A. Dolzhenkov: “the Ukrainian economy is held hostage by politics”

А. Долженков: «Украинская экономика находится в заложниках у политики»

The Ministry of Finance considers higher chance to get from privatization UAH 17 bn, which are incorporated in the state budget. This was at the briefing said the Minister of Finance Oksana Markarova. How is the situation now with big industry in Ukraine, what happens in the event of default, as well as who is a more effective owner – the state or private entrepreneurs – ГолосUA learned from the people’s Deputy of Ukraine, member of the Verkhovna Rada Committee on taxation and customs policy Alexander Dolzhenkov.

– Alexander V., how is the situation now with the major industry in Ukraine?

– Now talking about the fact that Ukraine is an agrarian state, but I believe that this is a rhetorical question. Agrarian state we are after large-scale industry we have, unfortunately, the “curdled”. Last but not least this happened due to the fact that the members of our coalition of Deputy factions in the Verkhovna Rada of Ukraine “European Ukraine” spoke strongly about the necessity of signing the Association Agreement between Ukraine and the EU, despite the fact that the economic part of this Agreement consisted of a very large number of routine technical procedures such as certification and standardization equipment necessary to provide access of Ukrainian products to the European market. On the one hand, Ukraine has significantly reduced the cooperation with the CIS countries (and not only with the Russian Federation), on the other – do not provide access for our producers, representatives of large industry (e.g. heavy engineering industry, mainly aviation industry) needed a market. Despite the desire of domestic producers to export their products, unfortunately, European countries are not eager to buy, for example, the Ukrainian aircraft, as they have their own, and so for each sector of production. Here the country was in such dire Straits.

The economy is now held hostage by the state policy. After the signing and entry into force of the Association Agreement between Ukraine and the EU, the foreign trade balance of Ukraine with the European Union worse than it was in 2013. I take it the part where the goods are exported. We have problems with the Russian Federation, we ourselves close the markets for the supply of goods. I understand that there is some strife between Nations, but concerns need to be addressed constructively, and not to actively prepare for the presidential campaign and enter the country under martial law. To terminate the Agreement on friendship, cooperation and partnership between the Russian Federation and Ukraine, but to fight for the transit of gas is stupid and irrational. In my opinion, should be fundamental to the end – either to fight or to trade, and if you do all this stuff, it is not necessary to deceive people and to establish trade-economic relations, which I support. For example, Armenia, a small country that has signed an Association Agreement with the EU as a full member of the European Union. In this case, the state’s interests are protected in all directions.

The principle is that profitable “General motors”, is beneficial to the United States, we do not work here. In Ukraine some fake targets, and the economy has let somehow adapts. Economics, unlike words, is not done quickly. It can be a lot of words to tell a story in just a few seconds, five minutes, and according to the Regulations of the Verkhovna Rada of Ukraine and after a minute or two, but the enterprise to reconfigure markets to find it is a matter of one month. So here’s the deal with the industry in our country situation is very bad. In figures it’s hard for me to say, but based on what we have in 2016 for the first time agricultural products have been exported to more than metallurgy and chemistry, we can state the fact that with these indicators, things are critical.

– What are the government mechanisms to improve the situation?

– Cooperation between States, and it is not only with the Russian Federation. Ukraine and Hungary are at odds, and with the poles we had some misunderstandings, and with EU countries is not particularly cooperating. This is where, for example, the serious investors from China, Germany, France, are in favour of Ukraine’s territorial integrity as its constructive. The attitude of these countries to Ukraine are friendly, but why not investors?! Why Ukraine, instead of to expand platform to attract foreign investors buying French helicopters?! In the Verkhovna Rada of Ukraine registered the bill No. 9369 “On amendments to the state Budget of Ukraine to 2019”, which proposes to provide additional costs for the Ministry of the interior in the amount of 2.5 billion UAH for the purchase of the French helicopter… and where is the logic, where the protection of interests of national producers?! What mechanisms has the state? The only true movement is only the re-election of this government.

– Who do You think is more effective owner of large-scale industry – the power or entrepreneurs?

