What Chance Has Ukraine Got When Following Financial Advice Like This?
Anders Aslund was one of the guys giving economic advice to Russia in the tumultous 1990s. Russia has learned its lesson, but Ukraine seems eager to learn the lesson for itself.
Unwrap yourself for a starving man
Come drown your thoughts if they bite you
Turn off the world if it makes you hurt
I’m just a clown but I like you…
Max Webster, from “Let Go the Line”
What follows is an object lesson in how a bitter hatred of a country or an institution, nurtured over a lifetime, can make an educated man forswear everything he ever learned in an effort to make the desired end-state a reality, against every single glimmer of common sense. In this, you can no longer tell hatred and besotted love apart, because both can cause the afflicted to make a fool of himself and not care, having lost sight of everything else but his objective.
I have speculated here in the past, several times, on the question whether Anders Aslund is (a) a victim of a progressive and creeping malady which is causing him to lose his mind, (b) a natural-born idiot who tricked the world into believing he is an economist, or (c) a madman who should be locked up. I am afraid I am no closer to an answer, although we can rule out (d), he is right and his advice is sensible. But perhaps if we break the situation down to two stark truths, you can help me reach a decision.
Although that’s a pretty slender dataset on which to base a conclusion, I nevertheless conclude that Anders Aslund is so dizzy with hatred for ‘Putin’s Russia’ that he is offering economic advice which runs completely counter to common sense, in the desperate hope that a flow of new money will keep Ukraine alive long enough that it can serve its purpose and destroy its neighbour.
Aslund proposes that there has been a number of positive changes in Ukraine since the revolution, and proceeds to enumerate them.
- Ukraine now has the DCFTA with Europe, which means that Ukraine has improved access to the vast markets of Europe. Is that so? Not according to any evidence I’ve seen. Poroshenko signed the DCFTA with Europe in June 2014. In the first half of 2015, Ukraine’s exports to Europe declined by 35% year on year. Exports to Russia declined by more than 60%; but that wasn’t important, according to Aslund, because the European market is so huge compared to Russia. So I guess a 35% decline in exports to a huge market is actually a gain, or something. There is, however, no escaping the fact that a collapse of Russian trade was expected, because an embargo was placed on Ukrainian imports to the Russian Federation. What is more, the trade with Russia that did occur in 2015 was mostly due to pre-existing contract sales, which would run out in 2015. The figures for this year are likely to be significantly worse.
- Ukraine has committed to adopting hundreds of good laws. Did I mention that its president committed to selling his business interests two years ago, but hasn’t gotten around to doing it yet? Or that during the peak of the hot civil war against the east – the disastrous battle of Ilovaisk – he was busy setting up a new offshore company with the now-notorious Mossack Fonseca of Panama, in which he was the sole shareholder? As of two days ago the monkey-house show known as the Radarefused to investigate the president, while Politico released this embarrassing, blubbering account of how President Poroshenko must be the most innocent man to ever get caught up in such a remorseless dragnet, they should be ashamed. I couldn’t read it all, because I started to laugh really hard at first but then I started to scream and I frightened myself. Read it at your peril. The authors are both from the Atlantic Council, so I guess I should not have been surprised. Suffice it to say that the poor sod – I forget his name – who leaked the early warning via Twitter that the Panama Papers were coming out, because he worked on it and he was so excited that it was going to be terrible news for Russia that they would stay up all night doing damage control, could never have imagined the report would be such a disaster for the west that it would speculate that Russia actually leaked them. Committing to ‘good laws’ is not adopting them, and adopting them is not enforcing them. You would think an economist would be a little less a believer in smoke and mirrors.
- In 2015, Ukraine managed to stabilize its financial system, and inflation fell to 9.8% in April 2016. The inflation rate is actually true, at least so far as the reporting source says, which is the state statistics service. The one caution I would provide there is that rapid deflation is no cause for celebration for governments carrying a high debt load, as Ukraine is. Outside that, lower inflation is better overall so long as it remains relatively stable. In the year it allegedly stabilized its economy, it fell 31 places on a leading index of economic stability, to 107th of 130 and the most unstable country in Europe. Russia was at 68, even though it is the target of western sanctions intended to topple its economy and the fall in oil prices “[dealt] a far more grievous blow to Russia’s commodity-dependent economy than any Western sanction.” If Ukraine’s economy is stabilized, Russia’s must be utopian. Just before we leave that subject, the biggest foreign investor, by a wide margin, in Ukraine over 2015 was the Russian Federation. Only 3 European countries were in the top 5, and Russia’s total was more than double all but Latvia, $122 million to $69 million.
