“Red alert”

The “world’s Ukraine defense team” consists of strong players. Unfortunately, there are so far not as many of them as we would like there to be. But the comprehension of a situation and the vision of necessary actions, which they display, are often “head and shoulders above” what the Ukrainian authorities show.

You can see this if you read The Day’s exclusive interview with Andrius Kubilius who served two terms as prime minister of Lithuania.

When Kubilius first won the elections and headed the government, Russia “declared a trade war” on Lithuania. His second premiership was marked with consequences of the world financial crisis and “divorce” with Gazprom.

It is Kubilius who introduced the current President of Lithuania, Dalia Grybauskaite, into big-time politics. In 1999 he invited Grybauskaite to be vice-minister of finance and appointed her as chief negotiator with the International Monetary Fund and the World Bank. She also worked with him during his second premiership.

Andrius Kubilius is still an influential politician today. He is a member of the Seimas, leader of the Lithuanian opposition, a member of Europe’s largest “elitist political club,” the European People’s Party, among whose members are European Council President Donald Tusk, European Commission President Jean-Claude Juncker, and German Chancellor Angela Merkel. Despite all of his regalia, Mr. Kubilius looks like a university professor – he is dressed “simply” and is “simple” in communication.

The West so much criticizes the Ukrainian government today for “slow reforms.” What will you, a person once called “anti-crisis premier,” say about the current performance of Arsenii Yatseniuk? Is it really bad or is it the maximum of what could be done in these conditions?

“I would not speak about the year of Yatseniuk’s government. It is objectively impossible to assess what was done before the parliamentary elections, for it was next to impossible to carry out reforms when the old parliament wielded power. Moreover, the government was also supposed to tackle the war. That was the No.1 task.

“Today I can see every reason to carry out reforms. Firstly, it is a deep crisis (perhaps it is too deep in Ukraine) and, secondly, it is a team of reformers. In my view (and I often visit Ukraine – this is my sixth trip to Kyiv since mid-December 2014), your government has an excellent team. What they lack is political skill. I think this is the main factor that slows down reforms. I always say at various-level forums in Ukraine that your government should clearly outline several priorities in its work. This applies to the prime minister and other ministers.

Photo by ZHULIAUS KALINSKO

“In other words, there should be what is known as governmental program. In our country, it was called ‘Program of Reforms’ and consisted of 200 pages. It worked for four years. The program clearly stated what was to be done in the beginning, at the end, etc.

“Every year we offered the country a list of our priorities and of what we, as a team, were going to do.”

How did you identify them?

“We won the elections in October 2008. The global crisis had been gaining momentum since September. The banking sector was going bankrupt at a breakneck speed. And we understood very quickly that the ‘nice ideas,’ with which we had contested the elections, were unrealistic now. Above all, we were to stabilize the economic situation. This is why we added a new chapter, ‘Crisis Stabilization,’ to the already-prepared program.

“We laid down a three-page clear-cut plan of what we were going to do with the financial crunch. At the time, our budget deficit was 14 percent of GDP. We knew that if we did not stabilize the situation, all the rest in the program would remain just a nice-looking piece of paper.

“Our second priority was energy sector reform. Our war against Gazprom was more ‘juridical’ than yours. But they were also trying to stifle us with the gas pipeline. But we held out and implemented our top-priority project ‘Energy Independence.’

“To realize these priorities, I, as the premier, was doing what is known as ‘manual control of the coalition.’ I know that Mikulas Dzurinda did the same in Slovakia. I was the premier for almost four years without having a majority in parliament. So, I used to sit in the Seimas for half a day, gathering all of the ‘ours,’ looking for allies, and trying to persuade the opposition not to resist our draft laws too diligently.

“It was clear to us: if we are to do what we are saying to the people, we must join forces, persuade the opposition to join us, and ask our President Dalia Grybauskaite to ‘pressure’ where necessary… This is what I call political skills – the ability to put your reforms into practice. It is extremely important to have these skills – especially with the parliament you have. It is very good but too much resembles our first parliament of 1990.”

In what?

“A lot of romanticism, idealism, and great expectations: ‘we will live like in Switzerland.’ Our government called that parliament ‘a ship of fools.’ Society very soon began to show mistrust towards and disappointment in them. And this should be borne in mind. The political leadership of a country must have a broad-based program of actions; it is not enough to draw up a reform. Of course, sometimes you have to slam your fist on the table, but still the premier should know how to persuade. There were some reforms over which my parliament used to literally swear at me. Then I had to look for a way to reach them out from a different side.”

