On Ukrainian ”Economic Freedom Philosophy” in the economy

Marek Budzisz

Anna Derevyanko, the Executive Director of the European Business Association (EBA), the Ukraine’s largest organization of foreign investors, which was established under the auspices of the European Commission, told the NV portal, referring to the companies associated with her organization, that “the condition is severe, but the patient has survived.”2 Currently, all of the Association’s member companies are operational (in March of last year it was 71%), whereas 9 out of 10 companies pay their employees full wages and salaries and, in addition, it can be said that in recent months companies have managed to build a financial “safety cushion.” While a year ago the financial reserves would have been sufficient to continue operations for a few months at most, they have now gone up significantly and are sufficient for six months to a year of operation. This does not mean, however, that everything has gone back to normal, like it was in the pre-war Ukraine. 83% of the Association’s surveyed companies report a decline in revenues (measured in US dollars), with 54% of them exceeding 20%. Most of the companies have had to incur expenditures related to securing a steady supply of energy (generators, photovoltaic systems, etc.) and still have significant problems maintaining continuous production. One-third of the companies entering the Association suffered, due to the war, losses of up to one million dollars, while a little more than 33% say they suffered losses ranging from 1 to 10 million, 25% had assets in the areas now occupied by the Russians. Businesses operating in Ukraine have been adapting to the new severe conditions, but for the time being, they have suspended investment plans and are not developing new projects. Exactly for this reason the Deputy Prime Minister in charge of the economy, Yulia Sviridenko, has announced (a draft of the relevant law has already been submitted to the Verkhovna Rada of Ukraine) the setting up of government system to insure foreign investments against political risks, including those associated with the on-going war. Registered under No. 9015, the relevant law provides for the authorization of the Export and Credit Agency to insure, up to 100% of their value, business risks related to the war. The implementation documents are expected to be prepared within the next three months, but it is already clear from the government’s proposal that in addition to the pilot project currently underway, which insures assets with the maximum value of US $30 million, the Agency’s major project, with a maximum insurance limit of US $1 billion, is to be launched later this year. The project is supposed to benefit from government guarantees and the cost of the insurance policy should be in the range of 0.5 to 5% of the insured assets. The representatives of the Ukrainian government, which has recently signed a special framework agreement with JP Morgan bank and the institution is expected to actively seek investors, are soliciting intensively the participation of American, British, French, also Polish businesses in the future reconstruction of the country. The needs are enormous, for in terms of infrastructure alone, according to the estimates by the Kiev School of Economics, war damage by the end of 2022 closed at almost US $138 billion, of which houses and apartments were valued at US $ 54 billion, infrastructure facilities at US $ 35.6 billion, the assets of educational institutions at US $ 8.6 billion and losses in the energy sector were estimated at US $ 6.8 billion. One of the tools the Denis Shmyhal government wants to use to attract foreign investment, but also to accelerate economic growth while the war is still underway, is deregulation. Yulia Svyrydenko, the Ukraine’s Deputy Prime Minister and Minister of Economy, has announced that this year alone the government intends to abolish 47% of the business restrictions still in force in the form of various types of licenses, permits or other regulations restricting the economic freedom3. Currently, more than a thousand administrative business regulations of various kinds are still upheld in Ukraine, in the form of permits (528 types), licenses (224) certificates (121) or special approvals (145). However, a special inter-departmental working group that the Denys Shmyhal-led government set up in early January intends to abolish quickly the restrictions focusing in the first row on market entry administrative and competition containing roadblocks. The team’s first recommendations, submitted to the Cabinet a month after its establishment, envisage the abolishment of 47 administrative approvals and permits4.

