Anatoliy Kinakh: Ukraine’s post-war economy will be radically different

Russia’s military aggression has cause a devastating effect to our economic performance and prospects. Before the war, Ukrainian business was under constant pressure of various negative economic factors, the war completely destroyed many business opportunities. Despite this, Ukrainian entrepreneurs are the mainstay of the economy in wartime. GMK Center spoke with Anatoliy Kinakh, President of the Ukrainian League of Industrialists and Entrepreneurs, about the economic prospects of Ukrainian business.

How do you judge the impact of the war on the Ukrainian economy?

– The Ukrainian economy lost almost $100 billion due to the war. GDP may fall by 40-45% year on year. The atrocities of the Russian army have led to an unprecedented influx of refugees and internally displaced persons since World War II.

According to the UN, 5.6 million citizens left Ukraine; almost all of them are women, children, and the elderly. About 7 million people moved to the western regions of the country, i.e. 40% of the working population lost all or part of their sources of income. At the same time, even before the war, during the COVID-19 pandemic, the Ukrainian League of Industrialists and Entrepreneurs conducted a study of the socio-economic situation of fellow citizens. 52% of Ukrainians did not have a financial margin even for 2-3 months.

The figure is similar in business. About 42% of companies have not yet resumed their work. Some of them are in the process of relocation; many women entrepreneurs who ran small and micro businesses went abroad; large factories located in areas of hostilities with high intensity, lost production sites, equipment, personnel.

Only authorities and structured business organizations could all these challenges. Ukraine needs $5-7 billion a month in foreign aid to defend itself and meet its social costs. Not all aids are free, 64% of them will have to be paid back.

Therefore, the task of business and government is to save working enterprises and jobs. It is worth noting that the dialogue with the government and the parliament on this issue was set quickly, and at the beginning of the war five packages of positive legislative initiatives for the business community were adopted.

In particular, we are talking about the abolition of inspections, fines, zero excise duty on fuel, interest-free lending to farmers, simplified system and voluntary payment of 2% tax, simplified customs procedures and more.

Trust gives positive results. According to the State Tax Service of Ukraine, tax revenues for the first quarter exceeded last year’s figures by more than 27%. In April, the tax exceeded the plan by UAH 2.5 billion. It proves that domestic entrepreneurs just need a favorable tax environment and access to resources, so they will pay more taxes.

However, it is also true that the adopted changes had numerous conceptual shortcomings, which resulted in imbalances in the fiscal system and customs policy, unjustified granting of tax and customs preferences instead of real assistance to businesses.

Today, bills (№7311, №7311-1, №7311-2, №7311-d) have been registered in the parliament, which can make life difficult for taxpayers. Law 242244-IX, which did not pass the proper examination of the expert and business environment, was also adopted. This law has a number of significant shortcomings that will cause significant problems for business. The resumption of registration of tax invoices/adjustment calculations risks the loss of VAT payers’ right to a tax credit and will put such taxpayers in conditions much worse than in the pre-war period. At the same time, no business support measures were proposed.

Therefore, the business community has already appealed to the relevant committee of the Verkhovna Rada, the Ministry of Finance and the State Tax Service to correct tax innovations during wartime. For example, a simplified system of taxation with special features was introduced, provided for the payment of a single tax at a rate of 2%. It has supported small and micro businesses, but has had a negative impact on certain industries. In particular, for those who claims VAT refunds, etc.

As of the end of April, 39,000 juridical persons and 161,000 private entrepreneur had joined it.

Draft law №7311-d briskly abolishes preferences for taxpayers who have switched to the payment of the single tax at the rate of 2%, deprives them of the opportunity to plan their activities.

What support for business you expect from government today?