– Efficient owner of a large industry, of course, is private business. Private owner finds, saves, optimize for profit. Let it sounds a bit selfish, but 1776 is remembered not only for the Declaration of independence of the United States of America, but also a Treatise “ an inquiry into the nature and causes of the wealth of Nations.” In this study, the Scottish economist Adam Smith – the founder of the concept of the market economy said that the driving force of economic progress is the human desire to enrich themselves at the expense of the development of the means of production. He noted that the greed of the entrepreneur – the desire of gain is a kind of boon that before, like it was shameful. Why? Because if it is due to this profit something made, so he gave work to people, they get paid and the economy, in turn, is moving. Thus, the driving force of the economy is greed. This unpopular phrase introduced by Adam Smith, and is the basis of the capitalist system. It was a very popular idea, which then actually reactivated, the feudal way of life. When did this transformation, for many people it was kind of shameful thing to do business because the profit was considered menial. Adam Smith, in his study stated that it is good for society. In fact, private business that operates for profit, expanding, grow and create new jobs – it’s legal and positive for economic growth. The classical model that Adam Smith described in 1776 (the end of XVIII century), is valid today in the US, of course, it is more effective private property.

The monopoly of state ownership of the means of production has proved ineffective, because a country, for example, made Slippers, but they, unfortunately, did not need anyone but ourselves. The country has produced nuclear missiles, the perfect weapon, clothes, shoes, everything was fine to make, but, probably, therefore I bought everything overseas. In Turkish, the Chinese, and we just did not go. Of course, it is necessary to raise the economy and develop private business. Large-scale privatization is inevitable, but not in conditions of martial law. I repeat again, you either fight, or build the economy. Economy the current government to build failed, and the war is futile. So, there is only one correct decision – to put powers and leave. Privatization is inevitable, but each privatized enterprise should be brought to a normal financial measure, because if the company is in the financial bottom, it is cheap, and means to initiate the privatization of most benefit only to those who want cheap to buy. It’s obvious and understandable, on the surface.

– How to deal with monopolies in this market?

– Monopolies are different. Monopolies do not need to fight, need to create competitive conditions for other business entities. It depends on the area. As you complete the atomic monopoly, for example? How to break the monopoly of the nuclear power station? To allow private business to nuclear power? Possible. In France nuclear energy is private and gives more than 70% in the energy structure of the energy potential of the country. Try to raise the issue of the privatization of atomic energy say that there will be a “waste” of public assets. You need to create transparent conditions for all, which will not be issued for a specific monopoly. Under the current legislation in Ukraine there are subjects of natural monopolies. These rules will transparently written for everyone, in that case, if the market will be allowed foreign investors. I am in favour of foreign investors came in greater numbers, because they bring in foreign business culture. This culture is very interesting to me, because it is incompatible with corruption. I before the election to the Verkhovna Rada of Ukraine worked with a Dutch entrepreneur, and I am very impressed with his approach to business. He was engaged in agricultural business in Ukraine, transportation. I felt a significant difference between domestic and foreign entrepreneurship. Therefore, the arrival of foreign investors will gradually tear down the corrupt clan system which is very much entrenched in our country. This is certainly a very big plus. Corresponding changes to date, can be seen in the banking, retail chains, energy. For example, in the field of real estate. Why in our country such an expensive square meter? And foreign investors, developers operating here in Ukraine? Yes, what they say 50% of the total square meters is kickbacks to local officials, who decide on the allocation of land. Create rules that are transparent to all, start here foreign investors – the price will drop soon. Here you have the right selection mechanism for the de-monopolization of the market, the formation of a healthy competitive market environment, but the majority of those present in the hall of the Verkhovna Rada of Ukraine are not interested, as not interested and the local councils who are directly involved in addressing relevant issues.

– What are the enforcement mechanisms of the market, given that imports account for about 55%?

