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Results of 30 years of Ukraine's independence: From industrial state to raw materials appendage

Author : Olena Holubeva

Source : 112 Ukraine

Ukraine is the only European country that has not yet reached the economic indicators of 1991. According to the World Bank's methodology, 30 years ago Ukraine's GDP was $ 188 billion, and today it is $ 154 billion
23:07, 23 August 2021

Industrial production in Ukraine shows a significant decrease, compared to the previous year
Ukranews

Under the Soviet Union, Ukraine was considered a very developed industrial country. For 30 years of independence, many factories were cut for scrap, the rest are slowly degrading along with our economy. The most promising ones were taken over by the oligarchs.

Ukraine is the only European country that has not yet reached the economic indicators of 1991. According to the World Bank's methodology, 30 years ago Ukraine's GDP was $ 188 billion, and today it is $ 154 billion.

Agriculture and the service sector are failing, and the processes of de-industrialization are intensifying. Investors are frightened, in particular, by the lack of clear rules of the game and respect for private property. As practice has shown, any business or assets in Ukraine can be taken away by the National Security and Defense Council.

Ukrainian industry among the laggards

An illustration of the situation in the Ukrainian industry is the story of the only satellite assembled in Ukraine before full readiness, which the authorities wanted to send into space for Independence Day. "Sich-2-1" can see an oversized car from space, but it will not see a passenger car, while modern spacecraft of a similar purpose allow one to see even a gun in the hands of a soldier. For military purposes, a satellite with such a resolution is completely useless. But we still have not launched such a satellite, although it should have flown away several years ago.

The satellite has been assembled for many years at the Yuzhny Design Bureau, an enterprise where hundreds of missiles for the military-industrial complex and space were designed in Soviet times, including the most terrible missile ever created by mankind, Satan. Now the enterprise, like its neighbor Yuzhmash, is in a deplorable state even without large orders.

And sadly, a similar situation is observed in most other areas. Ukraine has not been producing its own cars and buses for a long time, it builds very few ships and agricultural machinery, which in turn leads to a decrease in the production of metallurgical products.

The industrial production index (a relative indicator of the dynamics of industrial production, showing its rise or fall) in Ukraine has been falling for several years in a row.

“In the first half of 2021, industrial production increased by 2.1% compared to the same period last year. In other words, the volume of industrial production in Ukraine is now less than in 2018, "said Yevgenia Akhtyrko, an expert on macroeconomics, energy, telecommunications, financial and agricultural sectors at Concorde Capital.

Metallurgy and the mining industry (iron ore) remain the industry drivers today. But, in particular, the growth in the volume of the metallurgical industry and the production of iron ore is primarily associated with a large external demand for these products. If the Ukrainian economy does not develop, the country will continue to sell raw materials for export, instead of producing products with high added value.

The production of the main types of metal structures is a reliable indicator of economic activity, which has always been sensitive to trends in the construction sector and the dynamics of renewal of the metal fund within the country. Last year it fell by 26.3%. At the same time, the volume of construction in Ukraine continues to decline. Thus, housing construction in 2020 decreased by 18.5%.

The situation is no better in the engineering industry, which is also one of the largest consumers of metal. There is a tendency towards a decrease in the share of sectors with high added value. The largest decrease was noted in the segments of the production of railway rolling stock and motor vehicles.

Historically, the Ukrainian production of industrial equipment had strong ties with the CIS countries, which acted both as suppliers of parts for Ukrainian enterprises and were the main sales markets for Ukrainian products. Due to the loss of the Russian market and the shutdown of enterprises in the east of Ukraine, the export of engineering products from Ukraine has significantly decreased. If in 2012, at peak values, exports reached $ 13.2 billion, then by 2018 it fell to $ 5 billion. In the total volume of world trade, the share of Ukrainian exports of engineering products does not exceed 0.05-0.1%.

Another blow to Ukrainian machine builders was inflicted by export restrictions from Belarus, imposed in response to Kyiv's actions. More than a thousand pieces of equipment were supplied to the republic annually. This amount would be enough to process an agricultural area the size of the Kharkiv region in just one working day. All volumes of products that Ukraine stopped supplying to Belarus are replaced by goods from Russia.

The shipbuilding industry in Ukraine has also been in decline for several years. The total tonnage of the launched floating craft decreased by 10% compared to 2019. The leading companies in the industry stand without orders. There are no new orders at the Kuznya na Rybalskiy plant, and two unfinished projects are not financed by the Ministry of Defense. The Okean plant began to develop well in 2019, built two barges for the Dutch, but after court decisions they suspended cooperation. For the fifth year, there have been trials at the Kiliya Shipyard. Mykolaiv shipbuilding plant has not been engaged in shipbuilding for 15 years. SMG is mainly engaged in ship repair and ship modernization. Pallada has no orders at all.

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Until recently, great hopes were laid on the oil and gas industry, which is one of the largest consumers of pipe products, which in turn serves as a powerful help for metallurgy. Until recently, huge funds were invested in the development of gas production in the public sector, and attempts were made to attract foreign investors. In the short term, this had a positive effect, after which the decline continued. In January-July 2021, natural gas production in Ukraine decreased by 4%, to 11.9 billion cubic meters in comparison with the same period last year. The largest drop was shown by the public sector (it accounts for 75% of the total production volume).

According to experts, the negative trend will further increase Ukraine's dependence on volatile foreign markets. High gas prices, coupled with soaring electricity prices for businesses that the country will not be able to get away from this year, will further worsen the industrial sector.

