Ukraine must strike at heart of corruption to survive-adviser

By Margarita Antidze

TBILISI (Reuters) - Ukraine must take brave measures to transform an economy hooked on cheap Russian gas, huge state spending and corruption into an investment destination able to bolster a weak state, an economic adviser to the government said.

Credited with helping liberalise Georgia's economy to shed Soviet-era practices that encouraged nepotism and corruption, Kakha Bendukidze has a tough message for his new employers - either overhaul the economy or face destruction.

Drafted in by Ukrainian President Petro Poroshenko to take up a position on the government's international expert council last month, Bendukidze told Reuters the former Soviet state would have to launch two or three waves of reforms, striking at the heart of widespread corruption and lavish state spending.

Most reforms would not be popular - subsidised gas prices would have to be increased, hundreds of state employees would lose their jobs and corruption scams would be broken up - but the results should please the majority, he said.

"It's a 'to be or not to be' question for Ukraine right now," Bendukidze said. "If this country does not carry out all these reforms, it may disappear as the state."

Bendukidze is no stranger to taking hard decisions.

He made his name and fortune in Russia after the fall of the Soviet Union, building the country's biggest heavy engineering group, OMZ. In 2004, he sold his interest in the company to head to his native Georgia.

Asked to join the new Georgian government after the country's Rose Revolution brought Mikheil Saakashvili to power, the burly 58-year-old championed liberalisation and deregulation and set about cleaning up an economy riddled with corruption.

Now Georgia, ranked eight in the World Bank's ease of doing business index, has become an investment destination with the economy boasting growth rates of 6 percent. The police no longer demand bribes and the country is no longer hostage to power cuts.

Bendukidze said Ukraine could do a lot worse than follow Georgia's example.

"I have ideas that I have been defending in Georgia and they work. I'm ready to implement them in Ukraine," said Bendukidze, commenting on why he accepted the invitation to take his new role from Poroshenko.

"Apart from that, Ukraine and Georgia are now countries with common interests, common enemies, we are now on one side of the barricades," he said in a clear reference to Russia.

COMMON ENEMY

Georgia fought a brief war with Russia in August 2008 over two breakaway regions, which Moscow went on to recognise as independent states, splitting the country.

In March, Russia annexed Ukraine's Crimea region and Ukraine's leaders accuse Moscow of helping pro-Russian separatists in the country's east. Russia denies funding or arming the rebels who are fighting Ukrainian troops.

Russia has cut off gas supplies to Ukraine over unpaid bills and has also said it will end preferential trade terms with Ukraine if Kiev pushes to sign agreements with the European Union, threatening its neighbour's economy.

"If Russia introduces trade sanctions, the Ukrainian economy will contract by more than 7 percent this year and its fiscal deficit will be even bigger," Bendukidze said.

He said Ukraine had to wean itself off Russian gas and start introducing market prices at home - as it agreed to do as part of a $17 billion (9.97 billion pounds) two-year deal with the International Monetary Fund, introducing a 50 percent price hike from May 1. The government says the price of Russian gas may rise 79 percent.

Bendukidze said Ukraine could survive without supplies from Russia, it just had to rein in consumption by cutting subsidies.

"Ukraine should become the country that consumes gas out of its real needs ... If this reform is not carried out, it would be a drug user of a country that is hooked on the needle of a gas pipeline," Bendukidze said.

To weather difficult times, Bendukidze said Ukraine had to slim state spending, which runs at 48 percent of gross domestic product (GDP), including energy subsidies at 5 percent of GDP.

"No economy can tolerate all that," he said.

Tax reform was needed to reduce some taxes but also to strengthen control over their collection.

"The non-payment of taxes in Ukraine is a kind of national sport, it's a well developed business," he said.

"We need to change that."

Ukraine also had to cut its police force from 350,000 people to create a new efficient structure that would help to fight wide-spread graft, he said.

"The major part of reforms will not cause popular discontent, they will cause discontent just among some individuals," he said.

"But in general who will suffer if there is an efficient judiciary system in the country or there are policemen, who don't take bribes?"

(Reporting by Margarita Antidze; Editing by Elizabeth Piper and Janet McBride)