What does the new government have in store for the economy?
Ukraine’s financial markets, usually very sensitive to political developments, reacted without any upturns or downturns to the emergence of a new prime minister. In this case, no news is good news. Nevertheless, this has undoubtedly placed some strain on large companies in planning their neat year’s performance. The Ukrainian practice has it that the new head of government makes public an economic program only after being confirmed in office, which naturally introduces in some unpredictability. Viktor Yanukovych has already said he does not rule out replacement of all the economy-related ministers. In his words, this will happen only if the government is told to fulfill a different kind of tasks.
What kind of tasks the premier has assigned himself can only be clear so far from his speech in Verkhovna Rada on the eve of his confirmation. This speech was not, of course, devoid of some vagueness. This means we can discuss here the political and economic intentions, rather than the priorities, of the parliament and government. Yet, the economic theses the premier laid down in his speech deserve attention at least because they point out Mr. Yanukovych’s preferred fields of activity.
The new prime minister identified combating poverty as the top priority in his government’s work. As of today, average wages in this country are about UAH 400 a month, which Yanukovych finds inadequate. In all probability, he will not only raise public-sector wages and pensions, a usual palliative, but also talk tougher with industrial managers, for it is large businesses that have accumulated the bulk of wage arrears. His experience as Donetsk oblast governor will undoubtedly remind him that precisely this problem can always be a weapon in the hands of his political adversaries. Moreover, outgoing Premier Anatoly Kinakh was also fired ostensibly for failure to solve social problems. On the other hand, the likely difficulty of fulfilling the next year’s state budget, as well as having to make considerable payments to foreign creditors, will inevitably stifle many of the new government’s initiatives.
What Mr. Yanukovych identified as his next priority is the reinforcement of regional policies. The premier set a goal to make each oblast fully self-sufficient. That most Ukrainian regions currently rely on central subsidies is due to political, rather than economic reasons. The government’s tendency to centralize power in the past few years has weakened economic independence of the regional elites. If this priority does not remain a mere declaration, the economy is certain to get a major boost. Already discernible is the instrument with which the new premier intends to achieve this goal: these are free economic zones, priority development territories, and other mechanisms of a dubious market nature. But, by all accounts, this country has received a government that is not going to try hide behind the mask of a reformer.
Mr. Yanukovych also said he intended to support small and medium business. The latter was promised to be granted “the most favored economic treatment,” although it is still unclear how this will be done. Ukrainian entrepreneurs are likely to remain happy if at least the current system of tax exemptions is not revised. The uniform tax has allowed millions of individuals to legalize their incomes. They are unlikely to have any grounds for fear while the new government is in office. In addition, the premier entertains the idea of cutting taxes, although he might have to change his position a bit when he looks into central budget finances.
What deserves a special compliment is Mr. Yanukovych’s promise not to repeat the career of Pavlo Lazarenko. The premier said he was setting the goals that completely differ from those of the current American jailbird. Frankly speaking, many large scale managers had some doubts about this because Kyiv has perpetuated a stereotype about the principles of doing business in Donetsk. Mr. Yanukovych announced he was really going to bring a team of his own to the Cabinet of Ministers, still vouching for the team member’s honesty and high skills.
Most experts expect the steel- making and coal-mining lobbies to strengthen their political positions. The steel-making elite has long been calling on the state to liberalize its currency rate policy in order to stimulate exports. It is perhaps this factor that brought about the current political consultations about the likely replacement of the National Bank of Ukraine president.
In addition, the exporters (Donetsk oblast is a region of exporters) are very interested in tax reform (suffice it to recall the VAT refund problem). The only point is whether the new government will be able and willing to press for reasonable taxes for all or everything will boil down to tax relief for the sector lobbies.