- Ukrainian workers are educated and will work for peanuts. I honestly couldn’t believe Aslund was presenting this as a positive change, but then I realized this is how you pitch to investors, and they don’t necessarily care what happens to the country so long as there is the opportunity for profit. He says that hopefully this will not persist for long; but if it doesn’t, given the overall economic instability, where would be the incentive to invest?
- Thanks to the new tax laws, the payroll tax has been halved, to 22%. When Yanukovych’s government proposed amending the tax code in 2010, the reaction of the business community was hostile to say the very least; the proposed tax plan was “draconian and needs major revisions”, said they. The business community did not like that the new laws would give too much power to tax inspectors; why, they would be able to levy and collect fines for violations! And if you were the target of such a fine, you couldn’t get your money back until the matter went to court! The cheek; can you imagine? Tax officials might have access to confidential banking information, and be able to see a company’s whole financial history! This is the nation that expects one day to join Europe. I suppose its attitude is no more childish than that of the United States, which threatened to tax European companies in the USA double if the EU did not drop a tax-evasion investigation against American companies; perhaps that’s why America voices such staunch support for Ukraine, they’re a lot alike in their understanding of finance and the value of bullying. When the Yanukovych government was in power, the Ukrainian tax base was larger by about 5 million people than it is now. The confidence that a new tax code imposed by the Poroshenko government would empower honest and forthright tax officials while such restructuring under Yanukovych would have empowered thieves and extortionists seems to me mostly wishful thinking seasoned with wilful ignorance and a dash of selective perception.
- Ukraine has adopted a floating exchange rate, and no longer has a cumbersome current account deficit. I would suggest just about any country could achieve this positive miracle provided it received massive international assistance through cash infusions, while I see no assurance thus far that Ukraine will not collapse like Gumby without his wires as soon as the sugar tit of international financial assistance is withdrawn. The current account deficit in the first quarter of 2016 was $942 million USD. Ukraine’s current account balance has been relentlessly negative for the past 5 years except for two quarters in 2015, and has since headed negative again. But I suppose a miracle could happen, and a country with a civil war it cannot resolve to its advantage but won’t make peace, headed by a corrupt president it will not hold to account for his unethical practices, which has lost its biggest trading partner in favour of new markets which are buying less and in which the tax base has shrunk by about five million over the past three years, could balance its books and provide a good standard of living for its citizens. Put that way, it doesn’t sound very likely. But you never know.
- Ukraine has introduced a public procurement system which will allow all sorts of enterprises to participate in public procurement. How this contributes to a healthy investment climate, he doesn’t say, but it seems to me the more variables you introduce, the fewer opportunities for profit because of the increased likelihood that someone who doesn’t know what they’re doing drops the ball. But if we review what the project is all about, it looks more like system intended to render government spending more transparent. It was created by Maidan volunteers, and I have yet to see anything created by Maidan volunteers work, but we mustn’t be too judgy. However, the premise was that lots of people can participate in government procurement, while all you can really do is watch it happen. You don’t get to spend any government money yourself, which is overall a good thing as it would be a recipe for disaster. How this is a boon to an economy in which entrepreneurs cannot float $200.00 for local advertising is a mystery to me, but I’m not an economist. If you read the section entitled “About the reform“, it informs you this is a system which monitors public procurement and state spending with the aim of eliminating systemic corruption. But when confronted with a graphic example of the country’s president starting up a new company in a discredited offshore tax haven, the legislative body declined to even investigate, never mind prosecute. Can you see those parallel lines of reality ever coming together in the end of systemic corruption? More people can watch what the state does, but how many will realize if you hide “funds to build me a new dacha” inside “state highway reconstruction”? It honestly seems like a good idea. I’m just not sure how effective it will be in wiping out corruption in a country that will not enforce the law with an even hand. Prozorro was introduced in February 2015, and over 2015 Ukraine fell 31 places on a major index of economic stability. Some references suggest the government prepared for the introduction of this ‘transparency’by changing the law so that the range of procurements excluded from the public tender process was expanded: “On April 20, 2014, the Ukrainian parliament introduced a number of controversial provisions to the 2010 procurement law, reducing transparency in government procurement and expanding the range of government procurements that can be excluded from public tender requirements. The amendments limited the requirement to use open tender procedures and publish information on procurement by state-owned companies only to procurement using state budgetary funds; however, there is no mechanism to allocate state funds to specific procurements within such companies, making the open tender requirement meaningless with respect to these entities.”
