- Oleh, the situation in the Eurozone has been compelling attention of the world economic society for a year now. What is going on there?
- In the fight against the debt crisis, the European central bank constantly increases liquidity, allocating means to banks of relatively stable EU countries for purchasing debt obligations of weak economies. But the real problem lies not in lack of liquidity or cold cash, but of credit capacity - problem countries do not get loans, but if they do there is a problem with disbursement (governments do not want to reduce state budget deficits). The problem in the Euorzone remains and affects the world situation. In order to overcome this problem, apart from common monetary strategy, the EU countries must unite budget policy, meaning Brussels must form the budget of the EU. In its turn, it means that stable countries, like Finland, Germany, Poland, will have to finance and support weaker 'colleagues', but France, Finland and some other countries stand against it. As for 2012 the EU banks need up to 300 billion euro of recapitalization.
In 2013 the EU expects certain economic revival, but only thanks to Eastern Europe - Poland, Romania and other new members. Anyway, the EU will no longer be the same, including the shape.
- But the emerging markets keep growing...
- Yes, the growth continues, but slows down, and it concerns all BRICS countries, including China and Russia. The inflow of foreign direct investment (FDI) in India slows, and they are not enough to cover current transactions. In US, on the contrary, the macroeconomic situation is stabilizing: the latest statistics proves the economy recovery and employment growth. In 2013 US my become the main drive of the world economy, also because 80% of its industry is aimed for internal market.
- Ukraine has had recently the latest round of talks with IMF. What are the prospects of further cooperation between Ukraine and the Fund?
- To estimate the situation we must understand the mandate of IMF. Don't forget that IMF is a technical structure and its means are aimed at covering the deficit of current transactions of various countries (caused by devaluation, currency outflow, etc.). The Fund does not finance state budget deficits and does not give money for development of separate sectors of economy and industry - these are the activities of other structures, the World Bank for example. At the last session of G-20 it was decided to increase IMF capital by $700 billion, and $75 billion will come from BRICS countries, including $45 billion from China, which will increase their share of votes in the Fund's governing body.
Cooperation with IMF is very important for many countries, not only Ukraine - first of all for those, which have big external debts. If cooperation with IMF is active, a country can relatively easy refinance its debts and vice versa. Besides, IMF resources are cheap enough - 4% per annum. Thus, the competition for this resource is very big and keeps intensifying due to the turbulence of the world economy. Such countries as Spain, Italy, Romania also claim this money, I don't speak about Greece and Portugal.
At the same time, the Cabinet did not lie when declared that Ukraine did not need IMF money for now. Reserves of the National Bank make about $30 billion, which covers 4-month national import. The situation is not bad. But we should not lose the opportunity to take the Fund's means, at least because such positive cooperation grants access to the works with a number of other structures. Vice PM Valery Khoroshkovski met recently in Washington with top managers of the WB and agreed on further crediting of our economy with $1 billion annually. However, this will work only if Ukraine continues cooperation with IMF. The WB means, by the way, are also at 4% per annum. In general, the talks were successful enough, and the Fund admitted that the Ukrainian side observes its principle obligations.
But due to the increased demand for its resources, IMF will not lighten the conditions, but may toughen instead. However, nobody will insist on the increase of gas tariffs, as it is not stipulated by IMF mandate. The Fund can only insist on the reduction of the state budget deficit, and Kyiv does not have another fiscal space, but gas prices. Doing without IMF money is difficult for Ukraine, as it would require the cut of budget salaries, cancellation of social benefits, repeated increase of pension age, gas price rise by 5 times. All this would lead to devaluation pressure on hryvnia with strong outflow of gold value reserves.
- As far as we understand, the old stand-by program has run its course, and at the yearend there will be talks about new program and new conditions.
- Yes, in December Ukraine's authorities will address IMF with a request to open new stand-by program, which may be launched in January-February at the new basis. The new memorandum may include separate articles on structural reforms, like pension and tax reforms. In 2013 these reforms will be active enough as for the next two years we will have an open window of opportunities (due to the fact that the country will not have national elections).
- What will 2013 bring for national economy in general?
- It will be not a bad year, taking into account the cooperation with IMF and the launch of the import substitution program. Next year our economy may show 4% growth, while the base inflation will remain at 6% level and will weaken the disproportion of trade balance. In five years Ukraine may reach 5% annual growth of GDP and more, and in 11-12 years may double the absolute volume.
At the same time we should count too much on import substitution. It can reduce export dependence, but it is a long process. For this, we need stimulate internal demand and current governmental social initiatives are aimed exactly at this. Besides, the industry also needs stimulation to keep pace with consumption.
For this, we need to improve the investment climate for both foreign and domestic investors. Investments will increase the effectiveness of economy and, consequently, the domestic consumption. We must revive large-scale production of agricultural machinery. But here we have a question of requirements to the concentration of the final product: now the requirements stipulate that 15% of agricultural machinery produced in Ukraine must have domestic component parts. And Russia uses this as an advantage, as in the RF the obligatory concentration makes only 5%.
