Ukraine's obligations to EU in exchange for receiving 1.2 billion EUR loan

Author : Media outlet

Source :

Finance Minister Serhiy Marchenko and new head of the National Bank Kyrylo Shevchenko on behalf of the government signed a memorandum with the EU in Brussels on the allocation of macro-financial assistance to Ukraine
21:37, 5 August 2020

Open source

Ukraine has assumed a new portion of obligations in exchange for receiving money.

At the end of July, Finance Minister Serhiy Marchenko and new head of the National Bank Kyrylo Shevchenko on behalf of the government signed a memorandum with the EU in Brussels on the allocation of macro-financial assistance to Ukraine in the amount of 1.2 billion euros. But until recently, the terms of the memorandum were known only in general terms, and only now the full text of the agreement has appeared, which was published by the journalists of the Ukrainian News outlet.

As it turned out, we can get a loan for 15 years at low-interest rates (0.125% per annum) under several conditions. In particular, the issues of salaries of members of supervisory boards of state-owned companies, the gas market for the population, medical purchases, etc. are spelled out.

Some of them overlap with those that are already laid down in the memorandum with the IMF, some contain new nuances.

The memorandum will receive legal status only after it is ratified by the parliament, for which it is planned to convene an extraordinary meeting of the Rada around the 20th of August tried to figure out what Ukraine had promised to be done in exchange for this loan.

Related: Naftogaz raises price of natural gas for population

Billion for coronavirus

Ukraine received macro-financial assistance from the European Union before. There have already been four such programs. Our country received the last tranche in the amount of 500 million in June this year. In total, since 2014, funding has amounted to about 3.7 billion euros.

Back in May, the European Union agreed on a new program - this is special macro-financial assistance to stabilize the economy in connection with the pandemic. Ukraine was included in the list of 10 countries that will receive money from the EU (Georgia, Moldova, the Balkan countries are also on the list). The total funding will amount to 3 billion euros, but the largest amount - 1.2 billion - was allocated by the European Union to our country. For comparison: Georgia will receive only 150 million, and Moldova - 100 million.

The loan is designed for 15 years at a very low-interest rate (0.125% per annum).

It should be noted that a lot of time has passed since the macro-financial assistance memorandum was signed. The EU delayed the memorandum until it became clear that our country would continue to cooperate with the IMF. This is a prerequisite for obtaining a new loan from the European Union.

The money from the EU will be transferred directly to the budget, and, according to the government, it will be used to maintain macroeconomic stability and reforms.

"In fact, we are talking about banal financing of the budget deficit. We are not talking about any investment programs or business support. A loan from the EU will fall into the budget black box and from there will be directed either to finance debts or to cover urgent budget payments. In other words, since this is a common boiler of the budget, it is not excluded that they will be used for corruption," economist Viktor Skarshevsky believes.

The program itself, unlike the previous ones, is a kind of "first aid" for the pandemic-stricken economy. It is designed for only a year (the previous one, for example, was valid for 2.5 years).

Ukraine will receive the first tranche in the amount of 600 million immediately after the ratification of the memorandum (that is, in late August - early September), the rest after the fulfillment of its conditions. Thus, it is assumed that we will be able to complete all the reforms prescribed in the memorandum within the next 12 months, and if not, then the EU will have a reason not to pay the second tranche in the amount of 600 million.

Related: Ukraine may sign $350 million loan agreement with World Bank in August

Salaries to the supervisory board members, healthcare, gas

It should be noted that until recently, the terms of the memorandum were known only in general terms.

In particular, four blocks were reported.

  • Public finance management (corporatization of the State Procurement Group, a continuation of the reform of the tax and customs services).
  • Public administration and the rule of law (judicial reform, reform of the High Anti-Corruption Court, creation of an ethics commission with international participation, reform of the civil service).
  • Improving business climate (expanding the powers of private executors, blocking funds in bank accounts by granting permission for electronic communication between banks and executors, gradually eliminating the tax police and creating the Bureau of Financial Investigations).
  • Sectoral reforms of the economy, in particular, the creation of independent supervisory boards in the largest state-owned enterprises, the corporatization of the public sector, etc.

Related: Ukrainian parliament forbids banks to charge fines for non-payment of loans during quarantine

"All this is also in the memorandum with the IMF, so the agreements with the EU, in fact, duplicate and consolidate the former," says Skarshevsky.

However, the full text of the memorandum, which appeared only recently, still contains many interesting details.

  1. Salaries of members of supervisory boards

The memorandum with the EU states that Ukraine should reform the management of state-owned enterprises, in particular, create independent supervisory boards at the largest 15 state-owned enterprises with market remuneration for their members.

During the lockdown, Ukraine limited salaries of the officials at state-owned enterprises to 47,000 UAH (1,700 USD), in connection with which President Volodymyr Zelensky has already begun to receive complaints from offended members of the supervisory board. That is, the EU requirement, which PM Shmygal agreed to fulfill, is to restore the former huge salaries of the members of the supervisory board.

