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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

A GHOST OF STRUCTURAL REFORMS APPEARS IN UKRAINE How long?

13 November, 2012 - 00:00

Last week showed signs that the President and government are beginning to understand the inevitability of market reforms in the real sector of the economy, evidenced by a series of edicts already signed and being prepared for the Chief Executive. Let us consider some of them.

On July 7, the President decreed the establishment of the National Agency of Ukraine for the Management of Corporate Rights. The document is inspiring not only by its legal contents, but also by the appointments thereunder. NAUMCR will be headed by Oleh Taranov who presided over the EBRD Convention Organizing Committee.

Another edict is called On Additional Measures to Enhance the Effectiveness of Bankruptcy Proceedings. The bankruptcy law currently in effect was enacted in 1992 and actually protects bankrupt enterprises from their creditors. According to Finance Minister Ihor Mitiukov, arbitration courts opened 8,474 bankruptcy cases involving enterprises last year, totaling Hr 743 million, of which 4,000 were proclaimed bankrupt (Hr 246 million), bringing the state budget about Hr 2.5 million from the sale of such property.

At this writing several other edicts were awaiting approval shortly, including On Changes in the VAT Rate and Payment Procedures, On Restrictions Concerning to Barter Transactions, and On Payments on the Territory of Ukraine. The VAT edict introduces new accrual procedures as per goods shipped and services rendered, rather than payments for them (opposed by the Ukrainian Association of Industrialists and Entrepreneurs, along with Oleksandra Kuzhel's State Committee on Business Development). Business people want the VAT rate to be lowered to 18% and 15% in 1999, and are, of course, resolutely against the cancellation of VAT exemptions and zero VAT for natural gas imports, electricity, critical imports, medications, tuition, and transportation. The other two edicts do not contain such pleasant "counterweights" as the ones on VAT and financial-industrial groups (the latter promises certain tax breaks).

The first of these documents instructs enterprises to lower the barter ratio in their turnover by 5% in the next five quarters. Those failing to do so will be fined 0.5% of the total yield of such barter deals (without reductions). In addition, the Cabinet is to adopt a list of barter-exempt goods. Naturally, denied such barter opportunities, a number of enterprises will have to undergo accelerated bankruptcy proceedings and their lot will not be any easier (especially that of enterprises living on tax liabilities) by the payments edict introducing a new vehicle of exacting tax arrears. This document in fact augments a series of measures aimed at an accelerated reorganization of debts with subsequent assignment to the creditor.

The importance of these documents is hard to overestimate, considering that the need for the began being discussed 3-4 years ago. In fact, they are meant to launch radical changes in the system of production which would be impossible without instituting the enterprise's financial liability for its commitments. In other words, every industry and enterprise will have to change its economic model, with attendant changes in the system of management. Is Ukraine prepared for such radical changes? Until recently Ukrainian industrialists and politicians mostly believed that the current situation is marked by a temporally limited crises like those that were repeatedly registered and overcome in 1960 - 1980. Meanwhile, "unofficial" economists were increasingly convinced that what is happening is by no means temporally limited, resulting from the socialist economy, where production and consumption were coordinated by the state, being irreversibly transformed in a postsocialist one where all coordination is done by prices and money.

In fact, there are two economies in Ukraine today: socialist and private. And the former means not only that which is legally owned by the state, but also those working due to the mechanisms of state redistribution of resources. This economy does need financial managers, because they have nothing to do there. Instead, it needs bureaucrats at ministries and agencies, former Soviet procurement and planning specialists learned in commodity turnover, shortages, and hidden reserves of Ukrainian industry.

Perhaps precisely because those steering our reforms hoped to go through the motions of market reforms in industry, Ukraine now has two systems of economic coordinates: legitimate and illicit production, clean and dirty money, expensive and cheap credit, barter deals, prices surpassing all world standards, staggering debts, and excess profits. The reader may well ask why, then, is there such optimism about the edicts? What could have happened to change politicians' views almost overnight? (And we are talking only about politicians at the moment.) Denying government bodies the use of administrative levers to control industry will automatically deny them their usual rent (i.e., amounts regularly received as income from possessing something which does not require any business efforts on the owner's part – Ed.) Regrettably, the reader's doubts and conclusions are not unwarranted.

The old political apparatus is cutting its own throat. This simply does not stand to reason. Why is it going against the tide, ignoring the protests from industrialists? The explanation might turn out very simple, though. It is either the authorities are so frightened by the threat of financial crisis that they are ready to take any steps to put it off. Or there is something between the lines of these documents we have not as yet grasped, something using which the masters of industrial and government bureaucratic ships will quietly exchange their old vessels for new ones.

 

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