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Awaiting a “privatisation” conversation – Ukraine

September 7, 2015

It has been written here many times that the Ukrainian economy is grotesquely warped.  This grotesque warping reinforces corruption – directly and indirectly.

It is within the Ukrainian economy that the oligarchy dwells and reigns.

For many, “deoligarchisation” appears to mean the need to tackle the oligarchs and their business interests head on.  Whilst there may be an element of this that will lead to some form out positive outcome, the majority of oligarch interests are legitimately owned.  As they say in Odessa, “I can show you where all my money came from – just don’t ask about the first $ million.

Thus though it is popular to claim all oligarch wealth is nefariously earned, the oligarchy all employ very clever people that do generate clean profits.  Firtash has Group DF, Pinchuk has EastOne, Akhmetov has SCM etc.  All are filled with very bright business people.  It follows therefore that separating the dirty from the clean is not easy and certainly not simple – particularly decades down the line from the first nefariously acquired $ million nobody ever wants to discus per the Odessa saying.  Oligarchy corruption now often takes the form of cronyism, nepotism and “government favours”in a limited access market.

Thus to structurally tackle corruption and the oligarchy at a macro level simultaneously it is the Ukrainian market that has to addressed, for it is often impossible to separate State from oligarchy so entrenched symbiotic the relationship.

the-state-vs-the-market

When the oligarchy collectively controls significant double digits of GDP there is something not right.  That “not right” takes the form of limited access to the Ukrainian market – ever being thus since (and before) independence.  If not necessarily monopolies in every case, cartels would be the next step down.  A genuinely free market (or anything approaching it) has yet to appear in Ukraine.

It is a post-Soviet hangover that has yet to be cured due to no government having the political will to reach into the medicine cabinet and grab the aspirin.  This political will is lacking due to the power of the oligarchy both in terms of GDP and being the money behind the political curtain via funding parties, particular MPs, campaigns, bribery of Rada Committee or government, kick-backs for contracts, kick-backs for continued subsidies etc.  A self-fulling cycle.

In short the system has stunted Ukrainian economic, sectoral, and social development, keeping wages down and opportunities few in certain areas of the economy and/or in certain regions of the nation.  More broadly, for the nation as a whole, the limited access market has resulted in 24 years of economic stagnation, infrastructural decay and political paralysis.

Even today, with the exception of Minister Kvit in Education (and perhaps one or two others), the vast majority of reforms, or perhaps better labeled policy changes rather than real deep and structural reform, are entirely down to the conditionality imposed by the IMF, USA and EU in keeping Ukraine afloat – and Kyiv needs cash (and political support) and the IMF, USA and EU want structural reform for their investment.

Of the 1200 plus State owned companies, the vast majority are badly managed and subsidy dependent.  The drain to the Ukrainian budget in subsidies is in $ billions for a nation whose GDP is measured in $ billions.  Grim!

The current government intends to privatise a good number of the State owned entities.  Most of which, to right-thinking people, would not be measured in the asset worth alone, but in their savings in centrally allocated subsidies.  In short, it is not a question of how much these entities can be sold for and the revenue to the State any sale would bring, it is a question of how much money the sale of these State entities (even if sold for $1.00) would save the taxpayer and the nation.

There are, however, considerations as to which State owned companies could and would actually be profitable under proper management – thus negating the need for subsidies and actually providing a return to the State annually.  Therefore, recognising that, should the State be attempting to privatise potentially profitable entities that simply suffer from horrendous management and extraordinary inefficiency?

Should the State delay any privatisation of such entities until quality management has been put in place, profits begin to appear and subsidies are removed, but then privatise anyway?  To do so would then remove the limited access that currently characterises the Ukrainian economy, it would provide a profit when sold, and remove subsidies.

Perhaps – but there is the issue not only of creating a free market, but the issue of timeliness and the relentless subsidies during such a transitional process.  How much time should be given to that process – if any?  What are the costs of delaying any privatisation when the State coffers are hardly overflowing?

