Interviews mining & metals sector of Ukraine 22 March 2023
President of UUIE about the current state of the Ukrainian economy and priority measures to improve the situation
Ukrainian business turned out to be very adaptable to the conditions of martial law. If in the spring of last year up to 60% of companies did not work, now this indicator has decreased to 10%. However, there remain systemic problems that have worsened during the war, such as the insufficient volume of business lending, the lack of working capital, the absence of a clear industrial policy, predictability in the field of tax administration, etc.
Anatoly Kinakh, the president of Ukrainian Union of Industrialists and Entrepreneurs (UUIE) told about it in an interview with GMK Center.
What level and dynamics of business activity do you currently see in the Ukrainian economy?
– The losses of the Ukrainian economy from the full-scale invasion of the Russian Federation have become a challenge for both the government and business. Direct damage caused by the actions of the enemy is estimated at $140 billion, indirect damage – at $600 billion or more. GDP fell by almost 30% during the year of the war, the same as rate of unemployment. 60% among internally displaced persons (IDP) do not have a job, 7 million Ukrainians – went abroad. Exports fell by 35%, and the pace of business relocation abroad exceeds domestic times by many times.
However, in general, the Ukrainian economy and business turned out to be very adaptive and were able to minimize losses as much as possible. Large companies actively cooperate with the European market, UUIE can provide direct assistance in Poland, the Baltic countries, the USA, Italy – very strong partnerships with local business associations and the Chamber of Commerce and Industry.
If in the spring of 2022 up to 60% of companies did not work, now this indicator has decreased to 10%. A lot of new sole traders opened, according to statistics in February 2023, and this is a reflection of the wartime reality – every second one is a female entrepreneur.
However, it is clear that even if up to 90% of businesses have resumed their work, a third of them are still functioning in a limited format. Someone reduced the staff, someone reduced the volume of production. Now more than ever, a consistent and predictable policy is needed in the field of tax administration, lending to the economy, modernization of labor relations, and stimulation of the domestic market, which will prevent Ukrainian businesses from realizing their intentions to relocate abroad.
What industries do you think need the most support from the state today? Do you not see a bias in the direction of supporting agrarians?
– First of all, this is the mining and steel industry. Here the situation is critical, because the drop in production and exports is more than 70%. If nothing is done, then in 2023 this rate of decline may increase to 85%. The industry suffered great destruction due to Russian armed aggression, the country’s two largest steel plants were destroyed: Ilyich Iron and Steel Works and Azovstal. The blockade of sea ports practically stopped exports. We in the UUIE and the Anti-Crisis Headquarters (ASH), together with the associations of steelmakers and trade unions, are consistently advocating for the adoption and implementation by the Cabinet of Ministers of the Plan to ensure the functioning and development of steel sector. Such a plan developed by the government mostly contains measures of a monitoring nature, is not aimed at achieving specific changes in a short period of time, and generally does not meet the current expectations of steelmakers. We have already appealed to the President, the CMU, the National Security Service of Ukraine and are waiting for an appropriate response. In the past, 500,000 people worked in the industry, it is one of the budget-generating areas. In addition, for post-war reconstruction, we will need steel, metal structures, rebar and much more. We have to provide this demand.
Complex situation in the chemical industry. This year, farmers will apply 40-50% of the required amount of fertilizers, which will affect the future yield.
Agricultural industry remains the locomotive of the Ukrainian economy. The fact is that in the conditions of war, firstly, food security is a matter of national security, and secondly, Ukraine, a powerful exporter of agricultural raw materials and oilseeds, should be one of the guarantors of global food security. The need to deliver grain to African countries became one of the determining factors in unlocking grain export by sea for Ukraine. However, ground logistics for farmers, as well as for other exporters, is complicated due to the difference in the width of tracks from the European one, the increase in the cost of railway transportation due to the increase in Ukrzaliznytsia (UZ) tariffs, etc. Farmers also expect assistance from the state in obtaining seed material, tools for pest control and assistance with demining fields.
How do you rate the current level of support from industry authorities?
