“These Chechens…They are like wolves coming down from the mountains… I am afraid they will come after me…”, the Turkish character of Vigo Mortensen’s Eastern Promises movie ushered.
This brief yet strong statement concerning the imagination and representation of the Chechens as a wolf pack was what first intrigued me about the so-called Chechen’s warrior culture. Besides the reports of Chechens fighting in Ukraine and Syria, and now that we have recently read that Putin critic Boris Nemtsov was apparently murdered by Chechen hitmen, the Chechen warrior reputation will only prolong itself even further. In this opinionated article, I will briefly describe some anecdotes and stories while researching the warrior culture of three Russian republics (Ingushetia, Chechnya and Dagestan). However, I will limit this article to my experience with the Chechens, coupled with a few anecdotes—there are way too many stories to be shared that, unfortunately, this article would not be enough.
The Caucasus is one of the most diverse places in the world, both ethnically and linguistically. There is a story about Alexander the Great and The Caucasus. The story tells of the fierce resistance Alexander and his men faced while venturing in Vainakh (Chechen and Ingush) lands. Because of this, The Greeks tired of fighting the Vainakh tribe, decided to turn around and march towards modern-day Dagestan. A potential explanation of why you find more tribes and diversity in Dagestan than the more uniform Ingush and Chechen clans. And a potential explanation of why the Russian North Caucasus nations have been, throughout the course of history, more territorial than many other nations in the world, for history makes no distinction: you are either conquered and colonized, or you simply aren’t. The Ingush and Chechens, in reality, never were.
Each republic in the Russian Caucasus is as diverse as the other—politically and culturally. The Ingush, for instance, though physically similar and ethnically related to the Chechens, have had different problems, specifically, because of land ownership and territorial boundaries, with their Christian neighbors, the North Ossetians. And, well, Dagestan, I would describe it as the most diverse of all republics, from its landscapes and its peoples. Dagestan is a world of its own—with numerous ethnic groups and different idiosyncrasies (from Wahhabis to secular-inclined villages).
When I asked a Chechen highlander, in the breathtaking, mountain village of Tazbichi, about why have the Chechens historically fought the Russians for so long, he simply replied with a proud-looking face and a smile: “We are the sons and daughters of the mountains”. Not another word more, not another word less. Only that profound statement. At first, I didn’t understood what that meant, but then I truly understood his meaning: This landscape, this environment, these mountains, what you see and feel, is and has been our home; we have lived and hunted in this land for hundreds of generations. The mountains are our family.
The question most likely, by now, you are probably wondering is: How did some guy from Guatemala end up in Chechnya?
Before telling you my story, first, I would like to ask you a few questions: Have you ever been curious about the unusual, exotic, remote and untraveled landscapes? When you look and read the morning news, about places that have been labeled as ‘failed states’, like Iraq, Somalia, Yemen, Afghanistan, and so on, but despite of how bad the situation seems to be, still, have you ever wondered what it would be like to talk to a Yemeni tribal elder from an important, politically powerful tribe? Or listen to what the local Mexicans have to say about how the Mexican cartels support the local economy and communities, despite of the violence ravishing Mexico? And, lastly, have you ever been to places (which I’m sure many of my American, European and Canadian colleagues have), such as the beach resorts of Cancun, south Spain and Punta Cana, where there are hordes of tourists, fighting for the few beach chairs and umbrellas? Where you ought to wait until someone, hours later, leaves his chair and umbrella? Well, I have experienced these types of landscapes—from researching conflicts in ‘failed states’ to enjoying a nice beach vacation in a five-star resort. In my case, I prefer the former: the remote, the untraveled, the unknown and the war-torn spaces; I have been writing and personally researching, what I call the ‘warrior culture’ of a place—and eventually looking forward to write a book, about the stories and essence of these dark and remote places. But, I know what you are thinking: this guy is completely crazy. What does adventure-writing has to do with geopolitics or whatsoever? My response: a lot—I will explain this at the end of the article.
My story with the Chechens and Chechnya began in a hot, humid, typical Florida day, at a Russian-owned deli shop, in the summer of 2010, in Daytona Beach, Florida.
