Almost three years after the Revolution of Dignity, Ukraine’s recovery picked up steam in Q3 2016, as GDP grew at the fastest pace in recent years and has amounted to 2%. Long-term credit ratings improved. Resumed macro stability resulted in FDI surge. During the last year Ukraine has attracted more than $3 billion foreign direct investments.
The government’s cooperation with the IMF also bodes well for Ukraine’s outlook and the economy is expected to continue on an upward trajectory. Surging fixed investment due to an improving business climate and higher household consumption also fuels the economy’s acceleration. The government forecasts GDP rising by 3% this year.
To increase the FDI inflow, late last year the National Investment Council was established in Ukraine. Boris Lozhkin has been appointed as the Council Secretary. Former successful businessman, after the Revolution of Dignity he has been appointed as the Head of the Presidential Administration of Petro Poroshenko. He held this position for two years until September 2016.
For many years Ukraine was known as a highly closed market with opaque rules. What has changed in recent years?
After the collapse of the Soviet Union Ukraine had faced the new reality but couldn’t adapt to it quickly. Highly regulated centralized economy for many years fed high-level corruption and nepotism that were difficult to understand or work around for international community. As a result, Ukraine has attracted on average 3 times less investments than its peers. The average net foreign direct investment inflow to other post-socialist economies (e.g. Estonia, Latvia, Romania, Poland etc) in 1997 — 2015 amounted to $4,2 thousand per capita. In Ukraine it was only $1,5 thousand. We think, during all these years we have lost about $150 billion in «missed» investments.
Post-Revolution governments were largely composed of people with business background. They have a much soberer view on managing economy and realized that creation of open, predictable and non-discriminatory market is the only way to move forward. Now, while on well on track with reforms, Ukraine is keen to attract $120–200 billion FDI in the next 20 years to close the development gap between Ukraine and other CEE countries.
Would you elaborate Ukraine’s reforms progress? What changes are important for potential investors?
First of all, let me say that local and foreign media often present a mixed picture of what is going on in the country. An in-depth review shows that Ukraine has achieved a significant progress in several areas. Banking sector is a good example. National Bank of Ukraine has removed all non-viable and so-called «zombie banks», thus completing the cleansing of banking sector and ensuring its higher stability. The quality of anti-corruption legislation has also improved.
Tax administration is a priority area now. The payroll tax has already been halved to 22 percent. Officially, an automatic system of refunding VAT has been introduced, and conversations with foreign business associations (including, Amercian Chamber of Commerce, by the way) suggest that the situation really has improved for large businesses. At last, substantial deregulation has taken place and many regulations and inspection agencies have been eliminated. The total amount of state permissions decreased by 40% for two years and nearly 90% of mandatory certification was cancelled.
As a result for the last five years Ukraine moved up 72 positions in World Banks Doing Business Report, ranking 80 in Doing Business-2017 compared to a ranking of 152 in Doing Business-2012.
What is the NICs role in the process of attracting investments?
National Investment Council is a coordination and communication platform of leading foreign investors and key decision-makers in Ukraine. Our goal is to get leading investors from all over the world interested into investing in Ukraine and to support their projects, to create a high-level dialogue. Also we are working on providing institutional changes to improve the investment climate in Ukraine.
Which sectors of the Ukrainian economy are the most promising for investment?
Energy sector, agribusiness, IT and infrastructure. Ukraine boasts over 30% of the World’s reserves of most fertile black soils. Cost of investment in Ukraine’s farmlands is the lowest in Europe while it provides the highest return potential given the high soil fertility and unrealized agri-ecological potential of Ukraine’s soils.
Agricultural infrastructure such as field granaries and port grain elevators are becoming increasingly demanded by the fast developing farming sector and growing international demand for food. And this is also a great opportunity for international corporations.
Our serious advantage is the highly skilled workforce and its cost. For example, in IT sector. World leaders in software development outsourcing have opened their branches in Ukraine to elaborate software architecture design projects and brain-intensive R&D assignments.
One more opportunity is the large-scale privatization which is going to take place in the closest future. The state owns more than 1800 enterprises. Roughly two hundred of them are considered strategic and will remain in state ownership. But everything else shall and will be sold to private investors in the next few years. We welcome foreign investors to participate.