– We need to provide real support to businesses, especially those still working with the general system of taxation. This includes:

• resumption of budgetary compensation to exporters (business was mostly positive about the initiative to compensate it with domestic government bonds);
• reducing payroll burden to save staff and jobs;
• VAT release or delay mechanism for critical imports (to do this, it is necessary to revise the current List of Critical Imports, approved by the Cabinet of Ministers of February 24, 2022 №153);
• for the period of wartime increase the time for receiving electronic documents;
• introduction of a single tax period for filing a VAT tax return for the periods February-May 2022.

The business community insists on the inclusion in the economic bloc of Ukraine’s post-war reconstruction plan of a clear commitment by the government to finally carry out tax reform. This is extremely important to stimulate small and medium-sized businesses. All the recent innovations that allow entrepreneurs to return to work will end after our victory and the abolition of wartime legislative. We all hope that this will happen as soon as possible.

After that, Ukraine’s economy will face many challenges, because the scale of destruction and loss is impressive. Conditions for the return of the 5 million refugees who left Ukraine to escape Russian aggression should be set up immediately. To do this, it is necessary to implement projects to rebuild the housing, not temporary housing, new buildings purchase of by state and local budgets (if there are donor funds from the EU and international organizations).

The second step is to create conditions for employment. In the first years after the war, the tax burden should be minimum and access to financial resources should be transparent and easy. Fiscal benefits are needed for those who open their own company and employ at least a few people. Tax reform to consolidate these provisions must be prepared now. So that the country, which has risen politically and morally to a huge number of steps, did not find itself after the war in the economic realities of previous years.

Do you consider the exports problems the most critical in the current economic situation, or not?

– It is no secret that the aggressor’s blockade of Ukraine’s seaports has critically reduced the daily and monthly supplies of agricultural products and products of the mining & metals complex abroad. Exports of the domestic agro-industrial complex are carried out exclusively by road and rail in the western direction, but the capacity of such roads is too low. During the year, transshipment in Ukrainian ports amounted to 160 million tons, while by rail in the current conditions – 1 million tons per month, or 12 million tons per year.

Currently, 4.5 million tons of grain are blocked by Russia in ports, 20 million tons in elevators, where the aggressor strikes missiles, steals products etc. Therefore, expanding the capacity of land crossings with the EU is on the agenda. Both the government and Ukrainian industrialists are working on this issue with Poland, the Baltic nations and Germany. Significant progress has been made in speeding up the transshipment of grain by rail.

In fact, we are talking about the supply of products of the mining and metals complex, which together with grain is the main item of our foreign trade. Like grain, mining and metals products are profitable while exported by sea. Especially since we have a good opportunity to supply steel to the United States, we continue to trade with partners in Asia and so on.

Part of the steel capacities has been lost or conserved. According to the Ukraine’s National Bank, some enterprises resumed operations in April, operating at 40-50% of capacity. Logistics and sales are especially difficult. Part of the resources and workers are reoriented to the needs of the defense sector, alternative routes of supply are being developed – through the ports of Romania and Baltics nations.

A more effective solution is to ensure the safety of sea routes. Ukraine loses $170 million every day due to blocked seaports. The Ukrainian League of Industrialists and Entrepreneurs proposed to appeal to international organizations, such as Turkey, etc., to jointly organize a corridor for the export of grain blocked in ports, in the future – to create safe corridors for our exporters of metals and other products.

Many countries in the Middle East, North Africa and others are interested in improving the logistics of Ukrainian food exports. The United Nations is calling for a resumption of Ukrainian food supplies to other countries to ease the global food crisis.

Our agro-industrial complex meets the needs of 400 million people, so Russia’s war against Ukraine has disrupted food stability in the world and put the most vulnerable regions at risk of starvation.

Just the other day, the Vice President of the European Commission, EU High Representative for Foreign Affairs and Security Policy Joseph Borrell, spoke about the mission to “liberate” Ukrainian grain. We hope that “green corridors” or “solidarity corridors” will be organized, because this is the interest of many countries around the world.

