of the reform concept on 01.04.2014 by the Cabinet Ordinance No. 333.

What should be specially highlighted is the so-called budget decentralization that has led to the expansion of powers and increase of financial resources for cities of regional significance, amalgamated communities and districts. In this process, powers and financial capacity of regions started to shrink, but at the same time regions received a share of profit tax and equalization grant based not on expenditure but on revenue.

All these measures are intended to reduce regional self-indulgence and increase capabilities of regions that demonstrate relatively faster growth.

Figure 6. Principles of distribution of corporate profit tax between budgets   

 Figure 7. Principles of budget equalization between budgets of communities and regions   

Generally, budget decentralization and introduction of the regional development financing system based on transparent formula from the Regional Development Fund gave hope that the European model for stimulation of regional development will finally work in Ukraine.

The year of 2015 showed first positive results – allocations for regional development were based on formula, not on political loyalty, as it used to be the case.

Figure 8. Comparison of funds allocation from Regional Development Fund in 2012 vs. 2015

The diagram shows that in 2015 the government succeeded in introducing predictable allocation of public funds for regional development, which was no longer based on special interests. The same allocation approach was used in 2016.

In 2017, parliamentarians from the Budget Committee decided that, apart from such automatic allocation of funds between regions, they would want to have say in determining projects to be financed from Regional Development Fund, and following this initiative the system started to fall apart: firstly, the amount of money in the 2017 Regional Development Fund was not 1%, as stipulated by the Budget Code, but only 0,5%; secondly, parliamentarians decided that 10% of the Fund should be ear-marked for sport development projects and 10% for energy efficiency in education and healthcare[3]; and thirdly, the inter-agency committee that approves allocations for projects should include as at least half of its membership… parliamentarians from the Verkhovna Rada Budget Committee[4].

The reduction in the amount of Regional Development Fund distributed among regions by using the formula “80% – according to the number of inhabitants in a region; and 20% – dependent on the level of socio-economic development of regions in relation to per capita gross regional product (for regions where this index is lower than 75% of the national average)” was simultaneous with the steep increase of allocation for the so-called political subvention – for socio-economic development of certain territories. This subvention is allocated manually, by request of individual parliamentarian.

Just a few examples of such important projects of “socio-economic development of a certain territory”[5] are buying of refrigerators for the municipal institution “Pohrebyshche District Medical Centre of Primary Care” of Pohrebyshche District Council for the amount of 25,000 UAH, or buying of furniture for a school in Khrinivka for 7,700 UAH or toys for 7,000 UAH for a number of kindergartens in Koziatyn district. Understandably, people will be pleased to receive these benefits from central budget; however, budget decentralization provided considerable amounts for local budgets some of which are in deposit accounts, and the money worth spending on boosting local capacity were channeled to cover consumption costs that have nothing to do with local development.

The situation when Regional Development Fund that essentially finances development of all Ukrainian regions has the budget of 3.5 billion UAH with only 1 billion as guaranteed money from the general fund, and the subvention for socio-economic development of certain territories has the budget of 5 billion UAH with 2.5 as guaranteed money from the general fund of the Ukrainian national budget is against common sense and the key idea behind the new regional policy that stresses transparent, impartial and stable financing of regional development. It also goes against European experience and Ukraine’s EU commitments under the signed budget support agreement for regional development[6].

Figure 9. Structure and size of Regional Development Fund and subvention for socio-economic development of certain territories (based on Annex 3 to the Law on State Budget of Ukraine for 2017)

Essentially, as of 2017, positive developments observed in Ukraine in 2015-16 with regard to establishment of systemic approaches to the development and implementation of public policy on the basis of European best practices have halted, and there is an obvious setback with return to the practice of manual distribution of funds. These funds are primarily channelled to operational needs in the regions, rather than development on the basis of own capacity and mutually aligned strategic documents – the National Strategy for Regional Development and Strategy for a particular region. The same tendency is observed in the shift away from the principle of sustainable and transparent financing of regional development from budget funds via Regional Development Fund instrument.

