No Privileges for Offshore Entities
The Second Congress of Ukrainian Metal Workers and Coal Miners held in Dnipropetrovsk last week discussed, among other problems, the development of the mining-and-metallurgical complex (MMC) and the results of an economic experiment in this sector. The congress was attended by President Leonid Kuchma and First Vice Premier Oleh Dubyna.
Taking advantage of the opportunity, MMC and sector trade union leaders spared no harsh words to describe the situation in the sector. According to them, the revision of the experiment conditions earlier this year, a worsened situation on the world steel market, and the protectionist actions by the US, Russian, and other governments have reversed the achievements of Ukrainian steel-makers, so now the nation’s MMC, which accounts for 27% of GDP and about 40% of hard currency earnings, is again in dire straits. The state has so far failed to pay steel mills an almost a billion in export VAT debt, compensate for insufficient current assets, and clear almost UAH 84 million in wage arrears. The sector captains hinted to the president that tax exemptions be restored and fuel and transport charges be reduced.
Having carefully listened to the delegates, Pres. Kuchma presented arguments of his own: he recalled that the main goal of the MMC economic experiment is raising funds to modernize the sector, which requires UAH 50 billion at a conservative estimate. For the wear- and-tear of steel mills’ fixed assets is 65%, almost two-thirds of the products are low-technology items, while metallurgy in Ukraine is 1.5- 2 times as power-consuming as in, say, the European Union.
In addition, the president said, although UAH 7.4 billion have been earmarked in the past two years for retooling the sector’s enterprises, only 8% of the manufacturing equipment has been updated. “The state,” he said, “met the MMC halfway. Although we put great hopes in this experiment, it has failed, unfortunately, to bring about any radical changes, with only 10% of the gained profit being spent on modernization.” “On the one hand,” Mr. Kuchma noted, “the MMC experiment has worked in the sense that has it stabilized production and improved financial and economic results.” On the other hand, “we failed to achieve the projected results,” so, in his opinion, “a new mechanism” of incentives for the sector has to be considered. Above all, the latter should not be so dependent on the foreign market situation because 75% of all metal products are intended for export. “We saw the danger of this late last year,” the head of state added, “when export prices for metal fell, but demand stayed at the same level.” Moreover, a number of countries have launched antidumping investigations and closed their markets. It makes no sense for the state to support the experiment under these conditions, the president believes. “The paradox is,” he emphasized, “that the state extends privileges to steel makers, but they use these to build up exports at underrated prices.” Further, the metal price on the domestic market is now 50% lower than on the foreign market, and consumers have begun to increasingly import metal products from abroad.
The president believes this has been caused by the actions of large metallurgical enterprises which “continue to form metal prices, taking advantage of the shortcomings of the antimonopoly law and the absence of a full-fledged competition.” In addition, in the chief executive’s opinion, they sell metal products to offshore areas, i.e., “to themselves,” at underrated prices and then resell them at world prices and leave the “difference” there as well. “Shame on you,” said the head of state. In his words, “there are two ways in which things can develop” under the circumstances: either the owners of large enterprises “understand this and begin to work as they should or I will request Verkhovna Rada to cancel the experiment.” Seriously or not, Mr. Kuchma suggested that every steel mill put up a plaque bearing the owner’s name. Then, he noted, “there will be no problems with wages.” In his opinion, Ukraine should market “end products,” such as machines, aircraft, and equipment, and not to confine itself to “supplying raw materials and semi-finished goods.” In this connection, Mr. Kuchma asked the delegates and the congress chairman a far from idle question: is it not time to carry out economic experiments in the nation’s mechanical engineering rather than in metallurgy, in other words, encourage the consumption, not the production, of metal on the domestic market?
