Ukraine and economy: why everything is deeper in the red

The economic results of last winter turned out to be moderately unsatisfying for the country. The continued downturn in industry, the failure to meet budget indicators and the growth of external public debt due to new loans – all this is against the backdrop of inability of the authorities to ensure the proper functioning of the state mechanism and eliminate the "shadow" schemes. But Prime Minister Oleksiy Honcharuk was fired not for that…

Failed start

If we consider the start of national economy in 2020 from the point of view of "the beginning of the year sets the tone of its run", then the January results drive into pessimism.

It will just suffice to mention the failure to fulfill the plan of revenues to the state budget: 24.5%, or UAH 13.8 billion, were missed. The official explanation of this fact by the Ministry of Finance looks frankly implausible.

Allegedly, it is all the fault of the too "strong" hryvnia: the rate of 27 UAH/$ is laid down in the state budget, but in fact, it was 24.1 UAH/$.

The head of the Ministry of Economic Trade (Tymofiy Mylovanov at that point in time) promised to adjust macroeconomic indicators for the state budget – but did nothing. What for?

Indeed, the amount of excise taxes income, denominated (for some reason) in euros, and not in the hryvnia, the national currency of Ukraine, depends on the exchange rate.

The volume of value-added tax (VAT) payments, which are transferred by Naftogaz of Ukraine, the main donor to the state budget, when importing gas, also depends on the rate.

But the real rate was 11% lower than the forecasted, and the shortfall in the state budget was almost 25%. That is, it is far from only the exchange rate miscalculations of the Ministry of Economic and Trade.

Meanwhile, the government was filled the resulting "hole" in the old proven way: borrowed money on the side.

To this end, the Ministry of Finance of Ukraine issued external government bonds worth €1.25 billion.

This operation was presented to the media as an achievement: they managed to borrow at just 4.375% per annum, the lowest interest rate for the years of independence. But!... Although in general it is a praisable quality - to seek positive in everything, in the case of state finances, such a presentation looks like an attempt to manipulate public opinion.

The Ministry of Finance's statistics, published at the end of January, according to which the public debt for 2019 increased by $6.05 billion, is also not a subject of rejoicing.

Meanwhile, one can guess the true nuances of the budget backstage that took place in January from individual fragments.

The amount of VAT refunds this month was much more than the average value for the previous year: UAH 18 billion instead of UAH 12.7 billion.

The statement of Prime Minister Oleksiy Honcharuk on his intention to root out the corruption schemes related to the compensation of fictitious VAT should be considered in this context.

However, it sounded only a month later, on February 27. But in such cases, it is always better later than never.

"Today the government stops the tax fraud and tax evasion with VAT. We started the reboot of the SFS the day before yesterday, Centrenergo – yesterday, today we stop the deals with VAT. The government eliminates all the "shadow schemes", in particular, unfair tenders or tax schemes", - O. Honcharuk reported on social networks.

According to him, the State Tax Service has launched an updated risk monitoring system when registering VAT invoices for this purpose.

In particular, new criteria that indicate the fictitious nature of operations have been added - on the basis of which the automated system refuses to accept applications for VAT refunds.

It would seem that the question has been settled – but there is one problem. Mention of PJSC Centrenergo (CE). State-owned company that manages the Trypilska, Zmiivska and Vuhlehirska power stations.

It is believed that during the presidency of Petro Poroshenko, CE worked in the interests of his business partner Ihor Kononenko. After the change of power in the country, owner of the Privat group Ihor Kolomoyskyi became a new informal beneficiary.

So, the Cabinet of Ministers appointed a new acting General Director of CE on February 26. However, some armed people prevented the new leader from getting into the CE office and getting to work. on February 28, some armed people prevented the new leader from getting into the CE office and starting his work.

According to media reports, these were I. Kolomoyskyi's security officers. Then, on March 3, the Kyiv District Administrative Court banned the Cabinet of Ministers from changing the company's management on the suit of the CE supervisory board.

O.Honcharuk was dismissed already on March 4. By strange coincidence, it was on that day that the order on the appointment of a new head of the CE was issued (i.e. entered into force).

It follows that the reason for dismissal of the head of government was his attempt to remove some "nice guy" from the public trough. And not the failed economic results of the country.

Which, it just happened, the country's top leadership is not interested in whatsoever.

In this case, an attempt to stop the billion embezzlements from the state budget through the fictitious VAT refunds will end with the same result as an attempt to return CE to the state's effective control.

Then the Ministry of Finance will again have to borrow the missing billions on the side (which will have to be returned with interest) – and convince the taxpayers that the next "victory" has been achieved.

While sharing a "cow"…

Meanwhile, the revenue plan was underfulfilled in February again – now "only" 6.3%, or UAH 4.182 billion.

Already at the end of February, it became known about the January drop in industrial production by 5.1% compared with January 2019.

The Ministry of Economy and Trade explained the deterioration in industry over the course of 7 months in a row without much imagination. They say that the hryvnia appreciation, the fall in world steel prices and the new sanctions imposed by the Russian Federation against Ukraine are to blame.