Clearly any privitisation of any State asset must come with the very clear understanding for any buyer that there will be no continued subsidies whatsoever.  At best, any loss-making acquisitions will be a tax right-off (tax regime of the registered buyer’s nation allowing).

In selling off State companies/assets, how to prevent the oligarchy that is already responsible for a grotesquely warped economy and political structure, from simply buying up the (best) assets and compounding, rather than relieving the problem of GDP diversity (and with it power)?

How heavy handed should the government be in market intervention in order to create a free market that in turn diminishes oligarchical GDP power within the economy (and by extension politics)?

If it is to actively favour bidders that are not hostile to the future vision of Ukraine (currently that would mean actively discriminating against the domestic oligarchy and Russia) in order to level and diversify the economic and business playing field, dramatically broadening the shareholders in a Ukrainian future, then government intervention in the market whilst it is still one of limited access appears to be one of necessity.

What of those State entities that nobody wants to buy?  Should the State continue to heavily subsidise loss making entities, or should it simply close them?

Which State owned entities truly have to remain State owned – subsidies or not?  What are the parameters to qualify for that?  (Upsetting nationalists due to privatising State assets to foreigners is surely not a parameter.)  Therefore what is and is not a State asset that must remain a State asset for specific qualifying reasons has to be agreed – and publicly stated.

What are the plans for the huge financial savings from ending the enormous subsidies to mismanaged State owned companies?

Will those currently return-less expenditures be channeled into decent pay for the police, teachers, doctors, the civil service, the military – in turn providing salaries that make corruption a moral choice and not an economic necessity for those that currently hold such roles?

Will they be channeled into infrastructure?  If so what?

When the Donbas is eventually reintegrated into Ukraine, clearly a return to heavily subsidised mining and metals is not going to be the mainstay of its economy.  Whilst some mining and metals industry will remain, what of retraining the previously subsidy dependent Donbas workforce?

There will of course be a lot of construction work that will, for a limited time, employ a good deal of labour – but what then?  When the Donbas is redeveloped, how will its infrastructure be orientated?  Toward R&D?  Toward IT?  Toward the service/call centre industry?  If the international community is going to jump into the post-conflict redevelopment arena (and it seems very likely it will) it will want to know how the post-conflict development is to be orientated.  A return to oligarch dominated, subsidy dependent industry will not meet with enthusiasm.

Do the people of the Donbas not deserve to be told that The Donbas economy, as it was, will not return?  Should these messages not be continuously sent now?

Indeed, with the nation as a whole, should there not be a discussion about why mass privitisation will take place?  It is, after all not simply about selling entities for a profit (when most are simply not profitable and technologically retarded).  It is not only about enormous savings by ending subsidies.  It is not only about reducing oligarchical power within the Ukrainian economy and thus reducing oligarchical power politically.  It is about all of these things – and more.

When re-orientating the economy (which is entirely necessary), the future direction of Ukraine for generations is also reoriented.  The privatisation of State entities (and the buyers) is an early, necessary, and integral part of that process.  The effects are both immediate and long-lasting.

With 302 State owned entities listed for the first wave of privatisation, and hundreds more to follow in subsequent waves, not only is there a need to very carefully manage the privatisation process (and rapidly reduce subsidies) but there is a very clear need to explain to the nation why, how, what, when and in some cases (or perhaps many) who, is preferred – before doing it.

To dilute and minimise the oligarchical economic (and political) influence requires Ukraine to open up the its currently limited access market.

A public and prolonged adult to adult conversation with the Ukrainian constituency is required – and the government must convincingly make its case regarding the societal, as well as economic, benefits of economic reorientation.

A Soviet-style announcement and belated explanation/justification in a parent to child lecture is not how this particular issue can be addressed with any hope of being accepted with any understanding, or in some sections of society, tolerance.

It is a conversation that needs to begin now.  It is a conversation that needs to be given some prominence and a conversation that has continue.  It is an issue that the government has to explain – and identify where the benefits of these actions will be seen and felt.

It is a conversation that if not had, and not seen to be had, is likely to lead to some particularly difficult and otherwise avoidable moments.

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