Leaving the shadows as insurance against political problems of owners
In 2002, the fastest-growing legal business in Ukraine was petroleum refining. Over the past eleven months, Ukrainian oil refineries stepped up production by 57.6%, thus outstripping their closest rivals almost twofold. Liudmyla Musina, deputy state secretary of the Ministry of Economy, attributed this unprecedented growth to the eventual self-assertion of Russian oil companies as owners of Ukrainian refineries. This year they started exporting Ukrainian-made petrol and diesel fuel to Central Europe. Ukraine has a more developed transport infrastructure than Russia, and Moscow companies have turned this advantage to their account, not to mention the close relations they have established with the Ukrainian authorities. Strange as it may sound, this encourages them to keep clear of shadow practices when performing most of the transactions.
A similar growth pattern has been recorded in the woodworking sector, namely companies manufacturing and processing wood in the Carpathians. In the upshot, production growth in the sector in the past 11 months hit a record high of 27.3%. Also, with foreign companies hired to fell trees, the threat of an ecological disaster has been minimized. But, as was to be expected, ambitious owners of Ukrainian wood harvesting companies refused to put up with such a state of affairs. Forecasts suggest that in the immediate future Polish and German furniture made of our wood will be gradually ousted from the Ukrainian market. Simultaneously, most national wood processing companies are expected to post high legal profits not to lose the market because of political problems of their owners.
Simultaneously, metals producers, despite no apparent political problems, seem to have lost the image of the country’s industrial leaders. This year they plunged to eighth place according to the rate of growth of legal production. The industry was in its heyday in 1999- 2000 when the tax experiment was in process. Deprived of their privileges and faced with the problem of missing export VAT returns, owners of metal mills have lost all interest in posting the actual profits. Currently, most transactions are made via offshore companies. And to save on VAT, mills even resort to converting their earnings into exported meat products. As a result, the Economy Ministry even warned against the growing share of foreign-made foodstuffs on the Donbas food market.
While the dynamic growth in the Ukrainian machine building sector is obviously due to the achievements of the previous Cabinet of Ministers. Kinakh’s government made a bet on high-tech production, stimulating domestic demand for sophisticated equipment. However, the 20.6% growth has been largely due to exports. The growth rate has increased twofold from last year. Further development of the sector is contingent on the availability of long-term investment. In this context, a third place in the rating of the fastest-growing sectors will come in handy for machine-building enterprises when negotiating with bankers and Western investors. They are followed by printing companies, agricultural producers, and chemicals plants.
On the whole, industrial production in Ukraine has grown 6.3% in January through November. Liudmyla Musina believes such a growth rate to be acceptable. She admitted though that the government did not expect such results which have been largely due to recovering economies of the traditional importers of Ukrainian goods such as Russia, the US, and EU. The ministry forecasts a 4.5% GDP growth with a zero inflation for 2002. The government expects GDP growth to reach 4% next year. “We prefer a stable 4% growth to leaps of production volumes followed by downturns,” said Ms. Musina. She went on to say that industrial and agricultural growth targets for 2003 are 6% and 3.8% respectively.
However, it is too early to say how realistic these forecasts are. The best part of the Ukrainian economy is in the shadows. It is impossible to foresee which sector will wish to legitimize its profit in half a year and which one will miff and go into the shadows. These factors are before all influenced by the success of certain political lobbies as well as the efficiency of state regulation of the economy. Mistakes of the previous government have caused the metals and chemicals producers to resort to shadow practices. And now similar trends are discernible in agriculture. Should the government of Viktor Yanukovych reach understanding with the core business elites similar to that the previous government had with the oil tycoons and machine builders, the legal GDP growth will be guaranteed.
