Continuing coma or acknowledgement of default: Ukraine’s economy for a week

July 10. A Ukrainian delegation led by Vitaly Lisovenko, Special Envoy for State Debt Negotiation and ad hoc committee of creditors held negotiations for debt restructuring. 

Foreign debt restructuring is one of IMF’s recommendations for Ukraine to receive a second tranche of the loan. The decisions on a new loan for Ukraine and on the date of official announcement of default are of political nature, not of economic one. Anyway, Ukraine’s debt will not be increased – they call it “assistance” – within the coming days. They will keep Ukraine in coma, at best, or announce a default, at worst. 

The next round of Ukraine’s negotiations with creditors is scheduled for July 15 in Washington with participation of Natalie Jaresko, the finance minister of Ukraine, the author of such gems as “If, God forbid, there is a default, what will it mean? Frankly speaking, it will have no impact on the Ukrainian people.”

July 10. Arseniy Yatsenyuk’s government continues to tell emollient tales for the population. The Cabinet has developed another option of the economic reform for Ukraine – a strategic “Way to Prosperity.”

“Ways to Prosperity” – “economic liberties based on the principles of expansion of the rights and opportunities of privates and businesses, competition and no discrimination.” Authors of the document are trying to adduce examples of the countries that refused to restrict economic liberties – Singapore, Hong Kong, Ireland – and can now boast of the highest level of economic development.  The principles the Ministry of Economic Development suggests as orienteers (supremacy of the law, property protection, competition, no corruption, and efficient state machine) will help, as the authors say, transform Ukraine into an “open, business-friendly economy able to create jobs and generate wealth.” Those behind the “Way to Prosperity” promise a doubled GDP per capita in 15 years (now this indicator is the lowest in Europe - $3,062), as well as an annual growth of investment flows by up to $8 billion within the coming 5-10 years (now it is $0.3 billion). The country’s ratings must be increased, with the taxation field and regulatory framework to become the best ones in Central and Eastern Europe.

The ministry outlines the following sectors of the most important structural reforms: judiciary, law-enforcement, taxation system, state administration, privatization, and liberalization with deregulation. “The measures must be quick, radical, and decisive, otherwise they will not bring the anticipated results,” the document says.

To be clear, taking aside the promises of what will happen in 15 years (in the case of Ukraine, the incumbent ministers may promise everything for the coming 15 years, though no one of them may be in Ukraine in a couple of years), one can say for sure that Ukraine is facing the toughest “shocking therapy.” No country began to live better after application of such instruments. Quite the contrary, the life in those countries has become even worse, as only 1.5%-3% of cronies gained from the situation.  Usually, the country undergoing “shocking therapy” loses its high-tech sectors, amid privatization of the industrial and agricultural companies, sale of lands, and establishment of control over the economy by global corporations.

It was tested by the countries of Latin America, Asia, and Africa, since the second half of the 20th century. Fortunately, such policy was not fully implemented in Russia in 90s, but its consequences are still felt. Now, it is time for Ukraine to fall into the same trap.

July 10. A foreigner is appointed as a new head of Ukrnafta Company, but it is not Yevgeny Chichvarkin, the ex-owner of Euroset, Minister of Economic Development and Trade Aivaras Abromavičius said. The plot thickens – who will head Ukraine’s biggest oil and gas recovery company?

However, it wasn’t quite the end of it. Yatsenyuk ordered negotiations with private shareholders for establishment of a vertically integrated national company on the basis of Ukrnafta, Ukrtransnafta, and Ukrtatnafta.  The point is that Kiev seeks to restore the government control over Ukrnafta, and, actually, to reduce tycoon Igor Kolomoisky’s influence in the sector.   The fight between the oligarchs continues. A Ukrainian proverb says: kings go mad, and the people suffer for it.

July 9.  Big sale of Ukraine’s remaining state property will start with the Odessa near-port plant.

Head of the State Property Fund Igor Bilous told a news conference the desirable price of the Odessa near port plant is $500 million - Minister Aivaras Abromavičius’s mentioned the same amount earlier. The enterprise, which was hard to make a bankrupt, is now undergoing “pre-sale procedures” and being driven to bankruptcy, so that its cost could be reduced for new private “investors.”  Under the pretense of “searching an efficient owner” and get proceeds from privatization, Ukraine “slaughters another speckled hen that lays golden eggs.”

Practice shows that after privatization once efficient state enterprises tangibly reduce payments to the state budget, cut employment benefits, and very rarely raise investments.  Such enterprises turn into a source of income for their new owners, who try to get maximum profits without any long-term plans. Earlier, Yatsenyuk said Ukraine planned to privatize about 300 enterprises that are on the list of the companies not subject to privatization. Ukraine’s Government seeks to get 17 billion hryvnias proceeds from the privatization. Yet, it is about as much as a 5-day volume of Ukraine’s import for 2014!

July 9.  Ministry of Economic Development and Trade of Ukraine made a two-minute clip “Ukraine is open for you” that tells about the potential and successes of the native economy.  

The clip is available on YouTube. It looks to mislead foreign investors by telling about Ukraine’s achievements and resources it has never had.  A very nice clip that would make the ordinary citizens of Ukraine feel proud of their motherland, if it did not resemble an obituary…

July 8. Ukraine’s National Bank permitted freelancers to work with foreign customers without contracts.

Ukraine’s National Bank and Ministry of Economic Development and Trade have facilitated the procedure of online cooperation of Ukrainian freelancers and foreign customers. The regulator posted the information on it on Facebook. Neither it is required that documents are translated into Ukrainian, except for the cases when it is a true necessity. However, it is not mentioned which cases are the true necessity and which are not.

The document specifies the following freelancer specialists:

1. Freelance exchanges (programmers, designers, copywriters, translators)

2. Direct sales (programmers, designers, copywriters, translators)

3. App stores (programmers), services\ stock sites (photographers, illustrators, operators)

4. Trading platforms (masters, sales agents)

5. Advertising agents (owners of website, bloggers) etc.

A true “peremoga” (victory – translated from Ukrainian). Ukrainians are facing more and more problems with visas to work abroad, while inside the country it is very hard to find a job. Therefore, freelancing will become more and more popular in Ukraine.

July 7. Around 1.5-year after the armed coup d’etat, Kiev tries to  maintain the free trade area within the CIS.

Trade representative of Ukraine Natalia Nikolskaya said: “By imposing quantitative restrictions such as tariff quotas unilaterally, Russia will violate the agreement on the CIS Free Trade Area, which will actually cancel the free trade regime between Ukraine and the Russian Federation.”

Ukraine that constantly speaks of quitting the CIS, damages the economic, political, cultural and other ties with Russia, makes aggression allegations against Russia has now remembered about the CIS free trade area. Meantime, Ukraine’s import from Russia fell 28% in 2014 as compared to 2013 and 1.8-fold as compared to 2011. Export to Russia fell 32% versus 2013, with export of foodstuffs having halved and that of metals fell by 1/3. The commodity turnover between Ukraine and Russia fell 64% for the first four months of 2015.  No growth of the commodity turnover is anticipated. Russia tries to safeguard itself against dumping by European producers that transit goods to the Russian market via Ukraine after Kiev and Brussels signed free trade agreement. Certain quotas may be imposed only if the volumes of export exceed the maximum volumes of export to Russia of the last years.

In such case, EU is behind Natalia Nikolskaya’s words. The European Union hopes to use Ukraine to settle its own problems that have emerged after Russia imposed retaliatory sanctions on the EU.

Alexander Dudchak, economist, specially for EADaily