This setback in regional policy takes place against the backdrop of newest challenges that become critical in the context of prolonged economic and demographic crises, the war in Eastern Ukraine and countering the aggressor – Russian Federation.

 

Going back to the new regional policy of the state and legislative harmonization

It took some time for Ukraine to formulate legislation for the development and implementation of its regional policy. In 2005, the country adopted the Law on Stimulation of Regional Development that seems, on the one hand, to operate as a framework law defining general approaches to regional development planning, and on the other hand, contains a set of provisions concerning rather specific regional development instruments, for example, on regional development agreements concluded between the Cabinet of Ministers and Supreme Council of Crimea or regional council. However, such agreement has quite a universal character and defines the procedure of implementation and financing of regional development strategies, which currently is discordant with provisions of another law that is really central for planning, implementation and financing of regional development – the Law on Principles of National Regional Policy adopted in 2015.

According to the new concept of the country’s regional policy defined by the Law on Principles of National Regional Policy, from now on, regional development planning should be carried out through the adoption of regional development strategies that also should be aligned with the National Strategy for Regional Development; and implementation of regional development policy in the regions should be supported from Ukraine’s central budget through financing of regional development projects from Regional Development Fund. Thus the two laws – the Law on Stimulation of Regional Development and the Law on Principles of National Regional Policy – contains contradictory provisions in terms of planning and financing of regional development, which creates difficulties in application. It should be noted that the instrument of comprehensive regional development agreements has indeed exhausted its potential – current agreements are not finances and no new agreements are concluded.

Another problem that requires amending the Law on Stimulation of Regional Development concerns legal regulation of the so-called economically challenged territories. Together with some general provisions of regional development regulation, the Law introduced the concept of economically challenged territories as the ones that experience particular development-related difficulties and require special attention of the state. However, although the Law has been in force for over a decade, no programme has been elaborated to address economic challenges of individual territories. On top of this, the criteria for defining a territory as economically challenged are too general and difficult to apply to different types of territories that require additional attention from national and regional authorities. Essentially, the instruments introduced in the Law on Stimulation of Regional Development, such as regional development agreements and programmes of revitalization of economically challenged territories have not been viable, and territories that are significantly limited in development opportunities remain unidentified and thus are not covered by support from the state or region.

 

Rural areas with low population density  

Ukraine is still recognized as a country with low level of urbanization and significant share of rural population (31%, although this figure could now be even higher due to annexation of Crimea and loss of jurisdiction over some heavily urbanized areas of Donbas).

Despite the fact that the agricultural sector plays a key role in Ukraine’s economy, especially in its export, the structure of agricultural production in recent 10-15 years has changed significantly, with steep decline of population engaged in agricultural industry. This has created conditions for the decline of multiple rural settlements and challenging demographic situation. A large proportion of rural districts, that already were characterized by low population density, have become extremely vulnerable to further population decrease. Especially high rates of population decline are observed in northern districts of Zhytomyr, Kyiv, Chernihiv, and Sumy regions, as well as in Poltava and Kirovohrad regions.

Figure 10. Population density[7] in Ukrainian districts, 2013

Today, the least populated district in Ukraine is Poliske district in Kyiv region with about 4.5 inhabitants per square kilometre. Another example of district with low population density (less than 13 inhabitants) and accelerated depopulation is Semenivka district in Chernihiv region – a district remote from development centres and located along the state border. Traveling to the regional centre would mean to cover the distance of 346 km by railway, or 168 km by motorway[8]. It has the area of 1,500 square km and population of 18,252 inhabitants. In the period from 1.01.2013 to 01.01.2015 its population reduced by 5.2%. In the recent period, the district crossed out from its books a number of settlements with no inhabitants at all: Hluhivshchyna († 1992), Trudove († 1992), Osove († 1997), Branok († 2005), Hannivka († 2005), Horodok († 2005), Parnia († 2005), Dachne († 2013), Kuty Parshi († 2013), Lohy († 2013), Mykhailove († 2013), Parnia († 2013), Rakuzha († 2013).