WILL TRUMP CHANGE US-UKRAINE RELATIONS?
As the date of inauguration of the U.S. President-elect Donald Trump is approaching, there appear more and more various assumptions in the national mass media on perspectives of a further development of the U.S.-Ukraine relations. Opinions of both experts and politicians are often totally different: someone is full of unreasonable hopefulness, appealing to the fact, that the Republicans traditionally conducted more decisive and non-compromised foreign policy, compared to democrats; someone is on the contrary disposed to over-dramatize the situation, being afraid of the possibility of the next «reset» of the US-Russia relations, which can happen, in particular, due to sacrificing Ukraine’s interests as well, primarily with regard to correction of the U.S. position on annexation of the Crimean Peninsula and the Russian aggression in Donbas.
However, we need to keep in mind one and very important detail: regardless of Ukrainians’ tendency towards excessive personalization of politics, reducing it to interpersonal relations, in fact, the progress of modern political process is hardly defined by personalities, even if they are as powerful as the German Chancellor or the President of the USA.
Modern politics, especially in developed democracies, has not been so greatly personalized, rather institutionalized — power has been dispersed among many institutions and the process of political decisions’ making has been long restricted to a narrow circle of persons, regardless of how powerful they would be. Moreover, complexity and diversity of problems, in relation to which decisions have to be taken, leave a very narrow space for improvisation of «top officials», alternatively, experts, analysts, mathematical modeling, strategic forecasting and planning start taking a dominant lead increasingly.
All this leaves too little space for personal likes and dislikes, therefore, we should not overestimate possible consequences either of an awkward position of some part of Ukraine’s political elite, which was straightly oriented to Hillary Clinton, or Manafort’s scandal inspired largely at the instigation of some «new stars of Ukrainian politics», dependant on American grants.
It is beyond arguments, that all this can cast a shadow on interpersonal contacts and relations, but will unlikely determine state-to-state relations.
Moreover, we should keep in mind, that many appointments to the key state posts in the USA require not a simple majority of votes in Congress, but a qualified majority — two-thirds majority of votes. That was the reason why Barak Obama at his time could not fully «staff» his Administration, «based on his own preference». It is unlikely, that Donald Trump will manage to lobby through the representative authority all desired and suitable for him candidates.
Given this, we should not expect sweeping changes of the US policy, both on the international stage, and in general, as well as with regard to Ukraine, in particular.
At the same time, we need to realize, that under any circumstances Ukraine can bank on support from both the USA, and other states, but only to the extent our national interests will overlap with their national interests. And it is quite obvious, that if these interests clash, we shall have to correct them after all.
LET’S CONCENTRATE ON THE USA
Trump’s presidential course can be called «let’s concentrate on the USA». Therefore, his economic program represents a set of measures, aimed to protect domestic market, job creation, bringing production back from abroad. These ideas seem to be really logical with a view of overcoming the crisis. But today the economic reality not only in the USA, but far beyond its borders, is so complicated and unpredictable, that traditional solutions may not prove to be effective.
The main target of Trump’s economic program is American production sector and business. That’s why he promised them a «tax revolution». It means significant reduction of taxes for corporations from 39 % to 15 %, abatement of income tax and even exemption of hired employees from paying taxes. All these measures are aimed at middle class support.
Trump’s proposal is to reduce the number and amount of taxes without cutting of social expenses. And defense expenditures, being the main item of the American budget, are proposed to be increased. It will cause either budget deficit or the national debt increase. However, increasing the national debt is not critical for the USA, because the USA spends 1 % of GDP for its service. He also mentioned investing in infrastructure development, which is possible at the cost of new debt.
When it comes to increase of the share of American goods and import phase- out, primarily, of the Chinese one, it will cause opening production, job creation and increasing of salary level. But those goods will be more expensive, than currently imported ones. So the question remains on whether the consumption will grow, given that Americans got used to cheap and accessible goods.
Main items of Trump’s course are protectionist practices, re-industrialization, energy independence, «tax revolution» etc. All of them are aimed at the activation of American economy and protection of middle class interests.
Director of the Institute of Global Studies