– It is the right and wise questions. But, unfortunately, we don’t guide to make political decisions. We with your hands close to yourself markets. Our US partner, but trade relations with the Russian Federation more than ten times the foreign trade turnover with the United States. Don’t understand what the problem is. If our great friend the United States help Ukraine to boost the economy. United States in the postwar period helped the Marshall Plan Europe, contributed to the state of Taiwan to rise as a result of confrontation with the people’s Republic of China (Chiang Kai-shek regime), raised in the postwar period, Japan investment and technology, South Korea. Why does USA doesn’t help then Ukraine? I want more than to say that some branded anti-dumping crash barriers that have been introduced since 1985 in respect of products exported from the Union of Soviet Socialist Republics, is still valid. In particular, it concerns the Ukrainian metallurgy. Still have not abolished these protective barriers. But if we are our own markets open, and they use us as Papuans, excuse me, bring us to the same Russian Federation. With whom will we fight? With a nuclear country? Who will fight? Million-strong army. Pragmatism is what has to be, because the battle are not the ones who shout from the podium, and ordinary people who are driven to the military. Ordinary people with arms to defend the country, doing their duty. People have nothing to reproach not. At the same time, you statesmen, came here not to in a meat grinder to throw these people. It is necessary to make sensible ideas and be somewhat constructive. How can we fight with the state, which are much stronger than us. What kind of relations can be said? On the one hand, the terrorist, the aggressor, and on the other hand, let this “terrorist” gas through our territory. “Nord stream-2” is a blow to the diversification of energy supplies, gas noose around the neck of Europe. Tell me straight: the country receives for the transit of gas of 3 billion is 3% of our GDP. The country is 112 billion dollars, a 2.8-3% of GDP, and us that money to lose. We need to tell everything as is, and not to envelop all some high-sounding words: the love for the Motherland, patriotism, because it looks cynical, because “to whom war and to whom mother is native” and who warms his hands on it. Smuggling in our country has increased in all positions. Fuel wood is taken out, the amber taken out. Anyone with the amber in there fighting? Headed the streams of some structures, I don’t know what, but so far all is extracted, and the forest in the Rivne and Zhytomyr regions turns into a horror. Bare landscapes, instead of old pine forests. Plunder the country and is divided in parts.

How to fix the situation in the sense that we are exporting mainly raw materials?

To fix just. To engage in protectionism of national producers, not to buy American locomotives, and French helicopters. Create tax benefits. I, as an MP, proposed to exempt from import VAT and import from import duties all equipment 1986-1987 (machines, other equipment that are used for the production of value-added products). For example, we import without paying VAT machine. This is a loss for the state. The government receives VAT. It’s in the next month, during the reporting period importowania. But that the state will receive in six months or a year? It will get a much larger multiplier effect on tax revenues, because produce on this machine products in the ratio will block the VAT that is not paid to the state originally. This is, firstly, and secondly, exponentially will increase tax revenues from manufactured products on the territory of Ukraine. I’m not talking about wages that will get people, and also deductions in local budgets. It’s a simple theory. It hit China in the 80-ies. Deng Xiaoping said that China will never be an economically developed country, unless imports of these technologies in its territory. So one of the requirements of China for the admission of foreign investors to the domestic market to share their technologies, expand production sites in China. That is, the finished products is prohibitive duties. Why trump is so outraged, why has created such a tense situation, because China’s prohibitive duties. Place their production in China, – to provide jobs for people, train workers to produce these products in China – which is very important. Thus, in China, maximally stimulated the processing sector.

To increase exports and improve its structure, we need to work on increasing the depth of processing of production orders. We have second or third order processing, and have the fourth, fifth, sixth. With each order the amount of VAT increases. Ukraine exported 39 million tons of grain, but not the largest exporter of flour. Why Turkey is the largest exporter? This country produces an amount of grain, but it is the largest exporter of flour, and Ukraine in such a state is not. Yes, because a ton of flour, is much more than a ton of grain. Look at Belarus as an example. Belarus has preserved engineering, petrochemical industry, which supplies Ukraine with its diesel fuel and gasoline. That is, Ukraine lives as underdeveloped countries. The grain is collected, is little used in warehouses and exported. Metallurgists ore dug up, something it did and exported. It’s all the products with low added value and high energy consumption. Therefore, in a state of such imbalance. In Ukraine a substantial consumption of energy resources per unit of manufactured products.