It was the first time I walked into a Russian deli shop. As I walked in, I encountered a well-endowed, tough-looking, mature, bold, white-bearded person, whom the customers—in Russian, of course—seemed to ask many questions, thoroughly putting attention to whatever the old man replied; as if you would see someone asking his grandfather or a respected elder for an advise.
The deli shop, resembled like those picturesque mom and pop stores, in Brighton Beach, New York, given its unofficial label, by the Russo-Ukrainian community, as ‘Little Odessa’. This store, felt exactly like that: the menu was written in Russian, with mouth-watering pictures of fresh rye bread, borscht, Siberian pelmeni; and needless to say about the amazing selections of black tea, vodka, caviar, and other fine Russian products. As I stood, while waiting in line, and listened to the TV—in Russian, of course—I felt I was in a complete different country, since the owner and customers, seriously, glanced at me, silently implying: “Are you lost, son?”.
“Priviet…What can I do for you?” very seriously, the owner asked me.
“What would you recommend me? I’d really like to try something authentic and traditional”, I shyly asked.
“Well, I recommend you the borscht…you cannot get more Russian than that. However, this is Ukrainian type of borscht; we are not only Russian but Ukrainian as well; Russia has all kinds of people, with all kinds of different foods”…
Although as ironic as it seems—in light of the current conflict between Russian separatists and Ukrainians—my initial journey into the Caucasus started every Tuesday at lunchtime, whenever on occasional basis, while eating a sandwich or potato salad, the owner decided to talk to me about his experiences in the Soviet armed forces; moreover, his experience relating to the people from the North Caucasus.
By hearing the owner’s stories, regarding his experience in the North Caucasus region, I, in turn, used my own geographical imagination—about the mountains, the valleys and peoples, and how mysterious and culturally untouched it must be—based on the representations and descriptions the owner told me. The owner originally served as a cook in Soviet submarines, as well in the infamous North Caucasus Military District, which oversaw the diverse republics and borderlands of the then-Soviet empire. And that’s when my curiosity for the Russian North Caucasus skyrocketed. The first thing the owner commented was the hardcore nationalism he saw and encountered when dealing with Ingush and Chechens, especially. But what captivated me the most was his narration of inter-clan feuds in Chechnya and Ingushetia, particularly the Chechen interpretation of vendetta.
“Regardless if you were in the army, and were protected by your rank and uniform, like many of my colleagues were, if you ever decided to lay your hands upon a Chechen girl, you would have to think it twice. If one of her relatives would find out, that she’s dating a non-Chechen and non-Muslim, they would intimidate you—and her—regardless of your rank”, the owner once told me.
“Chechens still think and act like a tribal society and each family, has its own patriarch or head of clan—just like that Mel Gibson movie, Braveheart, but in modern times”, the owner pondered with a serious look, finishing his cigarette.
“It’s even worse if you are fighting them and you kill one of their members; doesn’t matter whether it’s a brother, a cousin, an aunt, a relative, or the dog as far as I am concerned”.
The owner went on: “the head of the clan, will choose one of the members of his clan to avenge the killing of his family member; the person he [the patriarch] chooses, will sleep on the floor, grow a beard, and until his family member’s death has been avenged…only then, he will be able to sleep in a normal bed, shave his beard and continue with his life. The Chechens value blood and honor”. Scratching his bald head, in a soft, paused, tone, the owner leaves my table, goes back to the kitchen, silently suggesting: I have too many memories about the Caucasus that I do not want to talk or share.
Eventually, the Russian deli shop, out of the blue, without previous warning, closed—no goodbyes, no nothing. A part of me was sad—I wanted to learn more from the mysterious, white-bearded, bald, Russian person. Yet it was that conversation (blood, feud and honor in Chechnya) that struck me as if you would of encountered an old, battle-hardened American cowboy from the mid 19th century, telling you stories about the Apache tribe. Whether his anecdotes were true or not, I still wanted to know more about Chechens and Chechnya—the landscape, the place, their culture, codes of honor and values, and their so-called tribal mentality.
