Ihor YUSHKO: Democracy means the targeted use of public funds
It is always interesting to hear a professional financier’s views on political and economic life, especially if this financier used to be President of the First Ukrainian International Investment Bank, Deputy Chairman of the Finance and Banking Committee, authorized representative of the Regions of Ukraine group of deputies in the previous parliament, and Finance Minister in the Kinakh cabinet. He knew perfectly well what was going on in high offices and the corridors of power. At present, Ihor Yushko is a member of the National Bank of Ukraine board and an aide to the president of Ukraine. Ever since stepping down as finance minister, his remarks on budget tenders, foreign loans, and tax reform have become even more outspoken. Mr. Yushko’s business, administrative, and political experience shows that he is on the Ukrainian political substitution bench at least.
As a man that started the budgetary process last year, would you let us in on what caused that budget scandal at the Verkhovna Rada? A breach of the rules? Whose political or financial interests were hurt?
Yushko: I’m not sure about anyone’s interests, but rules were broken; we’d been headed there since last summer, starting with that budget resolution when we tried to impose on the cabinet recommendations as Verkhovna Rada instructions. After all, the Budget Code allows two kinds of parliamentary views on the budget: recommendations (the government must take them into account or reject them and explain why when working on the budget bill) and instructions (these are compulsory). The budget committee pushed through a great many recommendations (not always sufficiently justified, as far as I’m concerned) as instructions.
Then, as we all remember, there were procedural transgressions in the second reading of the budget bill, so the members voted on the bill prepared by the parliamentary committee, not the one submitted by the cabinet. By the way, those saying such transgressions weren’t all that important because they related to the rules are very wrong. In actuality, those breaches addressed the Budget Code. It is meant to formalize the procedures to pass a bill and implement it. These procedures, in turn, shape the key functions and, accordingly, the alignment of forces and interests within the executive that have to carry out a realistic or unrealistic budget, on the one hand, and the legislature striving (quite naturally) to raise the budget plank.
If we also rise above the notion of procedures, suppose we answer the following question. Are we prepared to respect the law regardless of our own position? You see, that’s the answer to your question.
The budget turned out to be not too very well balanced, the authors “forgot” to provide for appropriations to raise the minimum wage. How do you think they will cope with this problem?
Yushko: The budget turned out balanced in principle, based on the bill originally submitted by the Finance Ministry, at least in its general parameters. The changes in its indices are generally insignificant — to give or take 200-300 million hryvnias in revenues doesn’t change anything in terms of the budget’s ideology and policy.
As for the minimum wage, it wasn’t adopted within the context of the budgetary process. The vote on it after passing the budget bill looked to me more politically than economically motivated. It’s hard to say how the government will cope with the problem. Obviously, there aren’t many options. They can’t sacrifice a balanced budget or refuse to increase wages, neither would add to their popularity. So they’ll probably have to revise some of the budget items and this, of course, is a very sensitive and complicated matter.
We’ve heard about tax reform for the past eight years. Does this show a lack of political will?
Yushko: Political will emerges when it’s in social demand. It would be naive to deny that it is in social demand now. The question is whether we have enough experts and whether our political elite is united enough to carry out this reform. Experience shows that up to now we have lacked such unity and professionalism.
Wouldn’t it be naive to expect that social demand from Ukraine’s man in the street who’s struggling just to survive — or a sense of responsibility from our bureaucracy? Isn’t this all just a vicious circle?
Yushko: I think that Ukraine will break out of this circle. Take an example known by few, I should think. Not a single bill on banking was passed in the first eight years of Ukrainian independence. We had inflation, trust partnerships, etc., and still there was social demand. How long could people continue to lose money? So when did we hear we wanted normal regulation of the banking sector? They passed the bill on the National Bank of Ukraine only in 1999, a revised law On Banks and Banking, and so on. The realities and relationships have changed, a new generation has grown up, and there’s nothing strange about our failing to adopt the Tax Code in twelve years.
It would be strange not to have politicians interested in setting up a banking system or having a stable hryvnia. Could your example also apply to the tax reform? Isn’t twelve years long enough to call into question the absence of experts to carry out this reform?
Yushko: I’m not saying that it’s good not to have a tax code after all those years. I’m saying that it’s not strange. Not so long ago they debated how to adopt a tax code: all at once by political will or step by step. If all at once, the document’s quality will be automatically questionable. As an expert, I don’t believe that such a code would embrace the whole range of tax nuances, for the simple reason that no one can understand all the existing tax standards, determine what we need and what we should do without, and analyze the consequences. Theoretically, a tax code could be adopted just like that, but I have a feeling that we would have a lot of problems trying to carry it out.
There’s another option which I consider more professional and complicated. We know that the Russians are carrying out their tax reform step by step, and are moving forward methodically. In this case the quality of laws must be better, but there is also a risk of slowing down the reform at some stage.
In Ukraine they tend to strengthen the administration of taxation. When will our state provide adequate conditions for doing business?
Yushko: A cabinet member said recently that the tax code would be adopted by summer and that the next year’s budget would rely on the new taxation base. Let’s hope so. However, I can’t fathom the logic of the parliament voting for a 5% income tax cut without broaching the subject of tax refunds. If this approach persists Ukraine will undergo a tax reform that will be cosmetic at best, with the budget losing some 1.5 billion hryvnias precisely because of that 5% income tax reduction.
Talking of tax system changes, the timeframe looks pessimistic. A lifetime. It takes a professional to understand that changes in the tax structure of any country can never stop.
