A Long and Winding
Road to Prosperity
The first attempts to get Ukraine on the road of economic reforms were made in the late eighties but the work began in earnest only after Ukraine’s independence. Search for new ways in economic development was similar to the one conducted in other post-socialist states. Ukraine chose the way of liberalizing its economy and reducing government interference in the economic affairs, thus reducing the budget expenditures. But the transition to the market economy is hampered by the slow rates of the reforms and by a deep economic slump Ukraine is now experiencing.
The success in solving complicated economic problems Ukraine is now facing, largely depends on several factors: creation of the necessary legal and taxation basis; speedy transition to new economic relations based on private ownership; encouragement of private entrepreneurship; promotion of consumer-oriented industries.
Welcome to Ukraine correspondents Andriy Shestakov and Olena Zelynska talked to Yury M. Taratorin, General Director of the National Network of Centres of Vouchers Auctions (NNCVA) and asked him to share his views on the present-day state of economy in Ukraine, problems and prospects of the privatization process, investments into the national economy.
WU: What is the
state of Ukraine’s economy at the moment, in your opinion?
Could you also give some figures and statistical data, please?
Taratorin: Information, published in the press and statistical data show that we can predict the gross domestic product (GDP) of Ukraine to be about 100.2 billion hryvnyas in 1998 which is 0.6% less than in 1997. It can be regarded as the best economic performance for quite some time, since the annual rate of the GDP reduction was 3.2% in the previous years. The draft of the state budget, worked out by the Cabinet of Ministers, sets the GDP at 112 billion hryvnyas for 1999, that is 1% higher than last year’s (the Ministry of Finance gives a slightly different figure: 117 billion hryvnyas).
The volume of the industrial production is expected to grow by 1% in 1998, whereas last year it dropped by 1.8 per cent. The year’s rise in the index of prices was 110% at the end of last year, and this year inflation caused a rise which has not been previously foreseen, and the index has risen to 111% and is still rising.
Ukraine will see an expansion in the labour market. Ukraine’s population is about 50.4 million people and it decreases by 0.5 million a year. At the same time unemployment continues to grow and will reach, according to some estimates, 4.6% of the working force. Which means, it will have doubled within one year.
A negative balance of current payments at the level of 3.7 billion hryvnyas is expected (19.2 billion in revenues, and 22.9 billion in expenditures). The deficit of the consolidated budget remains rather high but every year it decreases. In 1994 it was 8.9% of the GDP, 6.6% in 1995, in 1996 — 4.9%, and in 1997 — 6.7%. This year’s budget deficit is expected to be 4.4% of the GDP and last year’s greater deficit was caused by a decision of the government which was forced to take urgent actions in order to stimulate business activity in Ukraine. The government reduced its interference into the economy, lightened somewhat the pressure of taxes upon Ukrainian companies. Reforms in the pivotal sectors of the economy also contributed to the budget deficit.
Thanks to these efforts it became possible to rearrange the internal debt, a considerable portion of which belongs to foreign investors and prevent the external debt from growing to a dangerous size. If that had happened, Ukraine would have been pushed out of the zone of economic confidence into the bog of default, something that Ukraine has not experienced before.
WU: What can you say about Ukraine’s exports and imports?
Taratorin: According to the published statistical reports, the economic situation in Ukraine is heavily influenced by the structure of its external economic relations. Both exports and imports continue to fall, though slightly.
The export of goods and services has remained this year at about the same level as it was in 1997 (18.3 billion dollars in 1998 compared to 19 billion dollars in 1997). The Ukrainian export to the CIS countries dropped by 22.8% compared to the 1996 level, but increased to other foreign countries by 30.5%).
The Russian Federation remains the biggest market of Ukrainian goods, then follow China, Belarus, Turkey and Germany. In the structure of export the lion’s share is that of ferrous metals (38.8%, followed by chemical products (10.5%), industrial machinery and equipment (9.5%), and also raw materials and food products.
The imports dropped from last year’s 18.6 billion dollars to this year’s 18.3 billion dollars.
