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How to avoid “betrayal” of reforms

Three-generation economists on the revenge of the oligarchic clan system
19 March, 12:37
ANDRII DLIHACH (IN THE CENTER): “‘HYDRA’ OF THE OLIGARCHIC SYSTEM IS CORRUPT TO THE MINUTEST DETAIL. THIS RESISTANCE RESEMBLES A QUAGMIRE. THERE SEEMS TO BE SOME PROGRESS, BUT IT IS SO NEGLIGIBLE THAT YOU GAIN AN IMPRESSION THAT YOU ARE STANDING IMMERSED IN THE GROUND” / Photo by Artem SLIPACHUK, The Day

Against the backdrop of a “triumph” in the governmental quarters, the text of a debate at Den’s editorial office looks even more contro­ver­sial than we expected. There are ini­tiatives, papers, and reports, but there is no progress. The participants of our round­table claim that the economy continues to plummet and name of the main causes of this: it is… the oligarchs who hinder our progress.

Volodymyr Lanovy, president of the Economic Reforms Center and ex-minister of economics, knows how to resist the system’s “oddities.” As The Day wrote, he was once dismissed from the office of vice-premier for his “staunchness.” Although Lanovy is one of the few who resisted the temptation of being drawn into the oligarchic clan system, his experience is of no use for the team that was catapulted to power by the Maidan which called, among other things, for changing the system.

Andrii Novak, chairman of the Committee of Economists, has the experience of consulting the officials who “simulated” reforms. He said at our first meeting at the editorial office that he had sworn off doing this again. Since the first day of the crisis, the expert has been saying that Ukraine should repudiate a part of its foreign debt on the basis of the commitments of Budapest Memorandum guarantors. In his view, his suggestion does not suit the current governmental team because it will produce no personal “gravy.”

And, finally, the youngest participant in our discussion, Andrii Dlihach, cofounder of the New Reform civic platform and coauthor of the initiative First Professional Government of Reforms, and his team have offered an alternative package of initiatives and portfolio distribution options.

They seem to be listened to, but the actual response is different.

Alla DUBROVYK-ROKHOVA: “To what extent does the IMF cooperation program serve Ukraine’s strategic interests? Is the government right to meet the Fund’s demands so unobjectionably?”

Andrii DLIHACH: “I do not think the government is meeting the IMF’s demands unobjectionably. This cooperation is very important to Ukraine not only from the viewpoint of the Fund’s next tranche, but also as a signal to other, especially private, investors that this country is undergoing posi­tive changes and it is worthwhile to work with it. But this often results in a situation when the expected systemic reforms are not carried out, loans are being ‘eaten up,’ and the economy further declines. So, the Ukrainian leadership should map out its own clear strategy of economic changes, and, instead of blindly submitting to the IMF’s demands, it should bring them into line with its own program of reforms. Unfortunately, we don’t see this. Therefore, the loan will only help close the gaps instead of developing the economy.”

Volodymyr LANOVY: “The Ukrainian economy is running a deficit so far. At first, the Azarov Cabinet borrowed three-four billion dollars a year, placing governmental euro-bonds at 14-16 percent per annum. Now it is as if nothing had happened – we conti­nue to buy Russian gas at no one knows what price, in what quantities, and for whom.

“The Ministry of Fuel and Energy has announced that it is necessary to import 25 billion cubic meters of gas in 2015. Why so much, if the whole country economizes? To load the chemical and steel industry? If so, let the mediators – Naftohaz Ukrainy and Ukrtranshaz – negotiate these purchases. Let them do this together with the consumers who will be answerable by means of their hard-currency earnings under the signed contracts. Why should the state budget guarantee Naftohaz multibillion amounts? Do we have free hard currency for this? If the average price of gas is expected to be 300 dollars per thousand cubic meters, it will take 7.5 billion dollars to purchase 25 billion cu. m.! In these conditions, Ukraine will have to continuously ask for new loans and will never rise above the poverty line.

“To rectify the situation, we should have a deficit-free budget and begin to accumulate hard currency to pay off the loans. This year we need 15 billion dollars to pay off our foreign private liabilities, 10-12 billion for IMF payments, and 7.5 billion to buy gas. We must not just receive the IMF money but adopt a certain strategy of actions. Even 10 bil­lion dollars will not be enough. The IMF is temporarily deferring our short-term foreign liabilities so that Ukraine is not pronounced a bankrupt. What we really need is a program of restructuring and development.”

Andrii NOVAK: “I have noticed that the attitude of our politicians to cooperation with the IMF varies directly with their political attitude. If they are in opposition, they scathingly criticize the Fund. But, once they come to power, they count on its assistance only. This forms a circle. So, let us set the record straight. First, cooperation with the Fund is extremely critical for us today. Can you imagine what will happen to the eco­nomy and the hryvnia should the IMF not work with us? Second, it is a benchmark for other creditors and investors who have already confirmed their support in case the IMF says ‘yes.’

“What does the Fund expect in turn? It expects Ukraine’s state budget to be solvent and capable of repaying these loans. So, its experts show the government the weak points in the state budget and ask it to rectify these faults. But it is exclusively up to the Cabinet, not the IMF, to decide how to make up the Naftohaz deficit and stop the inadequate funding of state-run monopolies. It is no one else but the government that decided to bail out Naftohaz by way of raising household rates, without seeing that the company is in fact a big shady scheme. There are many other ways to make up the budget deficit. So, complaints must be properly addressed.”