It was the fall of October 2013. And now instead of being in sunny Florida or in my homeland—Guatemala—I was in the cold, wet, British town of Egham. After living four years in Florida and one in China, I decided to apply for a master degree in geopolitics at a top British university. I wanted to study, reflect and research geopolitics, specifically taught from a geographical point of view. This was one of the principal motivations on why I wanted to study geopolitics. I wanted to focus more on the ‘geo’ than in the ‘politics’. (Needless to say it was in the U.K. where geopolitics internationally aroused—Halford Mackinder’s Geographical Pivot of History, is the best example). Besides academic purposes, there was also another side of the story on why I chose Britain: London Heathrow would be my traveling hub into conflict-ridden countries on which I wanted to personally research. Heathrow would be my gateway into what Mackinder would of called the “World Island”. But Vladikavkaz would be the entrance into the wild, mysterious, Kavkaz (Caucasus).
Guatemala, the place, the country—most commonly and derogatorily labeled as the ‘banana republics’—on which I was born, has been ravished by war and conflict since the post-colonial period, which, in turn, has prompted me to study—academically and personally—world conflicts, particularly in the world region that I love the most: The Global South. From the guerrilla conflicts in Central America—i.e. Guatemala, El Salvador, Nicaragua—to more unheard conflicts in places like Guadalcanal Island, in the Solomon Islands. But apart from the fact that I come from the ‘Global South’, let me tell you, my dear reader, that there is also a little bit of ‘Global South’ in you. Yes, in you. In the coffee and tea you drink; in the fruits, vegetables, and chocolate you eat; the fuel your car uses; the cobalt mineral inside your smartphone; and, in the tacos and kebabs you eat after a crazy Friday night out with your friends. Regardless whether you live in New York, London, Vienna, Toronto or Tokyo, you experience on a daily basis the Global South. And, though Russia can be labeled, based on physical geographical terms, as a ‘northern’ country and ideologically as an ‘eastern’ country (apart from Moscow and St. Petersburg), Russia, can be, essentially, considered a part of the Global South. This was the impression I had when I first was at Vladikavkaz airport in North Ossetia and Alana—manual baggage handling, no gates, a very short and bumpy runway followed by the taxi drivers standing literally next you, as you waited for your luggage—oh yes! The warmth and kindness of the people made me feel just like I was somewhere in the tropics; however, without the heat and mosquitoes.
Vladikavkaz is the invisible border inside the Russian North Caucasus, indirectly making North Ossetia and Alana a Christian enclave nestled between Muslim neighbors—primarily because North Ossetia borders Kabardino-Balkaria and Ingushetia, which are of Islamic majority. Locally—Vladikavkaz, that is—is known as the entryway towards their ‘badly’ behaved, rebel neighbors, Ingushetia and Chechnya. I say badly, because the 2004 Beslan Massacre, was still well and alive inside the hearts and minds of the North Ossetians, more notably, all Russians. Vladimir Sevrinovsky, whom I met through another Russian acquaintance, was my guide, friend and expert for this expedition. (If you would want a guide for the Caucasus, Vladimir, was the perfect guide—he thoroughly knew the most remote places of Russia and, more importantly, Russian ethnic idiosyncrasies).
At the airport, when I picked up my luggage, Vladimir already had hired a taxi driver. Our taxi driver had a thick, dark mustache, almost resembling to that of Josef Stalin, with an impeccable shave, a medium-sized height and a chubby figure. Our taxi driver, a North Ossetian, was extremely friendly and happy to see a foreigner who had come all the way to Kavkaz (Caucasus). The taxi driver drove us to many interesting points in Vladikavkaz—for free. However, when he understood the true reason of why I was in the Caucasus—the Ingush, Chechen and Dagestani warrior cultures—he automatically told Vladimir that he had to take me to the cemetery to pay tribute to the departed hostages that died. His smile, friendliness and happiness, suddenly turned into a grumpy, serious look. He wanted me to see what the Ingush and Chechens did to the North Ossetians (the terrorists that participated in the school takeover, apparently were of Ingush and Chechen ethnicity). What our taxi driver really meant was: Before you even dare and study these ‘savages’, you must first see what they did to us, to our people and to all of Russia.
What 9/11 was for the entire American and Western world, the Beslan Massacre was the 9/11 Russian version of tragedy—I respectfully paid homage to the deceased. No questions, only silence. The beginning of my expedition was filled up with more questions than answers, notwithstanding. If the Ossetians were majorly Christians, why weren’t they so opinionated against other Islamic republics—Kabardino-Balkaria and Karachay-Cherkessia, for example—as they were against both the Ingush and the Chechens? Were the Ingush and Chechens perceived as the same belligerent group? Or were they perceived differently amongst their fellow Caucasus neighbors? What do the Dagestanis had to say about the Chechens and Ingush? And what did the Ingush had to say about the Chechens?
