Azarov fails to impress business leaders

The way Prime Minister Mykola Azarov sees it, the country’s economy is finally on the mend after five years of chaos under the previous authorities.

But the rosy picture presented by Azarov on Feb. 22 during a meeting with the Kyiv-based European Business Association met with some skepticism.

Azarov told about 200 foreign diplomats and business leaders that inflation has been tamed, the currency is stable and the investment climate is better.

President Viktor Yanukovych is expected to deliver the same message during a three-hour television extravaganza on Feb. 25, marking his one-year anniversary as president since Viktor Yushchenko left office.

Gross domestic production jumped in 2010 by 4.2 percent and industrial production by 11 percent, year-on-year. Inflation remained under 10 percent. The central bank boosted hard currency reserves to $35 billion.”

– Mykola Azarov, prime minister.

“Gross domestic production jumped in 2010 by 4.2 percent and industrial production by 11 percent, year-on-year. Inflation remained under 10 percent. The central bank boosted hard currency reserves to $35 billion,” Azarov said.

But speaking with the Kyiv Post after discussions with Azarov, EBA executive director Anna Derevyanko said companies surveyed by the 807-member business association say they are fed up with promises and want results. Timely refunds of value added tax to exporters are at the top of many lists.

“The economic indicators look good and we also see strong long-term prospects, but on the ground we don’t see major investment climate improvement. During the past year, businesses are facing increasing fiscal pressure and corruption from the side of state officials. All of this is hurting Ukraine’s fiscal stability. Government must make investors feel more at ease, so that more investment will come,” Derevyanko said.

“This new dialogue with government is great, but it needs to produce results.”

While he applauded improvements made by Azarov’s government to improve the investment climate following the 2010 presidential election, EBA president Tomas Fiala said that reaching Yanukovych’s goal of joining the top 20 economically developed countries by 2020 will require much more work, maybe even a miracle.

“In order to catch up with Belgium, which currently has the world’s 20th largest gross domestic product, Ukraine will have to maintain 11 percent economic growth for a decade,” Fiala said. He then meticulously ticked off a list of the issues that worry business most: a dysfunctional court system, corruption, harassment by tax authorities, customs clearance delays and government meddling, in that order.

The concerns expressed contrasted with Azarov’s words.

“The fact that we imported $9 billion more than it exported can be attributed to the rise in personal income, which helped boost total trade turnover by 13 percent,” Azarov told the audience. “This shows total personal incomes have gone up – not down, as our critics have led some to believe.”

Government-imposed grain export restrictions and VAT (value-added tax) refunds owned to companies by the government remain unsolved problems, Azarov said, noting that attempts under way to downsize government and redistribute authority among state agencies make the job more difficult. “This is all very complex and time-consuming,” Azarov said.

Government must make investors feel more at ease, so that more investment will come.”

– Anna Derevyanko, EBA executive director.

This can’t come soon enough for Ukraine’s largest foreign investor, ArcelorMittal, which is reportedly again being investigated for $57 million in alleged tax violations.

Owner of Ukraine’s largest steel mill, the company denies wrongdoing and insists, rather, that the nation’s tax administration owes it hundreds of millions of hryvnias in overdue VAT refunds.

Ukraine has a dismal investment climate and has, as a result, attracted only a tiny amount of foreign direct investment compared to the levels that have flowed into neighboring Poland, for example.

Released on Jan. 12, the 2011 Index of Economic Freedom, compiled by the Heritage Foundation and Wall Street Journal, dropped Ukraine from 162 to 164 out of 179 countries between Uzbekistan (163) and Chad (165).

The Global Corruption Barometer released in December by Transparency International, a Berlin-based corruption watchdog, ranked Ukraine’s judiciary system – which Yanukovych claims to have reformed last year – as the most corrupt in the world.

When ArcelorMittal, one of the nation’s largest investors, is treated this badly, observers say it raises questions about whether President Yanukovych’s administration is really serious about attracting more investment that Ukraine so desperately needs.

Since acquiring the Kyrvy Rih steel mill in 2005 for $4.8 billion, the top steel producer has seen its top managers shot at by local gangs.

Top Ukrainian officials have also repeatedly challenged its ownership of the plant.

Azarov said Ukraine in 2010 paid out $6 billion (Hr 48 billion) in VAT refunds, almost twice the amount returned in 2009 when Yulia Tymoshenko was prime minister.

He added that the new tax code provides for the automatic refund of value-added payments, effective March 1.

But the opposition sees problems. Hyrhory Nemyria, a former deputy prime minister under Tymoshenko, last month accused Yanukovych in a statement of “authoritarianism” and “incompetence.”

Click here to see “Taxes around the world’ infographics.

Kyiv Post staff writer Peter Byrne can be reached at [email protected].