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5 February

“We could see 5% growth by QIV 2018”

Ukraine’s Prime-Minister about economic strategy, innovative development, the future of state monopolies, and the large-scaled privatizations planned for 2018

Interviewed by Dmytro Krapyvenko

Which sectors of the domestic economy would you call the drivers of economic growth?

— In top place, without any doubt, is the farm sector, which currently accounts for nearly 15% of our GDP, and then comes mining and metallurgy, infrastructure projects, machine-building, and the military-industrial complex (MIC). One of our Government’s main objectives is to incentivize the manufacture of goods with a high added value. For instance, we plan to provide incentives for producing farm equipment. Altogether, UAH 1 billion has been allocated for such purposes in 2018.

The MIC will also be a major driver. We’ve allocated UAH 16.5b for the development of new weaponry and upgraded versions of old weapons. Plans are also to set up an export crediting agency whose purpose will be to attract funding to promote Ukrainian-made products on foreign markets.

How long is mining and metallurgy expected to be an economic driver, especially if we consider China’s rapid expansion in this sector of the world economy?

— We have some serious competitive advantages in metallurgy and demand for Ukrainian products is on the rise. Right how considerable capital is being invested in modernization and environmental security at many enterprises in this sector, which is why I believe this is a primary sector in terms of the growth of the domestic economy. There are major opportunities for an economic breakthrough right now, including in mining and metallurgy.

How can Ukraine grow domestic champions, meaning transnational corporations like those that emerged among the Asian tigers?

— This is not an easy path. We already have a number of high-profile companies that are present on international stock exchanges. As the Government, we have to provide the necessary climate to attract investment from both Ukrainian and international companies. Right now we’re working on a joint venture with General Electric to localize 40% of the manufacture of locomotives in Ukraine. Of course, not all Ukrainian companies have big-name brands, but that hasn’t stopped us from coming in first place in global exports of sunflower oil and seventh place for meat exports.

RELATED ARTICLE: National champions wanted: How likely is it that companies with a global readh will emerge in Ukraine and drive its economic breakthrough? 

The rationale behind Asia’s national champions was to enter open niches, expand those areas of manufacturing that were just beginning to become popular, such as consumer electronics. Today, demand is growing for drones, solar panels and so on. What opportunities do we have in these sectors?

— Innovation is a major pre-condition for sustainable economic growth. For instance, right now Ukraine has a strong position in UAV technology and we’re clearly competitive there. We also have plenty of potential in farm technology in the agro-industrial complex (AIC). Today, there are many start-ups across the country which should eventually be able to enter global markets. But first we need to take steps to establish the necessary ecosystems for the transfer of technologies into the real sector. We also have to pay attention to changes on world markets: something that was a hot trend 20 years ago may not have much demand today. Ukraine’s IT sector, on the other hand, is very strong and should be encouraged.

How probable is it that the MIC will become a driving force to modernize the entire economy, the way it did for Israel?

— We’re getting some very good feedback for high-tech developments in the defense sector. I won’t go into details, but things are looking up, both there and in the aerospace industry. Right now we’re just starting to revive support for this sector. Investments in the MIC that I have already mentioned involved the application of high-tech components.

How can Ukraine increase the high tech aspect of its defense industry?

— We’ve already drafted a bill to protect intellectual property. This is a very important step because inventions and innovations must be registered in Ukraine. We need to also ensure the transfer of inventions to industrial applications. For this purpose, the 2018 Budget includes UAH 50 million to set up an Innovation Support Fund.

How can science and business be brought closer together?

— Our entire system for organizing science needs to be changed, together with its funding and incentives. We need to support competitive developments and technology transfers, we need to upgrade the technical side of our scientific institutions, and we need to support young scientists. The Science and Technology Council that I chair will meet this month to discuss setting up an ecosystem to support innovative developments. Once this gets going, the innovative component of the MIC will begin to expand steadily.

How much time will this take?

— I think we will spend 2018 looking for new approaches and new instruments. Business is certainly interested in this. Ukrainian companies already produce many innovative products, as we can see from their active involvement in international expositions.

