10 Februray 2022 (Thursday)

16:00 – 17:15

Pavlo Sheremeta, Ukrainian Economist and a former Minister of Economic Development and Trade, Kyiv

Alena Kudzko, Vice President of GLOBSEC & Director, GLOBSEC Policy Institute, Bratislava

Meeting Abstract

The aim of this exclusive closed – door event was to bring a new perspective on current events in Ukraine from the Ukrainian perspective and through the prism of economic reality. The themes discussed were:

  • The current state of the Ukrainian economy
  • Which reforms that need to be carried out?
  • What help should allied countries consider to help Ukraine defend itself?

The opening remarks painted a bleak picture according to Minister Sheremeta who declared that even without an open military intervention, Russian President Putin already achieved his goal – the destabilisation of Ukraine. The current bilateral tensions gripping Ukraine prevents any meaningful reform or significant investment. Minister Sheremeta speculated that by the looks of the situation any further military intervention from Russia could only cost Russia more than was already gained by his escalatory statecraft. This extended to costs in financial terms, as well as in terms of human lives and reputational as it would be unlikely that the narrative of Russia being the victim would be accepted.  Despite the glimmer of some positive diplomacy, there are some serious doubts over if the Minsk agreement can be implemented. The problems that the potential re-integration of break-away republics, such as Luhansk and Donetsk back into Ukraine would cause are hard to foresee. They include not only financial burden of rebuilding infrastructure, but also political ones of for example the large number of Russian passport holders.

Should integration be feasible a silver lining to contemplate would be that such investment into these two regions as well as foreign aid that could be attracted would have a spill over effect on the whole country and would spur further development and reform efforts.

Minister Sheremeta endorsed last week’s Ukraine Focus speaker General Hodges’ statement who remarked that live goes on as usual in Kyiv and that the only marked difference is fewer cars on the roads. This is explained by the current wave of COVID-19 Omicron wave, as opposed to rising tensions with Russia.

On Ukrainian leadership handling of the current crisis

President Zelensky’s current stance is somewhat bewildering to western observers, because of his apparent downplaying of the situation, according to the Minister. In his address to Ukrainian citizens, he outlined the coming year in terms of the Easter holiday, May Day parade, summer holidays and upcoming Christmas. In other words, President Zelensky’s message was that the crisis will pass, and life will return to normal. The reason for this is twofold; first to calm the nation and second his inability to muster a different reaction wishing for things to return to normalcy as soon as possible.

The crisis on the eastern border and possible conflict could be described in biblical terms akin to David fighting a Goliath, or other small nations fighting for their sovereignty, such as Finland, Israel, Singapore, or South Korea. However, when drawing parallels from the past one must remember that previous struggles of small states against much larger opponents a strong economy was the winning and decisive aspect. Something Ukraine lacks at present. Russia’s population is 3.5 times bigger, its economy 8 times larger, its military spending 13 times larger and sovereign fund is almost 20 times the size of Ukraine’s with 600bn USD versus 30bn USD. This imbalance is unlikely to change in the short term and continues to give Russia a competitive geoeconomics edge vis-à-vis Ukraine

Reforms are urgently needed if Ukraine is to stand a chance.

Against the backdrop of his David vs Goliath analogy, Minister Sheremeta heavily advocated the need to implement reforms to improve Ukraine’s resilience and overall ability to defend itself.