– Unfortunately, we did not have a clear policy of industrial support before the full-scale war, and there is none now. The law on industrial policy has not yet been adopted. The recovery plan of Ukraine, presented in Lugano last summer, is not accompanied by sectoral industrial development programs. According to our estimates, the fall in industry at the end of the year is up to 35%.
The «Available 5-7-9 loans» program is not enough for the purposes of restoring production, modernizing infrastructure according to European standards and decarbonization. Resources are limited. Therefore, we advocate coordinated actions of the National Bank and the government in this direction. We are currently negotiating with the Board of the NBU regarding holding a joint meeting on expanding lending to the economy.
Industrialists and entrepreneurs are concerned about the NBU’s decision to keep the discount rate at 25% at least until the end of the first quarter of 2024 without compensatory measures. In our opinion, this deforms the crediting system of the economy, which already does not meet the challenges of wartime.
About 40% of businesses in Ukraine experience an acute shortage of working capital.
What measures are included in the MMC support plan?
– Among the proposed measures is the need to expand the existing grain corridor for export by sea and to Ukrainian steel industry. This is beneficial for us, for Europe and other consumers – steel will go to the EU at a fairly low, therefore, competitive price. It is also necessary to reduce tariffs for freight transportation by rail, postponement of eco-taxes and inspections, further development of the infrastructure of Danube ports, loading of the industry at the expense of domestic demand.
The anti-crisis headquarters insists on the approval of the target action plan for the preservation and development of steel industry at the level of the Cabinet of Ministers.
How do you generally assess the government’s economic policy?
– We appreciated the government’s efforts at the beginning of the war to stabilize the situation: fuel excise duties were abolished at one time, the list of critical imports was significantly expanded, and there were proposals for a radical tax reduction. In the banking sector, the NBU did very well: the financial system remained stable.
But there are also ill-conceived decisions in economic policy. In particular, according to the same list of critical imports, at one time everything was imported duty-free: from yogurts to bananas. With the joint efforts of business circles, we managed to ensure that only necessary equipment and goods for the needs of the country’s defense, as well as production, where necessary, and such things as generators, etc. remained in the list.
The level of coordination between the actions of the government and the National Bank is worrying. The budget for 2023 was approved with a forecast of GDP growth of 3.2% (now the indicators will be revised). But the NBU’s current forecast is currently 0.3%. The difference is ten times. The government predicts a 14% drop in exports, and the National Bank predicts a 1% increase. The Cabinet of Ministers foresees import growth in 2023 by 1%, and the National Bank – by as much as 24%. Similarly, regarding inflation forecasts: the government – 28%, the NBU – 18-19%. It is unacceptable.
The same applies to wartime tariff increases. I already mentioned the increase in the tariff for transportation of Ukrzaliznytsia immediately by 70%. When we sent a corresponding request to the Ministry of Economy, we received the answer: “But they did not agree with us.”
Again, there is no clear industrial policy, there are problems in the tax field. It is not clear why they talked about the prospect of liquidating the Economic Code. UUIE and the Anti-Crisis Staff of Business Assistance are concerned that the Council voted in the first reading of draft law No. 6013, despite previously provided negative scientific-legal, expert and technical conclusions from the National Academy of Sciences and other professional bodies.
Ukraine’s recovery plan is practically not being worked on. Since the presentation in Lugano (summer 2022), the document on «Recovery and development of the economy» has simply increased by a dozen pages, but where are the next specific actions, funds, etc.?
The government is trying to put out problematic issues with firefighting methods, but the issue of developing a long-term policy for the development of the economy, industry, and exports under the conditions of a protracted war is not yet timely.
Ukrainian infrastructure and business suffered multibillion-dollar losses due to hostilities. How do you see funding recovery for business?
– This is only a public-private partnership. Neither Ukraine nor any individual business (as a rule) has enough funds to restore the entire infrastructure that was destroyed.
Therefore, the solution is to increase localization in state procurement, help the state to find grants for restoration. In the very distant future, it means receiving compensation for destroyed property at the expense of funds from seized Russian assets abroad. But this requires legally formalized recording of losses, keeping registers, etc. And this work must be done now.
