Seven holes of Ukrainian ship: key challenges of 2016

Author : Mykola Topalov

Year 2016 could be remembered by some positive sides: the economy returned to growth, the introduction of e-declarations, nationalization of Privatbank. But also there were some negative events
23:21, 5 January 2017

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112 Agency

We brought together major economic failures of Ukraine’s authorities.

Late last year, we conducted a survey among business and government asking "Why in 2016 our lives would become better?"

Even despite this question, businesses had pessimistic forecasts for next year.

"In the new year we would not feel these illusions, and we would not feel disappointment. You are disappointed. We live in a permanent political crisis," said one of the respondents.

Most of the activities that are called as "painful but necessary", they hit the middle class.

The minimal wage of 3200 UAH, an attempt to limit the parcels, Single Contribution for entrepreneurs who do not drive activity, the right for local authorities to verify the employment relationship, persistent attempts to eliminate or, at least, emasculate "limited tax" – these are significant losses for the small business.

This "fighters against shadow economy" somehow overlook offshores, "tax pit", and the oligarchs remain untouchable.

So, the positive sides of 2016 would be remembered by economic growth, the introduction of e-declarations, nationalization of Privatbank. But also there were some negative events.

Odesa Portside Plant: sell without selling

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The authorities always talk about how important is launching a large-scale privatization and attracting major foreign investment. As a result, not a single sign of privatization for 2.5 years has been noticed.

Thus, privatization of Odesa Portside Plant (OPP) was to be the model of deregulation and driver for investment, but turned into a bad example.

Over 15 months since the launch of selling OPP, neither the government, nor the president, nor the State Property Fund are not engaged in market privatization of OPP. Lack of applications in two campaigns on its sale was the best proof of it.

Related: Odessa Port Plant temporarily halts production

The competition was not just postponed twice. This is a major failure that puts an end to privatization in Ukraine. The people responsible for the process led to the state loss of hundreds of millions of dollars.

In summer plant costed hundreds of millions of dollars, now it is hundreds of millions and even less. If Ukraine does not sell it, the privatization process stops.

“Mykhailivsky bank” operation. Ukrainians gave 1.2 billion to "those guys" and Poroshenko

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State reimbursed 1.2 billion to depositors of Mykhailivsky bank who consciously or unconsciously placed deposits on the bank accounts, and bank-related financial companies. How it happened?

Related: Ex-Director of Mykhailivskyi bank released under house arrest

At some point, the National Bank forbade Mykhailivsky bank to attract retail deposits, so it attracted funds to affiliated financial companies that were not parties to the deposit guarantee system. In fact, partly, this is the fault of the investors, who were just looking for high rates, not studying details of the treaties.

Related: Deceived deposits: Ukrainian authorities do not want Mykhailivsky bank case to repeat

According to the law, investors cannot count on any compensation. However, November 15, Parliament approved the necessary bill, introduced by President Poroshenko.

That is, taxpayers paid for populist decisions and negligence of the state, not those who stole the money. The president promised that the perpetrators of this fraud would be punished, and the money would be found. But it did not happen.

Related: Mykhailivskyi Bank depositors picketed Ukrainian Parliament, demanded their money back

Earlier we wrote that the money, collected from investors, often derived through the mechanisms of lending to companies related to the bank's shareholder Viktor Polishchuk.

Eternal moratorium

In October, it was seventh time when Parliament extended the moratorium on land sales (for another year). This is another ill-considered decision of Ukrainian parliament, which pulls the country down. Deputies again stop the land reform, while the President and Prime Minister silently tolerate it.

Related: Ukrainian Parliament extends moratorium for the routine inspections of the businesses

This temporary measure, moratorium on sale of agricultural land, was introduced in 2001. It is the most problematic issues of Ukrainian economic reforms.

The point is that the moratorium affects the wealthiest segments of the population: 68% of the land, or 27.7 million hectares of arable land, are owned by peasants shareholders. According to the Center for Social and Economic Research "CASE-Ukraine", moratorium directly affects at least 16% of citizens.

Related: Groysman shows what to expect from a moratorium on tariff increase

Although probably, we should not underestimate the land owners. They are able to make decisions and know exactly how to dispose of their own property. Unfortunately, 400,000 of the owners will never do it because they are dead.

Reform of the civil service

Adopted in December 2015, "Law on Civil Service" was considered one of the main laws of the year. High hopes were put on it.

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Its main task was reforming the civil service system, which was created in Soviet times and has always been a means of combating political elites, inter-party confrontation and interests of bureaucrats.