Zelensky had previously tried to lift the restrictions on the salaries of members of the supervisory board, but after numerous indignations in the media, he withdrew the corresponding bill.

How the government intends to persuade the MPs to vote for this norm? The measure is clearly unpopular and it is unlikely that it will be possible to collect votes for it.

  1. State purchases of drugs

The memorandum with the EU explicitly states that drugs should be purchased through a specific company - the state-owned enterprise Medical Procurement of Ukraine. It, in turn, should create an independent supervisory board, which will monitor the activities of this company.

As stated in the memorandum, this is done "in order to increase the transparency and efficiency of procurement of medical services, especially given the current medical problems associated with the outbreak of COVID-19."

Let's remind: earlier medicines were purchased through international organizations. But then the purchases were transferred to a new specially created enterprise. Moreover, the topic of public procurement has recently become one of the most resonant in the Ministry of Health and a reason for a group of so-called Soros to demand the resignation of head of the Ministry of Health Maksym Stepanov. Soros's lobbyists talk about the lack of transparency in the distribution of the drug budget and "personal interest" of Stepanov himself.

Related: Historical collapse of National Bank discount rate: What will happen to loans and deposits?

"On the one hand, it is strange that the memorandum does not spell out the principles of public procurement, but specifies Medical Procurement of Ukraine company. This looks like another confirmation of external management. On the other hand, in fact, it might turn out that the company will have to change a lot in to please Western partners," says Skarshevsky.

Apparently, this is the basis for the regulation on the creation of an "independent supervisory board," which will include people, oriented towards Western structures. That is, they will receive full control over all drug purchases.

  1. Reform of tax and customs authorities, appointment of their heads

This point is in the memorandum with the IMF, and the reform is already underway. True, so far only the head of the Tax Service (Oleksiy Lyubchenko) has been appointed, and the head of customs, Ihor Muratov, is an acting head.

Lyubchenko's status (he is considered close to the president's friend Ilya Pavlyuk) is also suspended. Because he was appointed on a fast track in the midst of the coronavirus epidemic. But then, at the request of the West, an amendment to the law was adopted, according to which persons appointed under this procedure hold their posts only until the end of quarantine. And then a new competition should be held.

By the way, according to one of the versions, it is precisely in order not to hold these contests that the authorities are extending the quarantine time after time.

But, apparently, the West does not like this, which is why it demands the appointment of full-fledged heads of tax and customs offices, where it is likely planning to promote people whom it understands.

  1. Expanding the use of cash registers

"Implementation of tax and customs reform plans (especially with regard to improving the VAT monitoring system based on risk management, development of methodology and legal projects for an electronic tax audit, introduction of electronic cash registers and the use of new IT solutions to expedite customs clearance)", the memorandum reads.

Related: Most Ukrainians oppose cooperation with IMF, - poll

On August 1, a PPO software was launched in Ukraine - enterprises can use smartphones as cash registers. But businesses complain about the software of the State Tax Service (they say that it fails), and the alternative ones are paid.

But PPO in a smartphone so far applies only to those enterprises that already use cash registers. Their mandatory use for small and medium-sized businesses has been postponed to the next year, and now the specialized associations are trying to postpone this "time of H" or even cancel the mandatory transition to cash registers altogether.

A bill on this topic has already appeared in the Rada. But in connection with the obligations that Ukraine took to the EU in the memorandum, the fate of this bill raises questions.

  1. Judicial system

The memorandum states that the Ukrainian authorities have pledged to adopt amendments to the law on judicial reform in accordance with the recommendations of the Venice Commission. We are talking about those obligations that are already indicated in the memorandum with the IMF, in particular, the creation of a commission with the participation of foreigners, which will conduct the selection of judges.

"Although, by and large, the same ethics commission with foreigners who do not know either Ukrainian legislation or even the language is simply treason and another confirmation that our country is under external control," says Rostyslav Kravets, a senior partner of the law firm Kravets and partners.

Related: Ukraine should think of IMF debt restructuring from the perspective of 'can we do this,' - Parliamentary Speaker

  1. Anti-corruption bodies

"The authorities will ensure and strengthen political independence and effective operation of the National Anti-Corruption Bureau (NABU) and the Specialized Anti-Corruption Prosecutor's Office (SAP), including by:

  • the creation of a depoliticized commission to select a new prosecutor of the SAP (the powers of the current prosecutor Nazar Kholodnytsky will expire in November 2020 - Ed.)
  • introduction of an autonomous system for managing electronic affairs NABU / SAP," reads the text of the memorandum.

Recall that current head of the SAP Kholodnytsky should leave his post in November 2020. Moreover, there are rumors that this will happen earlier - in August.

