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New authorities deal the final blow to Ukrainian industry

Author : Olena Holubeva

Source : 112 Ukraine

GDP fall, chronic poverty, an increase in migrant sentiments, and a deficit in the Pension Fund – according to experts, our country would face it soon
10:00, 21 December 2020

aviation industry
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GDP fall, chronic poverty, an increase in migrant sentiments, and a deficit in the Pension Fund – according to experts, our country would face it soon. All because of the record fall of the industry. Moreover, economists are convinced that not only the pandemic has led to this state of affairs, but also the lack of professionalism of the personnel appointed to their posts by the president's team.

Related: Ukroboronprom company increases arms exports to $ 908 million

The main pillar of the Ukrainian economy is an industry, which accounts for 20-22% of GDP and employs 2.5 million people. According to texty.org.ua and YouControl, after Zelensky's government replaced the heads of state-owned enterprises, our companies lost 10 billion in 2019. In 2020, the trend for unprofitability increased: from January to October, compared to the same period in 2019, production decreased by 6. 8%. According to the State Statistics Service, in the overwhelming majority of industrial sectors, there are minuses and only minuses for most indicators.

Against the background of falling production volumes, multimillion-dollar wage arrears at state-owned enterprises, the authorities demonstrate complete helplessness and lack of understanding of how to get out of the situation.

Square dance with appointments

"Industrial production in Ukraine has been stagnating since June 2019, this process started long before the pandemic. Covid in no way can serve as a reason or excuse for what is happening - the pandemic simply strengthened the processes and trends that took place before it began. it is expected that officials who are responsible for the industrial policy will try to write off the drop in production on a pandemic. But we understand that the reasons are different," said Vitaliy Lomakovych, head of the board and founder of the Growford Institute.

Related: Ukroboronprom claims theft cases at Antonov aircraft plant

Only at Antonov, three directors were replaced during the year. In June, president of Antonov State Enterprise Oleksandr Donets was dismissed. Instead, Oleksandr Los was appointed, who was replaced in November by Serhiy Bychkov. Since the summer, the SBU has been investigating the actions of the former management of the Antonov state enterprise, and in November the head of Ukrobonprom, Ihor Fomenko, announced the facts of embezzlement of funds at Antonov, revealed during the audit, and internal sabotage by the enterprise's labor collective. At the beginning of December, Fomenko himself was dismissed from his post, and the ex-head of the Kherson Regional State Administration Yuri Husiev was appointed instead. He is already the third head of the UOP after the dismissal of Aivaras Abromavicius in October.

The lack of transparency in the appointment of managers does not contribute to the stability in the work of enterprises and industries.

Key positions in the civil service are a bargaining chip in political agreements, and the emergence of "new faces" in the vacancies, previously lustrated officials of the Yanukovych era, indicates a rollback of reforms in the civil service. This is stated in an article published on the German website Laender-analysen.de.

Effectiveness of state-owned company leaders in numbers

The consequences of the personnel leapfrog are best told by the numbers. The steepest peak is observed in the engineering industry – over ten months, the industry fell by 20.4%. Decreased indicators of all traditional industrial giants – enterprises of the rocket and space industry, aircraft manufacturing enterprises, enterprises of the Ukroboronprom sphere. It got to the point that 12 million USD had to be allocated from the budget to pay off wage arrears for 11 months, tax and other mandatory payments at Production Association Yuzhny Machine-Building Plant named after A.M. Makarov, PA Yuzhmash, the flagship enterprise of the space industry in the past.

In a difficult situation, not only Yuzhmash but also the Yuzhnoye design bureau, where they are now trying to transfer people to a shorter working week in order to reduce the load on the payroll fund.

Enterprises in the space industry, like the aircraft industry, have not been able to recover from the severance of economic ties with Russia in 2014.

In particular, it was the Russian Federation that was the main customer of Yuzhmash, from which it bought Zenit missiles. All production and technological cycles of the plant are configured for the production of this rocket. The plant could not find an alternative to Russian customers, which led it to its current deplorable state.

Related: Antonov has released first aircraft without Russian parts

After the severing of Ukrainian-Russian economic ties, Kyiv's Antonov was left without components for aircraft. To replace them with imported counterparts, however, as well as to sell at least one car, has not been possible so far.

