$70 billion investment targeted

On 3rd June Ukrainian President Viktor Yanukovich took further steps to deliver on his election promises and announced a new programme of economic reforms to be implemented by the end of 2014. The aim is to strengthen the Ukrainian economy and make it one of the world’s leading countries by 2020. While the larger ambition is impressive, some analysts have been critical of the proposed speed of implementation entailed in the programme, the regulations required, and the ‘modest’ specific targets outlined. Reforms in two weeks The President’s Administration promulgated the ‘Programme of economic reforms for the period of 2010-2014’, an 85-page document put together in just two weeks. During the second meeting of Committee of economic reforms headed Yanukovich, the first deputy of the President’s Administration, Irina Akimova, characterised the structure of the Programme. The document has three aims: create a more financially secure society, competitive economics and an effective state apparatus. To achieve these aims, a detailed plan of reforms will be introduced, the new bills will be made and the national debt will be stabilised through a three phases. The first stage, to be introduced by end of 2010, will entail the introduction of new laws ‘About the state debt’ and a new Internal Revenue Code will be adopted to simplify tax liability. Parliament is also going to make changes to the Budget Code. The main aims of this period are to adopt all the necessary bills to facilitate future reforms. Stage two, (2011-2012) is intended to elaborate upon and adopt laws on state help the real estate sector. The short-term strategy for state debt will also be approved. The Ukrainian authorities will also implement reforms in the social sphere, such as a rise the pension level (though retirement age may increase). During the final stage (2013-2014) medium-term planning in the budget process is expected to get underway, the state share in the economy to reduce, falling from 37% down to around 20-25%, rural infrastructure is to be modernised and compulsory medical insurance introduced. Among the targets criticised as ‘too modest’ by analysts, each year the budget deficit is to be reduced by at least 1% of GDP, reaching 2% in 2013-2014. In this period the state debt must not be more than 45% of GDP and the inflation is to be reduced from 13% to 6%. Four year changes Proposed Parliamentary reforms cover every sphere of Ukrainian life and business. For example, the tax system changes will provide progressive lowering of income tax from 2012, tax vacations for small-scale businesses, and new taxes will be introduced for both personal residential and corporate-owned commercial property. Tough new financial requirements are to be introduced stipulating statutory minimum funding levels for financial institutions and the establishment of a fully functioning credit agency. According to the programme, the next four years will see significant privatisation of state enterprises. The Ukrainian authorities plan to elaborate on their programme, which will include listing, priorities and mechanisms for the sale of the country’s coal mining enterprises. Secondary assets of the state company Ukrzaliznycya (which combines all of Ukraine’s railways) will be also sold. There are also plans to increase domestic rates for communal services to the most affluent. Yegor Samusenko, analyst at investment company Concorde Capital notes that the reform package also stipulated plans for reform of the energy sector and privatisation of power generation and distribution assets, which is a move long-awaited by the market. The reform targets improving energy efficiency and changing market incentives for participants in electricity generation and distribution. ‘Regarding the renewable energy sector, no changes are anticipated or stipulated, since current prices for green energy in Ukraine are already more attractive than in most other European countries. The only barrier for active development of renewables is a lack of stability in the regulation environment, which add risks and makes the cost of capital higher – Samusenko suggest that market players are concerned that current high tariffs for renewable energy might not be retained. Investors are attracted One of the most important chapters in the report comprises some 14 pages dedicated to investors in a section titled: ‘Improvement of business climate and encouraging investment’. Valeriy Gladkiev, head of analytical centre ‘Best’ and Presidential economic reform committee member said that reducing the number of activities requiring licences by some 30% would be attractive for investors, ‘I believe that all the proposals in the programme will be enacted,” commented Gladkiev. Vladimir Dubrovskiy, a senior economist at the centre for social-economics research ‘CASE Ukraine’ said that he believes most of the reforms would not encourage investors. ‘I believe that only deep reform of the tax system would really improve the situation,” said Dubrovskiy. He explained that it is currently very difficult to pay taxes correctly, and so at any point the Internal Revenue Service can find a violation. That is why he does not believe that lowering income tax will significantly improve the situation. In the new programme it is suggested that a ‘single investing window’ is opened in which all permissions are granted in one place – it is not a new suggestion, but it has never been implemented. Dubrovskiy adds that the main problems the new agency faces are the lack of a transparent legislative system and systematic infringement of the law, and the new body would not be in a position to change the system itself. The Ukrainian authorities have forecast that these new reforms will lead to increasing Foreign Direct Investment (FDI) of approximately $0.5 billion per year and by 2014 the total FDI will have reached $77 billion.