Investors are still waiting

The European Business Association (EBA) has announced Ukraine’s new Investment Attractiveness Index in the third quarter of 2010. The new wave of polling the top executives of EBA member companies, conducted by the association together with InMind in September 2010, showed that the index had stabilized after a period of growth in early 2010. It has reached the level of 3.20 today, a little down compared to the 3.25 registered in the second quarter of this year.

The EBA explains that the level of 3.20 shows a neutral assessment of the investment climate and the absence of essential changes. “The previous eva­­luation of Ukraine’s investment attractiveness index showed a high level of investors’ expectations aroused by the new government’s reform program,” an EBA press release quotes its executive director Anna Derevianko as saying. “Yet the index showed a small drop this time partly because many companies that deal with foreign economic activities continue to encounter unjustifiably complicated customs procedures and technical barriers in trade. The other top-priority business matters, also on the EBA’s list, such as combating corruption, reforming the judicial system, land reform, and currency regulation, still remain essentially unchanged.”

Last Tuesday experts, national and foreign businessmen, opposition politicians, and top officials discussed the problems of stabilization and prospects of long-awaited reforms at the conference “Ukraine: Reforms, Competitiveness, Investments” organized by the Effective Management foundation and Financial Times.

And while representatives of the government and the opposition are, naturally, holding different views on the effectiveness of reforms, both admit that society and business have not yet fully understood the proposed reforms.

According to Natalia Korolevska, chairperson of the Verkhovna Rada Committee on Industry and Regulatory Polices, loss of confidence in the government is worse than a crisis. “The crisis is sure to come to an end. But to restore the confidence of business in the government and the belief that the government is capable of adequately carrying out the necessary reforms is a far more difficult and long process than reviving the economy,” the MP told the conference.

Moreover, confidence cannot be won by just simulating reforms, as Korolevska thinks the government seems to be doing. “Sham reforms are worse than inactivity because this upsets a delicate balance in the system,” the parliamentary committee chairperson said, “You cannot win the trust of business by declaring liberalization and, at the same time, increasing the fiscal and regulatory pressure on business.” For example, as Korolevska claims, the number of regulatory acts in this country rose by 20 percent in the first half of 2010 when compared with the same period of 2009.

Besides, in Korolevska’s words, even well-thought-out reforms may “trip” over corruption, as Ukraine’s President Viktor Yanukovych confirmed in his speech at a session of the economic reforms committee.

As a result, according to the Ver­khovna Rada committee chair, there are several business climates in Ukraine now. “For small-businesses, it is the North Pole and, judging by the government’s actions, it is going to be permafrost soon. For medium business, it is the jungles, where you can live, but you are always running the risk of being eaten by a cannibal bureaucrat. Big business feels okay, as it lives in a moderate climate,” Korolevska said.

So, in the MP’s view, reforms can become an instrument of both prospe­rity and ruination for this country. To ward off the latter, reforms should go side by side with a major anticorruption project.

Meanwhile, the ball is in the go­vern­ment’s court. Actually, as Prime Mi­nister Mykola Azarov emphasized at the conference, the fact that the new go­vernment has managed to stabilize the situation and launch radical reforms is also a concrete positive result.

To confirm this, Azarov referred to the tax reform. For, in his words, it could not be launched before the current fiscal stabilization had been reached. “We have reached it today,” the prime minister noted, “and, on the basis of this, we chose to cut taxes. Moreover, we are now conducting a cautious policy of accumulating resources in the state budget so that we can keep up the projected budget deficit in the first period after the tax cuts.”

Officials are planning a budget deficit of no more than 3.5 percent of GDP in the next year, said Vice Prime Minister of Ukraine for Economy Serhii Tihipko. He also revealed the plans for this year: “We will be able to keep the budget deficit at 4.9 percent in 2010.”

Tihipko is also satisfied with the liquidity of Ukrainian banks. “Banks have a super-high liquidity; today, the banks’ liquidity is in fact three times as high as in a normal period,” he said in his conference speech. In the vice premier’s opinion, the main cause of such a high liquidity is that banks are not crediting. “Banks are chary of crediting, and we should make certain decisions to encourage them to do so,” Tihipko stressed.

At the same time, Tihipko noted that the banking situation today “is stable and does not worry the government.” “I must say that we see no major problems in the banking sector, nor do we see any special risks there,” he added.

It is perhaps for this reason that Azarov announced that the government was going to allow Ukrainians to have bank accounts abroad without a National Bank license. “Maybe, some of you do not remember that individuals and businesses did not have the right to open hard-currency accounts abroad. Even now, much to our regret, we still have a provision that one must have a National Bank license. We are sure to cancel this restriction, the last of its kind,” Azarov said in his speech. In his words, a law has already been drawn up to this effect, and the Cabinet is certain that it will be approved by the Verkhovna Rada.

Yet Azarov promises not to confine himself to this. As he said at the conference, about 100 billion hryvnias may be invested in the national economy next year. The prime minister said that about 25 billion hryvnias will be contributed as investments, about 50 billion as internal and external loans, and another 30 billion as state budget expenses. “A total 100 billion hryvnias or so in a year — this is a real figure that we expect,” Azarov concluded. In the prime minister’s opinion, Ukraine will be able to reach 10 percent GDP growth after these investments have been made, thus returning to the 2007 level.

Azarov pointed out that funds would be channeled, first of all, to high-profile investment projects in agriculture, civil construction, innovations, energy-saving projects, as well as aircraft- and ship-building.

As far as construction is concerned, officials even have some concrete “proofs of efficiency.” Tihipko said that, using the experience of Georgia, the government aims to reduce fivefold the period within which the investor can be given land and begin construction work, “An investor who has money should begin construction work within 60 days,” Tihipko added.