The world must make Russia pay for the damage caused
European municipalities support Ukraine
We are pausing the newsletter for the Christmas period. The Ukraine Watch Briefing will be sent out again in January.
We wish you a wonderful holidays and a happy New Year!
SECURITY SITUATION UPDATE
In the first weeks of December, the situation in Ukraine has not changed much. Russia has lost the strategic initiative and continues to build defensive lines on the eastern bank of the Dnipro River to prevent Ukraine’s counteroffensive in Kherson and Zaporizhzhia regions. Kinburn Spit remains controlled by the Russian military and is under constant shelling from Ukrainian positions. This area is strategically important for the defence of Mykolayiv and the potential offensive towards the Perekop Isthmus, the narrow strip of land that connects the Crimean Peninsula to the rest of Ukraine. One of the developments of this operations area is that the Russian Armed Forces (RAF) have deployed multiple-launch rocket systems to the Zaporizhzhia Nuclear Power Plant.
The RAF continue to attack in the eastern part of Ukraine, claiming tactical gains around Bakhmut and Avdiivka, which remain key targets of the enemy to overtake control over the whole Donbas region. The Armed Forces of Ukraine (AFU) observe that Russian troops have changed their tactics in the battle for Bakhmut: instead of using company-battalion formations, the Russians are creating assault squads and groups, and these groups are already divided into subgroups that directly assault, and others cover them with fire. The AFU, though, are slowly advancing in the direction of Svatove-Kreminna. Luhansk Oblast head Serhiy Haidai believes there will be good news from the frontline in Luhansk Oblast.
At the beginning of December, for the first time since 17 November, there were new reports of attacks by Iranian-provided one-way attack (OWA) unmanned combat aerial vehicles (UCAVs). On 6 December, the Ukrainian General Staff reported shooting down 17 UCAVs, including 14 Shahed-136s. On 7 December, Ukrainian officials reported the use of Iranian-provided OWA UCAVs targeting Zaporizhzhia and Dnipro oblasts. Experts believe that Russia received resupplies of drones from Iran. In exchange, Russia is providing an “unprecedented level” of military and technical support to Iran. This may include advanced military equipment and components, helicopters, and air defence systems, according to senior Biden administration officials.
The war is becoming a long-drawn-out conflict, with neither side likely to make a decisive breakthrough in the near term. Russia’s political leadership is allegedly preparing for a war of attrition, with an outlook to 2024, which will mark the Presidential elections in the U.S. The decisive factor could be the decrease of the limits of the maximum operating range for AFU which would eliminate the significant disproportion in such capabilities between AFU and RAF. Providing the AFU with the ability to strike at a greater distance than the depth of the enemy's operational rear may change centre of gravity from the military standpoint. In this regard, recently reported explosions at Russian military infrastructure facilities, caused allegedly by the Ukrainian UCAVs, as well as speculation about the U.S. tacit endorsement of Ukraine’s long-range attacks on targets inside Russia, could influence the current dynamics. Having failed to impose negotiations on the Ukrainian capitulation through massive missile attacks on its critical infrastructure, Russia still continues to target energy and heating systems in a hope that more severe weather conditions would cause internal destabilization in Ukraine. Notably, Ukrainian partners have also shifted away from fostering Ukrainian-Russian talks, accepting the arguments provided by Kyiv that Russia seeks not peace, but rather an operational pause to reinforce and resupply its armed forces. Instead, the United States and other G7 countries announced support for the peace plan proposed by President of Ukraine Volodymyr Zelenskyy.
MACRON'S "SECURITY GUARANTEES" FOR RUSSIA
On 3 December, in an interview for French TV channel TF1, President of France Emmanuel Macron stated that "the West should consider meeting Russia's need for security guarantees if President Vladimir Putin agrees on negotiations on the ending of the war in Ukraine." This initiative has caused sharp criticism in Ukraine and across the EU. The Polish Foreign Ministry emphasized that today Russia is a security threat and guarantees are needed to prevent it from continuing its aggression - not vice versa. The Finnish MFA expressed a similar position. On 4 December, Oleksiy Danilov, Secretary of the National Security and Defense Council of Ukraine, questioned the provision of such guarantees "to a terrorist and killer state." Referring to the post-Second World War tribunals, he added: "Instead of Nuremberg – to sign an agreement with Russia and shake hands? ... The strange logic of the undercover diplomacy, the time of which is over." The head of the governing Servant of the People fraction and Ukraine's chief negotiator with Russia, David Arakhamia, said that Kyiv is ready to provide Russia with security guarantees after it withdraws its troops from Ukraine, pays reparations, brings all war criminals to justice, and voluntarily surrenders nuclear weapons. Meanwhile, the Russian Foreign Ministry claims that it is ready to talk about security guarantees for Russia.
