Melodies and Rhythms Of Government Regulation

As per President Viktor Yushchenko’s proposal, last week’s economic forum, which was held in the form of a dialogue between the government and the business community, will be repeated on a quarterly basis. Round two will address fiscal issues. “We will meet every quarter for as long as we do not grow tired of each other,” the president said. He accepted the proposal from the head of Ukraine’s tax authority to move the forum venue to the more spacious assembly hall of the State Tax Administration (the May 25 forum was held in the concert hall of Kyiv’s Ukrainian House). He further stressed that the reform of the nation’s fiscal system requires considerable time and effort, and that it is impossible to reform it within a year’s time. Yushchenko expressed his support for the discussion of VAT problems in particular and the taxation system in general. In addition to the ministers of the economy and finance, the president suggested inviting economics experts Oleksandr Paskhaver and Valeriy Heyets “in order to get a feel for the fiscal problem in the country.” Haven’t they already? Incidentally, on May 25 Minister of the Economy Serhiy Teriokhin apologized to journalists for the apologies that First Deputy Prime Minister Anatoliy Kinakh offered to Russian oil traders for the accusations made against them in connection with the recent gasoline crisis in Ukraine.

With the second quarter coming to a close, the nation has yet to hear of any increase in foreign investment in Ukraine’s economy. While the government keeps silent, unofficial sources point to a declining trend in foreign investment dynamics. Indirect proof of this may be a series of high-profile public events that took place last week. After all, foreign investors are closely watching the relationship between the Ukrainian government and the business community. It appears, however, that last week the nation’s leaders tried to drown out the voices of businessmen, who came forward with serious complaints about the government’s policies.

Number one on the list of last week’s events was a forum entitled “Regulatory Policy as a Guarantee of Open and Transparent Government,” attended by Ukraine’s President Viktor Yushchenko, Prime Minister Yulia Tymoshenko, and First Deputy Prime Minister Anatoliy Kinakh. Planned as an adjunct to this forum was the report (already postponed once) by economy minister Serhiy Teriokhin entitled “Government Efforts to Create a Business Environment Conducive to Innovation and Investment.” A same-titled news conference organized by State Tax Administration chairman Oleksandr Kyreyev and his deputies was scheduled to take place at the same time.

The star speaker at the forum was the president. He threw some cold water on the businessmen’s expectations by inviting them to “get ready for a fresh start.” Could this mean that they will be expropriating everything? Of course not. All joking aside, Yushchenko is not a complete stranger to business, but he tried to show his toughest side.

As the overriding goal of the government and the business community, the president identified bringing the economy into the open and stressed that “neither private business nor the authorities may put up with the fact that virtually half of our businesses are using shadow schemes. We will fight this without mercy.” Speaking about taxes, he pointed out that under the current conditions it is much simpler to work “in the shadows” than reveal one’s cash receipts to the authorities. The latter also received their fair share of criticism and lecturing from the president, who said that the focus of the authorities should not be the state, but businesses and specific individuals. At the same time he recommended that they should also contribute to the “macroeconomic culture.” The president identified the state budget as the primary component of this culture: “We took over the reigns of power with a budget deficit of 32 billion. This is the deficit of a country at war! I dread to think what would happen to the previous government a year from now, given their approaches to pricing.” This rebuke directed at the former leadership was followed by a compliment to the current government, which has minimized the budget deficit. “But no one should be under the false impression that the 2005 budget is a horn of plenty,” Yushchenko said, adding that budget revenues are already exceeding targets by 9%. The president also expects inflation to decelerate: “The first quarter felt the political repercussions from the fourth quarter of last year, which is why inflation in the first three months reached 4.4% — a yellow card for us.” However, April inflation declined to 0.6%, while “July or August, or perhaps even June, might see deflation.”

Repeatedly returning to the question of investment, the president was apparently implying that he views Russia as the primary source of investments. Could this be the reason why he urged his team not to create an illusory enemy, searching for would-be conspirators abroad? “We have closed the book on the so-called energy crisis. Those with patience and wisdom have stopped theorizing about conspiracies. I would like us to stop toying with legends and myths so that we won’t be the laughing stock of the world. We got ourselves into it [the gasoline crisis] and climbed out of it on our own. These are subtle things, and the whole world is watching how our country is responding,” Yushchenko said.

The president then donned the role of investment analyst and spoke extensively on improvements in the country, such as the rising national rating and open doors to foreign capital. As a result, by the end of 2005 the volume of direct foreign investment is expected to increase by 1.5 times from 2004.

How much hope can we hold out for this, given the “death” of free economic zones this year? Yushchenko even expressed condolences to investors affected by this move and said that he understood the discomfort this must have caused them. He also promised to look further into this matter with an ad hoc commission. As if to atone for this, the president reminded those present that by June 1 all of Ukraine’s customs offices should switch to one- stop service, and on July 1 every region will have one-stop services for the registration of businesses. He even threatened to dismiss the chiefs of regional tax authorities and administrations if they fail to comply. He further obliged all ministries and departments to work in the interests of businesses. “I have a request, or even an order, for every department and ministry to submit within 10 days their resolutions to revoke those regulatory enactments, which parliament decided to strike down in its bill on the system of permits,” Yushchenko said. He promised that if and when this bill passes in parliament, “over 1,000 regulatory documents will disappear immediately.” According to the president, if these enactments are eliminated, “the process of registering businesses will be cut down threefold.” He then displayed a heap of documents required to register a startup business. “For two-thirds of Ukrainian citizens this is a barrier they cannot overcome,” Yushchenko said.

The president ended his speech by stressing the need to reform the fiscal system by introducing a single social tax and reviving the simplified taxation system for small businesses. The president again urged the government to “extend a hand to the business community.” Then Yushchenko passed the floor to Anatoliy Kinakh, bypassing Prime Minister Tymoshenko, a move that is bound to cause some speculation, especially since Kinakh immediately criticized the government for “imposing VAT on the import of investment funds.” “This mistake must be remedied,” Kinakh said, rightly emphasizing that the government must also step up protection of ownership rights in the country. Thus, a signal has been sent out to investors. But it appears that it consists mostly of good wishes.