Investment climate stagnates
Sociological reports demonstrate that foreign companies still view Ukraine’s investment climate as mostly negative. Specifically, a survey conducted by Research & Branding Group on the latest initiative of State Tax Service of Ukraine shows that the investment activity index in April was only 4.23 out of 10.
Key factors in the study were: investment climate evaluation, climate changes in the last 6 months, expected changes, accordance of Ukrainian economic policy with world reality and companies’ investment plans. According to the report, 4.5 percent of investors view the investment climate as good, 8.3 percent see it as very bad, 35.5 percent consider it close to very bad and 50 percent think it neutral.
In reaction to the survey Oleksandr Klymenko, the head of State Tax Service, said that the government shall take it into account to improve working conditions for businesses. At the same time, Anna Derevyanko, executive director of the European Business Association, stated that the mood among investors towards Ukraine is rated from 2.18 to 2.19 out of 5.
In her words, 70 percent of companies say that they fail to notice any positive changes in the Ukrainian economy. Business representatives think that the negative impact on business activity is caused by intensification of fiscal policy, corruption in state organs and pressure from customs.
People First comment: Unchanged means heading in the wrong direction. Unfortunately there are some businessmen in Ukraine who truly believe that they can own or control everything in the country, unfortunately these gentlemen are neither scholars in the art of business building nor students of history as greed is the quickest way to bankruptcy. Similarly what this reactionary regime don’t seem to understand is that by managing a modern economy using methods that are 50 years out of date you secure your ticket on Titanic rather than a mention in the Forbes magazine.
Certain members of the regime seem to want to own or take a cut from everything they can, control everything they can’t own and then tax anything that is left. Even a first year student of economics can understand that cannot possibly last… but then maybe that’s the plan. To steal or acquire as much as they can, while they can, build stockpiles of cash, force what is left into bankruptcy and then use their wealth to sweep up what the remnants at rock bottom prices.
The philosophy appears to still be in plunder mode. What is needed in Ukraine is a real dose of economic reality to shock those who think they are serious businessmen into understanding that it takes a great deal more than men in black masks, threats and intimidation to build a successful business.
Rising debt a dead end for Ukraine?
Ukraine’s debt situation is becoming a political trap for the ruling regime.
With dependence on foreign creditors growing, the Ukrainian government risks losing the last of its geopolitical clout.
It is all too easy to surmise how this all might play out: first would be a drop in Ukraine’s international credit ratings, next would come financial isolation from the West – for which we can blame Ukraine’s worsening investment climate and breaking of democratic norms and principles – finally increased financial dependence on Russia, through refinancing the old and forming new debts. Indicators of this path are already on the table: in March the government borrowed from the Russian Gazprombank with the limit of $2 billion till 2019 to pay for Russian gas supplies. Currently the Ukrainian government claims to be able to make all the necessary payments to cover its external debts. According to the state budget the government must pay Hr 34.7 billion ($4.3 billion) of internal debts and Hr 30.5 billion ($3.8 billion) of external debts this year – if we add into this the payments due to the IMF the total increases to $5.3 billion.
The effect of the current situation is a constant lowering of Ukraine’s credit ratings. This March Standard & Poor’s changed the sovereign credit rating prognosis for Ukraine from stable to negative. But not only Ukraine’s obligations to the IMF remain key, there is also the question of fulfilling obligations to the Russian VTB bank; the term of the $2 billion loan will be reached this June. The Ukrainian government has already made a new proposal to the Russians: to borrow more money from VTB to clear the previous debt. Thus the debt trap remains one of the most dangerous threats to Ukraine.
People First comment: Ukraine is not a Switzerland and should not try to behave as if it can or ever will be a neutral party. Switzerland does not produce much and does not have vast mineral or agricultural resources but it does have one commodity that is more precious that all the others put together and that is trust. In fact Switzerland places so much importance on trust that it has taken some of the most powerful nations in the world decades to persuade the Swiss to relax just a few of their secrecy laws in the interests to tracking money laundering and tax evasion.
Ukraine does not have that luxury. Back in 1991 the World Bank went on record saying that Ukraine had the potential of being one of the richest countries in Europe. 20 years on the nation has gone backwards in financial terms whilst a self-elected few have plundered the nation into almost bankruptcy. Ukraine may have some of the most valuable mineral and agricultural deposits in Europe but nobody is going to seriously invest in either because neither the regime nor the system can be trusted. In fact whilst the ratings agencies might well cite raw materials as the nation’s largest export it is, in fact, the export of corruption that is having most impact.
Many of the Ukrainian wealthy keep their ill-gotten gains in complex offshore financial structures that are specifically designed to make it virtually impossible for all but the most determined to track. They ‘persuade’ frankly naïve western professional firms of lawyers and accountants with overly generous fee payments to set up legal structures to enable them to launder their ill-gotten gains and to secure them by investing in the western financial system to the point that their activity is now the subject of numerous investigations. Such activity especially at the higher levels of power does not invoke a climate of trust and is actually only ‘safe’ until the next inspection by the special services.
