Let us start with some hard numbers in order to have a more evidential basis for a discussion on whether the Ukrainian state has struck the right balance between its role as a modern regulator on the one hand, and service provider/business actor on the other.
More than 17,000 state-owned enterprises (SOEs) and municipal enterprises exist in Ukraine, according to the official statistics. More than 3,000 of these are central government-run Ukrainian SOEs. Compare this to only 21 SOE in Denmark, 29 in the Netherlands, 47 in Finland, 48 in Lithuania, 51 in France, 71 in Germany, 126 in Poland, as attested by the Organisation of Economic Cooperation and Development (OECD), the developed market economies think tank. Through its SOEs, the Ukrainian state is involved in all kinds of business, from alcohol production to hotels. Apart from this comparative disconnect, is there anything wrong with the very high number of SOEs in Ukraine?
To answer this question, let us have a look at another important number: almost Hr 800 billion ($28 billion) are locked in unpaid court debt in Ukraine, much of it pending for a decade or even more, according to the official statistics by the Ministry of Justice. This represents some 25 percent of the country’s annual gross domestic product. Only about 2.7% of the aforementioned Hr 800 billion is collected annually. In other words, the real annual contribution of Ukrainian courts is merely 2.7% in terms of the actual outcome of the judicial way of solving disputes. By reverse logic, 97.3% of salaries, pensions and other claims by legitimate Ukrainian owners and creditors who win in court have constantly remained unpaid. One might wonder who is responsible for most of that unpaid annual 97.3% total? You guessed it right, the bulk of that responsibility lies with Ukrainian SOEs.
Another interesting number: 9 cents on 1 euro invested is the amount that creditors can expect to get back in Ukraine in case of bankruptcy (including restructuring) proceedings. Compare this with almost 90 cents on 1 euro recovered in the same circumstances in Germany, which is the top European jurisdiction in this component in the World Bank Doing Business rankings. By reverse logic, any person contemplating a financial or business relationship in Ukraine should foresee the risk of 91% of losing everything by entering into a contract. It is clear that the exorbitant cost of credit by way of the very steep interest rates in Ukraine is based largely on the assessment of that risk by the financial system. It is moreover a major factor preventing foreign direct investment (FDI).
In this context, a reasonable observer might expect policies to promote more foreseeable and transparent relationships among the business players and the society at large by building sustainable financial and justice systems in general, responsible and well-run SOEs, and properly regulated bankruptcy system in particular? Instead, the evidence shows that the various Ukrainian governments since almost 2 decades have been involved in juridical-financial engineering called moratoria.
Our Project experts have counted at least 12 separate moratoria statutes adopted since 2002, with 4 of them added recently in the context of Covid-19. What does a moratorium mean, exactly? Some of these statutes protect certain business sectors while others protect against the collection of certain types of debt. The beneficiaries of almost all the aforementioned moratoria (except one) are SOEs. For instance, in order to pay the court-ordered debt, one cannot seize any SOE property – including its real property, equity, or technical equipment – except for what is left on this SOE’s current bank account. Luckily for SOEs, they are also exempted from appearing on a nation-wide Debtor Register, calling into question the very purpose of its existence – namely to warn prospective partners, suppliers, customers, creditors, and employees from dealing with an irresponsible business. If more transparency is good for private business, why not for SOEs?
Any money which is owed by somebody is also owed to someone. Time is money. And a party who “wins” in court, cannot “lose” by way of political opinion to discard the court decision. Judging from the policymaking and jurisprudential practice in Ukraine, it is unclear that this basic essence for the fabric of the rule of law and the market economy is fully understood. How can one “protect” an SOE or another debtor with a privilege such as a moratorium, without at the same time punishing the other party at the receiving end, who remains unpaid by the very operation of the same moratorium? While SOEs are primary and essential beneficiaries of moratoria, the reverse beneficiaries are mostly small and medium businesses (SMEs), and private Ukrainian citizens. Moreover, are moratoria offering any other sensible regulatory tool apart from prolonging – and eventually – losing time to dispose of the debtor assets to settle its obligations?