Before Russia's full-scale invasion of Ukraine, the topic of "security guarantees" for Russia was the Kremlin's primary condition for the collective West. At that time, Moscow blamed NATO for threatening its security and used this manipulation as a justification for the war in Ukraine. The narrative that the West and Ukraine are responsible for this war because they had not supported the RF's conditions before 24 February is a central narrative in the arsenal of Russian propaganda. Macron's statement about "security guarantees" for Russia legitimizes the pro-Russian narrative and can be used as an argument in the Kremlin's information operations against Ukraine and NATO. Such rhetoric strengthens the position of Putin regime's and illustrates the weaknesses of European politicians. Consciously or subconsciously, the French President simply echoed the pro-Russian message, which is why he drew sharp criticism from Kyiv and several European countries. Currently, the topic of negotiations with Russia, especially the provision of security guarantees to the aggressor state, is very sensitive in Ukrainian society. Most Ukrainians are opposed to talks with Russia and consider the armed struggle necessary to be continued until complete victory over the occupiers. Similarly, this topic is dangerous for the European Union because it polarizes European society, splits the unity of EU member states, and exacerbates internal conflicts, signalling to the Kremlin that "Europe is ready for compromises."
Currently, in the face of constant hybrid threats from Russia, Ukraine, and the states of Central and Eastern Europe need security guarantees. In mid-September, the Office of the President of Ukraine presented recommendations on future security guarantees for Ukraine. NATO member states, together with Ukraine and the EU, should develop an effective plan in this regard, which would become a safeguard against new conflicts on the European continent.
NAFTOGAZ WILL FINALLY GET A SUPERVISORY BOARD
Ukraine has announced a competition for the selection of independent members of the supervisory board (SB) of Naftogaz of Ukraine. The SB is expected to be formed in January 2023. Naftogaz of Ukraine is a company that manages the country's largest state-owned Naftogaz Group, which employs more than 50,000 people and contributes a fifth of all revenues to the state budget. The Group includes the companies Ukrgasvydobuvannya (more than 70% of domestic gas production), Ukrtransgaz (manages the largest underground gas storage facilities in Europe), Ukrtransnafta (transit and transportation of oil, production of petroleum products), gas supply and gas distribution companies that supply gas to the majority of consumers. Naftogaz's portfolio also includes a contract with Gazprom for the transit of Russian gas to the EU, heat and electricity generation, and "green" businesses.
Every new government in Ukraine is trying to gain control over Naftogaz, as these are, first of all, large financial flows. These finances can be used both for the purchase of imported gas or for investments in production, and for non-core projects - from financing road repairs to supporting the domestic aircraft or television industry.
After the scandalous change of the CEO in the spring of 2021, the previous SB of Naftogaz resigned in September 2021. The Ministry of Economy announced a competition for the selection of independent members of the SB of Naftogaz, and their approval was expected in February 2022. However, due to the beginning of a full-scale Russian invasion, the competition was postponed. During the absence of the SB, its functions are performed by the Cabinet of Ministers. These decisions often invite questions and cause concern.
The next CEO of Naftogaz of Ukraine, a former member of the Government Oleksiy Chernyshov, was installed on 3 November. He stated that the restoration of trust in Naftogaz is his key task, and this is primarily related to restarting the work of the SB, which will improve the transparency and manageability of the work of the Naftogaz board.
In fact, the main reason is slightly different. As part of the updated memorandum with the IMF under the stand-by program, Ukraine undertook to form the SB of the three largest energy companies of Ukraine last year: Ukrenergo (power grid operator) by the end of December 2021, Naftogaz by the end of January 2022 and Energoatom (operator of nuclear power plants) - by the end of May 2022. Due to the war, the appointment of the supervisory board was postponed. The Cabinet of Ministers and the Office of the President kept Naftogaz under manual control, and this situation could have continued for a long time if it weren't for the need for IMF funds to purchase gas.
