Ukraine's economy in freefall: New authorities make it worse?

Author : Olena Holubeva

Source : 112 Ukraine

The new team received a country with a difficult economic situation, burdened by a pool of systemic problems accumulated over the past decades
10:07, 10 April 2020


Almost a year later has passed since the time, when Ukrainians entrusted the helm of the country's governance to Volodymyr Zelensky, significantly strengthening the powers of his team with a mandate of trust in the Servant of the People party in parliament. It is difficult to recall which of Zelensky’s predecessors would have had such wide opportunities and could radically change the rules of the game that affect the country's development conditions. And its economy. But in reality, everything turned out to be not so beautiful as Zelensky promised before the elections. In 2019, Ukraine was following the knurled wave, but already this year it entered one of the most serious and severe economic crises.

On April 21, 2019, 73.22% of voters voted for Zelensky in the second round of elections.

The presidential political force, in the wake of an unprecedented euphoria, received a mono-majority in parliament, which gave Zelensky literally unlimited opportunities for radical changes, which none of his predecessors perhaps possessed. Something like this was painted by many media in the summer of 2019. In fact, it turned out that the new president, like his predecessors, had to negotiate with the oligarchs, so automatically the expected changes were questioned.

The new team received a country with a difficult economic situation, burdened by a pool of systemic problems accumulated over the past decades. Ukraine remains one of the poorest countries in Europe in terms of GDP per capita. This most important marker of the state of the economy is formed by two sectors - agrarian and mining and metallurgical, which is why Ukraine is critically dependent on raw materials prices in the world. Moreover, in recent years, the country has more than ever been dependent on external loans, and therefore - on the mood of international investors.

Both governments of Arseniy Yatsenyuk and Volodymyr Groysman, who worked under Petro Poroshenko, for five years also failed to solve systemic problems and push the country's economy to rapid growth. It was possible to stabilize the situation thanks to the support of international lenders, which led to the formation of serious external debt, peak payments for which are yet to come.

Despite promising promises and assurances to provide Ukraine with 40% of GDP growth over five years, the government of Oleksiy Honcharuk, after half a year stomping on the spot with a scandal, was dismissed in early March. Speaking in the Verkhovna Rada on the day when the MPs dismissed Honcharuk and voted for the new Prime Minister Shmygal, Zelensky described the Cabinet’s miscalculations as budget failures in the first months of 2020 by almost 586 million, smuggling and chaos with payments for gas and utilities. He also noted a drop in an industry that the government failed to overcome, non-payment of salaries to miners and illiterate coal policy.

Miscalculations and errors of Ze-team

“As a result of unacceptable actions by the authorities, a sharp deterioration in economic indicators occurred. Already in the fourth quarter of 2019, it was absolutely clear that budget indicators would not be met. The budget revenues were also in disrepair in the first quarter of 2020 (and these were also periods when there weren’t influence of quarantine measures). To a large extent, this was facilitated by the lack of professional personnel at customs. The head, who now heads the State Customs Service, obviously overestimates his understanding of its work and therefore completely lost control over the operational processes,” says Nina Yuzhanina, MP, member of the parliamentary committee on finance, tax, and customs policy.

Related: U.S. preparing to set off Antares launch vehicle with Ukrainian first stage

She noted that the initiatives initiated and carried out by the Ze-team were sharply negatively accepted by business and did not find support in society: in particular, these are laws on the introduction of a cash-back system, on the mandatory total use of cash registers without reducing the system of fines.

In general, we have not seen any major shifts, improvements, or new tools in the tax sphere, she says: “Speaking about fundamental legislative developments, the Ze-majority in the Verkhovna Rada adopted only those that had been developed by the previous committee: in particular, this is amending the Customs Code on authorized economic operators and joining the automated system of joint transit and exchange of information on goods between the countries. At the same time, the mechanisms provided for by these legislative initiatives have not started to work. The new governments have not developed by-laws for half a year, so their implementation was postponed by other laws for another six months. Among the fundamental initiatives from the new government, the worst traditions, only Law No. 1210 was passed, in which, of course, there are a number of norms that are necessary for business, but, unfortunately, many norms are unacceptable, this document gives significant discrepancies significant rights to regulatory authorities, increasing corruption risks.”

The conditions for the legal activity of the gambling business and, accordingly, the increase in tax deductions, despite numerous statements, have also not been created. Gambling in the country is still working underground. Despite the president’s promises to resolve the issue with the cars, bought in the EU countries, which could also become an article in filling the budget, this was also failed.

Related: "Has been" team: Would Zelensky's exes form a new political force?

Key industries decline

The situation in sectors critical for GDP has not changed for the better. As it was repeatedly reported, the metallurgical industry (mining and metallurgical enterprises provide 12% of Ukraine’s GDP, 30% of foreign exchange earnings and about 700,000 jobs, taking into account related industries), has been experiencing the most serious crisis since 2008. Since the middle of last year, the industry has entered the field of lowering demand for steel and raw materials for the production of metal products, which was further aggravated by the most serious recession that occurred in connection with the coronavirus pandemic.