RELATED ARTICLE: The threats and opportunities brought by Gazprom's probably termination of gas transit through Ukraine after 2019

Every Ukrainian PM has talked up Ukraine’s great economic potential. To what extent is that potential actually being tapped into today?

— It has indeed been a kind of post-soviet tradition, to talk in such clichés. When I talk about potential, it’s not in the sense that what I’m projecting but what we actually have to offer today. Look at Ukraine now: it has the capacity for growth from its underground resources to outer space. The problem in the past was that no one in government was actually interested in innovative development. All that interested them was to over-regulate, to corrupt and to co-opt any opportunities coming Ukraine’s way. The challenge today is to remove unnecessary restrictions and provide proper market conditions. Then we will see every sector flourish. The space industry, healthcare, the farm sector… every area has its own technologies, but they need the means to apply these. The Innovation Support Fund will be one such instrument.

What are your thoughts about a Marshall Plan for Ukraine?

— Ukraine can use everything that will spur economic growth. The $5bn a year of investment that the “Marshall Plan” anticipates is a very important resource. But we also need a normal investment climate, a high-quality judiciary, open competition in the privatization of non-strategic assets, reasonable regulations, and modernized infrastructure and industry. That will guarantee economic growth.

How interested are other countries in helping grow a high-tech competitor?

— The question of Ukraine’s competitiveness is mainly ours to resolve. We need a strong economy and a high standard of living. For this purpose we need to take advantage of the experience and practices of other countries and institute them here, but we need to also understand that other countries will inevitably defend their national interests first.

What kind of expert support does the Government need?

— The government, Ukrainian society and expert circles are all in the process of evolving. We’ve all gone down a certain path in the years since the Euromaidan and have gained a lot of experience—including lessons learned from our own mistakes. The main thing is to be able to analyze self-critically and to draw the right conclusions. As to outside expert help, I think that’s something we have plenty of.

How are Ukraine’s state monopolies doing these days?

— Personally, I’m completely against monopolies, whether public or private. They always have a negative impact on competition. I believe that we need to improve our anti-monopoly legislation and we’re working on that right now. The Anti-Monopoly Committee needs to have more power in terms of investigating cartels.

As to state monopolies, we do need to get rid of quite a few of them, such as UkrSpirt, the alcohol maker. It’s completely unacceptable to have that kind of monopoly! This is definitely a hangover from stalinist times. NaftoGaz Ukrainy also needs to definitely be demonopolized, to make it a competitive, transparent company. Where there is no monopoly, we see a market and competition, and consumers, meaning Ukrainian citizens, come out the winners.

RELATED ARTICLE: How Ukraine's joint ventures with EU countries in the energy sector develop

Does that mean also getting rid of UkrZaliznytsia’s monopoly, the state railway?

— This is a case where we need to avoid making mistakes, as those have cost other countries dearly when they tried to reform their railways. The tracks must remain in public hands, but rolling stock is already partly in private fleets in Ukraine. This is the first step towards demonopolization. I sincerely hope that we will be able to establish a supervisory board at UkrZaliznytsia that can institute quality decisions.

How well supervised are state enterprises or is there friction with the line ministries?

— The function of a ministry is to establish policy, not to manage businesses. That kind of function more properly belongs to independent supervisory boards. This is a standard mechanism that we are now establishing at NAK Naftogaz Ukrainy. The main thing is for there to be clear separation. Looking for conflicts is not constructive.

Can we expect to see the privatization of major assets in 2018?

— The state still owns 3,500 assets, among which some 100-200 should remain in public hands. The rest will go under the hammer. Most state-owned enterprises tend to be inefficient and corrupt. I, for one, have no intention of accepting that kind of situation. I hope that the Verkhovna Rada will pass the new bill on privatization, which is currently prepared for second reading. After this we can start large-scale privatization.

How likely is the Rada to put the brakes on privatization, just like it does on a predictable basis with the sale of farmland?

