Ukraine meets the second anniversary of Volodymyr Zelensky’s presidency in a crisis. There is no reason to believe that the latest staffing changes in the government will significantly turn the situation around. Unfortunately, instead of a military threat from Russia, we risk getting the prospect of the Kremlin establishing economic control over our country.
The fall in Ukraine’s GDP by 4% in 2020 is a bad reason for the pride of our government. Let this figure not mislead anyone – a relatively small decline occurred only because the Ukrainian economy simply has nowhere to fall. Nevertheless, the decline in GDP continues: in the first quarter of 2021 – “minus” 2% more. If we compare the economy with the human body, there was a loss of blood – the outflow of foreign direct investment amounted to $868 million.
This is an all-time high for 20 years, for almost the entire time of systematic investment of foreign investors in the domestic economy. This year, the trend has intensified – in the first quarter, the outflow of foreign direct investment amounted to $301 million. Talks about investment nannies and Zelensky’s video address have little effect on foreign investors. They do not hide their irritation with the high level of corruption and the lack of real judicial reform. We should not react to pathetic statements about “unique Ukrainian opportunities” – we have been hearing about them for too long. Genuinely, the economy needs resuscitation to develop business activity, but the reality is different.
The authorities have announced changes to the Tax Code, that provide for a significant increase in taxes for manufacturers. Yes, they will not affect small and medium-sized businesses, but they will hit those companies that form the bulk of the gross domestic product.
The growth of discipline within the mono-majority suggests that the changes will be approved and they will start working literally on July 1, despite the lack of discussions with trade unions and expertise on compliance with the law. Much can be done under the slogan of political expediency and attack on the oligarchs.
This means that strategic investors, of which there are already few in Ukraine, receive direct signals about the possibility to change the rules right in the middle of the game (take it as – to raise taxes), to ignore the opinion of those who invest in Ukraine’s economy. Considering the procedure of changing the management of Naftogaz of Ukraine, the picture becomes truly sad. The episode with the attempt to introduce regulation of gasoline prices, by the way, shows that the government does not expect to continue funding from the IMF soon.
Ukraine’s position is rapidly weakening, and the lack of new investment will exacerbate social problems. We are already an outsider in terms of economic development, discrimination against investors will make the fight against this status hopeless. The state is losing resources for economic growth and the well-being of the population, and the borders closed because of the COVID-19 pandemic will not stop the growth of labor migration. In this context, the declared de-oligarchization (if the relevant law is adopted) can lead to the destruction of the investment climate per se.
The only possible beneficiary of such developments is… No, not the Ukrainian oligarchs, but the Kremlin, which has lost neither the desire to establish control over Ukraine nor the financial resources. And besides, there are plenty of fictitious legal entities ready to play the role of strategic investors in Ukraine.
Yevhen Mahda is the director of the Institute of World Policy in Kyiv.
