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22 October, 2011

Depressionism

A social order with limited access to political and economic activity is taking shape in Ukraine

A recent study by the European Business Association (EBA) shows that Ukraine’s investment attractiveness index in the third quarter of 2011 took a nosedive to the level of the crisis-stricken year of 2009. Unfortunately, this is no big surprise.

On the one hand, it is clear now that the world financial crisis is not over and that Keynesian measures cannot stop the recession, while EU countries and the USA are unable to further sink into debt or cut interest rates any more. As a result, a slowing world economy will deliver another painful blow to Ukraine. Just like before, our national industry relies on a few dozen huge enterprises that suffer from any negative trends on world markets. Since 2008, Ukraine’s economy has become even more monopolized and consequently more vulnerable. The only source of comfort may be found in a realization that new bubbles have not had time to form since the crisis.

However, this time investors’ pessimism is linked to internal causes. A look at the structure of the EBA’s index will reveal that Ukraine ranks lowest in the investment climate section. Its score essentially sums up the efficiency of the government, which made big promises but delivered, to put it mildly, very little for business. Until recently, foreign businessmen and some Ukrainian businessmen still believed in these promises and tried to look optimistically into the future. However, they have now become finally convinced that the promised “stability” pertains to individuals rather than to the rules of the game.

According to other studies, the business climate has in practice deteriorated in Ukraine. The promised “revolution” in this area proved to be a bluff. Whatever deregulation exists is just for the sake of appearance. For example, the government reported a significant cut in the number of licenses needed for construction works. But MP Ksenia Liapina found that instead of separate licenses for each type of work they now issue one license for several types. Perhaps there are fewer papers to be filled out, but investors are primarily concerned with how quickly decisions are made, and this aspect has not improved a bit. The Tax Code simplified life somewhat for large businesses but also greatly expanded the authority of the Tax Administration, which led to methods of terror being applied to many entrepreneurs. Another innovation was automatic VAT reimbursement. This mechanism works for some companies, but others have found it even more difficult to receive their money back.

The reforms also had an adverse effect on the judiciary. Even Party of Regions representatives acknowledge that no staff cuts have been made with regard to administrative reform.

Decriminalization of economic offenses may be the first real reform, but the bitter experience of previous “point” reforms tells us to be cautious: it is hard to imagine how our tax administration will operate without having such trump cards as possible criminal persecution, seizure of documents, etc. Some other mechanisms will likely be introduced to compensate.

Moreover, we need to distinguish between formal regulations and their actual enforcement. If you only knew what is really happening at customs checkpoints! True, customs officials have the right to inspect containers, but when they check, literally, every single one, investors fall into a stupor. Raids involving masked men are popular as never before. Controlling bodies and law enforcement agencies have been given the green light: they can drive any business to bankruptcy if it is not controlled by pro-government people or is owned, for example, by a disloyal individual. Using legalized lawlessness in every area, some businessmen close to the government are obtaining preferences for themselves. Corruption in Ukraine has also become more ordered, centralized and even bigger in terms of scale.

To the accompaniment of victorious economic news the government is pushing business out of the country. Why? The answer is obvious: in order to clear the way for its “own” people. But the problem is much deeper than that. By monopolizing markets and entire sectors in Ukraine, a social order with limited access to political and economic activity is forming in Ukraine. If the government succeeds in further monopolizing the economy, restoring full-fledged political competition will become even more difficult. This seems to be what the current leadership is hoping for. But with this “order” in place the country loses any strategic prospects for a very long time, if not forever. Investors understand it all too well, and I do not see any factor that can cheer them up. Well, perhaps the Ukrainian government will sign the free trade agreement with the EU, but in light of the current situation, it appears this is a very long shot.

Authorities in EU states and other developed countries give themselves the priority objective of keeping economic and political activity accessible through competition, ownership rights and democracy. However, the transition to this social order involves a drastic change of fundamental principles and cannot be smooth and painless. We are facing difficult tests. The more success the government has in limiting access, the more difficult these tests will be.


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