Andrii NOVAK: “After we join Europe, hostile takeovers will be off the point”

The economist Andrii NOVAK gave our newspaper the other day the fourth edition of his bestseller How to Revitalize the Ukrainian Economy. This book also contains Mr. Novak’s fresh interview, “Ukraine’s Current ‘Economic Environment’ Runs Counter to its National Character,” which he gave us in late March.

We used an opportunity to speak with the expert about not only the reaction of his colleagues and opponents to the published interview, but also about the current politico-economic problems, such as European integration as a chance to offset the 1990s debts, resuscitation of the governmental anti-hostile-takeover commission, and the quality of Ukrainian macroeconomic statistics.

Do you think the memorandum on cooperation with the Customs Union is a victory or a defeat for Ukraine?

“The signing of this document will have no economic consequences. This is a political step which the Kremlin needs to take in order to save its political face. Moscow wants to demonstrate that Ukraine has not gone away altogether but still remains in its orbit.

“The Ukrainian and Russian governments must have been tormenting themselves about a wording that will suite everybody and finally invented such thing as ‘political memorandum.’”

There was an interesting process before the signing of this document – a complete informational isolation and closed-door meetings between Putin and Yanukovych. The president’s advisors were openly saying on TV that they had never seen the text of the memorandum to be signed…”

“Moscow demanded that official Kyiv take a stand. For the Kremlin divides the world into black and white – you are either with or against us. This tough position begins to harm sooner or later. Putin met Yanukovych, and they seemed to be thinking up a text of the agreement that could allow each side not to lose its face. Kyiv was supposed to show that we are not dropping Euro integration.

“The Kremlin’s main task was to get prepared for Ukraine’s European integration from the informational angle: they pondered on how to make their voters believe that Ukraine was not going away. Otherwise, this can undermine Putin’s positions.

“We are in a dangerous politico-economic trap, and, to break loose, we must sign the EU Association Agreement as soon as possible. Following this, foreign-policy negotiations will shift from the Ukraine-Russia to the Ukraine-EU-Russia format. It will be easier to negotiate things, including oil and gas problems.”

Does the current Ukrainian government’s course towards the EU have no alternative?

“Yes. It is moving to where the real money is. And it is the EU and the IMF. For the Russian side is asking to be allowed to take over our facilities in exchange for this money. And we wouldn’t like to do so. Our government is already regarding these facilities as its assets, its property.”

How would you diagnose the Ukrainian economy’s condition with due account of the latest macroeconomic results published by the State Statistics Committee?

“Statistics in Ukraine is a very special phenomenon. The announced inflation rate has absolutely nothing to do with reality. Firstly, they rigged the very method of it by adding 39 items to the consumer goods basket by which the index is assessed. They included such items as electronics – laptops and flash drives – whose price is quickly dropping today owing to the pace of technological progress.

“If we look at the real consumer basket of a Ukrainian, we will see that foodstuffs account for at least two thirds. And there is no deflation.

“And the announced 5-percent drop in industrial output and an overall GDP decline show that the reduction of all indicators is so obvious that even doctored statistics can no longer hide this. The economy is marking time, to say the least. All producers settle accounts on a monthly, rather than quarterly, basis, for they have no incentives to invest money. Only the current technological progress is kept afloat. The Ukrainian businessman is not investing in development, for he knows only too well that once his business becomes profitable and attractive it may be attacked by corporate raiders who will try to seize the business for a certain politico-economic group.”

What do you think it means that the government has resuscitated the anti-raiding commission?

“It is a prompt response to a too outrageous situation. Ask any entrepreneur, and he will tell you the same: as soon as you contrive to reap a profit in these conditions, they will come and rob you of it.”

Coming back to the 1990s?

“It is a wild period, and we are still to go through it.”

Have the methods of taking over property changed?

“There are different schemes at work. In the agrarian sector, even the 1990s land lease agreements are being revised. I know an individual who has been cultivating a few hectares of land since 1992. And now he is an object of harassment for allegedly concluding an incorrect lease agreement in 1992.

“Hostile takeovers have a serious juridical background. And the choice of the place to ‘beat’ on depends on the enterprise’s legal history. If the history is legally flawless, they ‘beat’ with present-day implements, such as the tax inspection and the customs office.”

Today’s authorities in Ukraine are people who came from, remain and are apparently planning to stay for a long time in business. Like nobody else, they are supposed to understand the need for civilized rules of the game, the rules by which one can protect his property. Why don’t they establish these rules?

“Those in power now seize every opportunity to get hold of property. After we join Europe, hostile takeovers will be off the point. This is why property is being taken over so aggressively now.”

And the day of reckoning?

“Judging by my contacts with their representatives, they are bent on seizing property today and then legalizing it via EU structures.”

Is the lawsuit of Pinchuk against Kolomoisky in London an attempt of legalization?

“In the 1990s very many things were done by arrangement. This is what I have said above – they are checking the legal background. Failure to correctly finalize the deals in the past is causing now a desire to take over the property. Pinchuk’s lawsuit is a case that began in the 1990s, when people used to make deals on dividing their spheres of influence.”

In other words, it is a process of offsetting the 1990s debts?

“These debts will never be offset. Whoever comes to power in Ukraine will try to use them in order to make up for what they failed to do in the 1990s. We can already hear the hints that something is wrong in the business of Rinat Akhmetov, too. There is another group that wields a great deal of clout: it has its own judges, prosecutors, taxmen, customs officers, etc.”

Is the EU Association Agreement a chance to break this cycle?

“Yes, but we must not overestimate what is supposed to occur in the fall. After signing this agreement, Ukraine will have to work very hard in order to fully enter the European legal field.

“The fact of signing is a signal that Ukraine is becoming a participant in a civilized game, a signal that this country is breaking free from the CIS milieu in which what really matters is not the prosecuting and judicial institutions but those who manage them.”

This can obviously explain why the geography of investments in Ukraine is so broad. For example, the Indonesian ambassador recently told The Day that a Ukrainian businessman wants to acquire a cocoa farm on that country’s islands…”

“The No.1 question for Ukrainian businessmen today is: where is it safe? They know they will be robbed here – but not in Indonesia. You can find Ukrainian investments wherever there are civilized relationships.

“The businessman harbors no illusions. He only wants to know the answers to three questions: safety, profit, and prospects of development. But in today’s Ukraine it is impossible to draw up a business plan, for it has no value.”

This means, Mr. Novak, that you won’t believe that the following story is possible in the Ukrainian conditions: at 15 he went to work as delivery boy at an oil trading company, earned 200,000 dollars in a few years’ time, and launched a 300-million-worth business a year or two later?

“No, it is a story for books.”

But Serhii Kurchenko, the 27-year-old owner of the Odesa Refinery, says it is possible.

“The man you are talking about still remains a delivery boy. He is a servant of those who wield power and manage financial flows.”

Of whom?

“And who is in power here?”

They represent various structures.

“But only one of them has ample power. The rest are dividing the spheres of influence, like they were doing in the 1990s. Unfortunately, we came back to the mid-1990s in the development cycle.”

What’s the way out?

“Only a political one. There should be a true opposition, not one that resembles the government’s delivery boy. And the civilized rules of Europe should also help us.”

Why do you call the opposition the government’s delivery boy?

“Just look at all the key votings: there are always as many votes lacking as there should be.”