Friday, September 19, 2014

What Ukraine needs most now? Evidence from Slovakia Reforms

Ivan MikloŇ° (former Minister of Finance and deputy Prime Minister of the Slovak Republic)

I visited Ukraine for the first time in March, only a few weeks after the tragic and heroic events around Maydan. Since that time I have begun to intensively think about how to help Ukraine with necessary reforms. I spent almost all of my professional life preparing and implementing economic reforms in my country, Slovakia. The main aim was to change my country from backwardness and stagnation into a modern, competitive European state. We enjoyed mixed success, but in general we can say today that Slovakia has produced a successful transition. We are not only in the EU but also in the Eurozone (unlike neighbouring Visegrad countries, Poland, Czech Republic and Hungary). We have recorded the highest cumulative economic growth among all EU countries from the breakdown of the communism until now and we have been one of the world’s most successful economies in that period. At the time of independence in 1993, Slovakia had only 62% of the Czech Republic’s GDP per capita. Just this year, we caught up with our westerly neighbour on this metric. Twenty-five years ago Slovakia produced antiquated Soviet tanks and another heavy military equipment but not one car. Today we are the number one producer of cars in the whole world, per capita. The most important reason for that success is reforms. Let me illustrate this by comparing convergence success of the Visegrad countries from 2004 until 2008. Over those four years, GDP per capita in PPP in comparison with the EU average improved in Hungary by 1%, Czech Republic by 3%, Poland by 5% and Slovakia by 16%. These were the first four years of EU membership for all of these countries, therefore the big difference among their convergence progress has to have had different reasons. This reason is reforms.

Wednesday, September 17, 2014

Ukraine: Strategic considerations.

By Andrei Kirilenko (Sloan School of Management, Massachusetts Institute of Technology)

In this essay I outline a strategic vision for the state of Ukraine. I begin with the main principles of the role of the state. I then argue that the Ukrainian state has largely failed to fulfill its role. I rejoice in seeing spontaneous volunteer efforts outside the failed state structures and suggest that instead of trying to administer a multitude of these efforts, the state needs to set a strategic overall direction so that its people can rally behind it. I suggest that this direction is ensuring independence from direct foreign interference now and in the future. Then, I argue that the place to start is with energy independence. I show that there are not enough resources in the entire domestic financial system to support Naftogaz in its current incarnation and that it cannot continue without external technological and financing resources. I argue that because of their systemic importance, the decisions on Naftogaz are inherently political and then outline options on dealing with the decision paralysis at the top, as well as a possible process for getting things started. I then suggest that once a political decision is made, the process would start with a standard problem of valuing risky cash flows. I outline the main sets of cash flows and describe potential but not insurmountable difficulties in valuing them. I then remark that once the risky cash flows are valued, policymakers can be presented with the recommendations about what to keep, what to sell off and for how much, and what to get rid of. I conclude with thoughts on other types of independence that need to be achieved in tandem.

Monday, September 15, 2014

DCFTA is delayed – so what?

or Implementation of the Association Agreement was delayed. Estimation of Economic and Political Consequences

By the Editorial Board of VoxUkraine

On September 12, the EU announced that provisional application of the Association Agreement between Ukraine and the European Union will be postponed till 2016. This decision was a result of tripartite ministerial meeting of the EU, Ukraine and Russia aimed to resolve Russia’s trade concerns regarding allegedly negative impact of the EU-Ukraine DCFTA on Russia’s economy.