The regulatory situation has not improved with the start of the COVID-19 crisis and the emergency policy measures undertaken by Parliament since then, introducing new moratoria without establishing any clear sunset provisions. The expected impact of these policy measures will very likely be a significant increase in the duration of bankruptcy proceedings, and a decrease in effectiveness mostly because of the lost time and opportunity to settle earlier. As the reality shows, asset prices to pay for debt will in most cases be lower, not higher, come the end of the particular moratorium.
The best European practices show that, in the context of the COVID-19 pandemic, the debtor may expect some sort of temporary relief or even monetary assistance from the state, such as:
– direct employer payment schemes run by the government, ranging from 50% to 90% of the wages and the tax package for a particular workplace, lasting for months after the end of the lockdown (Austria, Czech Republic, Germany, Lithuania, Netherlands);
– postponing the payment of taxes and social contributions (Belgium, France, Portugal, Germany);
– postponing deadlines for repayment for bank loans (Germany), with no fines or interest (Lithuania);
– postponing the payment of rent to private landlords for COVID-19 affected businesses until June 30, 2020 (Germany), and State-provided compensation for subsidiZing rent (Lithuania);
– significant temporary or permanent reduction of VAT for some most affected businesses, such as restaurants and hotels (Czech Republic, Germany).
However, none of these measures extend to forgiving the debtor’s underlying obligations under the contract or a court decision.
All in all, the new regulatory changes by the Ukrainian policymakers show a certain conceptual misunderstanding of the role of the state during times of crisis, in contrast with the prevailing European practices in reaction to COVID-19. Instead of subsidizing business from its own state resources by way of monetary and fiscal policy decisions, company employee salary payment schemes and so on, the Ukrainian State is rather shifting its burden of helping the society to the private sector, effectively asking the creditors to pay for the consequences of COVID-19. The overriding moral hazard of this approach is obvious. Rather than showing the political willingness and the solidarity with private business – especially SMEs – the State is doing exactly the opposite, and paradoxically is effectively discriminating in favor of those who have done the worst in conducting business before the crisis, most notably the hundreds of SOEs protected by the moratoria.
Not imposing the obligation on the debtor to pay its court-ordered debt, or to go to court to seek bankruptcy protection where it cannot pay, creates a dangerous illusion of the debtor’s solvency, which is detrimental to all the other players in the business and financial activity chain, including the debtor company’s partners, suppliers, customers, creditors, and employees. The statutory moratoria have thus proven themselves as one more way of enabling a dishonest debtor to continue to perpetuate this illusion of solvency, instead of acknowledging that the debtor has limited resources, forcing it to cut down on its expenses, getting limited access to credit, and starting living by its means. Does anybody benefit from this illusion at the very end?
Besides, valid questions can be asked if any of the statutory moratoria are compliant with European Union law anti-trust and competition principles, or the state aid restrictions as laid down in the EU-Ukraine Association Agreement (Article 262). The recently-approved macro-financial assistance program includes some indicators, requesting Ukraine to get its act together with regard to the financial discipline of its SOEs – most notably, requiring opening the market of collection of small claims against SOEs to independent private enforcement officers. This is a very welcome first step towards greater accountability of SOEs.
Despite these early green shoots, the current regulatory environment in Ukraine necessitates a wider discussion on the questions which have not yet been systemically tackled since the country’s independence – namely, what should be the acceptable limits in protecting a state-run business in general, and whether a moratorium is a piece of modern regulatory engineering or rather legislative “alchemy” in particular?
Finally, even a more important question prompts to be asked – to what extent the Ukrainian private sector and individuals can tolerate the obvious appearances of discrimination by the state in not only playing an excessive role in business life by reason of the exorbitant number of SOEs, but also by making SOEs a privileged business player without the requisite level of respect for an equal and fair playing field for everybody?
It is to be hoped that the COVID-19 crisis and its consequences finally show the harsh reality of the economic and legal unsustainability of the statutory moratoria against enforcement and bankruptcy, setting the stage for a reasonable and gradual roadmap towards lifting all of them. We have no doubt that our project experts, other European and international partners, the Ukrainian business community and the society as a whole would be interested in helping in such an endeavor, without which it will be impossible to imagine either the genuine rule of law or a true market economy in Ukraine.
Arne Engels, Advocate, Bankruptcy Trustee (Germany); Katilin Popov, Private Enforcement Officer (Bulgaria); and Dovydas Vitkauskas, Team Leader, EU-funded project Pravo-Justice (Lithuania).