There is a lot of talk about corruption in Ukraine, often in an abstract manner. Did you receive any offers as Finance Minister?
Yushko: You know, there must be something wrong with the way I look. Never in my life, wherever I’ve worked, have I received a single such proposal. Believe it or not, I’ve never given a single bribe (although I know people who do just that and their money is willingly accepted) and never been offered one. Even when I worked at the bank. No one ever suggested an off-the-record rebate for a loan...
Did anyone ask for a loan by phone?
Yushko: Various things happened. That’s part of the job, but we always made conservative decisions.
By the way, how do you feel about the Bank Ukrayina bankruptcy? Can one really trust Ukrainian banks?
Yushko: Strange as it may seem, what happened to that bank is bound eventually to enhance people’s confidence in the Ukrainian banking system. You see, the individual depositors were all returned their money. As for business and its relations with the state, that’s a different story, of course. Yet all individual claims were met in that case. It shows that the laws on banks and guaranteed individual deposit are effective. This factor shouldn’t be underestimated. Banks go bankrupt all over the world. In other words, one needs to trust the banking system.
Do you think that the money supply currently getting far ahead of GDP growth threatens another inflationary spiral in Ukraine? The more so that we obviously have problems with the public debt, and the economy retreating further into the shadows makes it impossible to assess real money supply needs.
Yushko: I agree with the last statement, but you’ve just asked a very complex question that can’t be answered in simple terms. Here one must bear in mind a great many supplementary factors, like, for example, the lowering dollar ratio of money currently in possession of the population (as evidenced by increasing bank deposits in the national currency). I might as well tell you that my own bank deposits are 90% in hryvnias. Another important factor shows positive changes in the structure of consumption. While in the previous 3-4 years the so-called consumer’s basket consisted mainly of food, now the emphasis is on household appliances and suchlike. This, rises in the minimum wage, and people’s increasing buying power are positive indicators. Naturally, it’s just the beginning, but few if any can deny that the Ukrainian economy is getting stronger, and the hryvnia remains relatively stable. Also, the official policy of protectionism and phasing out barter patterns pave the way for growth in the money supply. Money is in demand these days.
Ukraine was pressured to start combating money laundering. Were the FATF sanctions more economic or political historically?
Yushko: Hard to say. The international community, of course, doesn’t want blank spots on the political map of the world, places where drug barons or terrorists could feel free to launder their money. Actually, those sanctions and requirements are like relationships among people. For example, I have living next door a drunk who accosts those he meets on the stairs and he regularly knocks on my door to borrow a couple of bucks. Of course, I won’t give him any money unless he quits drinking. In other words, I’ll apply sanctions to him. It’s the same with relationships among countries. Ukraine received a message, “Do you want to communicate and do business with other countries in a civilized way? You’re welcome to, provided you secure an effective mechanism to combat money laundering.” It was only natural. If we didn’t agree to universally accepted the rules of the game they’d have simply stopped communicating with us.”
In the economic context, I don’t think that Ukraine will become a venue for money laundering, but there is a potential threat, so appropriate measures have to be taken.
As Finance Minister, you met on more than one occasion with representatives of the World Bank, IMF, and other international financial institutions. Is their attitude toward Ukraine changing, considering that we keep asking for loans?
Yushko: Quite frankly, the period of easy credit to Ukraine is over. From what I know, Ukrainian relations with international financial institutions in the mid-1990s betrayed a certain geopolitical aspect. In all honesty, it’s much easier to have a dialog with somebody who owes you money. You only have to look through the recommendations at the time: the market will regulate itself; nothing wrong with high interest rates, and so on. Our experts discussed all this in whispers for obvious reasons, while our debts kept piling up.
We don’t have to borrow money at any cost. I could give you several examples. Take IMF loans. This money is transferred to the NBU reserve. It is not an instrument to extend credit to the economy; it serves to sustain the hryvnia exchange rate. By and large, the current reserve ($4.7 billion by the latest estimate) does not quite satisfy us; considering $22 billion worth of imports, we’d be better off with $10-12 billion. The minimum task we must set ourselves is to increase that reserve to $7 billion in the next couple of years — in other words, to have as much as we owe in terms of our public debt, thus signaling to prospective investors that Ukraine has enough hard cash to pay its debts. By the way, this is being solved by the National Bank of Ukraine, and we are generally moving in the right direction.
As for the World Bank and EBRD, leaving aside formalities, I can say that the dialog is gradually being raised to a new level. Last year we had rather interesting discussions concerning the principles of municipal financing. Ukraine was expected to provide top-level guarantees of programs for which local authorities were actually responsible. I said at the time, “I’m not interested, not only as Finance Minister anxious to keep the central budget in one piece, but also — and above all — as a professional in the field.”
In my view, the IFI mandate and our own aspirations should be aimed at shaping civilized financial markets that would be understandable and transparent. There they agreed with me. I then asked, “What are you doing, friends? You’re corrupting local authorities, providing loans against state guarantees that nobody’s going to honor.” I suggested a different concept that would help cultivate financial discipline at the local level. Turn over a new leaf in the next round of talks, without revising the terms and conditions of loans already granted. From now on loans should be granted municipal authorities against collateral agreed upon with the Finance Ministry. In case of bad debts, the sale of collateral, and the presence of not more than 50% liabilities, state guarantees could be applied. Without making local budget liable, we’ll long talk about priorities and build a society called democratic but where money will continue being spent for purposes other than the designated ones.