If we remember how the dismissal of the previous SB took place, the independent members of which were ex-heads of powerful energy companies from EU countries, it also becomes clear why Ukraine's international partners pay such attention to this process. We wrote about it in detail in September.
Therefore, the main task to be solved by the new CEO of Naftogaz and the SB is to attract funds for the purchase of gas. At a recent meeting with G7 and EU ambassadors, the CEO of Naftogaz estimated the need for gas imports at 3 billion (bln) cubic meters this winter, for which more than $4 bln is needed. Ukraine cannot do without the help of international partners. The EBRD has already provided a loan of EUR 300 million (mln). Canada and Germany supported this loan with guarantees. Norway promised to allocate $195 mln. The Ukrainian government handed Naftogaz about $325 mln received from Canada. Obviously, this is not enough. Especially when the purchase of gas is not the only problem of Naftogaz.
Naftogaz issued bonds several times to attract funds, and must make payments on them. This is currently impossible - there is no money. In July, Naftogaz announced a default, but the situation was resolved after creditors met and agreed to postpone the payments. Now, Naftogaz has again appealed to the owners of its eurobonds (maturity 2022 and 2026), with a proposal to intensify interaction in order to find a mutually acceptable solution. In November, Naftogaz concluded an agreement with a French company to restructure the fulfillment of its Eurobonds obligations. In addition, in November, the Group's gas production facilities suffered significant damages due to Russian shelling. Gas production losses were estimated at $700 million.
During the war, Naftogaz took control of many new assets that belonged to pro-Russian oligarchs. In particular a network of gas stations associated with Viktor Medvedchuk, regional gas distribution networks of Dmytro Firtash, etc. All these businesses need to solve complex managerial, financial, and technical problems. The company also faces the task of increasing its own gas production and providing financial resources for the stable operation of the company. After all, for the first half of 2022, Naftogaz suffered a net loss of UAH 57.2 billion (EUR 1.4 billion).
The fate of the Ukrainian oil and gas giant, which is a pillar of Ukrainian energy independence, depends on the new SB. Therefore, strict requirements for the members of the SB regarding their professionalism and impartiality must be strictly observed.
URBAN PLANNING REFORM: NEW NAME, OLD STORY
Urban planning reform has been long awaited in Ukraine due to numerous instances of corruption scandals, illegal constructions, and the harm done to cultural heritage and the environment. Within the process of post-war reconstruction, urban planning reform will be one of the demands of citizens and international partners.
The draft law No.5655 “On Amendments to Certain Legislative Acts of Ukraine on Reforming Urban Planning” is supposed to establish the framework for urban planning reform. This law will also be crucial for Ukrainian reconstruction as it will set the roles of various stakeholders (development companies, registers, oversight agencies, architects, local authorities and affected communities) in the planning and construction process. The draft was registered in Verkhovna Rada of Ukraine in June 2021 and passed the first reading. According to the author of the draft, it will be passed in the second reading soon but after recent changes, the latest draft is stillmissing on the parliamentary website.
There are concerns both regarding the process of passing the law and the content of the law. Chesno movement (civil society organization) received the draft from deputies and provided their feedback towards the draft. Local government representatives as well as the Chamber of Architects criticized the proposed bill. The National Agency for Corruption Prevention (NACP) has issued its own conclusion regarding the corruption risks of the bill.
The proposed law clearly envisaged developers as winners of urban planning reform while affected communities will be excluded from the urban planning process. The draft limits citizen oversight of the planning and construction process by granting oversight functions to private firms that can be established by or connected with developers. The developers, according to the law, will also have increased authority over architects and creators of projects - for example, they could easily dismiss architects. Another winner is the Ministry for Communities and Territories which will establish the “urban planning chamber” that will register and issue certificates and fines, without any procedures as prescribed by the law. The NACP recommends solving corruption risks posed by this legal uncertainty.
The most crucial concerns regarding this law are that it excludes local communities and local authorities from the urban development process. On one hand, the whole construction process will become more transparent thanks to digital tools of the State Digital Construction System. On the other hand, impacted communities will have literally no rights to influence the development and construction process. Private inspectors will not be accountable before the public and will not be obliged to review citizens’ appeals. Citizens will only have a right to go to court. Considering that the judicial system remains corrupt, the chances for members of the public to terminate illegal construction will remain low. In addition, the law will encourage chaotic construction since it does not require consistency between the development project and urban planning documentation.