After an adventurous week in Ingush tribal lands—the militarized, Dzheirakh valley—along Vladimir, we changed course onto Chechnya, where I was received with the highest honors and welcoming by our Chechens hosts (Murad and Ruslan). “In Chechnya, in this fine land, that Allah the all mighty gave us, you are most welcome”. Murad continued, “in this land, you are our guest, thus you are protected by our highest codes of honor: the guest is sacred and untouchable”.
When I asked, Murad what he meant by ‘untouchable’, Murad bluntly replied: “This means that even if someone would try and do you harm, they would have to fight us first. Here in Chechnya, you are under my clan’s protection. We have rules; we have codes; we have the Adamallah…”
What do tribes and clans have to do with geopolitics? My response: Islamic extremism often grows in tribal societies within the Muslim world; for example, whether they are the Kanuritribe of Borno State in Nigeria, who make up the leading structure of Boko Haram; whether they are the Syrian and Iraqi Sunni tribes who, out of discontent with the Iraqi-Shiite government, joined ISIS, by allowing them to settle from Al-Raqqa to Al-Anbar; whether they are the Ghilzai Pashto tribes of South Afghanistan, who eventually became the all-powerful Taliban; whether they are the Al-Houthi rebels from Yemen, who have recently wreaked havoc in all of Yemen; or whether they are members of Abbu Sayyaf fighting in the islands of Mindanao and Basilan in the southern Philippines, it is important to understand tribal structures and their internal codes to further understand their interpretations of warfare. By understanding tribal dynamics and codes, we are, in fact, delving into the geopolitics of political identity—and the repercussions that come with it. In a nutshell, the Islamic world is still a tribal society. And for us, in the Western world—or Latin America in my case—if we really want to understand the geopolitical effects of a tribe in grief, the cases of Iraq, Syria and Yemen, should give us a good head start.
In his book The Spirit of the Wolf, Shaun Ellis talks about how wolf packs were admired by the Native American tribes, considering them as another type of respected tribe. According to Native American folklore, there is a story that narrates how the Native Americans considered that to kill a wolf, was to eventually challenge the wolves to kill one of their own members. Therefore, they made a deal: to respect the wolves, so the wolves would respect the Native American tribes, and split the hunting grounds. In Chechnya, I realized that earning the trust of the Chechens is like earning the trust of a wolf pack. This means to earn the trust of a Chechen clan. At first you will be sniffed to make sure that you are not hostile. Secondly, you will be growled to make sure you are not easily intimidated. And thirdly: they will protect you as one of their own…
The rest, my dear readers, I will leave it to your imagination…
Shifting Geography of the South Caucasus
One year since the end of the second Nagorno-Karabakh war allows us to wrap up major changes in and around the South Caucasus. Most of the changes discussed in the scholarly works so far focused on the role of Turkey and Russia. The shifting geography of the South Caucasus, however, has been disregarded.
In many ways, the war accelerated the pre-existing trends, but also initiated new developments. The first and foremost change concerns geography. The South Caucasus has been historically dominated by neighboring states. Whether it is the Sasanian and Byzantine empires in late antiquity or later Ottoman and Persian states, the region was exclusively subject to one or two powers. The idea is that the region was mostly closed to the outside, non-regional influence. The trend continued in 19th-20th centuries when the South Caucasus was exclusively dominated by Russian power. The end of the Soviet Union changed this geopolitical reality when several powers were able to penetrate the region. Yet the pace of the change was relatively slow – Russia was still able to minimize the extent to which the neighboring or non-regional countries were able to act in the South Caucasus: Turkey, Iran, US, EU, and to a certain extent, China have been influencing the region to a limited degree.
But the second Nagorno-Karabakh war accelerated this process. The South Caucasus’ borders are increasingly shifting. No single power or even a duo of countries can dominate the region. It reflects geopolitical changes in the world where the emerging multi-polar world ushers in a different set of rules. Exclusive geopolitical control is no longer viable and the 2020 war showed exactly this.