The district has only 4 manufacturing enterprises; and the number of businesses does not grow. Together they provide about 530 jobs. There are also 43 farms, with no available data about employment. However, even such meagre data is sufficient to understand that such districts are too much weakened economically and demographically to be able on their own to achieve accelerated growth and overcome catastrophic shrinkage of population.

 

Economically challenged territories?!

Apart from rural districts with limited growth possibilities, there is another group of problematic districts and communities – those who have faced degradation of major manufacturing companies that provided employment and supported social infrastructure of villages and small towns in districts. This trend is characteristic of old industrial areas in Donbas and in some areas of Dnipropetrovsk and Zaporizhzhia regions.

The Law on Stimulation of Regional Development suggests that there is a group of economically challenged territories. But in reality, there has been no precedent when a district was officially recognized as economically challenged on the basis of this law, that would be followed up by suggesting a certain revitalization programme. However, one can make their own assessment of whether the criteria used to define economically challenged territories are truly objective.

“According to the monitoring of socio-economic indicators of urban development in 2014, indicators of the following towns meet the criteria of economically challenged territories: Berdychiv (Zhytomyr region); Tokmak (Zaporizhzhia region); Rzhyshchiv (Kyiv region); Oleksandria (Kirovohrad region); Novy Rozdil (Lviv region); Dubno (Rivne region); Lebedyn and Shostka (Sumy region); Izium and Pervomaisky (Kharkiv region); Vatutine (Cherkasy region).”[9]

In order to understand real ‘economic challenges’ of these cities and towns we have turned to the website selling real estate and selected prices quoted for 2-room apartments measuring 43-48 square meters in these towns: in Berdychiv it is 21-25 thousand US dollars; in Tokmak – 5.5-6 thousand US dollars; in Rzhyshchiv – 20-22 thousand US dollars; in Oleksandria – 8-12 thousand US dollars; in Dubno – 17-20 thousand US dollars; in Shostka – 8-10 thousand US dollars; in Izium – 6-8 thousand US dollars; in Vatutine – 7-8 thousand US dollars.[10]

If to analyse prices and quality of property, the most problematic from the given list would be Tormak – a city of regional significance. In the period from 1989 to 2015, its population declined by 29%. This shows the general deterioration trend, since the out-flux of people is quite noticeable. Considering other places, at least when it comes to Rzhyshchiv, Berdychiv or Dubno, their outlook is far from giving good reasons to classify them as economically challenged.

Therefore, the notion of economically challenged territories, as defined by the law, is not particularly objective and universally applicable, not speaking about the fact that it looks like some sort of stigmatization, signifying that one should avoid any dealings with such city or district.

 

Border territories

As many as 19 Ukrainian districts are located along the state border. Ukraine’s most extensive border is not with the European Union, but with Russia and Belarus that is under considerable Russian influence. The current situation along this border is quite varied, showing different development trends. Whereas the Ukrainian Western borders are becoming more and more transparent, and relations with the EU are bringing greater openness for movement of people and commodities, the Eastern border is becoming more and more resembling of the division line between the Soviet Union and the West.

During the years of war in Donbas, Ukraine’s trade relations with Russia have diminished greatly. Russia’s share in Ukraine’s foreign trade plummeted from 36% to 8%, and transit if Ukrainian goods through Russia to third countries almost stopped. This has dealt the greatest blow to Ukraine’s Easter regions that have lost not only the markets for their manufacturers who were closely integrated with Russian enterprises but also transit possibilities. Now these are the dead end stations and dead end routes. But what is even worse is that on the other side of the border we face Russian military forces, fully equipped to wage war. This creates an additional challenge – a private investor is not willing to invest into a territory that could become the first target in case of attack.