What does it mean for Ukraine? Let’s consider key points of the arrangements.
  1. Ratification first – flexibility next. The arrangements come into force in the case of ratification of the Association Agreement. According to the Joint Ministerial Statement “… the Commission is ready, in the event that Ukraine ratifies the Association Agreement with the EU, to propose additional flexibility.” It is important as it means that there will be no changes in the text of the Agreement, and the ratification – i.e. irreversibility of the Agreement – is a precondition for any temporary concessions.
  2. EU market remains open. The EU will prolong autonomous trade preferences for Ukraine till 31 December 2015 thus providing the Ukrainian exports free-market access for majority of products. Autonomous trade preferences replicate the schedule of trade liberalization envisaged for the first year of the implementation of the Association Agreement and set duty-free regime for 95% of industrial products and 84% of agricultural goods, and duty-free tariff rate quotas for the rest of agricultural goods. It is definitely beneficial for the Ukrainian business currently reorienting its export flows from Russia towards the EU. According to the State Statistics Service of Ukraine, exports to the EU grew by 14.9% yoy in the first half of 2014, while exports to Russia dropped by 23.3% over the same period.
  3. Ukraine’s business gets extra time to improve competitiveness. The delay in the implementation of the DCFTA provides the Ukrainian business with additional time to get ready to trade liberalization and intensified competition on the domestic market. However, we should understand that sharp devaluation of hryvnia has already provided much more serious shield for the domestic market compared to delay in gradual elimination of import duties, the average level of which is currently about 4%.
  4. Russia committed to adhere to the CIS FTA. According to the Joint Ministerial Statement, “…Russia and Ukraine confirm that they will continue to apply the CIS-FTA preferential regime”. This commitment reduces the risk of revocation of duty-free regime for Ukrainian exports to Russia. In July, Russia published draft regulation envisaging the increase of import duties to the MFN level for selected categories of Ukrainian exports. The regulation was expected to be enacted after ratification of the DCFTA. Now probability of its introduction is much smaller. Also, Russia should not be able to refer to Annex 6 of the CIS FTA as there is no free-trade regime for the EU exports to Ukraine. However, non-tariff rather than tariff barriers have always been major trade impediments in exports to Russia. Likelihood of continued ad-hoc barriers on exports explained by alleged violation of TBT or SPS requirements remains high.
  5. Major risk is postponement of reforms. Key feature of the Association Agreement is harmonization of the Ukrainian legislation with the EU acquis. It should ensure not only better quality of the Ukrainian legislation, but also its proper implementation – hence, improvement of investment climate in the country. Postponement of the provisional application of the Association Agreement means that the implementation schedules embedded in the Agreement are shifted and there is less international pressure for reforms. Definitely, reforms can and have to be continued for the sake of Ukraine itself, but one of the ‘sticks’ is temporary removed creating risk of delay.
  6. Additional time for Russia’s pressures. The delay of provisional application and continuation of tripartite talks create additional space for Russia to bargain further concessions and delays in the implementation of the Association Agreement. This risk is amplified by unstable political environment in Ukraine.

Hence, we would wrap up that in the economic terms the delay in implementation of the Association Agreement might have a moderate positive effect for war-torn Ukrainian economy, although the risks, namely the reform stalemate and continued Russia bullying, should not be underestimated.

The political implications of this decision are harder to interpret, especially as no much information on the negotiations is available yet. The optimists could take a view that Russia should now be appeased by the delay in agreement implementation and stop meddling into the Ukrainian affairs. So, in other words, it provides a face-saving exit for the President Putin, which got at least part of what he wanted, while at the same time will avoid further sanctions to be imposed on the already weakening Russian economy.

However, there could be also an alternative, less rosy, view. It’s pretty clear that the ultimate goal of Russian leaders is to retain Ukraine in its sphere of influence, while the delay in implementation of Association Agreement does not change Ukraine’s external orientation vector. Moreover, this decision could be considered by Russia as a sign of weakness (first of all on the EU side) and it might try to build up on this success by increasing the pressure on Ukraine by different means.

Reform priorities: expert survey results

By the Editorial Board of VoxUkraine

After many years of mismanagement, Ukraine badly needs reforms in nearly all areas. A key question is where to start and how to set priorities. In the first week of September, VoxUkraine conducted a survey among Ukrainian and international economists asking them to rank political and economic reform priorities for Ukraine and comment on their choice. 30 responses were received. Given the challenges currently faced by Ukraine, the majority of professional economists suggest to follow an integral approach to ensure complementarily of reforms and hence to improve outcomes. Survey results identify five clusters of most urgent reforms.