We are waiting a final decision on the temporary abolition of current tariffs and quotas on steel, industrial goods and agricultural products, which are currently not covered by the EU’s trade agreement with Ukraine. Duty-free exports to the EU, which is a 45% share in Ukraine’s foreign trade, is a matter of mutual development, transfer of technology and knowledge, closer integration.

How do you weigh the government’s policy of promoting critical imports?

– To support the army, volunteers with their humanitarian missions, producers in general, in Ukraine with the beginning of the war significantly expanded the list of critical imports and simplified customs procedures. This made it possible to quickly supply the necessary components and other products that for one reason or another were not produced in Ukraine.

However, the range of critical imports has unjustifiably expanded, now it is 69% of pre-war imports. This inevitably affects local entrepreneurs who are losing competitiveness. Because the difficult financial situation due to war, destruction, loss of logistics chains, etc. affect producers. In addition, even such products as bananas and yogurts have been imported as part of critical imports. This is a strange move, to say the least. Therefore, the business community asked the Cabinet of Ministers to review the list.

I would like to mention the duty-free import of cars to replenish the country’s fleet. This has become a controversial issue in society, and there are many opinions. More than 25-30 thousand vehicles were imported, and the losses of the fleet due to hostilities are estimated to range from 400 to 500 thousand units. So only a small part of the need is compensated.

At the same time, it is necessary to return the norm of “one car in one hand” (does not apply to those for the needs of the army and volunteers), to limit the class of cars that fall under duty-free registration and avoid earning money on luxury cars, further resale, etc.

In short, the business on imported cars harms the Ukrainian economy.

In general, the business insists on the need to simplify customs clearance and control procedures for the import of certain categories of goods, rather than certain categories of foreign economic entities.

In your opinion, how should the post-war modernization and reconstruction of destroyed industrial plants be carried out?

– The crisis has two sides of the coin. And the huge losses that Ukraine has suffered may be a point of no return to old solutions and methods. This is especially true of industrial development. The fact that I have insisted on for years is obvious: that Ukraine needs a law on industrial development, specific programs for aviation, missiles, shipbuilding, etc., financed from the budget and supported by private investment.

It is pity that the war started the mass production of Alders, Neptunes, Stugns, serial orders of aircraft for the needs of the Armed Forces, etc. By the way, before the war, Antonov worked on the production of three aircraft for our army. This was the first such order since the proclamation of Independence, and industrialists, experts have sought this for years.

The same applies to shipbuilding, because Ukraine is a sea state, and Russia will remain in the neighborhood, which will always create risks, both military and commercial. Even after our victory, there will be a constant threat from Russia, and we will have to live with it and prepare ourselves and our economy for this.

The localization of industrial production should be as high as possible. Not 30-40%, as the government said before, before the war, but 80%, and in some areas 90%. We also seek cooperation with European, American and Canadian partners, as both sides have their own developments and Ukraine is part of the Western, democratic world.

As Ukraine expects to be granted EU candidate status, it is important to think now about integration in terms of compliance with all norms and standards of production.

A lot of work towards the development of green energy. Our production is still energy-intensive, has a significant carbon footprint.

From 2026, the EU will impose additional duties on imported products depending on the amount of carbon footprint in the production process. If such customs tariffs are introduced, we could lose between €700 million and €1 billion annually. Therefore, measures need to be implemented now to minimize this additional financial pressure on Ukrainian exports and competitiveness. Betting on building new plants according to “green” standards is like taking one step out of ten: both existing industrial giants and medium-sized businesses need re-equipment.

Each plant is a separate business plan together with the state and international donors.

I think that we will become a member of the EU around 2024, and in order for this to become a reality, in addition to the fight against corruption, we need to adapt our economy, transport infrastructure and, of course, legislation.

Is the relocation of industrial enterprises successful?

– Despite the really difficult situation, about 65% of businesses continue their work, and new businesses are opening. Some of them moved to the western regions of Ukraine through the relevant government program, some retrained and work under wartime conditions. For example, in the Rivne region, which used to make juices, now produces canned meat for the army. There are many such examples.