How do the Ukrainian government’s priorities look in Europe?

“Naturally, the war changes very many things. But it is good that the government has an ‘intellectual resources’ to speak and think not only about the war, but also about reforms. We see this.

“Your budget deficit is 12-13 percent of GDP. World financial centers call this situation ‘red alert.’

“If I were the premier of Ukraine, I would come out and say: we have such a huge deficit that we won’t endure it for long, so let us do so and so this year, which will let us cut this deficit by 5 percent. You have a tool to do this with. And you are always talking about it but, for some reason, you do not associate it with the ‘first step.’ I mean liberalization of prices for energy resources. As far as we understand, this will immediately reduce your budget deficit from 12-13 to 5-6 percent of GDP.”

“Lithuania went through this in 1992-93. Of course, retail prices will rise dramatically. So, it is necessary to work out a mechanism to cushion the negative social effect. We spoke to your Naftohaz company management. In my view, they are very well aware of what should be done. This step must not be put off. Nor should it be taken piecemeal, for this would make the reform still more painful. It is better to do this in summer so that people can get prepared for a new heating season and the government can set up a system of subsidies at the expense of the saved money for the individuals who wish to winterize their living quarters. We, for example, compensated the replacement of old windows with European-standard ones, for we found that a great deal of thermal energy escapes through misaligned windows.”

“WE AVOIDED DEFAULT ANNOUNCEMENT AND… IMF AID”

Answering my first question, you used the term “too deep crisis.” Some of our specialists say that we have really fallen too deeply to carry our reforms gradually, so it is better to turn over a new leaf, announcing a default. Do you agree to this?

“Default means that the country withdraws from the international financial market for quite a long period of time. And it is difficult to say how long this period will be. We in Lithuania avoided this step. In 2009 our economy dropped by 15 percent of GDP. But we knew that announcing a default was not a way out. We did not even consider the IMF program as a ‘way out.’”

Why?

“Latvia had already been on an IMF program. And, looking at its experience, we were afraid that the IMF would force us to devalue the national currency. We estimated that, since our currency was pegged on the euro, this would have a very painful effect on our people.

“So, we managed to pull through without the IMF and with a 15-percent drop in the economy.”

Were there any budget expenditures that could not have been cut, no matter how grave the crisis was? For example, pensions, expenditures for education and health care?

“No. We cut everything. As we can see now, we even ‘overdid it’ in the defense sector. Naturally, when we began to cut pensions, people were indignant. But the previous government helped us very much in this matter. It wanted to win the elections so much that it raised pensions by 50 percent on the very eve of departure, while we reduced them by an average 5 percent only. But still people did not like this. They forgot that their incomes had risen by 50 percent just six months before. And we had then to opt for such a step as attraction of social partners. We used to meet with trade unions, business associations, and nonprofit associations of pensioners. We told them what our financial association was like and what would happen if we failed to stabilize the situation. Businesspeople, who looked forward for this stabilization, were the first to stand up for us. Of course, most of the pensioners were disgruntled. But some groups supported us. We received special support from the organization of former political prisoners and Siberia deportees. They said they felt no crisis – there was a real crisis in Siberia, but here, if necessary, let the state take this 5 or even 10 percent, for we struggled for this state… This looked great!

“What Ukraine could also borrow from our experience today is the reform of state-run businesses. This is what the West likes very much.”

HOW TO “DIVORCE” WITH GAZPROM IN A CIVILIZED WAY

Do you mean privatization?

“No. The first thing we did, on the advice of Swedish experts, was to publish an open quarterly bulletin of all economic data. We standardized the information that we gathered from all state-run businesses, such as profits, cost-effectiveness, etc. We thus had a basis for comparison. We saw that, for example, there is a 0.2-percent cost-effective enterprise in the public sector, while a similar enterprise is 8-percent cost-effective in the private sector. This reform enabled us to increase cost-effectiveness by up to 3 percent in four-five years.

“One of the reasons why we did so was a desire to win as many dividends for the state budget as possible. And we managed to do so.