Related: Infrastructure Ministry to fight corruption with Korean system

However, when in 2016, the Act came into force, competitive appointment began, and everything went wrong.

The law establishes the post of state secretaries - the top managers of ministries that monitor how the state carries out state policy in a particular area. They are appointed by a special commission for five years.

Related: Vice Prime Minister: Government assigned USD 9.2 bln to restore infrastructure in Donbas

Unfortunately, the competition for the post of state secretaries were accompanied by constant scandals. So, tenders in the Ministry of Infrastructure and the Ministry of Health were dubious.

"We have a good opportunity for a revenge: these people would be called reformers, and these would be called secretaries of state, who will be engaged in "business." We would warn: we do not screen anyone, and no one would do his  business behind out backs," said the Minister of Infrastructure Volodymyr Omelian.

One of the authors of the law on civil service Denys Brodsky also said that implementation of the law was failed.

"Rotterdam+" and Akhmetov

In April, the National Commission for regulation in the energy and utilities, headed by a former manager of "Roshen" Dmytro Vovk, introduced a new method of pricing for Ukrainian coal. The base of it was European formula API2 + freight.

API2 is a composite index of prices for coal in the ARA region (Amsterdam, Rotterdam, Antwerp), which includes the cost of coal and the cost of delivery to the port. In addition, the formula includes logistics costs. API2 rate already includes the cost of transportation, but the regulator also added the cost of freight.

Related: Coal stocks grow in Ukraine, - Energy Minister

It turned out that the Ukrainian anthracite extracted in the mines of Dnipropetrovsk and Donetsk regions, must first get to Rotterdam and then go back to the domestic thermal power plants.

Since March 2016, DTEK (energy division of System Capital Management headquartered in Donetsk) of Rinat Akhmetov began selling electricity for higher prices with this formula. Tariff of thermal generation in October rose more than 100% compared to the spring of 2015. In November, the tariff for thermal power plants continued to increase and reached a new record high (1.8 UAH per kilowatt-hour).

Related: Ex-Head of Kyivenergoholding detaned, he had Putin's clock

DTEK is the main but not the only beneficiary of the new methods of coal prices. "Centrenergo" company also benefits from it.

Experts have repeatedly criticized the "Rotterdam + formula" noting that NERC has not provided complete pricing of coal and electricity by this formula. In September, an expert in energy Andriy Gerus appealed to the court to cancel the scandalous formula. Sitting in this case has been repeatedly postponed, and December 29, the court refused to cancel the formula.

Doing Business failure

October 25, World Bank published the Doing Business-2017 rating, the main indicator of the global business environment.

This rating is important because it is a basis for economic strategy of Ukrainian government. It often measures its effectiveness in the degrees of the ranking. Even some legislative initiatives are specially prepared by the methodology of the index.

According to the World Bank, Ukraine ranked 80th place among 190 countries.

Progress by 2016 amounted to three points. "Proximity to the best world practices has been improved," notes the bank, but even this achievement seems misleading.

Three points are the result of methodological changes in the ranking: the introduction of gender component, expansion in the field of taxation. In 2015, retrospective application of methodological changes put Ukraine on 81 place. The real achievement of Ukraine is one point. The similar situation was in 2015. Officials highlighted that Ukraine has overcome some 13 steps, although there were only four. The improvement in specific areas of the ranking largely follows the trends of last year, indicating that the inertia of many positive changes have been laid by 2015.

"Independent" energy regulator

September 22, Verkhovna Rada adopted the law on the National Commission that conducts state regulation in the energy sector and public utilities. December 8, it entered into force. NERC regulates the activity of natural monopolies in the electricity supply, oil and gas sector, and establishes rates in these areas.

Related: Ukraine’s energy system ready for extreme cold spells in winter, - Minister

Before the vote, ambassadors of the "Big Eight" called on Ukraine to adopt a law on the controller, insisting on its independent status.

Independence of the regulator is needed to protect consumers and market participants. After all, monopoly markets that do not fall under authority of NERC also might be subjected to abuse.

If the regulator allows licensees to include in their costs results of nontransparent tenders, everything would be paid by the consumers (if not directly out of pocket, then through subsidies that come from taxes).

After all the talks concerning the independent regulator, parliament passed a law that keeps control of the Commission over Bankova. Thus, the adopted document envisages that the members of the NERC should be approved by the President on the decision of the Nominating Committee, which consists of five members. Two should be determined by the president, another two by the Parliament, one by the Cabinet (for the Minister of Energy).


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