Although in fact, metallurgy is only one of the industries. And not all the industry is export-oriented – that is, it depends on the exchange rate.

And finally, why Russian sanctions continue to hit Ukrainian industry 6 years after the annexation of Crimea and the outbreak of war in the Donbass? –The Ministry of Economic and Trade chose not to delve into this topic too.

But O.Honcharuk and his Cabinet of Ministers should not be blamed for everything - although now the former prime minister admitted in an inner circle that he is "a complete layman in economics". After all, earlier, the prime minister's chair was held by people with both candidate's and doctoral degrees, but it cannot be said that it was somehow different with them.

The authorities just had at their disposal the economic base from the "criminal Soviet Union" – and now it has almost been "eaten up".

Therefore, if the Nobel Prize winner in economics would have been appointed Prime Minister of Ukraine instead of O.Honcharuk, the result would be, alas, the same.

This means that there is no sense to sadden that the former top manager of Rinat Akhmetova has now become the new head of the government.

Although, of course, Denys Shmyhal's speech in the Verkhovna Rada before voting for his appointment reinforces pessimism regarding further economic policy.

So, as a first step to save the industry, the new prime minister was going to "get answers from industrialists, entrepreneurs, small and medium-sized businesses what they need - and this is about 100 steps that the government and the parliament need to take to make business feel at home, calmly doing its job".

But if a person needs to conduct a public opinion poll in order to find out what needs to be done, in which direction to move, this means only one – he himself has no idea and understanding of how to run the Ukrainian economy in order to prevent it from complete "drowning". Put simply put, we have another "layman".

The mention of certain "100 steps" is also alarming. Why not 200, 300 or 1000?

Do D.Shmyhal and his government have so much time for reforms?

Does the state have the necessary margin of safety to withstand the next batch of simulated hustle? And isn't it easier to take 3-5 steps instead of 100, but the most important and determining ones?

Nevertheless, the new prime minister designated one such vital thing. He called "work in the foreign markets in order to develop the export potential" as a second step.

"Today, Ukraine is almost the only country in the world that does not engage in lobbying of our industrialists and farmers in international markets - they are looking for sales themselves", - D.Shmyhal explained.

Perhaps, this is the only thing with which we should immediately and surely agree. Indeed, shortly before the resignation, on February 17, head of the Ministry of Economy and Trade T.Milovanov presented the program "Economic Strategy: Growth via Investments".

The raw material structure of the Ukrainian economy and its exports is indicated as a key problem there.

This was also said by previous Prime Minister Volodymyr Groysman. But! Neither he nor T.Milovanov mentioned the reasons.

The main one is the lack of an effective foreign economic policy on the part of the Cabinet of Ministers and the office of the president.

Indeed, the deterioration of trade conditions with the Russian Federation began long before 2014, and after the well-known events in the Crimea and the Donbass, it only intensified.

The second major trading partner of Ukraine is the European Union. Only the lazy would not speak about the disadvantage of trade agreement with the EU (which, just so you know, was developed in 2011 by the then First Deputy Prime Minister Andriy Klyuyev) over the past years.

But! Over the past 6 years after signing the unfavorable trade agreement with the EU, three prime ministers and two presidents of Ukraine have done absolutely nothing to revise it.

Meanwhile, the free trade agreement with the EU just stimulates the raw material structure of Ukrainian exports – therefore, the economy as a whole.

After all, if Ukrainian producers can import duty-free only steel slabs into the EU, but finished steel pipes, profiles and sheets are subject to duties in accordance with the agreement – this means only one – that Ukrainian metallurgy does not work for the EU market, but ensures the work of European factories that produce finished products with high added value.

The same for all industries. It is enough to recall, for example, with what persistence high-ranking European officials sought from official Kyiv to lift the ban on the export of unprocessed round timber. They appealed to the fact that such a ban is contrary to the trade agreement between Ukraine and the EU.

Meanwhile, round timber is a raw material for the furniture and paper industries.

But Ukrainian manufacturers can export neither finished furniture, nor even plywood and chipboard (semi-finished products) to the EU either because of duties or non-tariff barriers (certification, accreditation and licensing requirements, etc.).

How and who will be able to stimulate the growth of industrial production in Ukraine in this situation?

But instead of upholding state foreign economic interests, presidents, prime ministers and relevant ministers declare the need to raise the country in the international ease of doing business ranking, which is annually compiled by the World Bank.

There is nothing left then, but to try to brighten up the unsightly picture by means of "cosmetics and makeup" in the form of manipulations with numbers.

So, on February 27, the State Statistics Service announced the adjustment of industrial production indices for previous periods.

Due to the fact that 2016 is now taken as the base year, industrial production in 2019 did not decrease by 1.8%, as previously reported, but only by 0.5%.

Accordingly, in 2018, industrial production grew by 3%, and not by 1.6%, in 2017 - by 1.1%, and not by 0.4%, in 2016 - by 4%, and not by 2.8%. The decline in 2015 was 12.3%, and not 13%.

But could this convince at least anyone in the country that "things can't be all that bad"?

Vitaliy Krymov, OstroV