Sunday, September 14, 2014

How to avoid ‘failed state’ without Donbas and under permanent war actions

By the Editorial Board of VoxUkraine
Recent events with deployed regular Russian troops at the east of Donbas and decisive attacks of Russian forces to unlock the Donetsk encirclement of separatists have posed for the Ukrainian society a critical question: How can the country survive and develop while having Donbas occupied and facing permanent military actions or persistent instability akin to the situation in Transnistria, Abkhazia and South Ossetia.  Indeed all previous assumptions of Ukrainian authorities as well as international financial institutions (e.g., the IMF) presumed quite fast stabilization of situation and excluded presence of Russian regular forces on the Ukrainian territory. Under such scenario, the Ukrainian army was expected to finish anti-terrorist operation in a few months and the progress on encirclement of Donetsk in August indeed promised very fast conclusion of the conflict. 
On August 24 the situation has changed dramatically.  Now we are talking about long-run though still unannounced war with Russia on the Ukrainian territory with poor chances to put the situation in Donetsk and Luhansk oblasts under control of Ukraine’s authorities in the nearest future.  In other words, Ukraine received a constantly rotting wound on the body of its economy.  It will be killing the country slowly with very poor chances to fend off the smoldering conflict.  We are talking not only about military costs eating a large part of the government’s budget, but also about subsidies to the region which will not be paying taxes and not supplying raw materials (coal) to the rest of the country, about boom of smuggling and drugs supply through our territory (no border, no mechanism of control, no instruments of influence).  The Ukrainian society faces an incredible challenge how to start developing in such extremely tough environment.

Saturday, September 13, 2014

Open Letter to the President and the Government of Ukraine

On September 9th VoxUkraine with the support of Kyiv School of Economics hosted discussion on "The urgency and priority of reforms in Ukraine." Discussion was held as an event in the series of VoxUkraine Clubs with participation of Roger Myerson, 2007 Nobel Prize Winner in Economics. Based on results, organizers prepared an Open Letter to the President and the Government with consolidated position of the participants.
To the President of Ukraine
Petro Poroshenko
To the Prime Minister of Ukraine
Arseny Petrovich Yatsenyuk
Dear Petro Oleksijovych!
Dear Arseny Petrovych!

Ukraine is in its most dire state since independence. The ongoing Russian aggression is claiming the lives of our best compatriots and bleeding the economy. Yet this is by no means an excuse to delay long overdue reforms.

The situation is on the edge, and failure to take immediate radical steps may lead to the loss of Ukrainian sovereignty. People and businesses are increasingly frustrated with the lack of change for the better. It is not long before they will start to question whether Ukrainian leadership really has the political will to combat corruption, institute the rule of law and improve the business climate. Moreover, the forthcoming parliamentary elections provide a fertile ground for political confrontation, which Russia may use to sow discontent and provoke another political crisis.

We praise your commitment to reforms and understand that you have to devote much of your time to military matters. However, in order to ward off domestic unrest and thwart Russian efforts to ruin our economy, we call on you to unite Ukrainian patriots and mount a joint effort to rescue the country by immediately launching radical reforms instead of waiting until after the parliamentary elections.

The list of required reforms is extensive and covers many areas that should be prioritized without procrastination. Yet we would like to emphasize that in addition to setting the priorities, another vital question is who will take up the implementation task. The primary task should be to overhaul the government bureaucracy in order to transform it into an efficient state institution staffed with a new generation of pro-European professionals. Reforms must be systemic and uncompromising, as half-hearted measures will have no definitive impact.

We stand ready to do our utmost to help accelerate reforms by engaging in a broad-based dialogue, contributing personally and attracting the best domestic and foreign talent.


