Aslund thinks Ukraine’s government credit deserves more credit for the reforms they’ve undertaken. That was his generally optimistic message at a meeting of U.S.-Ukraine Business Council members on March 23.
“My basic view is that Ukraine has done a lot and certain things have not been done at all,” Aslund said. “Ukrainian is doing some reforms very well and not doing reform in other areas.”
Big energy savings
One big area where credit is due is the energy sector. The move to market pricing in oil and gas has deprived many intermediaries of fortunes made during the old days of non-transparency in trading.
“The prices are close to where they should be,” Aslund said. “This means that all energy subsidies are abolished. they should disappear this year. What you can say is that government deprived three major people of lot of money. They are Dmytro Firtash, Sergei Kurchenko and Igor Kolomoisky. I don’t think our hearts bleed too much for them.”
Firtash is the gas tycoon living in Austria and being sought for extradition to the United States on bribery charges that he denies. Firtash, a former owner of the now-insolvent Nadra Bank, got rich as a co-owner with Russia’s state Gazprom of RosUkrEnergo.
The RosUkrEnergo era spanned three presidencies — those of Leonid Kuchma, Viktor Yushchenko and Viktor Yanukovych — in which the nation did not meter gas use and the state-owned Naftogaz company suffered deficits of up to 7 percent of gross domestic product. Critics blame murky intermediaries such as Firtash for making billions at the expense of Ukrainian taxpayers, while he has always defended himself as an honest broker in the industry.
Kurchenko is a fugitive who was the alleged front man of Yanukovych. He became spectacularly rich through a number of state-sanctioned insider deals in the energy sector.
Kolomoisky is a billionaire oligarch known for making spectacular profits through control of pricing and production of the state oil producer Ukrnafta.
Don’t buy from Russia
Ukraine should also stop buying natural gas from Russia, Aslund said, because of the Kremlin’s use of energy prices through Gazprom as a tool of political pressure.
“Gazprom should be treated as a criminal organization,” Aslund said, citing investigations by slain Russian opposition politician Boris Nemtsov that the Kremlin stole as much as $25 billion a year from the company through transfer pricing and corrupt procuring during periods of high profitability.
“The worst managed big company in the world is Gazprom,” Aslund said. “It has wasted its market in Ukraine. It has wasted in ts market in Europe in general.”
The proof is in the numbers. It had a market capitalization of $369 billion in 2008 that has now dropped to $40 billion.
“You can hardly do worse than Gazprom,” he said. “The best you can do is not to deal with Gazprom.”
It shifts its price depending on the whims of the Kremlin and the political loyalty of the customer and “cannot be taken seriously as a commercial partner,” he said. “The market does not consider Gazprom a serious company.”
If Ukraine cuts its gas consumption from last year’s 36 billion cubic meters to 29 bcm, the nation only has to import 9 bcm because it produces 19 bcm on its own.
Ukraine is now able to buy natural gas cheaper and more reliably from Europe than Russia and may want to consider the examples of Baltic nations, which are investing heavily in liquified natural gas to avoid buying from Gazprom.
“This year, with normal gas savings, Ukraine can stop buying gas from Russia altogether,” Aslund said. “This is a national security aim of high priority.”
He said to “look upon gas sales from Russia as a means of warfare – the intention being to corrupt certain members of Ukrainian elite by the Ukrainian state. We have seen enough of this. This should not be allowed to continue.”
Other areas of progress:
Floating exchange rate
A depreciating currency hurts consumers, workers and many others. Currency controls from the National Bank of Ukraine are unpopular with businesses who cannot get more of their profits in hard currency.
But a floating exchange rate is essential, he said, to keeping the current account in balance and equilibrium to the economy. A market-valued currency helps the balance of trade, so that Ukraine does not need to spend hard-currency reserves.
“Ukraine is not losing reserves,” Aslund said. “Reserves increased from a miserable level of $5 billion a year ago to $13.5 billion this year on March 1. It should be $17 billion before you can start liberalizing currency controls.”
Other fiscal achievements
Aslund cited the importance of continued adherence to International Monetary Fund conditions to remain in the $17.7 billion lending program, of which only $6.7 has been disbursed so far and another $1.7 billion awaits the formation of a new, reform-committed government.
“Getting a decent government and doing something about corruption, then Ukraine would receive about $4 billion in credits that is lying on the table,” he said.
He noted that Ukraine has delivered a largely balanced budget and debt restructuring will save the nation $15 billion in debt-service payments over the next four years. He also praised political leaders for cutting the share of public spending in the official national economy.
“The public expenditures were outrageously high in 2014 at 53 percent at GDP. They have gone down to 44 percent of GDP,” he said. “The budget deficit went from 10 percent of GDP to 2.1 percent of GDP last year. This is a very major achievement.”