- What are other factors, allowing to hope for GDP growth next year?
- For 2011-12 the government has reached a great progress in reduction of budget deficit. In 2009 the budget deficit made 10%, in 2010 it fell down to 6.5%, then to 4.5% last year and the plan for 2012 makes 2.5%. It is bold figures, but positive trends are obvious, which means we should not make new debts, as the situation is stable for a long-term prospective. It is a very important factor of macroeconomic stability: in EU countries the budget deficit ranges 5-15% and in the US it makes 10%. Moreover, Ukraine's state debt keeps decreasing as well: if at the year beginning it made 40%, as for today it has reduced to 36%. To compare: the state debt of the US is more than 100% of GDP and of Japan - 220%.
Despite disturbing moods on international markets, Ukraine keeps attracting investors - for the first half of the year the country has received $2.5 billion FDI, which proves world's interest in Ukraine and in emerging markets in general.
- In this respect, what is the meaning of the recent ratification of FTA with CIS? Does it mean integration 'tilt' to the east?
- Our economy depends 50% on export, and it does not allow integration of none of the key foreign trade partners. We must be with both, otherwise we lose too much. Up to 40% of export goes to the Customs Union, which means the CU forms up to 20% of our GDP. The share of export to the EU is 25%, which is also a great deal. Thus, Kyiv has to balance between both sides.
In this respect, I want to point out that world economy contraction forces leading countries to protect fiercely their national markets from import, regardless any WTO norms. The same concerns Russia. In practice, the protection policy is used by many countries, and notice of appeal to WTO will take from 6 to 12 months, while the governments will introduce protective measures way faster. Under current conditions, such attempts will be more frequent. Powerful countries and their teams will try to solve their economic problems at the expense of others.
Hence, the ratification of the FTA agreement with CIS is a positive thing. It will not remove all trade restrictions, but at least there will no more new claims and sanctions. However, it does not mean we can join the Customs Union, as it contradicts our foreign economic priorities regarding European integration. In a short-term prospective the FTA agreement with the EU is not so beneficial as FTA with CIS, but free trade with Brussels is a part of the Association agreement, providing for strategic institutional development of Ukraine (which will be paid by Europeans through support programs). In its turn, it means the possibility to improve the business-climate and economic effectiveness, which is more important than development of export.
- So, Europe is a priority. Then what should we do with the Customs Unions, as it remains the main buyer of our goods after all?
- Yes, the CU is the main market outlet of products with high added value (machinery, equipment). In 2011 export of only engineering industry production brought us $7 billion. But where is the guarantee that Russians will keep buying our production, if it is competitive only on Russian market? Anyway, we need to modernize the industry, and access to the European technologies can come in handy. Besides, with FTA and Association agreement will simplify the access to the biggest market of the world amounting to $15 trillion. To compare: US market makes $14 trillion and Russian market amounts to only 1.5 trillion.
To make Moscow to understand this point we must engage it in the dialogue "Kyiv-Brussels". Both markets are important for us and we must declare it. Kremlin must be an observer in our talks with the European Union. Russia's interests must be taken into account and it must have a possibility to influence the positions of the sides.
- Some say that ratification of FTA with CIS was overlong, while others say it was too hasty. Where is the truth?
- We needed to ratify the agreement by the end of July - before Russia would have entered WTO. And the Cabinet acted properly. 79-80% of agreement's norms are written with reference to the WTO norms.
- This summer Kyiv agreed with Beijing on two big loans. What can you say about this direction of foreign economic policy?
- Beijing is playing big geopolitical game, and Ukraine for it is a platform to promote its interests in Europe. For Ukraine, China can serve as an influence peddler of our interests on the world arena. Chinese economy is the second biggest one in the world, and cooperation with it may be very fruitful. From the point of crediting policy, China cannot replace IMF, as it allots money for concrete tasks and purposes and obliges to use its technologies and sometimes its labor force. Hence, in such a way Beijing finances its own economy and export.
Besides, China is the biggest holder of bonds in dollar and is not interested in collapse of this currency.
- What should Ukraine do to become a geopolitical player and center of influence?
- We should continue the fight against corruption and deregulation of business. We need to carry out the judicial reform and to establish stable legislative field. We also need to reduce credit interest rates, as the current percentage does not allow developing business.
At the same time, the majority of foreign experts admit that Ukraine has formed relatively developed democratic system, the one of the kind among former USSR republics, apart from Baltic countries. The world also admits we have developed enough infrastructure - roads, oil and gas pipes, power grids, communications, etc. We also have relatively cheap labor force with European level of qualification.
Our agricultural sector has huge possibilities, and we do control the world agriculture industry, as we are one of the leading exporters of grain and other agricultural products. Due to the poor yields in US and Europe, Ukraine's role on the global product markets will strengthen in 2012.
In general, Ukraine is on the crossroad of a number of international interests: Russian interests in Europe, US interests in Europe and CIS, interests of China. We can manipulate the situation and obtain our goals - this is the right moment to do so. As a result, in several years Ukraine's economy can grow by 7% and more per year.
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