There is also yet another dimension of the unfolding geographic change. The war also solidified that the Caspian basin and South Caucasus are inextricably linked to the greater Middle East. Russia and Turkey are basing their strategies in the region on developments in the Middle East and the Black Sea region. Not since the end of the Soviet Union has the South Caucasus been such a critical point for the powers around it. In a way, this re-emergence of close contacts between the South Caucasus and the Middle East is a return to normalcy which was disrupted in the early 19th century by Russian annexation of the South Caucasus. Indeed, in pure geographic terms the region is better connected to Turkey and Iran than to Russia, with which it shares the impassable Caucasus Mountain range.
This also means that the role of the South Caucasus in the thinking of Iran and Turkey, and by extension Russia, has grown. Considered if not as a complete backwater region in the calculus of large powers, the South Caucasus has nevertheless experienced a lack of attention. This was especially true for Iran, which now struggles to retain its weakening position in the region.
It is true that Iran was never a dominant power in the South Caucasus. Unlike Russia or Turkey, the traditional power brokers, it has not had a true ally. Tehran was certainly part of the calculus for states in the region, but it was not feared, like Ankara or Moscow. And yet, the South Caucasus represents an area of key influence for Iran, based on millennia of close political and cultural contacts various Persian empires had with the South Caucasus.
The 2020 war changed Iran’s calculus in the region as the Islamic Republic’s interests were largely unheeded. Iran has now to adjust to the changed geopolitical landscape and it can be even argued that the recent escalation it had with Azerbaijan over the detained trucks, drills, and alleged Israeli influence, was an effort to wedge itself back into the geopolitics of the South Caucasus.
Yet there is little Iran can realistically do to boost its position in the region. The South Caucasus will certainly feature higher in Tehran’s foreign policy agenda than before. But Tehran does not have an ally in the region, nor does it have financial means to strengthen its soft power. Iran can support Armenia in its efforts to balance the triumphant Azerbaijan.
The lifting of US-imposed sanctions could augment Iran’s projection of financial and diplomatic power in the South Caucasus. Still, a more realistic approach for Tehran would be to build closer cooperation with Russia. Both loath growing Turkish influence and the Islamic Republic does not object to growing Russian influence as much as it does resent the West’s and Turkey’s presence. Surely, interests with Russia do not align always, but for Tehran, Moscow is a traditional power in the South Caucasus which is about maintaining a status quo. Turkey, on the other hand, disrupts it seeking greater influence.
There has been a certain retrenchment of the Western influence in the South Caucasus. While it does not signify a definitive decline in West’s fortunes, it is nevertheless important for Washington and Brussels to formulate a more robust approach toward the region. Decreasing the tensions with the Turkey could be one of the steps. Increasing economic engagement with the region would be another. Delay could be damaging. Georgia, which serves as a door for the West to the Caspian basin and on to Central Asia, could be the biggest loser if Washington shifts its foreign policy away from the region. An alternative could be a Russian model of peacebuilding and regional order where Georgia, Armenia, and Azerbaijan will face a lack of foreign policy options if the West’s unwillingness to commit to the region continues to grow. Author’s note: first published in caucasuswatch
Russia: The Neighbor From Hell
From Belarus to Ukraine to Georgia, an arc of instability has emerged, offering opportunities for malign activities by foreign powers. This has proved too tempting for Vladimir Putin’s Russia, which openly pursues an activist foreign policy seeking gains for the Kremlin at whatever cost to its neighbors. For the West, it is time to consider the wider Black Sea region as a whole and to develop a strategy.
The migrant crisis unfolding on the Belarusian-Polish border is the most pressing and serious emergency. For some months, the Belarus dictator Aliaksandr Lukashenka and his security services have been funneling thousands of Middle Eastern migrants toward the EU border. Officially, Russia has distanced itself from the crisis, with President Vladimir Putin on November 13 denying claims he had helped to orchestrate a crisis.
Russia is often disbelieved by neighbors with unhappy experiences of its statecraft. In this case, too, there are reasons to doubt Putin’s words. Firstly, the Belarus migrant drama bears an uncanny resemblance to the events of 2016, when the Kremlin unleashed a sudden wave of developing world migrants across Finland’s and Norway’s Arctic borders. Secondly, few believe Lukashenka’s regime on its own is sufficiently organized to orchestrate events of complexity spanning two continents.