VoxUkraine Advisory Board:

Roger Myerson, PhD, University of Chicago, 2007 Nobel Prize Winner in Economics
Erik Bergloff, PhD, European Bank for Reconstruction and Development
Gerard Roland, PhD, University of California, Berkeley
Jan Svejnar, PhD, Columbia University

VoxUkraine Editorial Board:

Olena Bilan, Dragon Capital
Volodymyr Bilotkach, PhD, Newcastle University
Dmytro Boyarchuk, CASE-Ukraine
Yuriy Gorodnichenko, PhD, UC Berkeley
Tymofiy Mylovanov, PhD, University of Pittsburgh
Veronika Movchan, Institute for Economic Research and Policy Consulting
Dmytro Sologub, Raiffeisen Bank Aval
Oleksandr Talavera, PhD, University of Sheffield

Invited to VoxUkraine Club

Vasyl Gatsko, Democratic Alliance party
Hanna Hopko, Reanimation Reforms Package civic initiative, Samopomich party
Semen Semenchenko, Donbass Battalion
Yegor Sobolev, Civic Lustration Committee, Volya party
Oleksandr Solontay, Institute for Political Education, Syla Lyudey party

Anatoliy Amelin, Association Aspen-Ukraine
Anna Derevyanko, European Business Association
Oleg Derevyanko, PhD Association Aspen-Ukraine
Daniil Pasko, PhD, Harvard Club

George Logush, PhD, Kyiv School of Economics
Mykhailo Vynnytsky, PhD, Kyiv Mohyla Business School
Sergiy Garmash, OstroV online newspaper
Alexander Noynets , edition “Petr and Mazepa”
Alexander Zholud, International Centre for Policy Studies
Victoria Podgornaya, Center for Social and Political Planning
Ivan Lukerya, Ukrainian Center for Independent Political Research
Agnieszka Piasecka, Open Dialogue Foundation

Igor Buinyi, Democratic Alliance party
Denys Bigus, channel ZIK
Ostap Yednak, Reanimation Reforms Package civic initiative
Pavlo Illyashenko, Center for Economic Solutions, Open Dialogue Foundation, AYA Capital
Pavlo Kyshkar, Donbass Battalion, Samopomich party
Paul Kuchta, Center for Economic Solutions, Open Dialogue Foundation
Jaroslav Markevich, Donbass Battalion
Elena Minitch, Young Presidents Organization (YPO), Kiev Chapter, Democratic Alliance party
Andriy Pylypenko, Open Dialogue Foundation
Vira Prokura, Civic Lustration Committee, Volya party
Yuri Ryfyak, Democratic Alliance party
Volodymyr Vakhitov, PhD, Kyiv School of Economics
Pavlo Prokopovich, PhD, Kyiv School of Economics
Elena Besedina, PhD, Kyiv School of Economics
Anna Vakhitova, PhD, Kyiv School of Economics
Oleg Korenok, Virginia Commonwealth University
Ilona Sologoub, Kyiv School of Economics
Natalia Shapoval, Kyiv School of Economics
Sergei Kubakh, agriculture and land expert, Reanimation Reforms Package of Reforms
Roman Bakhovskyy, public activist

Friday, September 12, 2014

A German perspective on the situation in Ukraine

By Raphael Schoenle (Brandeis University, USA)

In the perception of the German public, the recent events in Ukraine have simply been outrageous and shocking. It is all too clear to Germans what is happening: we have seen it before in Europe, in 1938. That time, however, Germany was on the wrong side of history, and the leading aggressor wasn’t called Vladimir Putin.

Following WWII, then, starting with voluntary integration into the European Coal and Steel Community, Germany has tried really hard to make sure an event like WWII will “never happen again.” Ultimately, this has lead to the creation of the European Union and more than 70 years of peace and prosperity.

Avoiding an event like WWII is still a strong, deep motivation of German politics today. Without doubt, it is pre-eminently in the mind of German politicians in the Ukrainian crisis as well, as for example the recent speech of President Gauck in Gdansk or Merkel’s visit to Kyiv prove.

However, Germany has been holding back from playing a more active role in granting support to Ukraine. It does not seem far-fetched to consider a stronger response, for example, imposing a complete embargo towards Russia. That would mean no exports of food, technology or medicine to Russia, no travel for an elite to Europe that has tasted the sweet fruits of consumption, and no easy access to finance on capital markets for Russia and Russian companies. Putin’s cronies would turn against him very quickly. The hope then is that this would quickly stop any current and future aggression. Yet so far, only minor sanctions have been imposed. Why hasn’t Germany taken any stronger steps?