We can’t do without loans. The banking sector should return to lending to the economy. Of course, it is necessary to create a favorable investment climate.
The Anti-Crisis Headquarters works under the auspices of UUIE, which aggregates general or sectoral economic proposals of business and brings them to the authorities. Is there feedback on numerous appeals and specific decisions made?
– Yes, there are, and there are quite a lot of these results. Under the joint influence of the business community, at our insistence, the law on the reservation of specialists at enterprises (No. 2732-THEM) and appropriate Resolution of the Cabinet of Ministers No. 76 dated January 27, 2023 were passed. Businesses will be able to book up to 50% of conscripted workers who are critical to the business’ continued operations.
There is positive news from the results of our appeals regarding the inadmissibility of the liquidation of the Ministry of Agriculture and the Ministry of Strategy and Industry – these issues have been removed from the agenda.
Following the industrialists, the government began to more persistently articulate on international platforms the need to unblock sea ports for all Ukrainian exports, not just grain, to add the port of Mykolaiv to the list, as well as to completely replace Russian steel with Ukrainian steel on the European market. Constant work is being done to improve transport logistics on the western borders.
Some positive developments, implemented at the insistence of UUIE, were changes to Government Resolution No. 1165 in December 2022, according to which the directory of tax information codes functions, which is the basis for making a decision on the compliance of a VAT payer with the risk criteria of a tax payer. This will make it possible to better control the actions of tax officials when determining a business as risky. However, other measures are required. The lack of accuracy of the SMCOR algorithms is noticeable (the system for monitoring the compliance of tax invoices/adjustment calculations with the criteria for assessing the degree of risks) leads to the suspension of tax documents for bona fide businesses, preparation of necessary documents on hundreds of pages takes time.
Many of the proposals of the Anti-Crisis Headquarters will be considered at the meeting of the National Security Council. This concerns the rescue plan of the domestic steel industry, as well as a number of other decisions of the ASH, in particular regarding the formation of infrastructure for the training of specialists in humanitarian demining, the comprehensive State program for determining the needs of business relocation, the design of infrastructure facilities in need of urgent restoration, etc.
The anti-crisis headquarters directly contributed to the introduction of a new budget program in 2023, thanks to which the program for renewing the rolling stock of the railway will be financed, as well as the contract between Ukrzaliznytsia and the Kryukiv Carriage Works for the production of passenger cars.
Also, at our insistence, the Verkhovna Rada finally approved Law No. 7198 on the creation of a state register of property damaged and destroyed by the war, as well as the procedure for receiving compensation, which finally paves the way for the adoption of the corresponding state program.
The work continues, meetings of the ASH are held regularly – every month. We constantly monitor the implementation of our proposals. Representatives of the Office of the President, the government, the VRU, the National Bank, all major industrial associations, trade unions, etc., are involved in the work of the headquarters. This is a platform for constructive and maximally pragmatic dialogue.
How do you rate tax policy during martial law? Is it balanced and systematic?
– We desperately need a feasibility-based tax reform and a stable tax environment. Issues of tax administration remain problematic (blocking of tax invoices, difficulties in refunding VAT to exporters). It is also necessary to reduce the fiscal burden, in particular on the wage fund.
Do you see sufficient progress in solving general logistics problems and developing transport infrastructure?
– During this year, tremendous work was carried out to increase the throughput capacity of railway exports through the western borders. Anti-crisis headquarters, UUIE were also involved in these processes, in particular, held a series of negotiations with Polish, Romanian, and Moldovan partners. Yes, a number of border crossings need to be opened and modernized, but the process has started here. The other day it also became known that the Agreement on the liberalization of road freight transport with the EU has been extended until June 30, 2024. Ukraine is a candidate for joining the EU, so I believe that it is necessary to agree on longer periods of customs and transport visa-free extension.
Difficult negotiations are currently underway regarding the extension of the grain corridor by sea, as you know, the Russian aggressor is trying in every way to prevent the effective implementation of this initiative. Still, it works, because Ukraine is one of the guarantors of global food security, and the UN and some partner countries will support food exports from Ukraine by sea.