Russia’s rapid dispatch of advanced combat aircraft and paratroopers (two of whom died in the exercise) to the Belarus-Poland border and Putin’s contemptuous dismissal of Germany’s Chancellor and the EU’s senior head of government Angela Merkel (she was told to call Lukashenka herself) were open signals of approval for the Belarusian position. Only when Lukashenka mused that he might cut off gas supplies to Europe was he publicly slapped down by Russia. It was also notable that Russia and Belarus recently agreed on further steps in their on-again-off-again Union state.
To the south, in eastern Ukraine, the clouds are also gathering. Fighting is worsening with Russia’s separatists in Donbas, and ceasefire violations are spiking. US briefings now suggest around 100,000 military personnel and large amounts of armored equipment are located within reach of the border; military movements are being organized at night. Not only does this follow the deployment of large Russian formations for exercises in the Spring, but it also matches a threatening drumbeat of anti-Ukrainian rhetoric from Russian leaders including Putin, who have questioned the country’s right to an independent existence. The Kremlin has increased funding for the Donbas and pledged humanitarian support to the rebel-controlled regions thus facilitating trade between Russia and parts of Donetsk and Luhansk.
The bottom line is that Russia is putting Ukraine back on the agenda and — as some predicted — forcing the Biden administration to take notice, despite its desire to park Russia and focus on China. Putin and his aides remain determined to build a near-exclusive sphere of influence in its neighborhood and Ukraine is the crown jewel in its geopolitical thinking. If Russia is finally seeking a settlement to its seven-year-long forever war, that would require agreement from Ukraine to effectively hand control of eastern regions to Russia and its local agents, plus a commitment to stop the country from joining Western military and economic institutions. There is no sign that Ukraine will agree to such constraints on its sovereignty.
Further south in the South Caucasus, Georgia, the West’s only partner in the region, is suffering a continuing crisis following the municipal elections in October and the former president Mikheil Saakashvili’s stealthy return to the country. He is now in prison on a hunger strike. Russia lurks here too. It might not be orchestrating the crisis, as in Belarus, but it does benefit. Russian media has been actively addressing the events in Georgia and playing on recurrent tensions between the country and its Western partners, especially the European Union (EU). As always, chaos — sometimes resulting from direct Russian interference, and sometimes not — makes it harder for candidate countries to meet the membership terms of Western clubs while emboldening those European countries sympathetic to Russia and skeptical of expansion. This makes it harder for organizations like the EU to engage Georgia.
Russia’s grand strategic aim is to maintain its power in neighboring states. That means keeping the West at bay, and political instability serves that purpose. Belarus, Ukraine, and Georgia are distant, but the Kremlin is always present. In some cases, it resorts to military pressure to gain momentum, in other cases it sits and waits, but the pattern signals a clever use of opportunities as they arise, exploiting the space given by a West signaling decreasing willingness to engage in the wider Black Sea region.
Seen from the long-term perspective, the 1990s and 2000s were a period of a slow but steady decline of Russian influence in what then constituted the former Soviet Union. From the Kremlin’s point of view, the present period is much more productive, with concrete gains and the reversal of the West’s military and economic expansion. For Putin and his ministers, it seems likely that the US considers defending Ukraine, Georgia, and even involvement in the Belarus-Poland border crisis costlier than the potential benefits of having these countries within America’s geopolitical perimeter.
The ground is now prepared to seek a reversal of the West’s geopolitical gains and cast aside the wishes of the people of Ukraine and Georgia. The push against aspiring liberal democracies is now gathering pace, timed to coincide with a wider geopolitical shift, namely the recalibration of US foreign policy to east Asia.
Author’s note: first published in cepa
Five Important Principles for a Successful Mandatory Funded Pension for Ukraine
The government’s plans to launch a mandatory funded pension scheme (the so-called second pillar) has provoked a lot of debate about future of pensions in Ukraine. Over the past quarter century, second pillars were introduced in several of Ukraine’s neighboring countries. Contrary to common belief, such schemes are not immune to politics, as they change and evolve constantly. So, it would be important to ensure a design for the program that can be preserved and perpetuated in Ukraine’s specific economic, social and political context.