Representatives of local authorities also note that the proposed bill limits the role of local self-governance in the urban development process. For example, local authorities will have to conduct monitoring of the construction process without being granted access to the construction site.
The author of the draft law, Olena Shuliak, deputy head of the Committee of the Verkhovna Rada of Ukraine on the Organisation of State Power, Local Self-Government, Regional Development and Urban Planning , also admits that the law does not improve the process for public participation in the urban planning process but does not propose any amendments to change the situation.
The reconstruction of Ukraine should be based on engagement of local communities in the process which was declared at high-level meetings between Ukraine and its international partners. Urban planning reform should set the framework for transparent and meaningful participation of local impacted communities in the urban planning and construction processes. Yet, draft law No.5655 does not provide for just and meaningful civic participation and oversight of urban development processes.
UKRAINE FACES THE NEED TO HOLD LOCAL ELECTIONS
By the end of the year, the Verkhovna Rada plans to approve a bill on stripping the mandates of deputies of local councils from pro-Russian parties, which were previously banned. This will automatically lead to the loss of quorum in 91 local councils throughout the country (primarily in the East and South), which will make their work impossible.
The Verkhovna Rada of Ukraine banned the activities of pro-Russian parties back in the spring, a decision that was later approved by court rulings. But this does not mean that all MPs from pro-Russian forces immediately laid down their mandates, as that would have required changes to the Constitution, which is not possible during martial law. Therefore, two new deputy groups were formed in the Verkhovna Rada on the basis of the former "Opposition Platform - For Life", which actively help the "Servant of the People" with their votes. Formally, the "Servant of the People" has a parliamentary majority, but in practice it does not work, and the support of outside factions and groups is necessary to make decisions.
On the ground, pro-Russian deputies also continue to work. After the pro-Russian forces were banned, these deputies simply left the relevant factions, which caused public outrage and rejection. The new bill is designed to solve that problem. If approved it will lead to the creation of more than 90 temporary military-civilian administrations on the ground, which cannot always work effectively. And these, after the end of the martial law regime, still need to be replaced by full-fledged local councils. But local elections in Ukraine are not scheduled until 2025.
It is already obvious that after the end of the war, Ukraine will need to carry out a large-scale electoral legislation reform. As an EU candidate country, it must follow the recommendations of EU partners. This applies both to the improvement of the electoral legislation and to the provisions of the Criminal Code regarding the strengthening of responsibility for collaboration and cooperation with the enemy. If the decision on the deprivation of the mandates of representatives of pro-Russian parties is not taken now, it may lead to the so-called "popular lustration", which does not always correspond with democratic norms.
THE WORLD MUST MAKE RUSSIA PAY FOR THE DAMAGE IT CAUSED
According to the Vice President of the World Bank, the reconstruction of Ukraine could cost at least €500 billion. This is a colossal amount that will increase, and Ukraine's partners will not be able to provide grants or loans for this amount. The obvious way out of the situation is to recover these funds from Russia because its actions led to losses on such a scale. However, there are reasonable suspicions that the terrorist country will ignore its obligations to cover Ukraine's losses, even when it is recognized at the level of international courts.
Since launching a full-scale invasion of Ukraine, Russia has been hit with unprecedented sanctions, including asset freezes. As of May, according to the National Agency on Corruption Prevention calculations, European countries, the U.S., Japan, and other partners have frozen over $1 trillion in Russian assets. Although Canada and Ukraine have already adopted legislation on the confiscation of private assets, there have been no such precedents in Canada, and the Ukrainian court has issued only one such decision since May. In the case of Ukraine, there are several mechanisms for tracing and confiscating such assets. Suppose the relevant legislation is used with further consideration of the case in the High Anti-Corruption Court. In that case, there is a need for close cooperation with intelligence to identify the persons involved and all their assets. Since Ukraine's intelligence is currently focused mainly on military targets, that is why this process is going slower than everyone would like. In any case, other partner countries can use these two cases as an example for developing their legislative framework.
