• Українська
  • Русский
  • English
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

Nowhere to Go But to Hell! Next spring may see Ukraine’s economic collapse

13 November, 2012 - 00:00

In practice exports are the only chance Ukrainian enterprises have in terms of getting real money and the principal export sources are agriculture and ferrous metallurgy. In 1996-97, the world market situation was rather favorable in this sphere, producing an adequate foreign trade balance. Early this year the situation changed drastically.

Last year saw agricultural overproduction, while demand for agricultural products was higher in previous years. The overproduction crisis in certain agribusiness sectors coincided with the financial crisis in Southeast Asia, causing an unprecedented price slide. World forage wheat and rye costs dropped almost three times compared to 1996.

Estimates show that Ukrainian grain can be competitive on the world market provided its producer warehouse cost is set at Hr 170 per ton of third class wheat, Hr 85 (fifth class), Hr 90 per ton of forage rye, Hr 115 per ton of third class corn, and Hr 180 per ton of third class peas. In other words, a considerable part of the 1998 yields will find no buyers, since the par value will be slightly over the selling price. Sunflower seeds and other oil-bearing plants and their products are the only commodities in permanent high demand.

Despite a degree of increment in rolled metal stock in the first quarter of 1998, its world market prospects are not very promising, as evidenced by the fact that the part purchased by international traders was never sold and is still in Ukrainian port warehouses. Thus, one may expect a reduction in rolled stock exports in 1998, so that integrated iron & steel works’ and metallurgical plants’ boosted output looks rather dubious.

Ukrainian agricultural exports are also threatened ($1.99 billion worth sold last year, or almost 10.3% of gross export proceeds). Even assuming that grain exports will remain at last year’s level the returns will lower by approximately 40%, totaling $796 million, or 4% of gross export proceeds.

Under such conditions any country genuinely concerned about its national interests should make every effort to help its enterprises make export contracts, so as to (a) keep domestic enterprises ticking and (b) provide for a hard currency influx to maintain its national currency rate. It is generally known that on the agricultural market, being a purely competitive one, producers mostly do not trade in their products, because this calls for considerable marketing expenses and has its specificities which are Greek to the Ukrainian operator used to receiving orders from the state on what to sow and how much to charge for the crops.

Ukrainian traders are faced with too many obstacles to increasing their exports, the biggest one being the existing tax laws. If one analyzes the law of Ukraine On Company Income Taxes one can only assume that its authors lack even a passing knowledge of economics. They seem to have taken into account everything except one little thing known as objective economic laws. Thus, the very definition of taxable income has nothing to do with economics, because the stated formula relates not to income, but to an enterprise’s adjusted gross revenues.

The authors also seem unaware that income appears only after receiving money for goods delivered, so it is impossible to determine taxable incomes when receiving money for goods still to be delivered, let alone goods still to be made or produced. On the other hand, levying taxes proceeding from the shipment of goods, without being paid for delivery, results in considerably raising their costs, and if raising prices is impossible, in suspending production until these goods are actually sold.

In practice, all this means that the state is trying to tax not company incomes but their turnover, which leads to the washing away of their current assets, eventually causing a total breakdown of the financial system. In addition, under such conditions it is practically impossible to channel funds under forward contracts into the agrarian sector where the production cycle lasts 4-5 months and the accounting (taxation) period is one month. As a result, the Ukrainian agricultural producer, after receiving prepayment (which money does not belong to the producer de facto) must pay the income tax (30% of the contract cost!). Even showing rather high revenues (10%), the producer is in practice unable to carry out such a contract under such tax laws. The existing taxation system leads to the extinction of small business, complicates things for medium businesses, and increases the real costs (thus reducing the competitiveness) of goods supplied by Ukrainian producers.

Given the unfavorable world market situation for Ukrainian goods, this taxation approach causes a reduction in exports and aggravates the country’s foreign trade balance. Add here the overall fiscal situation and the picture will show that certain sectors (where the turnover term exceeds one month) may well collapse in the spring.

The Ukrainian foreign trade balance could be kept at last year’s level if the Verkhovna Rada quickly makes the necessary changes in this law, and if it abides by the interests of Ukrainian businessmen and ordinary citizens, rather than those the bureaucrats.

 

Rubric: