State support for industry does not correspond to the scale of losses

In the conditions of war, the Ukrainian government is constantly expanding credit and grant programs, but their volumes are minimal

The military aggression of the Russian Federation against Ukraine caused huge losses to the country’s economy. In conditions where approximately 60% of state budget expenditures go to defense, business support policy is limited by budgetary possibilities. At the same time, the government toolkit of this support has been constantly expanding since the beginning of the war, although its volumes still remain small in terms of the economy and taking into account the already existing business losses from hostilities.

List of tools

A key tool for business support even during the coronavirus pandemic (February 2020) is the “5-7-9% available loans” program. Since its inception, banks have issued almost 49,000 loans worth UAH 146.4 billion to businesses, including more than 13,500 loans worth UAH 54 billion since the beginning of the war.

However, the investment value of this program for the economy, in particular for industry, is greatly exaggerated – only UAH 11 billion has been allocated to this since February 2020 (the main part of the funds went to anti-crisis goals and refinancing of old loans). And among the recipients of affordable loans, 24% and 14%, respectively, fell to the sphere of trade and production and industrial processing.

In October 2022, the program of affordable loans was expanded to restore destroyed industries. Borrowers can receive no more than UAH 60 million at 9% per annum for 5 years. Conditions – profitable activity in 2021 and location no closer than 50 km from the front line. Up to 80% of obligations under such loans will be covered by a state guarantee.

“In order to get a loan, the company must apply to any bank that participates in the “5-7-9%” program, provide confirmation of the amount of destruction and a business plan for recovery. The business plan may provide for a credit holiday for the period of recovery of actual assets (up to 12 months)”, explains Ukrainian First Deputy Minister of Economy Denys Kudin.

In addition, the “eRobota” program (grants of UAH 250,000 for business creation and development) is in effect. Within its framework, more than a thousand grants for micro-businesses worth UAH 250 million have been issued. In addition, grants of up to UAH 8 million are issued through “eRobota” for existing and new projects in the field of processing. To date, 320 million hryvnias have been allocated for this purpose for approximately 50 industries.

“These are food and furniture production, wood and metal processing, electrical and mechanical equipment production. That is, we are already talking about the creation of thousands of new jobs, and this is only the beginning of the program,” emphasizes Prime Minister of Ukraine Denys Shmyhal.

Medium and large business companies can count on the support of international institutional investors. Thus, the European Bank for Reconstruction and Development (EBRD) will invest up to €3 billion in Ukraine in 2022-2023, part of which will be directed to the private sector. Other institutional investors have similar plans.

Also, the mechanism of supporting Ukrainian exports through the tools of the Export Credit Agency (ECA) is gradually starting to work. However, its value is still minimal. As of the end of September, the insurance of 24 credit contracts for UAH 70 million, which made it possible to export UAH 323.5 million was financed. It is important to increase the lending limit for export contracts through ECA. Currently, it amounts to UAH 20 million, which is extremely small even for small companies.

“The main task for us during the war is to restart the economy. In the first half of the year, we have a 24% drop in exports. Therefore, we are currently working on stimulating export operations. I really want commercial banks to help in this and instead of NBU certificates of deposit invest in lending to the real sector of the economy,” emphasizes First Deputy Prime Minister – Minister of Economy Julia Svyridenko.

According to Dmytro Kysylevskyi, Deputy Chairman of the Republic of Belarus’ Committee on Economic Development, among the successful actions we can note the implementation of the process of production facilities’ relocation. So, according to the Ministry of Economy, according to the program of relocation to safer regions, 761 enterprises were moved, 80% (588) of them have already resumed operations at a new location. Another 274 companies are looking for a suitable location or method of transportation.

Inconsistency of support

However, the volume of preferential lending programs and grants for industry does not correspond to the size of industrial losses from hostilities. Thus, according to estimates of the Kyiv School of Economics (KSE), direct losses of enterprises and industry’s assets in monetary terms as of September 1, 2022,  amounted to $9.9 billion or 7.8% of the total amount of $127 billion. In addition, now the government is mostly focused on supporting agro-industrial complex and agricultural exports, rather than industry.

“Business needs access to finance. Banks lend little. The experience of successfully obtaining financing within the framework of “5-7-9%” is widespread in the agricultural sector, but not yet in other industries. In addition, the allocated funds are ten times less than the needs. Although the program itself is correct and has been timely since its launch,” notes Andriy Dligach, founder and CEO of Advanter Group.

According to Dmytro Kysylevskyi, it is very important to reformat the affordable loans program and change its priorities. There should be a separate program for industrial producers with large credit limits. Currently, the structure of issued available loans is dominated by agricultural and trading companies, in particular, importers.

Working for the future

To the best of its ability, the Ukrainian authorities are trying to improve their offers for industry, especially for exports. The Verkhovna Rada appealed to the EU to cancel all tariffs and quotas on Ukrainian exports until the negotiations on Ukraine’s membership in the EU are completed. Now it has been canceled for a period of one year.

In order to facilitate Ukrainian exports to the EU, Ukraine signs agreements with neighboring countries on the cancellation of permits for truck transportation, simplification of customs border clearance, opening of new checkpoints, expansion of border infrastructure, etc.

War risk insurance becomes especially important in the conditions of war. Ukraine agreed with MIGA (Multilateral Investment Guarantee Agency, which belongs to the World Bank Group) to launch a corresponding pilot project worth $30 million.

“So far it only works for foreign companies. But I expect that the government will find a mechanism to make it available to Ukrainian companies as well,” Dmytro Kysylevskyi said.

According to the plans of the Ministry of Economy, in 2023 the amount of insurance through the MIGA mechanism can be increased to $1 billion. Ukraine is also starting to attract other partners to a similar insurance mechanism – everything will depend on the demand for insurance among investors. The amount of insurance coverage will be at least 90% of the investment amount.

“In practice, this means that an investor who invests in a development project in Ukraine even during a war will have a guarantee that in the event of the destruction of assets due to military actions, the cost of the investment will be reimbursed,” Julia Svyridenko emphasizes.

State procurement is no less important: when 30% of uniforms for the Armed Forces are bought in Ukraine, and 70% – abroad, this is not normal. Where Ukrainian enterprises can meet the needs of the state, they should work in full.

Other initiatives that directly affect the possibilities of post-war industrial development include the development of a regulatory framework for the operation of industrial parks, as well as the improvement of the law on “investment nannies”. The Cabinet of Ministers has submitted to the Verkhovna Rada a draft law that provides for preferences for investment projects of €12 million or more (now the threshold is €20 million).

“In addition, we offer to expand the scope of implementation of the relevant projects. In particular, the production of energy-efficient building materials, climate equipment, heating and air conditioning systems, and hot water supply. Such changes will contribute to the fact that business will invest hundreds of millions in projects important for the economy and the country,” adds Denys Shmyhal.

Initiatives for business

Now it is important to promote any initiatives aimed at business, for example «helping Ukraine with Ukrainian goods».

“Currently, Ukraine receives a lot of foreign technical assistance. In this regard, the government can take the initiative for aid donors to purchase these products from Ukrainian producers, which will contribute to their loading and reducing logistics costs for delivery,” Dmytro Kysylevskyi emphasizes.

Under the current conditions, Ukraine needs to support any working business. This is especially true of medium and large industrial producers – the main employers in the regions affected by the war. Even according to official estimates, the unemployment rate in Ukraine at the end of 2022 will be 30%, and the monthly shortfall in the state budget will be approximately $5 billion. This requires quick and effective business solutions that will help increase budget revenues and reduce unemployment.