Archive for February 1st, 2010

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Creating a middle class in Ukraine

February 1, 2010

Interfax-Ukraine Ukraine needs to create a middle class, which will be based on medium and small businesses, presidential candidate and Prime Minister Yulia Tymoshenko said during a video linkup with Davos held as part of the 6th Ukrainian lunch organized by the Victor Pinchuk Foundation.

“The crisis has highlighted an increasing number of problems in the state. We saw that the unstructured economy, which is based on several industries –metallurgy and chemistry – has more difficulties living through a crisis. Our task is to create a middle class, small and medium business,” Tymoshenko said.

The prime minister stressed the importance of deregulating the country’s economy.”

Quite true madam…….however, which deregulation are we speaking of?

Making it easier to bribe your way around the system or actually tackling the systemic antiquated State organs which cintinue to use the Soviet administrative methods making it very difficult to accomplish anything quickly…….if at all.

How exactly are you going to create a middle class?  (As if one does not already exist).

Tax incentives for SME’s?  These already exist for those that bother to pay any tax at all.  An SME which is run by a registered private entrepreneur pays 250 UAH per month as a set tax rate if the business earns $100,000 or less per year.  That is a tax bill of $30 per month or $360 per year on a company which could generate $100,000 or less.

That is a tax incentive which almost every nation on earth SME’s would envy.

Are you going to force the foreign banks to make loans to start up businesses for office rental, equipment and a reasonable cash-flow based on what is normally a business plan written on the back of a cigarette packet….if it is that well thoughout at all?

How are you going to force the banks to make such loans?

Are you going to force the banks to loan money at far less that the incredible 20-30% interest they currently charge on loans?

How can you force the mostly foreign owned banks which are not subject to State enforced lending to lend to someone with a business plan written on the back of a cigarette packet?  

The banks have already and will continue very soon, to be hit by bad corporate debt taken out in foreign currency by those crippled by currency fluctuation and 20-30% interest rates as set by the banks.

As you cannot force the banks into make bad or risky commercial decisions to loan money for start-ups is the Ukrainian government going to set up a fund?

Funded by what?  The IMF, EBRD, WB?  Ukraine cannot afford it along with all the other promises you have made.

I once managed to draw down an EU loan for the renewal of boilers in Leeds under the reduction of greenhouses gases guise and had to refit 750 boilers with new ones.  It took over 14 months to find the right people in the EU, complete the paper work and get the grant.  Most of that time was spend actually trying to find the right people who held the purse strings…..and I speak and write fluent English unlike the avergae SME who will have to deal with the EU if they even know there is a chance of getting funding there.

Are you going to set up a department fluent in English to help the “would be” middle class when dealing with the applications for EU loans and grants…..which are for certain cheaper than the already reluctant banks who are bracing for another round of defaults?

How are you going to safe guard the SME’s from the hostility of the oligarchy and already established large business empires who will see a good idea and simply take it by fair means or foul?

What is the point of building a middle class built on a debt bubble?

The average Ukrainian owes much, much less to the banks than most, if not all other nations in Europe or the “west” in general.

Is there going to be a NGO which will deal with this?  Are there going to be special areas of interest either by business arena or geographical areas in Ukraine which will get additional and preferential help funded by the government?

Who amongst the Ukrainian elite will police this to insure there is no corruption…….none can be trusted to do this if the plan is that this will be government sponsored.

Everywhere I go in Ukraine, almost everything is an SME unless it is an international bank or owned through smoke and mirrors by the oligarchy.  There are very few, if any, companies which are of the traditional SME model which operate in more than one Oblast or more than one location in an Oblast.

The SME’s already exist here in abundence, they are everywhere you look.  The fact is most are not registered as a LLC company or private entrepreneur because it takes to long to do and is not the easiest thing to do either…..I know!

It is why the black economy dwarfs the white economy in Ukraine…….before we even get to tackling one of the most bizarre and opaque tax systems I have ever come across……or the minimum of 6 months to actually close one sould it fail!

It is not that there is not a middle class based on SME’s……there is and it is everywhere……the fact is that 90% of it openly flies under the radar because of the “civil service” it has to deal with to officially appear on the radar and the fact that it flurishes much better in a cash only black economy……which is now almost cultural and would not move willingly into a white, taxed and regulated economy.

Ms Tymoshenko, you have been a politician since 1996…….almost 15 years…….much of that time in positions of significant influence under any President……..the independent Ukraine you now want to change is the independent Ukraine which, for all but the first 5 years of independence, you have built as a politician and person of extreme influence.

In those 15 years you have not had a plan for post Soviet Ukraine, you have seen the SME’s flourish in the black economy and done nothing about it.  We both know that the SME’s exist and in an absolute abundance in Ukraine.

The fact is the middle class already exists……but it flies under the official governmental radar due to the fact you have failed to move it into the “white economy” for the 15 years you have held significant office and influence in Ukraine.

What you are really talking about here is creating opportunity for those who are now looking to start up on their own……and not those millions which already exists as SME’s officially or otherwise…….and you have no idea how these start-ups can be financed because Ukraine has no money, the banks won’t lend……and when they do they should be shouting “Stand and deliver” and wearing a bloody mask…….and many family cash pots are dwindling in a failing economy!

OK…..this is the plan Ms Tymoshenko…….what is the strategy to achieve it and where does the finance come from?

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