Special emphasis, as demanded by countries supporting Ukraine financially, is to be placed on combating the shadow economy and corruption. The launch of reforms is one of the prerequisites for the continuation of financial aid by the European Union, which unconditionally handed over in January only the first tranche, worth €3 billion, of aid to stabilize Ukraine’s macroeconomic environment. The rest of this year’s disbursements, totalling €15 billion, will be made after Kiev has implemented its announced reforms and the European Commission has evaluated its legislative and administrative actions5. In light of the agreement signed by the European Commission and President Zelenskyy during the visit of Commission members to Kiev in February 2023, the process of harmonisation of the EU legislation with the European standards is also supposed to be accelerated a great deal. It was the Ukrainian side that insisted successfully on the acceleration of the review of the progress of adjustment projects, which is already expected to take place this fall, because that way adjustments can be made more quickly if objections are set forth by Brussels. The authorities in Kiev hope to accelerate the integration processes significantly, they even want, which seems to be overly optimistic, to complete the membership negotiations within two to three years. Already, the Ukrainian exports to European Union markets are exempt from customs duties, including regulations covering agri-food products, and during a recent visit of the European Commission, it was reported both that these wartime-approved regulations would be extended for one more year and that a number of other administrative roadblocks such as certificates, phytosanitary certificates and standardization approvals for the Ukrainian products would start to be lifted. As President Volodymyr Zelenskyy stated following the Kiev EU-Ukraine summit, “one of the important achievements of the summit was the progress of Ukraine’s integration with the single market of the European Union. We approved the Priority Plan for 2023-2024. Its implementation will make Ukraine a de facto member of the European Union at the level of industrial sectors, agriculture, energy, digital services, transport, finance and in the customs area.”6

Similar measures, in terms of combating corruption in Ukraine, are being taken by the Americans, who are expected to allocate to Kiev $10 billion in financial support this year. The U.S. auditors have arrived in Kiev to investigate, upon the request of the Senate, whether the aid is being used properly7, and in parallel a special commission has been set up comprising general inspectors of 17 ministries and other government institutions, which has already developed general principles for overseeing how the funds provided by the United States are used by the Ukrainian authorities. One of the primary goals of this new oversight institution is to combat corruption8.

The majority of the Ukrainian public supports both the combat against corruption and the reforms announced by the government.9 Moreover, more than 70% of those surveyed in January 2023, supported conditioning the start of EU accession talks upon the implementation of the announced changes. In other words, the Ukrainian public and the authorities realize that the country’s economic position a year after the war commencement is so difficult that there is no other way but deep reforms and a putting the corruption to an end. Paradoxically enough, this gives reasons for optimism, for it is so bad that the government in Kiev has nothing to lose – it must move on. The government has already announced a reform of the tax system, including, inter alia, a reduction in VAT tax rates and the introduction of an electronic settlement system are under consideration. The excise tax system is to be fully overhauled, and the circulation of alcohol and tobacco products will be subject to electronic surveillance under a new e-excise10 system. Just last year, prior to the reconstruction conference in Lugano, Deputy Prime Minister Yulia Sviridenko spoke of a far-reaching liberalization of the Ukrainian economy, which in order to recover from the war must offer more attractive conditions for investors than elsewhere. She described her approach to reform as a “free steppe philosophy”11 because Ukraine must, if it wants to make up for the lost years, become, in her view, an area of economic freedom. If the war with Russia can be won, and if Zelenskyy’s team has enough determination and perseverance, it could be that our eastern neighbour will become the economic tiger of our part of the continent.

1 Translator’s note: literally ”Free Steppe” philosophy

2 https://biz.nv.ua/experts/9-iz-10-predprinimateley-oshchushchayut-posledstviya-obstrelov-vyplachivaet-li-biznes-polnye-zarplaty-50305926.html

3 https://delo.ua/ru/economy/deregulyaciya-biznesa-v-ukraine-mogut-otmenit-pocti-polovinu-licenzii-i-razresenii-410281/

4 https://www.ukrinform.ua/rubric-economy/3663020-deregulacia-smigal-kaze-so-urad-moze-skasuvati-47-licenzij-i-dozvoliv.html

5 https://apostrophe.ua/article/economy/budget/2023-02-04/dengi-v-obmen-na-reformyi-chto-doljna-sdelat-ukraina-radi-milliardov-es/50281

6 https://www.unian.ua/economics/finance/na-shlyahu-do-yes-yak-ukrajinskiy-ekonomici-shvidshe-integruvatis-z-yevropeyskoyu-12138699.html

7 https://zn.ua/POLITICS/v-kiev-pribyli-auditory-ssha-chtoby-prokontrolirovat-ispolzovanie-pomoshchi.html

8 https://zn.ua/macrolevel/sledovateli-i-auditory-mohuchej-trojki-protiv-ukrainskoj-korruptsii.html

9 https://www.eurointegration.com.ua/rus/news/2023/01/10/7153897/

10 https://delo.ua/ru/economy/cego-ozidat-ot-didzitalizacii-nalogovoi-i-ee-servisov-410178/

11 https://vidbudova.online/svyrydenko-rozpovila-yakoyu-bude-ekonomika-ukrayiny/

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