From the first days of the war, the Ukrainian League of Industrialists and Entrepreneurs was involved in and assisting in the implementation of the government’s program to relocate business from the areas of ​​active hostilities. Any company can become a participant by submitting an application on the Prozorro.Sales website.

Transportation is provided free of charge by Ukrzaliznytsia and Ukrposhta, which is responsible for transporting equipment to the railway station, as well as providing prompt passage of checkpoints and issuing transport invoices. To date, more than 500 companies have moved to the western and central regions.

But that’s only half the battle. The most important is the integration of the enterprise into the socio-economic environment of the region, the solution of social and domestic issues of employees and more.

Here, the business community is already actively cooperating with local military administrations.

I will give an example of the Zakarpattia region. The regional administration forms a catalog of industrial sites that can be provided for the location of enterprises from the east and south. At present, several dozen enterprises and industrial capacities have moved to Zakarpattia.

Each relocated company is provided with a personal taxman for support. Construction companies got permits for 500 plots of land for temporary or permanent building items stocking. They will be very important for the rebuilding of Ukraine in the postwar period. There is an idea to build modern settlements. It is also true that relocated enterprises need to be integrated into the structure of the economy of new areas. For Zakarpattia it is IT, processing industry, some machine-building enterprises.

The head of the Zakarpattia Regional Military Administration and the heads of some other administrations joined the work of the Anti-Crisis Staff for Aid to Industry and Business, established under the Ukrainian League of Industrialists and Entrepreneurs. It consists of the chairpersons of the relevant parliamentary committees, the chairperson of the National Bank Council Bohdan Danylyshyn, representatives of the government and the President Office. In this way, we are already solving problematic issues that have arisen or may arise during relocation.

Probably the key issue in the post-war reconstruction of the country should be the restoration of housing. How do you see this process?

– More than 10 million Ukrainians were forced to leave their homes due to Russia’s armed aggression. About 250,000 lost their homes. The government has guaranteed appropriate compensation, and the process of building or buying ready-made apartments is underway. However, it is not too fast, and funds are needed.

In our opinion, this system program should be as cheap as possible, without compromising on quality. This is possible due to strong partnerships with European countries.

This is the so-called digital construction, in which detailed projects of new buildings (schools, houses, etc.) are developed using interactive systems, and then quickly implemented. Lithuanians are already implementing the experience of using such panel constructions in Sweden, Norway and Finland.

As we have been working with Lithuania within the Ukrainian-Lithuanian Business Council for many years, we have brought this issue up for discussion with the Baltic partners.

There are real results of the negotiations organized by the Ukrainian League of Industrialists and Entrepreneurs and the Confederation of Lithuanian Industrialists: Lithuanians are ready to provide Ukraine with a digital project for the construction of a number of high-rise buildings, social infrastructure facilities, etc. It is proposed to select a group of Ukrainian specialists who are not in military, and conduct their face-to-face training in Lithuania on relevant technologies.

It is clear that it is necessary to concentrate on cooperation with concrete cities, for example, Bucha, Mykolaiv, etc., and conclude the relevant agreements. This is one of the options.

In conclusion, I would like to note that Ukraine has every reason for economic optimism if we properly use the help of our Western partners, as well as maintain a high level of mutual trust and dialogue between society, government and business.

Our defenders on the battlefield in the suburbs, towns and villages of the country, in the iron fortress of Mariupol, in the airspace, etc. show an unprecedented strength of spirit, faith and skill. We also need a united and patriotic economic rear.

And we have it: I have already stated that business, despite the war, losses and uncertainty of the future, has paid more taxes than in previous years. Now it is very important not to abolish positive fiscal innovations, to solve logistical problems of exporters, to attract foreign and donor investments for specific projects of localization of production, reconstruction of cities, etc.

We believe in victory, we are working to accelerate it. Everything will be Ukraine!