Natalia BILOUSOVA: “What do you think about the suggestion that the next step after receiving the IMF tranche should be the beginning of negotiations with international creditors on writing off or rescheduling a part of Ukraine’s foreign debt?”

A.N.: “Immediately after the annexation of Crimea I took part in a conference at the WTO’s Geneva headquarters. I said there that, since the Budapest Memorandum gua­rantors of our territorial integrity failed to protect us from aggression, Ukraine could not be fully repaying its public debt, as if nothing had happened. So, we should try to have a part of the foreign debt written off. It is a very widespread practice which began in Argentina in 1956. Since then, various countries have concluded about 400 agreements on writing off and rescheduling debts worth a total 700 million dollars. The most illustrative example for us is Poland which had a half of its foreign debt written off in 1991 ‘for a successful transition from communism to a market economy.’ Greece had 85 percent of its debt remitted recently. Ukraine is now in a much more difficult economic situation – a part of its territory has been annexed and there is a war in another one. I thought the Ukrainian leadership would pick up and develop this idea, but, on the contrary, they are muting it – now it is clear why. Perhaps because you can’t possibly pocket what was written off. But when you take new money, there may be some benefit. This is the only explanation.”

A.D.: “On the one hand, it is obvious that Ukraine’s disarmament in the early 1990s resulted in a considerable economy for the world, especially for the US military budget. On the other, the Budapest Memorandum is not a guarantee as such of Ukraine’s economic or political security. For the main guarantor is the UN Security Council. Yet the world should appreciate the fact that Ukraine has assumed the role of an outpost in and defender of Europe and economically support this country. An economically independent and developed Ukraine is a guarantee of security for Europe. For this reason, we received a clear signal at Brussels donor forums in the spring of 2014 that 600 billion dollars for thorough modernization was an absolutely realistic amount that could be obtained in 10 years. Poland was given even more. But, against the backdrop of the activity of Russia’s lobbyists in the EU, our legitimate reformist leadership has not yet gi­ven the world an absolutely clear signal that Ukraine, as a political project, is able to invest. And who will help the one who does not want to rescue his own self? How can one invest in a country, where the population stashes away 75 billion dollars and over 250 billion hryvnias? All this money does not work in the economy due to an imperfect stock market, mistrust towards the banking system, and a slow consumer demand. This results from the fact that the leadership has no clear-cut program of actions supported by all the branches of government. There is no readiness to show positive changes and prospects for business.”

V.L.: “The IMF is not an independent organization outside the context of the Western world. This institution was established to financially help northern, southern and now western and eastern countries. Therefore, financial support plans are drawn up jointly by the founders of this Fund, who expect, as any business does, a profit for their contributions. Hence is the logic of their behavior towards Ukraine. We should not expect them to write off our debt because Ukraine is not one of the economically hopeless ‘losers.’ Instead, we are offered a different pattern – rescheduling debts within 10-15 years and raising the annual rate by 2-3 percent. Is it a civilized approach? Yes, but the difference in the writing-off procedures is obvious: we must pay an annual interest on the resche­duled debt. Ukrainian bonds were placed on foreign markets at 16 percent per annum, while those of other countries – at 7 percent. This means we must pay a solid 20 percent now! Twenty percent makes up a considerable amount over 15 years, which the state bud­get has to shoulder. This involves colossal expenditures, even though our debt is becoming negligible in a dollar equivalent because export is not developing. The situation would be different if the exchange rate were 8  hryvnias a dollar. But the IMF did not think, either, that we would allow the currency rate to fall so dismally.”

A.D.-R.: “How long can Ukraine exist as an independent state without a clear stra­tegy and plan of reforms? What will await us if we fail to show them to the world?”

A.N.: “We have lived without any strategy so far for 24 years. As a result, we can see a physical collapse of the country. So, it is an unlearned lesson.”

Larysa IVSHYNA: “But we can say that this strategy existed. It was called ‘reclamation of Soviet property.’”

A.N.: “No, it is not a strategy but a tactic: ‘everyone grabs what he can.’”

L.I.: “It was under control. The gray economy pursued its ‘shadow strategy.’ It is perhaps worthwhile to analyze on the basis of not only the ‘norm.’”

V.L.: “It is the ‘Red managers’ who mapped it out. They owned castles near London and Paris as long ago as the 1990s, they drove Bentleys, but we were unaware of this. Then the ‘reds’ would come to the NBU and ask to print more money which caused hyperinflation in the country. Incidentally, today’s economic model looks very much like the one at the time: oligarchs do not invest money in their own production facilities. Their main aim is to control export flows. For this reason, they are not working for the domestic market and do not care about the Ukrainian consumer. Oligarchs are grabbing the former state-run businesses that can work on foreign markets – it is via them that they can leave their export earnings abroad. If you think that they return their hard-currency earnings to Ukraine, sell it at the inter-banking auction, and then pay their workers and suppliers in hryvnias, you are mistaken. Oligarch simply go to the National Bank and take credits, which eventually forms a pool of 120-billion-worth unreturned refund loans. They have never thought to return them. Oligarchs take debt-related hryvnias and pay them as wages. Then they pay them to somebody else to avoid being bothered to return these loans.”

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