Figure 11. Districts bordering on Russian Federation  

Most districts bordering on Russia are characterized by low population density, weak local economy and considerable share of ethnic Russians, with domination of Russian television and radio broadcasters in their information environment. The most problematic are rural areas of Chernihiv, Sumy and Luhansk regions. District state administrations, that are the only government structures here, are also weak due to poor capacity of these areas which does not contribute to Ukrainian government’s credibility.

Figure 12. Border districts of Chernihiv region and population density

Figure 13. Border districts of Luhansk region and population density

In fact, Ukraine now faces a new challenge in its regional policy that was not recognized in 2008-09, when the country was formulating its regional policy ideology and even in 2015 when the Law on Principles of National Regional Policy was being pushed for adoption. Now it is critical to address this challenge. Probably, districts bordering on Russia should be treated a separate type of territories with problematic development for which conventional incentives do not apply. We need to search for non-standard solutions.

Possible options for modernization of regional development legislation   

It appears to be useful to prepare comprehensive draft legislation that would harmonize the Law on Stimulation of Regional Development and the Law on Principles of National Regional Policy, amend Article 24-1 in the Budget Code and introduce certain incentives for businesses that open on territories that face special development challenges. Since the Ukrainian convention requires submitting separate bills in order to amend codes, we can speak about a package containing at least three bills: on amending the Law on Stimulation of Regional Development, on amending the Budget Code; and on amending the Tax Code.

Considering amendments to the Law on Stimulation of Regional Development, it is important to considerably modify the subject of legal regulation in the law, when it comes to approaches to defining purpose and content of regional development agreements concluded between the Cabinet of Ministers and regional council, and introduce new approaches to defining special types of territories that experience serious development difficulties. To this end, it would be useful to look up to legal regulation of similar challenges in European countries as well as USA and Canada.

It appears to be expedient to abandon the format of regional development agreement between the Cabinet of Ministers and regional council as a general document under which the development of a region is entirely supported through execution of such agreement that essentially is not financed either from the central or from the regional levels. New approaches to such agreements should be fully aligned with new approaches to the development and implementation of the country’s regional policy stated in the Law on Principles of National Regional Policy. According to the new approaches, the key strategic planning document for a region is regional development strategy and corresponding implementation plan, and regional development projects derived from these documents should be financed from Regional Development Fund and partially from local budgets. Under these conditions, regional development agreements have lost sense and financing from the central budget. However, it would be premature to abandon regional development agreements entirely in view of Ukraine’s modernization and implementation of important infrastructure projects that concern a number of regions. Therefore, the proposed amendments should stipulate agreements only in individual cases, namely in case of major projects that are important both for the state and the region. For example, building of highways or railways to connect a particular region with major markets or the capital city would contribute to the region’s development only when such highway or railway is linked with the district transport network. In implementing such a project, each party assumes certain organizational and financial commitments. The proposed legislation should also regulate the procedure for concluding and implementing such agreements, as well as their revision, monitoring and legal remedies.

Another significant battery of new legal provisions should concern identification of some types of territories that face development limitations due to objective factors. The current provisions deal only with the general notion of economically challenged territories, with too general approach to their definition. Because of this, and due to the absence of viable mechanisms to foster development, these provisions remain unfulfilled.

The proposed legislation should stipulate identification of several types of territories with special development problems – from rural areas with low population density to border districts that are close to borders with special regime – this primarily concerns districts bordering on Russian Federation. These are the areas that ultimately lost opportunities for development by using cross-border trade or entering joint ventures with the neighbouring country’s businesses. In the context of the ongoing confrontation with Russia and destabilization risks in the event of potential escalation of military hostilities, the crises of local economy and demographic situation only becomes more and more severe, with private investment being too risky and unlikely. Therefore, without help from the state these districts would be doomed to decline – and this poses a serious national security threat.

