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EM Country Briefing
Ukraine says it has accomplished more reforms than most of Europe. So much so that it asked businesses to take the initiative as the government is rolling reforms out at full capacity. Deputy PM Tigipko at a recent investment forum called for civil working groups to prepare legislation in any field that is inefficient by regulation or otherwise. This contrasts sharply with Russia’s modernisation effort and low regard for business. The government still has some time left before the political window for reforms closes (2012 elections). According to Deputy PM Tigipko, the bulk of the legislation recently developed has been shuttled back and forth to Brussels and is heavily ‘European’. While Ukraine’s relations with Moscow have improved considerably under the new government, it is keen to stay positioned for good EU relations and business. Deputy PM Tigipko confirmed Ukraine’s choice of free trade area with the EU, despite Russia’s invitation to join its own customs union. He also confirmed that the Orange democratic experiment did leave indelible marks of pluralism on Ukraine that few of its neighbours have. The economy shows new confidence and strong growth. It has been twenty years since Leonid Kravchuk signed the nuclear disarmament of the newly independent Ukraine. According to him, the conditions have not favoured reforms since then as much as now. The political power is for the first time concentrated. He praised Deputy PM Tigipko who has led a string of legislations since the Yanukovych government took office. Leonid Kravchuk also noted that changes are done real time now, in a large bulk, which ‘makes one optimistic about Ukraine’. The reform momentum is, however, expected to wind down soon as the 2012 elections approach. Many fear that Sergei Tigipko could resign if the outstanding legislation faces resistance, or could be removed as the government seeks popularity. Many reforms are reportedly incomplete or half-baked and their full impact would depend on completion, although there is a strong positive momentum unseen in the recent past. There are nevertheless a number of measures stuck in Parliament, which the IMF awaits and Deputy PM Tigipko promises is only a ‘matter of time’. The government has a strong policy commitment for the year, backed by President Yanukovych. The focus is still on stabilising state finances and improving the business climate. The progress has been substantial, although a large number of measures are still not fully tested and refined or still partially in the legislature and facing some opposition. Revenue performance of the state budget has improved; the deficit could be lowered to a sustainable level of c. 3% of GDP this year that is fundable by Ukraine alone. The banking sector has been recapitalised and overcame systemic risks. The control and monitoring of financial institutions, disclosure of ownership have been strengthened and confidence in the financial sector has recovered. The deposit base increased 30% in 2010, which is 10% above pre-crisis levels. The investment climate has also been targeted with a list of measures although it is still seen as weak.
30 March 2011
Moody’s S&P Fitch
B2 (stable) B+ (stable) B (stable)
List of reforms and fiscal results
The fiscal deficit (excluding one-off items) will have been cut from 6% of GDP in 2009 to a projected 3.1% this year (plus a liability of 0.4% GDP for Naftogaz deficit), which makes Ukraine’s fiscal adjustment among the largest in Eastern Europe, equivalent to c. 3.7% of GDP worth of spending cut this year, mostly on wages and pensions. Currently the program continues to deal with the rationalisation of the energy sector, public administration and the pension and tax systems. The government has adopted a gas market law, with a single regulator of energy tariffs. This is said to be of limited functionality yet, but should eventually prepare the market for investments. The deficit of the oil monopoly Naftogaz has been reduced from UAH 30bn in 2010 to a projected UAH 8.5bn this year. Naftogaz should break even after another round of tariff increase of c. 50% in retail gas prices, which the government still has to pass. The closer the October 2012 parliamentary elections, the less convenient these measures will be, which are necessary for both Naftogaz finances, the functioning of the gas and the transit market and for the continuation of the IMF program.
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property rights and the judiciary need urgent action. Further systemic changes will be required for the long run. The relations between business and power. Shuster. Public discussions on a new labour law should start in April and together with others should ideally be passed by the Parliament’s July working session. etc. however. and the number of civil servants by 30% and eventually by up to 50%. The energy sector is undergoing a broader reform. Pluralistic mechanisms have become the norm and Ukrainians have become accustomed to such freedoms. Deputy PM Tigipko supports the privatisation of Ukraine's gaspipelines and its joint management by Russia and Europe. rather than monetary terms.5bn liability to RosUkrEnergo.6bn IFI loan is pending for the modernisation of Ukraine’s gas transit system. According to Deputy PM Tigipko the tax system changes are this year largely revenue neutral and should not threaten the deficit as the tax base is being widened and collection improved. The pension system has been another drag on Ukraine’s public finances. resulting in a net $1. It has been noted. Similarly. where equal number of government and opposition candidates debate in real time. The Stockholm arbitration court ruled against Naftogaz. 2 30 March 2011 .. the independence and integrity of the judiciary and security of property rights have been cited by Brussels for criticism. The ‘untaxed’ share of the economy is estimated around 40%. centralising authority and tightening its grip on Ukraine’s media that enjoyed an enviable reputation post independence. corruption and deregulation are still necessary. the government passed a new Tax Code in a first step.EM Country Briefing The price increases are therefore more likely to be passed sooner rather than later. the law on the gas market and a number of laws on technical regulation have completely aligned Ukraine with the Common Economic Area. which is expected to be settled in gas. This is set to downsize one of the largest governments in Europe. albeit not all has been resolved that was aimed for. have been aligned fully with the EU. the CIT rate from 25% to 16% over time (23% at present. that a number of measures regarding free enterprise zones. Where has the government failed? Deputy PM Tigipko highlighted that the next elections limit the political ability to extend the reform process much longer. Mr. The adjustments have in principle been agreed on and Deputy PM urges no further delay in passing legislation and takes responsibility in this field. this is not nearly as worrying as Russia’s media situation and the political and media climate has remained still far more lively and diverse than in Russia. but warned against the seizure of the pipeline by Russia. According to locals there has not been much seen of this yet but Deputy PM Tigipko promises more visible results when the measures reach healthcare and education. Both are notoriously corrupt and inefficient.4% GDP immediately and 2. The pension deficit equated to UAH 34bn in 2010 and the set of proposed parametric changes (increasing contribution base and eligibility criteria) will save 0. This has simplified the complex tax structure. a refugee from Putin’s Russia. The ownership concentration and state broadcaster have gained territory. reduced the number of taxes from 43 to 22. and his political talk show thrive in Ukraine. and simplified the law on allocation of land for construction. The cabinet has also completed a draft on a new customs code and the customs service is indented to be merged with tax administration. The Deputy PM acknowledged that issues about corruption. The corporate and VAT rates are being cut. A €0. He is urging all pending legislation to be passed by July. It is necessary to contain pension transfers that are excessive and rising. In order to boost the investment climate. The next steps are planned to involve downsizing bureaucracy at the regional level. The cooperation of the European Business Association and the Amcham has been intensive on key issues. The government has also established a system of automatic VAT refund for qualifying exporters and improved state procurement in line with EU norms. 2% point cuts annually) and the VAT rate will fall from 20% to 16% in 2014 and the dividend tax rate from 15% to 5%. According to Deputy PM Tigipko. state procurement. The government has also been criticised for backtracking on the Orange experiment with democracy. A new law on construction reduced licensed activities by 30%. cut government agencies and ministries. Measures in the field of customs.5% per annum over the longer term. The government amalgamated the functions of four social funds and works on an administrative reform and rationalisation of the executive function. Deputy PM Tigipko sees this unimaginable in many of its neighbours.
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