Crisis as remedy

A decade ago, the world was very much different. It is hard to overstate the experience of all those who raised Ukraine up from its knees after the horrible crisis in the 1990s. Quite a few of these businesspeople are now operating in the corporate sector and have acquired knowledge of today’s economic realities. One of them is Ihor MITIUKOV, Ukraine’s former Minister of Finance and now director of the investment bank Morgan Stanley in Ukraine. This man is in the center of Ukrainian business operations.

You have contact with the financial-industrial groups that are mostly located in Eastern Ukraine. What signs do you see? Is the Donbas still delivering or has the situation changed so much as to require the intervention of experts-I mean people of your professional caliber?

“There is no doubt that the global economic crisis has had its impact on Ukraine, above all on businesses in the industrially developed regions, including the Donbas. This is especially true of export-oriented businesses because market demand for their production has decreased, so they have to close production facilities and lay off, or even fire the workers. Survival is on top of their current agenda, along with attempts to carry out deep-reaching structural reforms, so as to enter the next economic cycle as more competitive business entities.

“Businesses that will succeed in preserving their output with minimum production cuts will have a chance of survival. Unfortunately, the current statistics indicate an output drop of over fifty percent for a number of businesses, although they are still operating. Well, the businesses that will be forced to close will be replaced by new ones and these will target the needs of the domestic and foreign markets.”

Last week the Ukrainian government failed to have macroeconomic figures included in the 2009 budget approved by the Verkhovna Rada of Ukraine. Why? Was it because the established parliamentary procedures were violated (the draft was read out) or were the MPs’ opinions split on the text, what with the IMF coming up with a different forecast?

“The world and the external conditions are changing very fast, virtually every day. The forecasts generated by our ministries for 2009 are simply outdated. Moreover, the ministries relied on different bases for their calculations. Not surprisingly, the macroeconomic indices could not be coordinated at the first try. This process takes quite some time, typically months, so I am not at all surprised to know that they failed to do it so quickly. Also, the IMF’s forecast is different from the one produced by the World Bank. Nonetheless, I hope that our government will take all this into account and will quickly determine the indices for the budget. I believe that we should brace ourselves for the worst scenario, as it is never too late to replace it with a more positive one.”

What do you think of the anticrisis program adopted by the Ukrainian parliament? Will it work without the appropriate bills being voted into laws? What are the priorities of the programs, if any, and are they well-grounded?

“The anticrisis program was adopted by the Verkhovna Rada. Here the biggest problem is that in order to carry it out, the government passed a resolution specifying the procedure for using the stabilization fund. However, this resolution was not supported by the pertinent VR committee. This committee pointed out that the cabinet’s document does not reflect all the provisos of this law and does not mention all the recipients of government aid that are included in this law. I hope that this resolution will be replaced before long, then the program and the pertinent laws will start functioning. So far, there is no information regarding the specific use of the stabilization fund.”

How is the first tranche of the IMF loan to Ukraine working? There are a lot of rumors on the subject. Some say that one half of the sum instantly found its way to the commercial banks’ accounts and was wired abroad to buy cheap dollars, while real Ukrainian economy received nothing. Others say that no IMF money has reached Ukraine (this allegation is supported by sources at the Ministry of Economy). Rather, it has immediately been forwarded to Ukraine’s foreign creditors. How true are these versions?

“Rumors and incompetent assessments regarding the use of the IMF loans have been circulating since the first time Ukraine received such a loan. It is important to understand the mechanism of such [loan] agreements: the IMF loans money not to the Ukrainian government, but to the National Bank of Ukraine. These loans are meant to support the exchange rate in countries that have problems with the trade balance and foreign trade operations.

“Ukraine felt the impact of these problems in the second half of this year. The [Ukrainian] government has no access to this money. Such is the [IMF loan] rule. Our government supports the budget with help from the World Bank. One of the specifics of the [loan] agreement with the IMF is that [Ukraine’s] stabilization fund can be replenished by using IMF resources, provided such loans are aimed at stabilizing [Ukraine’s] banking system, enhancing its reliability, and forestalling bankruptcies of financial institutions. In all other cases IMF loans are to be used on the interbank market to purchase hard currency for hryvnias for the purpose of paying for foreign trade transactions.

“Of course, no one will guarantee 100 percent that all Ukrainian commercial banks submitting applications to buy currency will use this money exclusively for trade contracts. I can assume that part of this money will end up being transferred to deposit accounts of commercial banks. However, this situation was possible when there were currency exchange rates for the hryvnia. It was high on the interbank market and lower at the National Bank’s currency auctions, so there was room for speculations in this sphere. Now the NBU has made the right decision to maintain a uniform exchange rate, ruling out speculative use of IMF funds (although this decision should have been made much earlier). Fortunately, this decision is in effect, as of November 28.”

Some political scientists believe that the National Bank is acting to bring to nought all the anticrisis efforts of the incumbent government. What do you think about the criticism directed at the National Bank?

“I treat it with understanding. The thing is that any decision made by this regulatory authority in the financial realm benefits some and leaves others at a disadvantage. It is impossible to make a decision that will make all market operators happy. The National Bank is following the right course in principle, although somewhat belatedly, in my opinion-I mean unifying the exchange rate on the currency market, as mentioned above, measures against speculative attacks on the hryvnia, and the refinancing of commercial banks, which is anything but an economically efficient measure, considering the de­positors’ panic sentiments.