– Do you consider correct the thesis that first, you need to cover most of the needs of the Ukrainian market and then go international?

– I totally disagree. We now need to increase exports. Its capacity is the creation of jobs. Export – a currency gain goes down, wage increases, increasing welfare of the population. The increase in exports will stimulate domestic demand. Due to which today we have become beggars? We need a currency, and the currency of the more developed countries. Only due to this, the country will be able to rise, and will go to the investor on the territory of Ukraine. Let’s maybe let’s just say we signed the Association Agreement of Ukraine and Europe. On the one hand, it’s good. As I said, we have the trade balance has improved, but on the other hand, we have the possibility appeared that the current government does not use, because in Ukraine continuous corruption. We have more grain from the fields taking. Never before such was not. It’s a disaster. Earlier there were some raider attacks at the highest levels, and now take the grain harvesters. Makhnovshchina full. Order in the country. The police were standing nearby and something is watching. There is not hit the woman in Kharkov, they never moved. A complete mess. And why is the government inefficient? The monopoly on violence. State no. And if we do not put things in order, it’s bad all over. I now have the Association of this time with the year 1917, when the territory of Ukraine was the Odessa Republic, and the UNR and ZUNR, the Bolsheviks were not supported, which then made coup, the “white” movement, which opposed the surrender. The Bolsheviks, in turn, signed the surrender and the withdrawal of Russia from the First world war. Here is such chaos reminds me of the current situation in Ukraine. Every princeling has some of his army. I don’t know why we are so God punished that we are in such a state…

Can offer three directions. First. This is the food direction when the country’s strong agricultural sector, and to develop light industry, food, the direction supplements. Ukraine in the Soviet Union was famous for the fact that light industry was well developed: flax spinning, the manufacture of textiles. Even if you can’t produce, can be purchased in Turkey, Italy, sew here, because now all enterprises of light industry are in the shadows, and major brands such I have not seen. In some places there are some glimmers, but it is negligible. The areas of Rovno and Khmelnitsky are famous for this, and could raise the light industry, because there are bases that are left over from the Soviet Union, respectively, of the company. To attract investors, for example, tailoring to Europe. Food products can be produced with a higher added value. These are the areas where we can do more or less on their own. With the help of foreign investors, for example, on franchising. In such schemes work “McDonald’s”, “Pepsi-Cola”, “Domino pizza”. These are examples of franchise business models, when shopping online go, there are trained personnel in the technologies, corporate culture. You can do it by bringing in such major operators for the production of household appliances, computer equipment, some elements of the cars, because the factory we have no one to build, the Slovaks are very strong now produce a million pieces. All brands such as Volkswagen (exactly), Mercedes has launched in Slovakia its production facility by reducing taxes.

– What should be the taxation of large industries in Ukraine? Whether any preferences?

– In Ukraine there is no clear tax policy. We have ERU 22% personal income tax 18% (total 40%) plus the war tax of 1.5%, plus 18% tax on profits. So consider those deductions, which must be done by the employer. That is, Ukraine needs a liberalization of the tax legislation, the moratorium on changes to it for five years. For example, if we come to power, it would recommend a moratorium for five years. A significant reduction would not work, but up to 13% personal income tax could be reduced. Military duty, of course, it is necessary to cancel, because it is generally a strange phenomenon on the body of tax legislation, which has the target character. Military training, it would seem, must go needs of the army, but he goes to the General Treasury of the state budget, and thus blurred. This is an additional 14 billion hryvnia, which are collected from all employers. Clear rules in the tax area and attracting investors, and the development of these, of course, the system of industries as the aircraft industry. We have some clusters, which, thank God, still somehow remained, but they breathe the incense. This is rocket science, aircraft engineering, power engineering equipment, heavy engineering, we have a carriage works. We do not have adequate state support for domestic demand. In this issue, we need to stimulate domestic demand through budget expenditures. To break into foreign markets difficult, but possible, but first you need to provide at least the domestic demand. The government needs to level the trade balance which is now negative. Exports must be always higher than imports. The President, when he visits any country, should take the statistics of the trade balance and see that there is exported, what is imported in our country, and that can be corrected, that exports increased. I would recommend to the President, whoever they may be. Ukraine needs to build the economy and stop screwing around, playing politics. We are not so big country to get involved in these geopolitical games. It is possible to elect such a Finnish version. To create a prosperous state. In Ukraine there are all prerequisites for it, but not enough wise, educated people in the leadership. In the bowels of the performers many of them, but in the top leadership of the state, unfortunately, they are few, or none at all, or they do not listen to those smart people who are among the performers. This is a problem of our country.