- Foreign investors who export from Ukraine don’t like the mechanism for recovering VAT. Since VAT is a hidden tax which is implicit in the cost of the item, it has to be charged. But goods for export are zero-rated, which means the exporter recovers the VAT in a rebate. The introduction of automatic rebates has alleviated the problem somewhat. But the law is vague on what can be recovered during the first year of VAT registration. All that aside, why should investors bitch about having to pay taxes? It’s going to nurture the country they supposedly want to help. This complaint just totally makes it sound as if investors are only concerned with making the maximum profit possible, or something.
- Substantial deregulation has occurred. Again, that’s supposed to be a plus for investors, to know that there are fewer regulations and inspection agencies. And it might be, in a country which is not acknowledged to be the most corrupt in Europe. Deregulation in the United States appeared to have mostly benefited the banks. Ummm…who owns the banks in Ukraine? Towering over all other Ukrainian banks, with half again the assets of its closest competitor, is Privat Bank – owned outright by Ihor Kolomoisky, naughty oligarch and onetime governor of Dnepropetrovsk. Here’s what a presentation called the “EasyBusiness Annual Report for 2015 – Ukraine” had to say on the subject; see if you feel reassured. “Given the size of the debt and the negative dynamics of macroeconomic indicators, Ukraine faces hardly positive prospects as the country is actually unable to repay its debts itself. Currently, Ukraine can only reduce its debts by using the IMF loans, which are the only source of financial aid received by Ukraine. The above problems resulted in the abatement of the performance indicators in the major spheres of both the Ukrainian real economy (such as agriculture, heavy industries etc.) and domestic production sectors (such as trade, construction operations etc.). Besides, these problems are making an increasing number of plants shut down, as they cannot stand against the regulatory impact and are unable to operate under such conditions. Reforming the regulatory system is the only way of solving these problems. It will not only help create a favorable business environment, but will also have a positive impact on the general economic situation. Besides, deregulation is a fast, efficient and also no cost method to combat bureaucracy and excessive regulation, which a struck root in the Ukrainian system. The introduction of this reform will not only facilitate doing business in Ukraine, but will also produce a positive effect on the economic growth, reduction of state expenditures and eradication of corruption,which, as a consequence, will improve the social environment and diminish the shadow economy of the country.” Uh huh. so plants are having to shut down because of the regulatory environment, but deregulation which imposes no costs on the system magically lets them operate again. Huzza! Business cuts another notch on the bedpost. Somehow, at the same time, deregulation will squeeze out the shadow economy in a tremendously corrupt country. If you mean it will reduce the number of agencies which need to be bribed, there might be some truth to that. If you are going to introduce a more transparent and honest regulation system in its place, even better. But you’re not. You’re just going to shut down half the regulatory agencies, because you said it will be no-cost. So there are that many less regulatory agencies to inspect outgoing exports to see if something is being sold that is not allowed to be sold, does not actually belong to the vendor, and so forth. Here’s how the former Finance Minister of Poland, Leszek Balcerowicz, describes it: “The principal objective of deregulation is the
elimination of excessive regulation of relations between the state and businesses and the elimination of excessive control over entrepreneurship.” I hope I am not being pedantic by once again emphasizing while slapping my palm with the back of my hand – this is deliberately removing state regulation on a business community (‘entrepreneurship’, ha, ha) which is more than 70% controlled by an oligarchy. That’s a fancy way of saying, shake your head. If it falls off, kick it.
- Winding it up with perhaps the most hilarious statement yet, No country is at the same time as corrupt and as open as Ukraine. Presumably this will help the nation to control corruption ever more. Umm…how? A country which is unmatched for simultaneous openness and corruption is a country which is unashamed of being corrupt. And when was the last time you heard an economist use the word, ‘presumably’?
It seems to have eluded a majority of western analysts that the current oligarch-heavy Ukrainian government which consistently fails to achieve any significant advances against corruption is in power because that’s the way Washington wanted it; it frequently likes to work through the wealthy because they do as they’re told so long as there is money in it for them. Ukraine’s president is an oligarch who continues to own a network of companies and businesses in the country which continue to fatten his bottom line despite an election-campaign pledge to sell them if elected and work 100% for Ukraine. Any public prosecutor who gets too nosy is promptly fired for corruption, and his demise chalked up to progressive reforms. Repeated condemnations of the country as corrupt fall on deaf ears, and the western democracies pay only lip service to reform – reform’s just another word for nothin’ left to lose, you might say – because a truly independent Ukraine is not in their interests. The interest was only ever in changing Ukraine’s allegiance, not in bolstering its independence. Ukraine is the lever Washington hopes to use to loosen Russia and rip it up by the roots.
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