Energy sector reform in the EU’s favor
The Verkhovna Rada has approved in the first reading changes to the Law ‘On Pipeline Transfer’ marking the start of a energy reform process. The changes open new opportunities for the reorganisation of state energy enterprises and subsidiaries of Naftogaz the state oil and gas monopolist. The parliament also maintained a moratorium on privatisation of state oil and gas assets. According to the government the changes to the Law were required due to obligations undertaken by Ukraine’s signing of the Energy Community Treaty.
Ukrainian energy experts note that the changes seem largely positive on paper. However, no laws on the reformation of Ukrainian oil and gas sector can be effective without the authorities approving the large range of other subordinate acts. For example, the procedure of gaining access to oil and gas facilities is yet to be reformed and currently contributes to the monopolization of the sector. From another perspective, the reforms are merely a smoke-screen as no structural changes have been adopted regarding energy sector management and at the same time Ukraine imports over 70% of its gas from Russia. We might expect further reformation to include a division of Naftogaz, in accordance with the 3rd Energy Package of EU, into smaller enterprises – each responsible for either extraction or transportation or network management.
At least the amendments to Ukraine’s energy legislation send the EU a positive signal regarding investment in the Ukrainian oil and gas sector. Whist Russia has been shown that the government of Ukraine is not yet prepared to transfer oil and gas assets into Moscow’s hands. It seems that negotiations between Russia and Ukraine over current and future gas issues will be becoming more and more complicated).
People First Comment: Any step designed to seriously reform the gas sector in Ukraine has to be welcomed. It seems completely indefensible that Ukraine should be sitting on an estimated 37 trillion cubic meters of gas which cannot be put to the national good because of Soviet era style of red tape and bureaucracy.
Naftogaz Ukraine has been a business basket case for decades simply because it is too large and too complex a structure for the modern world. Breaking it up into genuine profit centres will firstly show what works and what does not, what needs investment, what needs to be privatised and what needs to be closed down. A fitter and leaner Naftogaz will attract investment and this in turn should enable the industrial development of the gas sector. However, past governments have seen Naftogaz as a cash cow and have plundered its coffers on more than one occasion to fill holes in the state budget. As a more business-like structure it will, hopefully, also be more transparent and this, in turn, will create a more attractive investment climate in the gas industry.
In order to fully develop the gas sector, Ukraine most certainly needs new technology, expertise and considerable capital. Oil and gas prospecting can bring spectacular financial returns, however the cost of drilling even a ‘dry’ well runs to millions of dollars and for that Ukraine needs partners. This new law and the subordinate acts should enable the first steps to what will be a very long road, however without it nobody would have ever taken the first step.
Euro 2012: a litmus for Ukraine
Criticism of Ukraine’s preparations for Euro 2012 has been high in the European media, with even UEFA itself strongly chastising certain elements. At the official opening of the new terminal at Lviv airport Michel Platini, UEFA President, accused ‘bandits and swindlers’ of artificially overpricing hotel rooms in Ukraine for Euro-2012. The President of UEFA believes that the government of Ukraine must resolve the issue of speculative pricing, so that European football fans have a chance of actually coming to Ukraine for the championship.
Ukrainian state officials, headed by Borys Kolesnikov, responded by promising to resolve the problem of excessive hotel prices. According to Kolesnikov, the government has exempted hotels from income tax for the next 5 years. He believes that prices for hotel rooms will come back to normal market level for the period of Euro-2012. Prior to this statement the President ordered Kolesnikov and Poroshenko, Minister of Trade and Economic Development, to take measures to bring the prices for hotel services in Ukraine back to a reasonable level.
Earlier Markian Lubkivsky, the Euro 2012 tournament director and head of the local organizing committee, stated that Ukraine would be able to accommodate football fans of many different social groups during Euro 2012. He expects the arrival of approximately 800,000 guests for the football tournament). Some Ukrainian families actively support the idea of inviting foreign citizens to live in their homes for free during Euro 2012 – by doing so they strive to keep Ukraine attractive for Europeans despite the "efforts" of state officials and speculators.
People First Comment: Well done Mr. Platini, about time too. There is something a little hollow in the words of the regime in that the government that has requisitioned every single hotel room in all the cities hosting Euro 2012 matches for the whole duration of the championship. The government has agreed rates with all the hoteliers in the city and these are way below the rates being offered by the company retained by the government to manage the process.
The whole system is being run by the German travel company TUI and their client is the government… Therefore the government does not need to issue statements ordering that costs must be brought into some semblance of sanity – they simply need to tell TUI to cut the costs that they themselves determined in the first place. However, Euro 2012 is rapidly turning into the farce of the century with thousands of unsold tickets, government delegations threatening a boycott and the national reputation being dragged through the gutter and all because of the arrogance of those in power who believed it would all be so simple.
Viktor Tkachuk is chief executive officer of the People First Foundation, which seeks to strengthen Ukrainian democracy. The organization’s website is: www.peoplefirst.org.ua and the e-mail address is: [email protected]