Without selling a single aircraft abroad, Antonov signed a contract with the Ministry of Defense for the purchase of three An-178s. The department agreed to this after the disaster with the An-26Sh in Chuhuiv, which killed 26 servicemen. Prior to that, the fleet of military aircraft in Ukraine had not been updated for many years. The "youngest" aircraft served the Ukrainian Air Force for 35 years, and the plane that crashed near Chuhuiv was 43 years old.

And if the semblance of life is at least glimmering on Antonov, the second Ukrainian aircraft-building enterprise in Ukraine – Kharkiv Aviation Plant – has finally died. The plane for Kazakhstan was never completed, there are no orders, and the company's debt, including wages, has already reached 143 million USD.

And if in 2021 aircraft builders will at least be busy assembling aircraft for the army, then in the near future nothing will shine for space enterprises in the near future. The crisis in the space sector, which took place in the past, has significantly intensified and deepened over the past year.

The law on lifting restrictions and admitting private companies to the rocket and space industry also did not bring results.

The situation is difficult not only with the aircraft and space enterprises but also with the military-industrial industry. The European Union has officially announced the stagnation of corporate governance reform in the defense industry in Ukraine.

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In Ukroboronprom, 98% of the concern's revenue is generated by 28 out of 116 enterprises. The rest are in a difficult financial situation. With such a number of enterprises on military rails, Ukraine for all the years has not been able to establish a full cycle of ammunition production and is forced to acquire everything - from small to large calibers.

The country continues to slide in the export of arms, losing orders and entire markets, including due to improper fulfillment of contracts.

Even Pakistan is dissatisfied with Ukraine, which remains the last stronghold where Ukrainian military equipment is highly valued. In the fall, a delegation of high-ranking officials from Pakistan was in Ukraine and expressed "extreme dissatisfaction with the development of relations between Ukraine and Pakistan in terms of the fulfillment of their obligations by our enterprises." Former head Ihor Fomenko spoke about this at. Time to correct the situation was prolonged until March.

The state structures responsible for the export of arms are deeply permeated with corruption, which first Minister of Strategic Industries Oleh Urusky admitted in an interview.

Industry and private traders

There is a trend: if industrial enterprises, controlled by the state are pulling the industry down like a stone, then private traders keep afloat even in a pandemic and in the absence of support.

Ukrainian metallurgy, according to the president of Ukrmetallurgprom, Oleksandr Kalenkov, has been in crisis since mid-2019: it is experiencing a drop in demand and prices for metal products, an economic crisis, and the consequences of the Covid-19 pandemic. But, in spite of everything, it keeps working conditions and jobs.

Related: Embezzlement at Antonov Enterprise: Suspect dismissed from Defense Ministry year ago

“Starting from the middle of the year, we gradually increased steel production, and this allowed us to reduce the large drop that was observed in the first months of 2020. Ukrainian metallurgy has not yet left the negative zone, following the results of 11 months we have minus 3% for steel. nevertheless, this is not minus 20%, which we observed in certain months at the beginning of the year,” Kalenkov told.

International financial capital trusts private Ukrainian industrial giants, as can be seen from the quotations of Eurobonds of the same Metinvest and Interpipe. Their securities are trading steadily.

"The largest companies are the issuers of Eurobonds. And judging by their reports, they feel quite good," said Serhiy Lyashenko, head of the Cbonds Ukraine project.

The same cannot be said about the state-owned Ukrzaliznytsia, which demonstrates losses and not very good quotes for its Eurobonds.

Despite this, officials are in no hurry to transfer enterprises to private companies: large privatization remains on pause, and the whole country is watching the scandal surrounding the sale of Motor Sich, the largest manufacturer of engines for aircraft, helicopters, and cruise missiles in the CIS, to the Chinese Beijing Xinwei Technology Group.

"The case with Motor Sich has generally demonstrated that our subjectivity has been destroyed by 10%. The country should have taken a state position in relation to this enterprise, but we did not see it. Instead, we saw how dependent our government is on external forces and can bend under their influence," said CEO and Founder of Growford Institute Vitaliy Lomakovych.

According to him, the decision to cancel the sale of the enterprise was made under pressure from the Americans, who feared that with the help of this enterprise, Chinese investors would gain access to technology and would seriously compete with European and American companies in the global market.

Related: Defence Ministry official organizes embezzlement scheme at Antonov state enterprise

The failed transaction had every chance of becoming the only major one against the backdrop of a complete lull in the buying/selling sector. This is another consequence of the fact that the investment attractiveness of Ukraine remains low. The situation with "green energy" added black colors to the canvas.