Bank clean-up under way
He noted that 68 out of 180 banks have been closed and presumes another 40-50 more banks will be closed with little to no detriment to the Ukrainian economy. They are “mostly small banks with higher share of related lending or accused of money laundering.”
But all is not well. Besides the fact that little lending is taking place, Ukraine’s poor judicial system makes it hard for bankers.
“How do you collect on debt when you can’t go to court,” Aslund said. “The biggest problem from banks is to collect from big debtors because they are too politically important.”
Transparency, deregulation
He called the step towards competitive and transparent e-procurement, through the ProZorro program, as “the big breakthrough that we are now seeing coming. It should be able to save 2 percent of GDP in more efficient purchasing if it is properly implemented.” He also cited progress on deregulation, with thousands of Soviet-era rules cancelled but 25,000 remaining. “Much more needs to be done,” he said.
Tax reform
The big step forward is the reduction in the payroll tax from 45 percent to 22 percent which, over time, should persuade employers and employees to start declaring relationships and incomes officially.
Recovery starts now
There’s a consensus that Ukraine’s economy will grow 1-2 percent this year. Aslund attributed the 17 percent GDP decline in two years mainly to Russia’s war in the eastern Donbas and also the Kremlin-imposed trade restrictions blocking Ukrainian exports, as well as the lack of foreign direct investment into Ukraine last year. “The Ukrainian standard of living has been brought down by the war in the east,” he said.
Fire everyone!
The big “but” in Aslund’s remarks has been the failure of Ukraine to remake its corrupt, politically subservient and ineffective judicial system.
“Nobody has been prosecuted from the old regime or from the new regime,” Aslund said. “I am strongly in favor of lustration as very many in Ukraine. Sack these 18,000 prosecutors and these 10,000 judges. Hire new people. Open it up. There are lots of qualified lawyers in Ukraine of all ages. At the same time, introduce proper working conditions and salaries.”
Privatize now!
Ukraine still has 1,833 state-owned enterprises compared to 50 in France. Most of Ukraine’s state firms are being milked for private financial gain by political “gray cardinals’ who appoint insiders to run them, or they are simply being run inefficiently and serve as a drag on the state apparatus. All but 100 of the best enterprises, mainly in electricity and transportation, should be sold in competitive auctions.
“The first aim is to stop corruption. The second aim is stimulate the economy. The third to bring revenue for the state,” Aslund said.
He said he’s given up on the possibility that parliament will legalize the sale of agricultural land because of strong public opposition to this privatization, but he said Agriculture Ministry Oleksiy Pavlenko is helping to encourage private investment by extending the length of land leases from 5 to 10 years.
There were plenty of “ifs” thrown in, especially during the question-and-answer period, but overall Aslund stuck to his forecast:
“I am quite optimistic about the Ukrainian economy,” Aslund said. “We should focus on what has been done and put the emphasis on judicial reform and the reform of the prosecution service is vital.”
Anders Aslund’s assessment of Ukraine’s achievements:
1. Floating exchange rate: Current account in balance
2. Energy reform: Gas consumption -20%
3. Major fiscal adjustment: Budget balanced.
4. 68 of 180 banks closed – increased transparency: Owners revealed
5. Substantial deregulation
6. E-procurement
7. IMF financing & debt restructuring
Financial stability
IMF program, March 11, 2015, $6.7 billion disbursed
Fiscal Adjustment: Reduced public expenditures from 53% of GDP to 44% of GDP
Budget deficit from 10% of GDP to 2% of GDP
Debt restructuring postponed $15 billion in debt service
Major tax reform cut payroll tax from 45% to 22%
Energy reform
Household prices raised 4 times, closer to cost recovery
International energy prices fell by half
Almost all energy subsidies eliminated
Provide social cash compensation: Done
Sharply reduced gas purchases from Russia to 6.1 billion cubic meters
Successful monetary policy
Floating exchange rate: Current account balanced
Got large foreign financing to replenish reserve, $5 billion in March to $13.5 billion March 2015
68 of 180 banks closed
Increased transparency: Owners revealed
Major deregulation
Increased transparency: All kinds of property registries revealing real owners
E-procurement: ProZorro should save 2% of GDP
Substantial deregulation: Cut 15,000 GOSTY, though 25,000 remain
Abolished a dozen inspection agencies, but most remain
7 key reforms for 2016
1. Judicial Reform
2. Complete Energy Reform
3. Privatization: 1,833 state enterprises
4. Civil Service Reform
5. Reform Budget Process
6. More Deregulation
7. School Reform
Kyiv Post chief editor Brian Bonner can be reached at [email protected]