It is noteworthy that the authorities are well aware of how bad the current situation is. Last year, the Cabinet of Ministers of Ukraine presented the results of the "National Economic Audit of the State". It showed that over 30 years of independence, the country has not realized its $ 1 trillion potential. It was found that most of the missed opportunities (in monetary terms) are associated with the development, extraction and use of minerals. According to the calculations of the working group, in this area Ukraine has received less than $ 409 billion in 30 years.

The Cabinet of Ministers estimated the volume of lost foreign investments at $ 63 billion.

Investors are scared and don't enter the country

It should be noted that there have not been any investors who would be interested in investing in the processing industries in Ukraine for many years.

“The last time a more or less noticeable systemic interest of foreign investors in the Ukrainian industry was associated with green energy, which was a consequence of the introduction of favorable at that time“ green ”tariffs. In other cases, the interest and participation of foreign investors in Ukrainian projects can be described as small ", Evgenia Akhtyrko said to 112ua.tv.

As we remember, despite the promises and guarantees given to investors by the authorities, "green tariffs" were significantly cut through restructuring. According to the current projects, the calculations are proceeding with great creak (69% for 2020).

Another blow to the industry is the launch of a pyramid of domestic government bonds (OVDPs). The higher the interest rates on government securities, the more capital is washed out of small and medium-sized businesses, because such rates demotivate investors to invest in the real sector of the economy.

"Companies cannot win competition with the state on the proposed interest rates. In addition, this policy of the Ministry of Finance led to an artificial strengthening of the hryvnia, which is a lethal injection for the raw material economy. Since the level of added value is very low in the structure of the finished product, the strengthening of the hryvnia eats up almost all profitability of exporters ",  emphasizes financial analyst Olexiy Kushch.

Decent support for industry from the state is also not observed.

"In 2017-2018, the food industry, clothing and footwear manufacturers began to increase volumes, as new markets opened up for them. But the state did not stimulate these" entry points "with preferential loans, preferences," Kushch comments.

By signing the Association Agreement with the EU, Ukraine opened the borders for European goods that are brought to our country either without duties or with minimal duties. European competitors are pushing our products out of our own market. Olexiy Kushch emphasizes: "Such a scheme, when the GDP is positive, and the industry is in the red, is called a hybrid recession."

A striking indicator is the manipulation of the government's abolition of VAT on electric vehicles, in connection with which their production in Ukraine has stalled.

But most of all, investors are frightened by the lack of stable and predictable rules of the game not only in industry, but in all areas of the Ukrainian economy, a top manager of a large company told 112ua.tv on the basis of anonymity.

"There has not been such a situation as it is now in all the years of independence. Respect for private property has been completely destroyed in the country. Now the NSDC is the only answer. If this continues, this body will cancel the results of privatization tenders without trial and investigation. Not just enterprises will be taken away, as now, but houses and cars. In such a situation, no one dares to freeze real money in assets that can be taken away at any time, "he said.

Investors in Ukraine, including in the direction of industrial production, will not appear until uniform and understandable rules of the game are created, which will be respected and observed by everyone without exception: officials and security officials. Also, until the business begins to feel protected, including with respect to assets that no one could take away without trial and investigation, the interlocutors of 112ua.tv say.

"The industry does not require specific conditions to attract investors. As in any other industry, investors need a clear regulatory environment, equal rules of the game, no corruption, and an effective judicial system," Akhtyrko says.

The authorities have no recipe for a way out of the situation

Instead of creating simple and understandable incentives, Zelensky's team is trying to extend a set of tax and customs benefits, which supposedly should stimulate the development of industry.

"We have an important and ambitious goal for the development of industrial parks. This is the principle of industrial organization popular in the world, which is an effective tool for attracting investment," Zelensky said.

The President expressed the hope that "philosophy of industrial parks" will help the mining towns "in which there is nothing but just mines."

Already this fall, the parliament may pass bill 4416-1, which concerns the stimulation of the creation of industrial parks. It is personally promoted by the head of the Verkhovna Rada Committee on Economic Development Dmytro Natalukha, who is one of the co-authors of the document.

The document provides for compensation to management companies, initiators of creation - business entities and participants in industrial parks - 50% of the costs of connecting to power grids; compensation to participants of industrial parks for interest payments on loans, depending on the part of the export of products of their own production; partial compensation for investments of participants of industrial parks in the creation of production, conducting economic activity during the first three years.

Another bill on amending the Tax Code No. 5688 regarding the creation of favorable conditions for attracting large-scale investments in industrial production, co-authored by Natalukha, is expected to exempt from value added tax operations on import into the customs territory of Ukraine under the customs regime of import of new equipment , which is imported by participants of industrial parks, exemption from income tax for ten years, granting the right to local governments to set preferential rates of real estate tax and land payments.

The situation is undoubtedly twofold. On the one hand, if investors were interested in investing in Ukraine (as it was before), they would do it without additional benefits and preferences. And where is the guarantee that the guarantees provided will be used not by real investors, but by oligarchs and members of the presidential team, who will earn good money, while the budget will not receive any real benefits?

***

Note that against the background of stagnation in the industry, Ukraine continues to increase the export of grain and sunflower oil. While the consumption of food in the country is decreasing. And this fully reflects the situation of falling real incomes of the population and the number of Ukrainians in the country. In the first half of this year, the volume of food production decreased by more than 10% compared to the same period last year and, according to experts, it will continue to decline.

And when the population does not have money, the service sector does not develop properly. All countries of the world understand that the economy is based on strong industry; only in Ukraine they do not understand this.

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