— We’ve already voted in pension, education and medical reforms. We’ve also gone halfway down the path with privatization. We intend to carry out a major public awareness campaign so that people understand what’s at stake. Same with the land market: let’s sit down and talk about how to establish land relations so that both Ukraine and those who live here will benefit.

So far, it looks like the populists are winning the board. They’ve managed to roll out an entire mythology against reforms, built on popular phobias.

— People are being frightened in order to manipulate them. There isn’t a country anywhere that populist have done something good. Why are Ukrainians so poor today? Because populists and corruptioneers have driven many areas of life to the brink. I firmly believe in two principles in politics: be responsible and act systematically. People value results. Those who are trying to hamper reforms are not working for Ukraine. They con people by playing on their emotions and using threats that they themselves have set up. Everyone actually understands this. So voters have to simply demand that politicians do what they promised. And if they fail, to boot them out. I have my own success story in this sense: two terms as mayor of Vinnytsia, which has been rated one of the best cities in Ukraine today for quality of life.

What results will decentralization bring in 2018?

— It seems to me that we have been able to “infect” ordinary Ukrainians with this concept. At first, people were very skeptical of decentralization, but now they can see that it is providing them with new infrastructure, new social facilities, a new quality of life and new jobs. Any kind of change needs to be perfected. You have the conceptual phase, the implementation phase, and the adjustment phase. Right now we are in the process of setting up territorial communities: the more effective mergers we have, the greater the basis for considering this reform a success at the national level. Yes, I know that some territorial communities are in the way of county councils and administration, but I am always on the side of the OTH [unified territorial communities]. Local community governments are the most effective way of governing.

What is the level of the shadow economy these days and what is the Government doing to reduce it further?

— Experts say between 40-50% of GDP, which is an unusually high proportion. The best way to combat shadow economies is to improve fiscalization at the same time while streamlining it: make it so that oversight doesn’t get in the way of honest business operations.

We have changed the way that the VAT is administrated and there are no longer any loopholes that can be used to minimize taxes and move capital abroad. We've also approved new reporting standards and are using stricter measures against contraband. Raising the minimum wage was also an important step in moving business out of the shadows

When it comes to further economic development, what country would you say Ukraine can be compared to?

— If we’re talking about the country’s ambitions, then we should orient on Poland. But overall we should be looking both west and north, meaning Scandinavia, the Top 10 countries for quality of life, at the happiness index, and at prosperity, longevity and birth rates. Demographics provide an important indicator of a country’s development.

RELATED ARTICLE: Verkhovna Rada Speaker Andriy Parubiy on the challenges and tasks faced by Ukraine's legislature in 2018

Ok, let’s talk demographics. Right now, everyone’s saying that Ukraine will face a huge gap in its labor force because of labor migration.

— Labor migration is a global trend. You see it even within Europe. Poles move to the UK, Ukrainians move to Poland.

So who will come to work in Ukraine?

— The question is not who will come to work in Ukraine but how to grow our economy and ensure decent wages. There is no other option. If our economy begins to grow at 5% and more, people will start to come back.

When do you think we might reach that pace of growth?

— If the privatization bill is passed, along with other important bills, we could see 5%+ growth in the fourth quarter of 2018.

And then elections and new challenges?

— We need to keep working so that changes are fundamental and irreversible. This will make the entire system more stable and then elections won’t have a significant impact on it.

BIO

Volodymyr Groisman was born in Vinnytsia in 1978. A lawyer by profession, he studied at the Vinnytsia Institute of Regional Economics and Administration, the Inter-regional Personnel Management Academy, and the National Academy of Public Administration under the Office of the President of Ukraine. In 2002, he was elected to the Vinnytsia City Council, after which he was elected Mayor of Vinnytsia for two terms over 2006-2014. Over February-December 2014, he was deputy premier in the Yatseniuk Government and was elected to the Verkhovna Rada that same year on the Petro Poroshenko Bloc (BPP). He was Speaker of the Verkhovna Rada from late 2014 until April 2016, at which point he was appointed Premier of Ukraine.

Translated by Lidia Wolanskyj  

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