Russia is the biggest exporter of goods to Ukraine (46.7%), and then follows Germany, Turkmenistan, the USA, Poland, Kazakhstan, and Belarus. Fuels make up the bulk of the imports (45.9%), followed by industrial machinery and equipment (15.2%), chemical products (7.1%).
WU: As an expert in privatization processes, what is your view, Mr Taratorin, of the privatization situation in Ukraine? Can we say that privatization is one of the government’s priorities?
Taratorin: Ukraine is going through a process of reforming its ownership system. Privatization is one of the major factors of the economic reforms in this country. Over 57,000 industrial facilities (10,000 big and medium-sized and 47,000 small ones) had been privatized by January 1, 1998, 80% of them were transferred to the ownership of the people who worked at these facilities. The privatization in Ukraine is performed, ahead of anything else, through turning companies into joint-stock ventures. It began in 1992 with the introduction of cashless accounts, and in 1995 privatization vouchers began to be issued to the population of Ukraine with every citizen being entitled to receive them.
The government worked for several years at creating favourable transparent conditions for promotion of sale of shares packets at stock exchanges and through off-stock exchange channels. The current year will be the last in which the privatization vouchers are going to be used in the process of privatization of state property.
At present one can observe a transition to the cash property sales of state-run (and run poorly) property. The National Network of Centres of Vouchers Auctions (NNCVA) has also been engaged in the programme of privatization for 1998. Specialized auctions are organized through the NNCVA every month. Potential buyers show a growing interest in facilities offered for sale. The population is becoming more active in buying privatized facilities. Thus, the NNCVA has been helping bring internal investments into the Ukrainian economy. Foreign investors can take part in cash privatization in Ukraine through the Network of Centres of Vouchers Auctions.
Privatization should create conditions that may attract investors, help, efficiently use the credits, received from the World Bank and the European Bank for Reconstruction and Development. Changes in the sphere of privatization are likely to attract more foreign investments.
WU: What are the most effective mechanisms of getting the privatizaion process going?
Taratorin: Even those politicians who embrace retrograde and orthodox views seem to have begun to understand that the small-sized and medium-sized businesses are the foundation on which the middle class will be formed. And the middle class is a prime mover of the economy and a main supporter of Ukraine’s democratic development, whose aim must be prosperity of Ukraine. In the developed countries of the world, the small businesses account for up to 70% of the GDP, whereas in Ukraine they account for only 10%. Any further development of small businesses in Ukraine requires investments, ahead of any other sectors.
The legal foundation of the small- and medium-sized businesses also remains unsatisfactory. The systems of registration, licensing, benefits, customs duties, taxes are in need of considerable improvement. The Laws On Entrepreneurship have been worked out and adopted in December of 1997 thanks to the initiatives of the business community. New laws dealing with the state support of small businesses, simplification of the taxation system, licensing of services have also been adopted. The new laws must clear a path towards market-oriented reforms.
The Presidential Decree On Some Measures of Deregulation of the Entrepreneurial Activity has so far been the most revolutionary form from the economic point of view. Deregulation is, in general, one of the important directions of the state economic policy.
Another law of Ukraine, the one On Leasing has brought Ukraine closer to the new forms of economic life that are gaining popularity in Europe. I would like to point out in this connection that the NNCVA could play a positive role in the development of entrepreneurship in Ukraine. There is enough potential for that.
WU: Now let’s move to domestic and foreign investments, the main fuel of the reforms. Does Ukraine have enough attractiveness for foreign investors?
Taratorin: At the time when the reforms had just begun, we had to learn what “investments” meant and how they differed from the Soviet understanding of them. Investments are put primarily into promising projects with good guarantees of receiving profits, the dividends.
The reforms need working capital and investments and the changes in the structure of privatized companies have considerably increased the chances of Ukraine for getting foreign capital invested into Ukraine’s economy.
A good evidence of this is the fact that foreign donors agreed last year to give Ukraine bigger financing, including the World Bank credits. This year’s 2.1 billion dollars IMF credit shows that the world economy is closely watching the consequences of possible “next waves” of the world crisis. In spite of the fact that this year the direct foreign investments have grown to reach 1.2 billion dollars, the share of the gross investments is expected to drop down to 18.5% of the GDP (in 1997 it was 20.1 %).