  1. Liberalisation of the national economy. According to figures by the American think-tank the Heritage Foundation, the Russian or Belarussian economy is comparatively freer than Ukraine’s. The economy is dominated by inefficient State-owned industries as well as monopolies owned by oligarchs.
  2. Stimulating economic growth. As a model to follow, the aspiration of other former eastern bloc countries such as Poland or Estonia to join the EU created a necessity to adopt legislation to harmonize with that of the EU, by itself this aspiration fuelled entrepreneurial growth. This aspiration is a feature Ukraine desperately needs even if the prospect if of joining the EU is low.
  3. Accepting the concept of “Club convergence”. Members of NATO and EU voluntarily abide by internal rules and therefore as members of these institutions reap benefits of foreign investment and growth. Making it easier to converge and equalize differences with other more advanced members. Ukraine must go it alone with changing political climate and unfavourable domestic opinion on some issues that were resolved within the EU a long time ago, making Ukraine unable to accept the convergence model. An example is anticorruption effort. While the institutional architecture is already in place, crucial personnel appointments stymie the actual operational effectiveness of these institutions.
  4. Speeding up industrial privatisation. In the light of current geopolitical events privatisation, will be further delayed despite it representing a major policy priority. Minister Sheremeta remarked that even without the crises, there are indicators that Ukraine would not step-up efforts to privatise certain industries. As the belief in leadership is in strong hand of the State, rather than the benevolent hand of the market. Meaning the current trend is towards raising taxes and making more effort to collect tax more efficiently. As useful reference point mentioned by the Minister was the last transparent privatisation tender was of the Kryvorizhstal steel plant for 5bn USD in 2005 to Mittal Steel Company.
  5. Public procurement. According to the Minister the current law on public procurement is as good as these laws can be. However, it is crucial that it is used and that no large investment projects are implemented outside of this legislation as exceptions, the example given was the current bypass of Kiyiv, that was exempt from public procurement procedures to ‘speed up the construction’. It undermines institutional trust and opens space for graft and corruption in the eyes of the wider public as well as prospective investors. The EU should use its leverage to demand the implementation of anti-corruption measures not just the institutional architecture.
  6. Enforcing anti-monopoly measures. The current anti-monopoly government committee presently not functioning. Minister Sheremeta declared   some types of industries remain in government hands, such as banks, or coal mines and should not only be privatised, but also broken up to foster competition and improve the overall quality of service.

There are other drawbacks that need to be addressed include pension reform which consequently results in a staggeringly low level of private savings in banks. Within Ukraine most people rely on the state to provide their pensions. Furthermore, there is no stock market in Ukraine to speak of, that would help with investing savings and appreciate the value of savings. International financial institutions may have a leverage in this area. Cooperation with IMF is crucial, not only for the reassurance to investors, domestic and foreign, but also symbolically – representing aspiration to carry out reform, even if slow.

Minister Sheremeta stated that within the country, there is an existing demand for to investment vehicles and options. Both from domestic business community and from Ukrainians who went to work abroad, notably countries west of Ukraine. This is apparent in real estate, where many of the remittances sent are invested, raising real estate prices, without stimulating growth. However, investing in local business is almost non-existent. There is a regional divide that is apparent. Not so much in Kyiv, that naturally attracts investment. But in western regions of Ukraine that has many people working abroad and sending money home. Apart from Kyiv there is very little private investment in the east of the country, where even remittances are lacking. There is a real necessity to create conditions that would enable growth of small and medium enterprises to better support the economy.

According to the Minister, the major problem is large parts of the economy are in the ‘grey’ zone – unregistered, unlicensed and untaxed. One of the identified problems was the old style of thinking that is ingrained in the popular thought; the entrepreneur is someone who speculates and shuns honest work. Moreover, speculation was a crime in the Soviet era. So even at school, entrepreneurship is considered dishonorable, bordering on criminal. It is questionable if economic reforms could be sold to the public as a patriotic endeavor. One creative solution to sell the patriotic element floated by the Minister was that   Perhaps if paying of taxes and being a good citizen was connected directly to supporting the army then it could feasible

On help from abroad

The Minister reiterated that foreign aid is appreciated and welcome, not only military materiel, but also in terms of training. However, to some segments of the Ukrainian population efforts by western leaders to secure a photo op in Ukraine seen to be helping is obviously just a part of their domestic agenda rather than actual effort to help Ukraine. Furthermore, any help to broker peace is certainly welcome. However looming election cycles for many western leaders (US mid- terms in November, France) make them less credible in Ukrainian eyes. As can be illustrated by German leadership change and current dithering of German leaders.

At the same time the help and support of international monetary institutions will be crucial. Not only helping the Ukrainian economy in the short term, but in patiently guiding it on the long road to reform.