As for the opening of ports for non-grain cargoes, including steel industry, it is necessary to work more powerfully on the diplomatic front with European partners. I have already noted: Ukrainian steel must regain its leading position on the European and world markets.
The problem is expensive logistics. We are advocating a reduction in UZ freight rates.
Do you consider the level of efforts of trade diplomacy and, in particular, trade representations at embassies to be sufficient?
– Unfortunately, no. Due to limited resources and staff, the embassies are staffed with substandard trade representatives and advisers on economic issues. As a rule, this is one person who is involved more in bureaucratic work than in practical work. That is, some statistical reports are prepared for the Ministry of Foreign Affairs, the Ministry of Economy, but they rarely can really help businesses that want to gain a foothold in the market of the host country or find powerful partners. There are, of course, individual cases of good work, but it is far from systematic.
Therefore, UUIE has been actively developing the international direction for a year now: we have signed dozens of agreements with relevant organizations from Finland, the USA, Poland, etc. The first forum of US and Ukrainian industrialists was held with the National Association of US Manufacturers. We also became an observer in the «Business in the OECD» association and therefore effectively promote the economic interests of Ukrainian manufacturers and exporters in the Organization for Economic Cooperation and Development. We hope that our efforts will accelerate Ukraine’s accession to the OECD.
Similarly, we have been working with Businesseurope for several years – the largest business association of the EU, which unites the businesses of all member countries. Our application for observer status there is also in the final stage of approval.
In general, we are in favor of Ukrainian diplomacy strengthening bargaining at free-economic direction in its activity. We need to rebuild Ukraine, return millions of refugees from abroad home. This requires a working, strong economy, complex highly professional actions.
Did the enterprise relocation program pay off?
– Relocation became a way out for many enterprises that found themselves in temporarily occupied territories or were located close to the contact line. However, about 720 enterprises used the program for the entire year, while the owners moved 3-4 times more of their companies abroad. Why so? The first is the business climate and tax policy. Despite the war, we still do not have strong incentives for businesses to maintain their production and develop it. And the neighboring EU countries have access to credit resources, low fiscal rates, and, of course, there are no threats related to war.
Also, there is still no economic/production map of regions in Ukraine. Because the enterprise often cannot assess whether it will be able to integrate into the economy of the region, whether there are appropriate production facilities and energy resources there. The social component is also important: is there a sufficient number of qualified personnel in the new place, etc.
Systematic state support for relocation is necessary because a number of accompanying issues need to be resolved.
In your opinion, what 10 measures are important to take now to save the country’s economy?
- First of all, the adoption of the law “On Industrial Policy” is necessary, and on its basis – sectoral programs for the modernization of industry. Intensification of the activities of industrial parks and localization of production are also necessary.
- Changes in the reform of the defense-industrial complex based on the principles of accelerated transition to international standards of weapons and special equipment are very important to Ukraine. After all, we currently have a very high specific gravity of weapons based on NATO standards, which must be maintained in a combat-ready condition.
- Revision of the tariff policy for producers, industrialists in the direction of maintaining competitiveness and incentives for improving work efficiency.
- Timely reimbursement of VAT to exporters is important. Amid lack of working capital, these resources will support manufacturers.
- Tax reform: systemic and comprehensive.
- Credit incentives for self-employment, scaling of credit programs for the economy.
- We need an efficient judicial system.
- Fierce fight against corruption. Moreover, it is not the number of landings that is important, but really effective investigations of schemes and punishment of those behind them, not only the executors.
- Ukraine should intensify work on the specific implementation of the Recovery Plan. In particular, to offer a number of state programs (restoration of industry, construction, etc.). There is a great lack of specifics here, and business is worried about it.
- Last, but not least: formation of the national labor market, retraining for IDPs, modernization of vocational education, clear coordination of this direction with the tasks of the Recovery Plan. We will need builders, engineers, ecologists, humanitarian demining specialists and a number of other professions. That is, a clear state policy on the preservation and development of the human and labor potential of Ukraine.