As we can see from the text of the memorandum, the West is concerned about the process of selecting its successor. Probably, he would like the commission for the selection of a new anti-corruption prosecutor to be under his control and a person would be appointed to this position who would act in conjunction with the head of NABU Sytnyk (he is also considered to be oriented towards Western structures).

At the same time, if a person who does not share Sytnik's approaches is appointed to the post of head of the SAP, he can completely block his activities - without the sanction of anti-corruption prosecutors, NABU detectives cannot conduct investigative actions.

Related: World Bank to provide $350 million loan to Ukraine

  1. Expansion of powers of bailiffs

The Ukrainian authorities have committed themselves to equalizing the powers of state and private bailiffs, allowing private traders to act on behalf of any client and against any debtor, including state or public organizations.

"Although such a mixed system is not entirely suitable for Ukraine. There are already precedents when several performers, both state and private, open production for the same enterprise. And as a result, it does not work to help revive a bankrupt enterprise, but to finally kill it. In addition, such a scheme can be used for a raider takeover," says Kravets.

The second part of the assignment for this block is to simplify the blocking of bank accounts through closer communication between bailiffs and banks.

“Again, as practice shows, our bank accounts of debtors are often blocked in violation of the rules, and people are generally left without a livelihood,” says Kravets.

Also, a separate sub-clause highlighted the obligation to facilitate the return of assets of state banks, including by taking measures through the courts and criminal prosecution. It is clear that this paragraph is mainly about PrivatBank and its former owners – Kolomoysky and Bogolyubov.

  1. Bureau of Financial Investigation

Under the terms of the memorandum with the EU, the Cabinet of Ministers must decide on a "phased dismantling" of the tax police (it still exists and operates within the framework of the already disbanded State Fiscal Service) and develop a bill on the creation of a new agency for financial investigations of "serious economic and financial crimes."

Several conditions must be met: the delineation of the powers of the new agency with the powers of other law enforcement agencies; political and operational independence (including through competitive selection of the head); analytical work.

Related: Ukraine must maintain independence of National Bank amid governor’s resignation, - IMF

  1. Gas market for the population

The Ukrainian authorities have made several commitments:

  • give consumers the opportunity to choose their gas supplier;
  • introduce a gas market for the population and "cost-reflective" tariffs, that is, abolish the JI, which supplies gas to Ukrainians at a reduced price.

Actually, the same points are in the memorandum with the IMF, and they have already begun to be implemented. Since August 1, a gas market has been operating in Ukraine for the population with market rates, and you can also change the supplier according to a simplified scheme.

However, so far the market tariffs work only for kitchen gas and gas for heating in private houses. For the local energy transmitters, a delay has been introduced until the end of the next heating season, that is, until the spring of 2021.

As for the change of suppliers, then, apparently, this item is being squeezed for European gas traders. According to analyst of the Institute for Strategic Research Yuriy Korolchuk, they have long been "super pumped" and are waiting for the full opening of the gas market. But while its realities are such that Naftogaz still holds monopoly positions, and it is he who dictates the rules of the game and pricing policy.

Related: Zelensky’s aid, World Bank VP discuss $350 million loan to Ukraine

Setting a hook

"The Memorandum with the EU is a “back-up dancer” of the IMF agreements. But Europe also pursues its own goals, in particular, it lobbies for the introduction of its representatives into Ukrainian state companies and high salaries for them, as well as the business interests of European gas traders. The memorandum does not cancel restrictions on the export of round timber, but, obviously, they decided not to force the topic, since in reality these restrictions do not work anyway, and our timber is actively shipped to Europe,” says Viktor Skarshevsky.

Strategically, this memorandum, like the memorandum with the IMF, is tied to the fact that there is no deviation from the course that Poroshenko laid down. That is, Ukraine will continue the so-called policy of truncation – both of the business potential and the social part. They made it clear that we have no right to afford what other countries are doing now – to introduce monetary and fiscal measures to support business, to pursue a protectionist policy in relation to domestic production, and so on,” said Oleksiy Kushch, an analyst at the Growford Institute.

According to Skarshevsky, some of the reforms prescribed in the memorandum are unrealistic. Rostyslav Kravets agrees with him. "In particular, the judicial system and the creation of independent supervisory boards of state-owned companies may take much longer," he says.

Related: Transit of Russian gas through Ukraine through TurkStream decreases by half

This might become a formal reason for refusing the second tranche.

The memorandum states that the EU will monitor the implementation of the points of the memorandum, and the allocation of the second tranche will depend on this.

“In fact, everything will depend on the obedience of our authorities. If the parliament passes a law on the localization of production, which the EU is already dissatisfied with, this may become a reason for refusing the second tranche, but under a different a pretext - non-fulfillment of the terms of the memorandum and violation of the terms of reforms,” Skarshevsky concluded.

Lyudmyla Ksionz

Read the original text here.

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