The Ukrainian market attracts investors by its sheer size, by the richness of mineral resources, by a developed infrastructure, which needs investments to carry on with modernization. A high level of education of the Ukrainian population, highly-qualified personnel, an advantageous geographical position — all these factors contribute to raising the interests of potential investors towards Ukraine. According to some experts, the general need of Ukraine in foreign investments at the moment is about 500 billion dollars. At the same time surplus of liquid assets is observed in the developed countries. Ukraine has a good chance of becoming one of the biggest investment markets of the world.
Another attractive feature of Ukraine is a higher than in the West profitability of investments. Besides, there are practically no free investment niches in the developed countries whereas in Ukraine they still exist in many branches of economy and in many regions.
According to experts, a complex of general and special measures to ensure stability of laws concerning foreign investments, differentiated approach to preferential treatment and benefits in taxation and other spheres, easily accessible and efficient mechanisms of getting investments will stimulate foreign investors to invest into Ukraine’s economy.
In the meanwhile the lack of currency reserves, that can cause a serious problem at the time Ukraine is to reorient itself to the foreign debt, is dealt by the government using “an iron hand,” since no other ways except for administrative, have been worked. The fact that the market reforms have not been completed is a major obstacle hindering the formation of favourable conditions for foreign investment activity. Promotion of investments is something that depends on professionalism, honesty and enthusiasm of government, and trusting attitude to it.
The activity of foreign investors is regulated by almost 70 prescriptive regulations and laws and they are definitely not something that helps bring in investments since they are ambiguous and even contradictory. The first laws dealing with the protection of foreign investments were created as long ago as in 1991. The current Law On the Mode of Investing that was passed on December 22, 1994 says that a company that got registered before January 1, 1995 was liable to have tax benefits for five years. Refusal to provide such benefits (and there are many calls to do away with them) would violate the basic state guarantees of Ukraine, would cause Ukraine’ rating of a state with a favourable investment climate go down.
It is the creation of favourable conditions for investors that the new mechanisms of competitive sales of share packets of state-run companies are called upon to provide. In order to bring in foreign investments, open sales and tenders of the most investment-attractive companies are planned.
WU: To what extent will the influx of foreign capital help make the process of reform and contribute to getting Ukraine out of the current crisis?
Taratorin: In 1998, the first palpable results of the new approach to privatization and corporization appeared.
In the beginning of the second half of 1998 2.47 billion of US dollars of foreign investments were put into the Ukrainian economy, whereas in the whole of 1997 it was only 618.6 million dollars. The volume of investments, a very important economic factor, is growing annually.
Among the countries which have put the biggest investments into Ukraine’s economy and continue to show interest in Ukraine are the USA (as of July 1, 1998 the volume of US investments reached 428.9 million dollars, that is 17.4% of the total volume of investments); the Netherlands (234.7 million dollars — 9.5%); Germany (196 million dollars — 7.9%); the Republic of Korea (182.5 million dollars — 7.4%); Great Britain (168.3 million dollars — 6.4%); the Russian Federation (168.3 million dollars — 6.4%).
All in all, the structure of foreign investing amply shows the priorities of investors’ interests in certain branches of the Ukrainian economy. These branches are: food industry (20.4% of the total volume of investments); domestic trade (15.8%); machine building (13.6%); the financial sphere, insurance (8 %); construction (6.5%); chemical and petrochemical industry (5.3%); transport and communications (5.1%); health protection (4.7%).
And yet the effectiveness of using the investments in the industrial sector still remains to be rather low. Companies with foreign capital make up only 26.4% of the companies operating in Ukraine. Today foreign investments, either from the point of view of their volume, or from the point of view of the way they are being used, do not effect the Ukrainian economy in a measure that could be considered desirable.
Today one of the urgent tasks of Ukraine, which is building a new, market society, is to solve such high priority tasks as restructuring of the economy, technological modernization, reducing the dependence on imports. Investment policies should help get the country out of the crisis.