The business community has been waiting for some clear signals from President Volodymyr Zelensky since he took office in May regarding his administration’s reform agenda and economic policy. So expectations ran high when he took the podium at a business breakfast at Ukraine House Toronto in the first part of July.
At the breakfast – hosted by the Economic Club of Canada, the Ukrainian Canadian Congress, UkraineInvest, Ukraine House Foundation, and the Victor Pinchuk Foundation – Zelensky laid out before a sold-out crowd of 450 of Canada’s business leaders an ambitious program of reform and market-friendly, pro-business measures that would, in his words, “make Ukraine an Eastern European tiger economy.”
Here are my top 10 takeaways from his speech:
“Ukraine is one of the most promising and growing markets.”
His statement dovetails with what UkraineInvest is hearing from investors – that Ukraine has become a stable and predictable emerging market where risks and rewards can be profitably measured.
“Our economy has been growing steadily for 13 consecutive quarters, we have acceptable inflation levels, a stable currency and our foreign debt is decreasing. In the past few years, Ukraine was able to build a strong National Bank of Ukraine, the independence of which from politicians I personally guarantee. We also adopted legislation which allows for the gradual movement of capital, which we strongly support.”
The president intends to build on the stable macroeconomic position and is prepared to leverage the reforms achieved thus far to do much more. Macroeconomic stability and rules on capital movement are vital to building the confidence and trust of investors. His comments were buttressed by the Ukrainian central bank’s announcement last week of further liberalization of the rules on capital transfers out of the country.
“I want to assure you that Ukraine continues its movement to the West. My first foreign visit as president was to Brussels where I met the leadership of the European Union and NATO. Yesterday I had a meeting with the management of the International Monetary Fund and the World Bank. We are on the same page with them – that is why we will continue our close cooperation. I have no doubt about their support.”
By reaffirming his commitment to Ukraine’s on-going strong relationship with NATO, the World Bank and IMF, he is committing Ukraine toward an even firmer embrace of European values and institutions and to the irreversibility of continued progress on reforms to unlock more investment.
“Growth of 2-3 percent a year is not satisfactory, we need a minimum of 5-7 percent per year. We know how to do that, which is why we are preparing for very serious structural reforms to increase the speed of growth.”
Zelensky has just laid down a marker to not just maintain but to significantly speed up the pace of reform to achieve much higher growth rates.
“We already have new management of the Security Service of Ukraine and the state customs and taxation services. Their main task is to eradicate smuggling and corruption and to forthwith eliminate any remaining pressure on business. We have fired people who are connected with illegal business seizures and manipulation of state registries. As soon as we have a new government the picture will change even faster.”
Investors tell us that as a result of the government’s reform efforts over the past three years, there has been a major improvement in the business environment in Ukraine and in battling corruption. However, while reduced, corruption in the customs and tax services remains a persistent complaint of investors, so swift action with respect to these agencies (both of whom now have reform-oriented leaders) is a welcome development.
“The potential influx of resources to the state budget of Ukraine from eradicating smuggling and corruption and legalising the shadow economy is estimated by our team as high as $10 billion a year. We need this money to build up-to-date infrastructure for honest business, to improve the lives of Ukrainians and to defend our land from enemies.”
An independent study has recently established that corruption-prevention reforms of the government since 2015 translates into savings of $6 billion per year for the state budget. The fact that Zelensky sees another $10 billion in opportunities illustrates the level of his administration’s commitment to creating a fully transparent economy to further improve the business climate and the lot of Ukraine’s people.
“We need to get rid of the post-Soviet rules that gave the state ownership of everything. It is important to decrease the presence of the state in the economy – that is why we are continuing deregulation and privatization… It is important to do this gradually and cautiously so as not to repeat the experience of the privatizations of the 1990s because we cannot waste time. No Ukrainians should suffer. All of this should become operational assets and not passive resources that can be taken away by a corrupt official.”
Deregulation was one of the main boosters of business sentiment over the course of the past three years and the president’s recent scrapping of almost 600 decrees that impede business activity shows his commitment to on-going reform in this area. While the government last year established a new transparent and streamlined framework for effective large-scale privatization (including making any disputes governed by English law), it was missing a key ingredient – the political will to make a transparent and objective process happen. Zelensky’s welcome declaration indicates that he is prepared to put in the presidential backing that is so crucial to the success of the sale of large state-owned enterprises.
“It is important to introduce market rules in the energy industry and infrastructure, to limit monopolies, to defend intellectual rights and digitize state services.”
Zelensky indicated that his free-market beliefs extend across business sectors; that he embraces the technological revolution sweeping the world, and sees in its opportunities to make government services more efficient.
“We need fair courts in this century. Right now the judicial system does not enjoy the trust of Ukrainian society or investors. We are going to change that in the coming years, we have a special plan for that.”
The president’s frustration with the pace of judicial reform is shared by investors – this is arguably the single most frequently heard complaint from the business community. While business tells us that it recognizes that significant strides have been made in reforming the Supreme Court of Ukraine, it is just the tip of the iceberg. Presidential commitment is crucial to the success of reforming the appeal and lower courts, as progress on this issue could unlock billions of dollars in new investments over the next decade.
“Yesterday during my meeting with (Canadian Prime Minister) Justin Trudeau I asked him to think about additional support for companies investing into Ukraine, for example, reconsidering our credit rating by the Export Development Canada.”
This idea attracted a wave of applause from the crowd in Toronto; we are told by many potential Canadian investors interested in Ukraine that greater support from the Export Development Canada would help them compete with investors from the US and Europe. One very tangible way for the EDC to demonstrate the Canadian government’s commitment to boosting the Canada-Ukraine Free Trade Agreement is to extend political risk insurance coverage to Canadian business investing in Ukraine, much as the US Overseas Private Investment Corporation does with great benefit to US exporters and investors doing business in the country.
Overall, the feedback regarding Zelensky’s address from the Toronto business community was very positive – I heard from many business executives that they were impressed by his grasp of the economic situation, his vision and his commitment to push forward on economic reforms. Following the Ukrainian parliamentary elections on July 21, they expect to see swift and tangible action on all of the fronts promised. That is good news for foreign investors and good news for Ukraine.
Daniel Bilak is chairman of UkraineInvest, Ukraine’s foreign investment promotion agency.
