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Why Ukraine didn't become investment Mecca?

Author : Mykhailo Pozhyvanov

Economist Anders Aslund recently commented on the ruling Ukrainian leadership: "they are interested in corruption, they live with it," and this, unfortunately, is the truth. Ukraine will have to choose between such "interested persons" and potential investments. However, the choice seems to have already been made, and not in favor of the latter
22:34, 13 February 2018

Open source

Less than a year and a half passed, as Borys Lozhkin headed the National Investment Council - and now he is already leaving the newly created offspring. (I note that four institutions are involved in investing in Ukraine: the department at the Ministry of Development and Trade, Ukrinvest, subordinate to the Ministry of Finance, and to the Prime Minister, the investment council under the President of Ukraine, plus there is also the post of the authorized official for investments in Cabinet of Ministers).

However, all this was evidently not enough, and in 2016 another body with very vague powers and fuzzy functions was needed. Of course, from the very beginning, it was clear that the National Investment Council is just a screen designed to enrich the total "idle work" of the current authorities. It is interesting that the council had a prototype - the State Agency for Investments and Management of National Projects of Ukraine.

The agency allegedly "led" a number of projects that are of the greatest importance for Ukraine. But we saw no results. For example, the construction of LNG-terminals, with many conversations around this, did not end with anything. After the Revolution of Dignity, the then Prime Minister Yatseniuk speculated a bit about the scheme that it would be nice to revive the idea of liquefied gas, but these conversations did not end with concrete steps. However, we are not talking about Yatseniuk. It's about what a wonderful sinecure is the leadership of such an agency. Or a similar investment council.

As for Lozhkin, in his sphere (media management), he was a good manager. But it's not about the personal qualities of the person involved. The reason is an idle system that cannot be saved by "cherry on the cake" - the most intelligent and creative leader if he is deprived of elementary levers of influence and does not work in synergy with the entire state machine. I do not presume to judge what exactly the reasons brought Lozhkin to his decision. All this, in the end, is completely unimportant.

And also it does not matter what exactly will happen with the National Investment Council and how much its new head Dmytro Shymkiv will turn out to be a professional leader. The main thing is that Lozhkin's promise to make Ukraine an "investment Mecca" remained a mere swing of the air. And it is unlikely that his "shift" in this position - whoever this new person is - will be able to significantly change something.

However, according to Lozhkin, last year Ukraine attracted 2.3 billion dollars in foreign direct investment (which, by the way, is 30% lower than last year's indicator). To whom were these funds addressed? The official did not specify this, but the National Bank did: the investments were used to recapitalize banks. I would venture to assume that this is a question of replenishing the statutory capital of banks mainly with the Russian "residence permit".

Therefore, it is not surprising that the country did not feel such an infusion. If the money went through banks, then, most likely, money was given by foreign companies, and capitals also left the financial institutions - as loans or payment on contracts. If this is all that Lozhkin has achieved, then it is clearly not worth lamenting about his resignation. Because as the head of the investment council, he did not solve the problem of Ukraine's negative image in the eyes of a foreign investor.

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However, now let us return to the figures. 2.3 billion - is it big or small sum? If we consider it in relation to GDP, it is extremely small. GDP in Ukraine is growing extremely slowly: according to the most optimistic forecasts, this macro-indicator may show growth of 3.5% this year. As for investments in the economy, they make up no more than 1% of GDP, whereas, in order to keep afloat, you need at least a hundred times more - in the volume of the second GDP.

Some economic growth in Ukraine really takes place, especially against the background of a catastrophic collapse by 17% during 2014-2015. However, it is much slower than the global or European one. In addition, such GDP growth is not enough to put the country on the path of a sure recovery. As a result, Ukraine risks falling behind even Moldova and becoming the poorest power in Europe in terms of GDP per capita.

Ukraine has almost reached the top ten countries with the worst economic growth rates headed by Venezuela and where the second place is given to Brazil, the third - to Greece, the fourth - to Russia, and the fifth - to Ecuador. Bloomberg analysts, who presented these figures, note that Ukraine has not yet entered the top 10 anti-rating, but is a country with "very poor economic performance" and "is still in danger."

What is the danger? In particular, it is the situation when the main reason for Ukraine's slow economic growth is just a low level of investment. Donbas war affects the economy, but this is only one of the factors, including the problems of the banking system and the stupor in which our Western partners are staying because of the unwillingness of Kyiv to carry out reforms and guarantee the rule of law.

What exactly are we talking about? I will explain by using two examples. As for the banking system, as we know, the National Bank conducted a "reform", reducing the number of financial institutions from 180 to 86. But restructured banks, some of which still have unprofitable loans, fluctuate with the issuance of new loans. Due to the weakness of hryvnia banks are very cautious about customers who import machinery or raw materials. And the decision of the National Bank to increase the base interest rate from 14.5% to 16% further worsened the mood of the business.

At the same time, foreign investors in Ukraine, who have access to cheap financing, feel a little better in the country than local enterprises. The international steel producer ArcelorMittal, which bought the Ukrainian Kryvorozhstal plant in 2005 for $ 5 billion, is successfully expanding its lines and improving its energy efficiency through renewable technologies. But there are some problems.

The executive director of the company in Ukraine Paramjit Kalon complained to the "Dzerkalo Tyzhnya" newspaper that, according to him, local competitors, controlled by the oligarchs, as well as regional officials who are at war with each other, are still attacking the company "using all sorts of tools." Permits for construction are blocked. In addition, ArcelorMittal complains about unjustified accusations of environmental pollution. Kalon adds that the judicial system in Ukraine needs to be reformed so that conflicts of this kind are resolved in court - quickly, clearly and effectively.

All these plans are just dreams, at least for now. A separate topic for discussion is our bureaucracy, the system of obtaining permits, as well as the unique principles of taxation, capable of hobbling any projects. And the notorious Ukrainian corruption is widely known in the country. According to a recent poll, 90% of domestic entrepreneurs admitted that they faced corruption in state bodies during their activities.

Thus, all the components of the current Ukrainian realities are the courts with their bribery and "telephone law", the bureaucracy, exorbitant taxes (in particular, too high on land and just shameful on real estate), a weak national currency and a destroyed banking system - are able, rather, to ward off a potential investor from Ukraine, than to attract it.

Therefore, no cloning of investment councils and agencies is able to reverse this situation. An economist Anders Aslund recently commented on the ruling Ukrainian leadership: "they are interested in corruption, they live with it," and this, unfortunately, is the truth. Ukraine will have to choose between "interested persons" and potential investments. However, the choice seems to have already been made, and not in favor of the latter.

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