Exodus

Threats to Ukraine’s national security are increasing. The latest is capital flight abroad. President Viktor Yushchenko made this statement on Feb. 16, when he called to order a meeting of the National Security and Defense Council of Ukraine. Uppermost on the agenda were measures to prevent the unproductive outflow of capital from Ukraine. “The scope of capital flight from Ukraine over the past four to five years is proof that this phenomenon relates to one of the main issues threatening Ukraine’s national security,” declared the head of state.

Yushchenko admitted that it is difficult to provide accurate statistical estimates of the flight index and said that, according to the balance of payments, official estimates of capital flight in 2004-06 indicate 12.9 billion dollars, compared to 13.2 billion of foreign investments in Ukraine.

The president noted that Ukraine should be proud of the influx of foreign investments, but added that “we must clearly realize that a similar amount has been withdrawn from Ukraine’s effective and rational economic turnover.”

Yushchenko urged the NSDC members to analyze the reasons behind this situation. His own explanation is that there is an unfavorable climate for investments in Ukraine. “Why is this capital being transferred out of Ukraine’s economy? What are the causes? What is the role being played in this system by controlling and law enforcement authorities?” Yushchenko asked. He pointed out that the capital flight trend is especially dangerous now that Ukraine faces a trade deficit.

It appears that no recipe has been found to combat this alarming investment flight. At the meeting it was decided that the NSDC will return to this question in June. The announcement was made by NSDC Secretary Vitalii Haiduk during a briefing. He said that the first results of the effort to solve this problem should appear in May, and in the meantime the cabinet will have to prepare its proposals. Haiduk added that the June meeting will also broach issues relating to control over the implementation of the NSDC resolution and the president’s edict aimed at improving the investment climate in Ukraine.

COMMENTARY

How acute is the capital flight issue? What are the causes? How can this outflow be counteracted?

Vasyl YURCHYSHYN, director of economic programs, Razumkov Center for Economic and Political Studies:

An answer to the question why capital is fleeing Ukraine can be found in a recent issue of the Index of Economic Freedom where Ukraine placed 125th out of 157 countries. This document states that Ukraine’s business climate is practically the worst in Europe. At the same time Ukraine’s heaviest losses are tied to the protection of investors’ rights, their ability to defend their businesses in court, and the predictability and stability of the political and economic environment.

As long as business remains unprotected in Ukraine, as long as there is a large degree of state interference in the economy, and as long as “manual” management prevails, foreign capital will not seek to enter Ukraine. This means that, in addition to official statistics pointing to capital influx, capital outflow will continue either because of non-receipt of some revenues or overpriced exports or imports.

Another problem is that neither the president nor the prime minister has a medium-term action strategy, let alone a long-term one. Furthermore, every practical decision made by a branch of power elicits negative comments from another branch, and vice versa.

What should the government do under these circumstances? First and foremost, there should be a single decision-making center. Next comes the issue of unconditionally securing investors’ rights, followed by simple matters, like demonopolization, deregulation, and development of medium and small businesses. The government is now mostly talking about small business development and business support in general.

I am convinced that small and medium businesses are the levers, the real catalysts of economic growth. For all business branches there must be a stable, comprehensible, and predictable business environment spared the excessive burden of fiscal pressure, including that of manual management. All this has already been said; all this exists. We do not have extraordinary circumstances or instruments here. We simply must not do harm to ourselves, above all in understanding the clarity of upholding laws that we already have.