“But when we saw the way these enterprises worked, we began to carry out a lot of reforms in state property management. Nothing special – we were introducing European standards. To put it roughly, it was a reform of ‘how to disconnect these enterprises from ministers’ office telephones.’ In other words, we set ourselves a goal to make these state-run businesses more independent in achieving results. But when they were dependent, many political parties showed a temptation to make them their ‘feeding troughs.’ We changed this all. We obtained not only dividends, but also modern-day instruments to carry out major strategic projects, particularly in the energy sector. For example, we upgraded our oil terminal in Klaipeda. We formed a strong self-sufficient team and told them to build a liquefied gas terminal. This allowed us to disconnect from Gazprom. The port management did the job. But if a ministerial department were in charge of this, we would perhaps still be building…”

The Russia factor was also quite influential for the Lithuanian economy. How did you minimize this influence?

“I particularly came to grips with this factor during my first premiership in 1999-2000. The Russian market accounted for over 50 percent of our exports. And the trade crisis in Russia ‘helped’ us very much. Our business switched to the European market. Naturally, we had already signed a free trade area treaty and were supposed to join the EU shortly.

“Now more than 75 percent of our exports go to the European market and about 20 percent to Russia, but only 4 percent of the latter was of our production, while the rest were re-exported goods. We all seem to have understood that, as long as Putin is in power, the Russian market will always be very dangerous. For this reason, none of our businesspeople insist on ‘friendship’ with Russia and on coming back to its markets.

“Our energy dependence on Russia was the most painful issue. During my second premiership, we focused on ‘energy independence.’ We achieved this in the gas sector, and now we buy as much as it is economically beneficial to us. We have taken our pipelines from Gazprom in a ‘civilized’ way.”

And how is it possible in general to “divorce” with Gazprom in a civilized way?

“We kept quarreling and convinced them that they were wrong.”

Where did you convince them?

“To start with, in 2007, when our party was in opposition, we mapped out a very clear-cut strategy which we pompously named ‘Russia Containment Strategy.’ We could already see the danger that Russia represented. The document said that our weakest point was energy dependence on Russia, which posed a threat to our geopolitical security. At the same time, Europe was adopting the so-called Third Energy Package. And, unlike the Latvians and Estonians, we said we would implement it immediately without any ‘transitional period.’

“And, in general, sometimes we jokingly call ourselves ‘Northern Italians in the Baltic countries’ for our temperament: first we get into a brawl and only then think why.

“However, when we began to implement the provisions of the Third Energy Package, Gazprom began to publicly threaten us, write in our newspapers about what idiotic government Lithuania had, etc. Then we saw that we had taken a serious step and the Kremlin would not ‘forgive’ us. So, we decided that we should build our own terminal as soon as possible. Moreover, we refused to negotiate with Latvia and Estonia on the construction of a regional liquefied gas terminal, even though Europe offered to fund it. We refused, saying that while we were negotiating, Gazprom would strangle us – so we would be building on our own. We prepared all that was necessary in 2010: we drew up a project report, ordered a floating vessel, etc. In 2012 we lost the elections. But the current government did not pull a plug on our project, and Lithuania has now a terminal of its own. It is already operational. And we are planning to tell Europe to repay us a certain part of funds because this terminal can already perform the function of a regional facility.

“We are now laying pipelines to Latvia. We will be able to supply gas there by the end of the year. And the first batch of cargo from our terminal has already gone to Estonia.

“Gazprom pressured us in different ways: via the media and politicians (both ours and European), but we managed to thwart all the attempts to influence us. When we were finally fed up with Gazprom, we complained to the European Commission’s Directorate General for Competition about Gazprom’s non-European practices on the European market. It was a strong action on our part. The European Commission launched an inquiry all over Eastern Europe. This had a resounding effect. And Gazprom was scared, although it was putting on a bold face at first. It was clear to all that this inquiry might end up like the case about Microsoft’s monopolistic behavior on the European market. Microsoft had to pay a fine of several billion euros. We in Lithuania have assessed that in the case of Gazprom this fine will come to about 10 billion euros. And, frankly speaking, we just sat waiting, when suddenly… But after the Maidan this inquiry was cut short very oddly and quickly. Yet it brought us some result. For we have also filed a suit to the Stockholm Arbitration Court, seeking compensation for Gazprom’s unfair price policies since 2004. We claimed for compensation worth a total 1.5 billion euros. This suit is still under examination. But we can already see that we can emerge victorious. In May-June 2014 Gazprom cut the gas price by 20 percent, which helps us very much in arbitration, and even paid us compensation for 2013, which also helps us in arbitration. And, finally, they agreed to give us all shares in the gas transportation system. So, when I say ‘in a civilized way,’ I mean that we have bought out, not taken by force, these shares from Gazprom.”