“The NBU resolution substantially narrows down the number of banks eligible for refinancing. Such banks must be in possession of large capital (very true), but it is also stipulated that such refinancing applies only to banks that have the status of open joint stock companies. This ignores the fact that most Ukrainian banks do not have this status. Closed joint stock companies are even among the largest banks. Changing this status, considering our red tape, is a difficult and lengthy procedure. Therefore, this decision excludes banks that deserve the National Bank’s support. I would say that this is an issue that has to be resolved immediately.”

Now the parliament lobbyists are busy trying to secure support for their sectors of the economy. We also hear that it is necessary to stop supporting industries and channel what funds are available (apparently meaning IMF and WB loans) into social security, so as to ensure payment of salaries and pensions. Don’t you think that such statements are a very bad signal for the economy?

“I think it is high time for us to overcome the disease of social populism. What regards statements to the effect that more funds should be channeled into the social sphere — now that we are faced with the desperate need of supporting the domestic manufacturer — the only outcome would be a soaring inflation rate. Now we have to support all those that can provide goods and services and create job. We must find optimum mechanisms of carrying out this program. I am opposed to the idea of giving budget funds to certain sectors. I am absolutely convinced that such funds should be used to inject even more money into certain regions or sectors, including through banks.

“We won’t solve our problems by using budget funds only, while it is possible to invest tens of billions of hryvnias in our economy by subsidizing the interest rate, guaranteeing repayment of bank loans, and using other tools available to the government and the NBU. Then we will have good results.”

In the third quarter of this year the amount of direct investments in Ukraine’s economy was half of what was invested in the same period in 2007. Even Cyprus, the then leading investor in Ukraine, offered one-fourth of its last year’s investment volumes. Does this mean that the financial account will no longer serve as the basis of foreign trade transactions, the way it used to be? Will this serve to further devaluate the hryvnia? Will this help the exporters receive certain preferences, with their goods becoming more competitive? Will this enable Ukraine to restore its foreign trade balance?

“It is true that we were late to notice the hazardous trend of growing foreign trade deficit. Back in 2005 our exports started lagging behind our mounting imports. The problem seemed to be concealed by the large flow of financial resources that kept coming to Ukraine, mostly in the form of portfolio investments and proceeds from privatization and the sale of Ukrainian banks.

“The international financial crisis has cut this flow short in a matter of months. It is strange how this could be a surprise, considering that Ukraine’s exports were increasingly lagging behind imports at the start of the year. Today the Uk­rainian government is for­ced to suppress and limit imports, so as to regulate the payment balance sheet in the absence of financial resources. Failing this, the hryvnia will keep plum­meting-a fact already acknowledged by experts in the financial domain, as well as by politicians.

“What we need now is a determined, combined effort on the part of all branches of power to have an effective payment balance sheet next year. In solving this problem it is hard to overestimate Ukraine’s cooperation with the IMF for the next couple of years; its loans will give us time to seriously restructure our economy, balance our trade turnover, and increase manufacturing efficiency. Otherwise, the hryvnia will continue to go down.

“What regards export prospects, in conjunction with the hryvnia decline, this devaluation of the national currency will certainly serve to support our exporters, primarily in terms of the steel and chemical industries.

“Nevertheless, I would warn those doing business in these sectors against regarding this support as a standing factor. This temporary devaluation of the hryvnia should not be the reason for abandoning efforts to increase production efficiency and upgrade production facilities. The entire world is now accommodating changes, so we have to keep this in mind and keep abreast.

“Under the circumstances, our government has to consider tax concessions for businesses that are running renovation and modernization projects. Here one could consider re­vised, simplified amortization and lighter import tax payment procedures-provided, naturally, that the business is upgrading its manufacturing facilities and increasing their efficiency.”

Do you agree with international experts who say that the world financial markets have almost reached the bottom? Will this mean a relief for Ukraine? Is our market close to its bottom?

“Unfortunately, virtually no one in the world knows for sure what has to be done under the circumstances, let alone say whether or not we have reached the so-called bottom. Experts generally agree that the world market will stop declining in the first quarter of 2009. I believe that Ukraine will reach this point three to six months later.

“February — March will be the most trying period — as will be the rest of the coming year, so the main task for our government should be at least to keep the standards achieved by 2008, protecting our people against inflation and losses caused by the exchange rates. Our government should not make any big promises in order to win the electorate. Every effort should be made to keep the existing standards that are generally regarded acceptable. If our government succeeds in doing this, it will deserve every praise.”

Who do you think can save Ukraine in time of crisis: the IMF, God, a tsar, a hero, an iron hand, the unity of the political forces, or a technical government?

“The IMF alone, of course, will not be able to do anything for us without active efforts of all our political forces. What we need is unity of our political forces; we must make a quick decision on our political structure in 2009. (I presume that this alliance could be temporary and technical.)

“The sooner we make up our mind, the sooner we will be able to start working to implement the anticrisis program. If this program has to be improved or amended, we should do this quickly, too, and for this purpose we need unity among our political forces; we need a working parliament and an operating government. I think that this is our target that has to be reached using any possible constitutional means.”