The most significant Russian assets are located in EU countries. Therefore, decision from these countries regarding the confiscation process are highly anticipated. Considering the "legal traditions" of European countries, Ukraine can expect to recover in its favour the sovereign assets of Russia, which are estimated at $300 billion. Assets of private individuals there are protected by various legal documents. In the absence of a direct invasion of the territory of these countries, the mechanisms used by Ukraine in the confiscation process are not legally justified. The main task of those who have already developed or are developing confiscation mechanisms is to study all legal points in detail. After all, a minimal inaccuracy or mistake can lead to international courts finding in favour of the aggressor state.
Even though the EU and the U.S. have not yet taken concrete steps toward developing relevant legislation, the countries have been studying ways to introduce such mechanisms since May. The world understands that Ukraine's losses in the war are too high, and the crisis in the largest country in Europe and a huge exporter of agricultural products and metals will negatively affect the economy not only of the EU but also of the world. Therefore, rebuilding Ukraine and overcoming the crisis will benefit everyone. Meanwhile, the world is realizing more and more that Russia does not comply with any international norms or obligations. So, confiscating its assets in favor of Ukraine is the most realistic way out of this situation.
EUROPEAN MUNICIPALITIES SUPPORT UKRAINE
The Council of the EU reached an agreement to help Ukraine financially in 2023 with an €18 billionpackage making Europe, for the first time, surpassing the US in the value of total aid committed to Ukraine. The value of EU member states’ support is measured not only by financial or military aid. EU municipalities and communities are also the leading voices of Ukraine’s reconstruction and development, working directly with their Ukrainian counterparts to provide local municipalities with best practices and humanitarian aid.
At the beginning of October 2022, Région Sud provided various financial support including €200,000 to the NGO ACTED fully mobilized in Ukraine, €50,000 through the emergency and response fund managed by the French Foreign Affairs Ministry (FACECO) and €130,000 to support French firemen and civil protection active in Ukraine. Region Skåne has contributed to the national drug donation to Ukraine.
As of December 2022, Portugal, Latvia and Estonian regions are supporting Zhytomyr, Chernihiv and Kyiv regions with power generators and power banks, while Germany is supplying power generators to Ukrenergo, and supports Odesa, Mykolaiv and Kherson regions. Italy is providing humanitarian aid with a new dispatch of supplies from the United Nations Humanitarian Response Depot in Brindisi, which arrived in Chernivtsi in recent days. It allowed the transport and delivery of 9 tonnes of humanitarian aid (including, in particular, winter kits, tents, stoves and blankets), in response to the growing needs arising from the coming winter.
As of 20 November, EU member states and institutions had provided nearly €52 billion in military, financial and humanitarian assistance to Ukraine. The commitments made by the U.S. amount to almost €48 billion.
Global changes in business flows and the formation of new export directions and routes are underway. Regions and communities play a key role here. Therefore, making European regional and municipal cooperation with Ukrainian municipalities a distinct priority represents an efficient mechanism to address Ukraine’s recovery needs. This mechanism still hasn’t been fully embedded into the EU-led rapid damage and needs assessment platform for Ukraine. At the same time, European regional authorities have been mobilizing funds from their own budgets that are always limited. They assist recognized agencies working on the ground in both Ukraine and border countries to alleviate the humanitarian crisis. European regions have also been organizing in-kind donations as well as providing support with upcoming ‘winter’ needs.
Surprisingly, the Italian regions of Sicily and Abruzzo became champions in both providing humanitarian aid as well as cooperating with various Ukrainian local communities (Vinnytsia, Kharkiv, Chernivtsi, Sumy, and Kherson regions). Partially, such a phenomenon can be explained by the Ukrainian diaspora residing in these and neighbouring Italian regions.
However, local communities in Ukraine do not want only to receive this kind of support. They call their EU partners to foster thinking about Ukraine as a winner of this battle with the Russian Federation. Therefore, focus on improving administrative services, involvement of new investors, and joint grant applications are the key requests.
This dimension will be highly important in the upcoming weeks for the reconstruction and business development in Ukraine, and as major topics for upcoming conferences in Vienna and Paris planned for 13 - 15 December. A thorough needs assessment of Ukraine’s territories should definitely include more involvement of local municipalities so as to understand what Ukraine and Ukrainians really need. Therefore, thinking about the Ukraine Recovery Platform and its initiatives should align the efforts of municipal networks, peer-to-peer activities, bilateral and multilateral partnerships, and joint investment projects at the local and regional levels.