Considering provisions of the Law on Principles of National Regional Policy that define approaches to strategic planning of regions’ development, the proposed legislation should stipulate that the status of a territory with special development problems could be defined on the regional level by decision of the Supreme Council of Crimea or regional council, and on the national level by decision of the Cabinet of Ministers. A mechanism to support development of such territory should be determined with regard of the level of decision-making authority. Thus, if such decision is made on the national level, the planning and financing of revitalization efforts could be part of a regional development agreement, and the government should be able to apply additional incentives – from financing of development or social infrastructure projects to offering preferential terms for businesses that launch operations in these areas.

If territories with special development problems are identified on the regional level, they must be included in the region’s priorities and regional programmes should be adopted to stimulate their development.

Amendments to the Law on Principles of National Regional Policy would require changes in some other laws that determine possibilities for certain preferences for business operating in such areas, as well as changes in budget legislation, especially Article 24-1 of the Budget Code, to stipulate mandatory financing of development projects of such territories.

 

Instead of conclusion

Ukraine indeed has made a significant step forward in building a modern regional policy in 2014-16, but its implementation efforts have revealed that public institutions are not ready to work in this new environment. New regional development tools that stipulate strategic and operational planning and competitive selection of regional development projects were essentially replaced by conventional approaches – construction, refurbishment of public infrastructure, without proper linkages to regional development strategy.

In striving to return to the possibility of manual allocation of public funds for regions, instead of channelling money through Regional Development Fund, there has been enormous increase of subventions for socio-economic development of individual territories distributed without any logic, just as a wish list of Ukrainian parliamentarians.

The war, locking of the border with Russia, a large number of internally displaced persons, degradation of front-line territories, destabilization threats in compact settlements of ethnic minorities have given rise to new challenges concerning priorities and importance of the country’s regional policy that need prompt and effective response.

Today, as never before, the decision-making in these sensitive areas should be very speedy, and draft decisions prepared for adoption should be understandable on all levels of governance and by all social and political groups.

The Ministry of Regional Development, as a key central government institution responsible for shaping up of the country’s regional policy, faces crucial and challenging tasks: to safeguard the country’s regional policy from being ruined by populists; to make everything possible to ensure that regional policy tools defined by the Law on Principles of National Regional Policy are applied according to the new ideology, not old traditions; and finally to ensure coordination of various government-sponsored programmes in regions implemented by central government institutions according to priorities established by the Regional Development Strategy 2020.

А. Tkachuk

25.08.17

[1] The survey “Regional Tolerance, Xenophobia and Extremism in Ukraine in 2012” was conducted by Kyiv International Institute of Sociology and commissioned by the Institute of Human Rights and Prevention of Extremism and Xenophobia (IHRPEX) from 5 to 23 November (field phase from 9 to 19 January) 2012.

[2] Cabnet Resolution of 06.08.2014 No. 385 “On approval of the National Strategy for Regional Development up to 2020” http://zakon3.rada.gov.ua/laws/show/385-2014-%D0%BF

[3] Paragraph 2 in part 2 of Article 24-1 of the Budget Code of Ukraine.

[4] Paragraph 2 in part 3 of Article 24-1 of the Budget Code of Ukraine.

[5] Cabinet Ordinance of 12 July 2017 No. 463 “Some issues of allocation of 2017 subvention from the state budget to local budgets for measures on socio-economic development of certain territories”, Annex 1.

[6] Financing Agreement on Sector Policy Support Programme – Support to Ukraine’s (Sector Reform Contract) 27.11.2014. http://zakon2.rada.gov.ua/laws/show/984_019

[7] Population Density in Ukraine, 2013, internet publication http://artdruk.com.ua/news-and-ideas/demography/4976/gustota-naselennya-v-ukrayini-2013

[8] Here in later in the text, the author uses information of Semenivka District State Administration available on the website: http://semadm.cg.gov.ua/.

[9] Proskurin A. Government Regilation of Development of Economically Challenged Regions, Kharkiv Regional Institute of Public Administration. http://www.kbuapa.kharkov.ua/e-book/conf/2015-5/doc/4/03.pdf

[10] The analysis is performed on the basis of information available on the website dedicated to dealing in real estate: https://www.olx.ua/uk/.