Institutions are incompatible with manual management. Corporate governance is incompatible with a regulated economy. During the last two months, Ukraine has been rocked by two high-profile scandals involving the most successful and reformed institutions since the EuroMaidan Revolution ended President Viktor Yanukovych’s rule in 2014: Naftogaz and the National Bank of Ukraine.
In the first case, the government brazenly removed the supervisory board to replace Andriy Kobolyev, the head of Naftogaz, with Yuriy Vitrenko, and gain leverage over the state-owned enterprise. In the second case, we see the consequences of last year’s events, when the National Bank governor Yakiv Smolii resigned under political pressure, and Kyrylo Shevchenko was appointed in his place by the President’s Office. As a result, the National Bank has lost its independence, and an internal institutional crisis was accompanied by staff outflow and loud dismissals of members of the previous team.
This state of affairs in government agencies and enterprises has short-term and long-term consequences. In the short term, the already unstable trust of our international partners is undermined. Ukraine has not received a penny of financing from international creditors in a year, although it continues to be part of the current International Monetary Fund program. The most probable explanation for such a long pause in cooperation is the lost confidence in the Ukrainian government’s ability to continue reforms. As the pressure on anti-corruption infrastructure continues, the corporate governance of state-owned enterprises reform is rolling back and the independence of the National Bank has been undermined, foreign investors are losing optimism and are increasingly adamant about investing in our country. As a result, in 2020, the outflow of foreign direct investment reached more than $800 million.
As for the longer-term prospects, Ukraine is obviously returning to the Soviet-Mykola Azarov (prime minister under Yanukovych) style of economic management. In addition to the fading independence of the National Bank and the supervisory boards of state-owned companies, there are other signs of Soviet micro-management. For instance, state regulation of prices, increasing tax pressure on small and medium-sized businesses and giving unlimited rights to controlling institutions. The result is a strange cocktail of Soviet instruments and semi-reforms, which are accepted under external pressure.
The scandalous governmental draft law #5600 shows that Ukraine’s liberal development is under threat. According to the document adopted in the first reading, the tax administration is returning to the traditions of Azarov’s times when there was unrestricted corruption pressure on the business. The right to accrue and write off money from the accounts of entrepreneurs without the court’s decision is the dream of every corrupt official.
Obviously, the president and prime minister do not have any clear examples of managing the economy and the country, so they take the Soviet-Azarov style as a role model. However, it’s a path leading to poverty. As manual price management always leads to a shortage of the corresponding product, we will just go back to the times when the price of the sausage was low, but the sausage itself was not on store shelves. This is also the case with attempts to administratively regulate the prices of motor fuel, medicines, gas for the population, and electricity.
Exclusively market approach and competition can reduce the prices without losing quality in the long term. A great example is the internet service providers market. ISPs compete for the consumer in price and quality, which results in Ukraine having one of the best internet services. The same principle should be implemented in all socially sensitive markets.
The same applies to the management of state-owned enterprises. In 2020, the loss of the 15 largest state-owned enterprises amounted to Hr 72.4 billion or $2.6 billion. However, instead of continuing the reform of corporate governance in the public sector and making state-owned enterprises profitable, the reform is being actively curtailed. In such a scenario, state assets have no chance to break free from oligarchs, who are accustomed to perceive state-owned enterprises as their own honeypot.
In June, the 20-member Holos faction in parliament introduced a package of changes. One of them was the reform of corporate governance with the implementation of European best practices to finally put a line between politics and state-owned companies. Any company must bring profit to its shareholders. The main shareholder of state-owned enterprises is every Ukrainian. Therefore, state-owned enterprises must work to enrich all citizens, not just the oligarchs.
Kira Rudik is a Ukrainian politician and leader of the 20-member Holos party faction in parliament, to which she was elected in 2019. She is a former CEO of IT company Ring Ukraine. Rudik obtained her master’s degree in computer science at the National University of Kyiv-Mohyla Academy, a top academic university in Ukraine. She also attended the Executive Program for Women Leaders at Stanford Business School in 2018.