– What will be with large enterprises in the event of default?

-In case of default of large companies will not be able to carry out external loans, because any serious international foreign Bank, which will make the decision to open any lines of credit (no business can grow without credit), does not want to cooperate, and for such major capital-intensive projects definitely need outside investment. Domestic banks States to make this investment are not able to, that’s why you need to enter foreign markets.

One of my initiatives was the release from taxation all interest income on Eurobonds. If the state has not created conditions for the normal stimulation of domestic producers in the form of, for example, partial compensation of interest rates on certain kinds of investment projects implemented on the territory of Ukraine, banks resident in Ukraine, even though it doesnít nalogooblozheny the income earned by holders of Eurobonds, which provided the funding. The company must work and pay back what he borrowed plus interest. This is a critically important conditions for the realization of any investment project. A default will negatively affect the business. The business will be cut off from foreign credit markets. Ukraine needs to increase its exports because we need the revenue credit, because the loans are given in foreign currency, and the country 70 billion domestic and external debt, and nearly a trillion of income for the year 2019 we have 417 billion is the interest on the loans, plus the body of the loan. Perhaps in such a situation, it would make sense not to give up, but at least pause for a couple of years these payments. If Ukraine will continue to live in such a way that will take out new loans to pay old debts, the country will never get out of this debt trap.

The main priorities of the country needs to develop, it is energy independence. The economic system of national economy is based on imported, primarily fuel and energy complex. We have the raw material hydrocarbon, mostly imported, for hard currency. In order for this situation to change, to Ukraine, of course, need to exercise increase natural gas production. This is a key task of any government that has or will come. In Ukraine, gas production is approximately 16-17 billion cubic meters per year. In the 70-ies in Ukraine was 80 billion This gas was exported to Moscow a short period of time, about 10 years (before the opening of the relevant gas fields in Siberia and the Urals). Ukraine exported gas. Perhaps, when our country will become energy independent, not in words but in deeds, we can and the balance of payments will improve. Today, the balance of payments in a negative value due to energy imports. Oil is somewhere in the 3-4 million a year, in principle, little is imported but could be exported. The state imports about 3-4 billion cubic meters of gas annually. Therefore, most likely, these incentives would be a priority. First steps is, first of all, the maintenance of high technology industries: aircraft manufacturing, aerospace industry, heavy engineering. It is necessary to develop infrastructure as it gives a very good multiplier effect. No offense to farmers, but they have no effect, as the main article of consumption among farmers is fertilizer and fuel, all imported raw materials. That is, for example, farmers received 100 hryvnia, of which about 50 hryvnia will be spent on seed, fertilizer and fuel. Regarding the construction, there will be involved the whole chain: concrete batching plants, rebar, and steel companies is the employees who with their hands do everything. Well, we have a deterioration of energy and transport infrastructure is 70-80%. Ukraine with the collapse of the Soviet Union in 1991 was the second economy after Russia. Now we are already ahead of Belarus with Kazakhstan. Our country is on. Infrastructure is deteriorating, and politicians fill the people in the ears of some strange tales and stories. “Ukrainians will live better for vsih” – Oh my God! You at least to the level of the same Belarus scroll. People need to believe less populist. Because populism is no good we will not.