Ukraine’s second biggest foreign investor and third largest trading partner – Germany – also advises the government on economic affairs. Established in 1994 by the country’s Federal Ministry of Economic Affairs and Energy, the German Advisory Group has been consulting the Ukrainian government on macroeconomic, tax and energy policy. Its six-member team is based in Germany but makes monthly trips to Ukraine to meet with key government officials.
“The first and most important part of our mandate is to advise the (Ukrainian) government on economic policy,” says Ricardo Giucci, team leader of the German Advisory Group. “As much as we can, we support and facilitate economic relations between Ukraine and Germany and the European Union.”
The group’s most recent study, in particular, provides a glimpse into the Ukrainian-Russian deal signed on Dec. 17. The deal, including a $15 billion package for Ukraine and a 33 percent discount for Russian natural gas, came when the country was facing substantial budget and current account deficits: $8 billion and $8.3 billion, respectively, and its foreign-exchange reserves were at a perilously low level of $18.8 billion.
Ukraine was no longer able to finance itself without external financial help and had two options – receive financing from Russia or the International Monetary Fund. When Ukraine received the first $3 billion installment of the Russian loan in December, it helped stabilize reserves. The gas discount could save the country up to $3 billion in 2014 alone, Giucci says. Still, he says Ukraine could benefit more from the International Monetary Fund deal.
“We of course favor very much the IMF deal, because any IMF deal has two parts. Money is not the most important thing, the most important is economic policy advice and conditions to repair the economy, in this sense it would reduce the budget and current account deficits,” Giucci says. “After the IMF program the country is fitter, while the Russian deal is purely financial, it doesn’t contribute at all to improving the economic situation.”
On Jan. 24, the IMF’s deputy spokesman William Murray announced that the international lender is ready to discuss financial cooperation with Ukraine if such a proposal is made, but so far the Ukrainian government hasn’t submitted one.
Moreover, ex-Prime Minister Mykola Azarov has repeatedly criticized the fund’s demands which have included loosening the hryvnia exchange rate and increasing household energy tariffs combined with a number of social measures. The German Advisory Group also supports these ideas.
At around $100 per 1,000 cubic meters, Ukraine’s household gas and heating tariffs are among the lowest in Europe.
Meanwhile, the hryvnia has devaluated recently: from Hr 8.2 to Hr 8.5 to the dollar. Giucci says the German Advisory Group endorses flexibility, but to a certain extent.
“We favor flexibility of the exchange rate, but not complete flexibility. We advised the National Bank to have a currency basket (including) the euro, dollar, (Russian) ruble, so it adjusts better to the external situation,” Giucci says.
Regarding Ukraine’s trade relations, the group suggests having good relations with Russia and the EU. At the same time, closer integration with the Kremlin-led Customs Union could lead to increases in customs tariffs in Ukraine because Russia has higher tariffs, Giucci says. Average customs tariff in Ukraine is 2.7 percent while in Russia it is eight percent.
“Russia is a protectionist country and Ukraine is a liberal country in terms of trade policy. If Ukraine integrates with the Customs Union it turns into a protectionist country, meaning fewer imports, fewer exports and less gross domestic product,” Giucci says.
But should Ukraine integrate closer with the EU, Ukraine’s imports, exports and gross domestic product could each increase by six percent, when all the adjustments take place, according to GAG’s calculations.
Yet Ukraine rejected signing the Association Agreement with the EU at the Eastern Partnership Summit in November. The government’s decision led to massive street rallies in Kyiv that transformed into huge anti-government protests throughout the country, a political crisis Ukraine has never seen.
While there were numerous statements on behalf of the government regarding the negative impact of the protests on the nation’s economy, GAG says it hasn’t noticed serious impact so far.
Germany at a glance:
Size: 357,022 square kilometers
Population: 81.1 million (2013)
Government type: Federal Republic
Head of government: Chancellor Angela Merkel (since 2005)
GDP (PPP): $3.1 trillion (2012)
GDP (PPP) per capita: $38,700 (2012)
Main industries: iron, steel, coal, cement, chemicals, machinery, vehicles, machine tools, electronics, food and beverages, shipbuilding, textiles
Ukrainian-German relations:
Trade: $7.7 billion (January-November 2013)
Exports from Germany to Ukraine: machinery, motor vehicles, chemical and pharmaceutical products, electrical goods, foodstuffs and animal feed
Exports from Ukraine to Germany: textiles and garments, metals, alloys, iron goods, chemical products and motor vehicles.
German investment in Ukraine: $6.3 billion (as of January 2013)
Ukraine’s investment in Germany: $9.1 million (as of January 2013)
Source: CIA Factbook, State Statistics Committee, German Embassy in Ukraine, Ukrainian Embassy in Germany
Kyiv Post staff writer Anastasia Forina can be reached at [email protected]. Kyiv Post associate business editor Ivan Verstyuk contributed reporting to this story, he can be reached at [email protected]