Neither of the two types of pension schemes – solidarity and fully funded – is better than the other. In fact, they work best when they complement each other, as each is exposed to different risks. Thus, an effective reform will need to be centered around enabling synergies between the two schemes.
While the funded system is proposed as a risk mitigation strategy for the solidarity system in Ukraine, it also carries important implementation risks. To make Ukraine’s pensioners more secure, the Ukrainian government will need to map out all such risks and address them along the path to launching the new system. From global experience assessed by the World Bank, there are five key principles that should guide the preparatory work.
1. Strong regulatory and fiduciary framework. This is a key precondition for safety of the pension assets. First, no funded system should start without a regulator that is well-equipped and able to effectively enforce all legal provisions. Bill 5865 in Rada introduces a proper regulatory framework and powers of the regulator. This bill should certainly form part of the reform package. Second, it will also be important to establish proper segregation of assets and records between the activities of the existing voluntary plans and the new mandatory scheme. And third, several governance issues pertaining to non-state pension funds (especially the ultimate fiduciary responsibility of their boards, risk management and internal controls) will need to be addressed to have these funds prepared for their new role and be seen by the public as effective and trusted custodians of their pension assets.
2. Sustainable financing. The funded system can be introduced either as a complementary scheme to the current solidarity system or as a substitutional system. The current government proposal is a hybrid: on the benefit side, it is complementary, but on the revenue side, part of the solidarity system contributions is proposed to finance the new funded scheme. Such an approach may limit the effectiveness of the new system fiscally and socially, aggravating the risk of falling benefits in the solidarity system. This may result in no net improvement in the future combined retirement benefits from this reform. Instead, to maximize the impact of the new funded system, it will need to be funded from new contributions, without tapping into the same fiscal space that provides for the wellbeing of current pensioners. Ideally, these new contributions should come from employee wages, so there is personal attachment to the pension account – a signature element of individual responsibility in such programs. Such employee contributions could further be co-financed by the employer and/or by the government, as an incentive to contribute more for retirement.
3. Efficient administration. The mechanism of money and information flows in the new system should be carefully designed and tested, so that the administrative costs of the new system are minimized. No single Hryvna should be lost on its way from employers to an individual account, as it passes through the government machinery of revenue collection. For this, every detail of the process needs to be elaborated and all risks mapped and mitigated. It can be shown that a 1% annual charge on pension assets over someone’s full work career reduces around 20% of their pension benefits by the time of retirement. Therefore, cost reduction is key – and it has been shown that centralizing core administrative functions is an effective cost reduction strategy. Finally, simple provisions need to be introduced for individuals who do not actively choose a fund. This would pave the way to establishing a “default” fund with a life-cycle investment strategy. Importantly, a gradual implementation approach should help minimize various operational risks. So, Ukraine should start with a simple design that can be easily understood by the general public – and add more complex elements to the system over time.
4. Overall pension system design. The new funded scheme will be only a small supplement to the current system. With a 4 percent contribution rate, it will take an individual about 25 years of contributions for the account value to reach their corresponding annual wage in that year in the future. This is a rather insignificant amount, considering that this accumulated amount equivalent to one year’s wage will have to be spread over the remaining life of an individual after retirement. Therefore, better coordination with the solidarity system, especially its system of minimum income guarantees, is required
5. Well-defined role of the state. Explicit legal provisions about what government can and cannot do will put the system on the right track. The state plays several important roles here: ensuring proper regulations and fair competition in service provision; facilitating a “default” fund; providing co-financing from the general budget to stimulate participation; enabling core record-keeping infrastructure and standards of member services; facilitating markets for financial instruments to promote diversification of investments; providing well-coordinated general minimum income guarantees at retirement, through the solidarity system; and so on. So, having a clear implementation plan and well-defined transitional arrangements will be instrumental to the success of this reform.
A lot of work needs to be done to ensure that Ukraine’s future pensioners have an adequate pension that will allow them a dignified retirement. Therefore, learning from the successes and mistakes of other countries, the government should target a realistic timeline to build the second pillar – with well-coordinated preparatory work yielding a consensus on key design elements (incorporating all the above principles).
Originally published in UKRINFORM via World Bank
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