"In fact, the state refused to fulfill its obligations to investors, roughly speaking, the state" threw "investors who literally created an entire industry in five years, having actually invested about $ 10 billion in investments. Observing how the authorities dealt with this industry, foreign investors became even more convinced that Ukraine is definitely not the country where their money and investments will be reliably protected,” says Lomakovych.

According to the Growford Institute, following the results of 9 months, Ukraine for the first time in the last 20 years entered a negative foreign investment balance. And this is the main indicator of the country's investment attractiveness.

How to save the industry?

The authorities demonstrate a complete inability to do anything in the current situation. Bank lending remains a huge problem - it is still not available to industrial enterprises. The National Bank continues to pursue a tight monetary policy – the discount rate set at 6% also does not contribute to the availability of loans. The presidential initiative in the form of the "5-7-9" program to a certain extent relieved the tension in the field of lending but did not fully solve the problem.

"Worst of all, we are witnessing a complete absence of a balanced, intelligible, and sane industrial policy on the part of the authorities. The Ministry of Support of Strategic Industries has been created, but, as far as I know, the list of industries that it will deal with has not yet been approved," said Lomakovych.

Related: Ukroboronprom defense concern to be disbanded in 2021

The Ministry of Strategic Industries, headed by Oleh Urusky, has been created since the summer. This, however, did not prevent the new department from entering into a tough confrontation with Ukroboronprom, which resulted in the resignation of head of the concern Aivaras Abromavichus. In general, the conflict, which spilled over into the public plane, caused much more serious damage to enterprises in the military-industrial complex than even Covid could have done, experts say.

One example of such a negative is that due to a conflict between departments, work on bill 3822 was stopped, without which it is impossible to corporatize military-industrial enterprises. The law was supposed to be passed in the fall, but they are awaiting amendments, which the Ministry of Strategic Industry has expressed a desire to submit, but has not yet submitted.

Government policies do not fully meet the expectations of the private sector. Law 1210 provides for changes in the tax base, in particular an increase in rent payments for the extraction of iron ore.

“Throughout the autumn and winter, we have been proving to the MPs that in Ukraine the rent on iron ore is higher than in Russia (with which Ukraine fiercely competes on the global metallurgical market), Brazil, and other countries. Despite this, the increase still took place,” the head of Ukrmetallurgprom said.

Another serious blow was the rise in electricity transmission prices (due to the lack of sufficient funds to compensate for the highest green tariff for renewable energy generation in Europe). Over the past year, the transmission tariff increased three times, which increased the costs of metallurgical enterprises alone by 70-90 million USD.

Experts emphasize that the state does not even try to support domestic private industrialists, treating them as a cash cow, at the expense of which the budget needs to be replenished. Businesses have to deal with a huge imbalance in port charges, which are 4 times higher than those of competitors. High rates for rail transportation remain, which are at least 1.5 times a ton/kilometer higher than in Russia. UZ is constantly looking for loopholes to increase the tariff load on shippers.

According to Lomakovych, the government program does not include such a concept as the industrial development of Ukraine, and there is not a word about the rocket and space industry. The state should support the industries that produce products with the greatest additional value, carry out changes in monetary policy that would make lending available to industrial enterprises.

Related: An-26 crash: Ukroboronprom reports no violations regarding plane’s repair

“For people who are responsible for industrial policy in Ukraine, I would recommend not reinventing the wheel, but referring to the experience of countries with which we can compare ourselves. Such an example is South Korea, which has made a huge economic breakthrough by applying a number of simple solutions. localization of production, the creation of a preferential regime for industry, in particular for enterprises and industries producing products with high added value. For Ukraine, localization is one of the most painful issues. We conducted a study, according to which even in public procurement of 500-600 billion UAH in the year, a huge part of budgetary funds and funds of state enterprises is spent without reference to the localization of the production of goods and services,” Lomakovych said to 112.ua.

This should not be postponed anymore. It makes no sense to draw a pessimistic scenario that will come if nothing is changed – it has already come. Ukraine is the only country in Central and Eastern Europe that, even in 2019, before the pandemic, did not reach the level of GDP per capita in 1991. Most countries have at least doubled this level.

“We have already entered the regime of a stagnating and degrading economy. This means a renewed migrant sentiment, erosion of labor potential, a shortage of funds for paying pensions, and, naturally, chronic poverty,” concluded the founder of the Growford Institute.

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