In the current situation, mining and metallurgical enterprises have already reduced their investments, as far as possible, while retaining only priority investments, including in environmental projects, for which they have committed themselves.

At the same time, the authorities did not take any steps to support the industry.

In general, according to the State Statistics Service, industrial production in December 2019 decreased by 8.3% compared to December 2018, and overall, over the past year, it fell by 1.8%.

Related: Quarantine and implications for economy

The stagnation processes continued. In particular, Ukrainian engineering could not even take a step out of a state of a complete decline. Despite the adoption of one of the few truly sensational laws, according to which private companies were allowed to build rockets in Ukraine and carry out space launches, which was expected to give a fresh start to the projects of state industrial giants Yuzhnoye Design Office and Yuzhmash, Ukrainian state-owned aerospace manufacture, breathing in them new life, in practice, nothing has happened yet. The space industry development program that the Ministry of Economic Development and Trade promised under the leadership of Tymofiy Milovanov has not yet been presented.

Instead, we observe an unresolved problem with wage arrears to space industry employees of 12,5 million UAH and an enterprise debt for electricity of 1,5 million UAH. According to Volodymyr Usov, who was appointed to the post of head of the State Space Agency of Ukraine at the end of January, 8 out of 17 enterprises subordinate to the agency are currently unprofitable (including 2 enterprises that have been under liquidation for a long time). In 2019, Arsenal, Kyivprylad, Ukrkosmos, Pryroda, and DPI plants did not manufacture space products at all. Ukraine still does not have its own satellites in orbit, and the country's most ambitious and high-budget projects — the launch of the Lybid satellite, the construction of the Alcantara cosmodrome in Brazil and the Sea Launch project — left the country with huge debts of more than 1 billion USD and losses.

So far, the situation with domestic aircraft construction has not been improved. So far, Ukraine has managed to agree on the assembly of one single AN-178 aircraft for the Ministry of Internal Affairs of Peru. However, it is still not known whether Ukraine received an advance payment for the assembly of this machine. At a press conference on March 11, head of Ukroboronprom, Aivaras Abromavicius, assured that this issue should be resolved within a few weeks. He also said that in late February there was a meeting with the president on the situation in the aviation industry. According to its results, Ukroboronprom state defense concern, the National Security and Defense Council, and Antonov should have prepared proposals... apparently, they didn’t have time: a strict quarantine began. Although, given that in previous years there were many such proposals, it didn’t go beyond discussing them: Ukrainian planes remained unclaimed, and there was not much hope of a breakthrough this time.

Related: Top Ukrainian economist warns of potential huge hit to industry from coronavirus

Paused privatization

Another budget filling item could be global privatization. Ex-PM Honcharuk reported that the Cabinet of Ministers has transferred 530 state enterprises for privatization for a total value of more than 440 million USD. What is more than for all 28 years of independence?

Apparently, the situation with the presence of beneficiaries on state property has not changed, and the coronavirus has become a good reason to put the privatization of large facilities on a long pause.

Among others, the processes at Centrenergo (major electric and thermal energy producing company in central Ukraine and eastern Ukraine) and Odesa Port Plant, which, according to media reports, fell into the orbit of oligarch Igor Kolomoysky’s interests, were paused. The decision to dismiss the head of Centrenergo, associated with the oligarch, made by Honcharuk shortly before his dismissal his office, is still blocked in the courts. Meanwhile, Centrenergo continues to cheaply sell electricity to several Kolomoysky plants, in particular, Dniporazot chemical industry enterprise, as well as to Nikopol and Zaporizhzhya ferroalloy plants.

Related: IMF Head speaks on current state of world’s economic crisis

IMF assistance in exchange for land

However, all the economic decisions of Zelensky and his political forces literally fade against the background of the main step, which will definitely be forever inscribed in the history of the Ukrainian agricultural sector. We are talking about the opening of the land market. True, like many other breakthrough initiatives, this one was also adopted in a form far from perfect, not yet finalized and it is not yet known what consequences it will have for the Ukrainian economy.

“If we talk about the first year of work of President Zelensky and his team and what consequences they have for the agricultural sector, the following should be noted: the main promise made to the agricultural sector has been fulfilled. Parliament supported the law on the land market with 259 votes. What will this market be like, we will see how it will work in a year, but already now, when asked whether such a market was expected by farmers, it is safe to say that, obviously, there will not be. Will it be effective? It depends on the situation that will develop. But it’s already obvious that he will be influenced the global crisis and the effects of the recession following the coronavirus pandemic,” says Anna Belousova, AgroPolit editor-in-chief.

Related: Coronavirus to lead to largest economic crisis since WWII, - UN Secretary General

In other words, the presidential team was in a hurry with the land market in a recession: it will not be possible to gain a fair price for land in the implementation of the bill in its current form. But double standards are evident: it turns out that it was decided to pause the privatization of enterprises in connection with the recession, but the land can be put up for sale.

True, Zelensky has no particular choice. The lack of economic success of Ukraine has already taken advantage of international lenders who do not miss such blunders. It is known that the opening of the land market is the main condition for receiving the next financial tranche from the IMF.

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