You said in one of the latest Vitaly Portnikov’s Political Club programs that it is not time now for a bitter domestic political struggle because we must all focus on signing the Association Agreement with the EU in the fall. What is your forecast?
“My impression is that the opposition has been zombified. The question is who and how deep did it. If public opinion criticizes them, they may begin to act otherwise – perhaps for the sake of ratings.
“We must show the EU considerable progress on the 11 points before May. Both the government and the opposition should at least initiate the necessary changes to the law by that time. The European Union has made tremendous concessions: it reduced the number of points and shut its eyes to political repressions; it does not even demand complete fulfillment of all the demands – all we have to do is show progress. But the opposition has not taken this into account. This raises the question: what kind of an opposition is this and where is it guided from?
“When the Party of Regions (PoR) took a true revenge, political scientists pointed out that it would bring us to Europe sooner than the opposition. The root cause is the economic nature of integration: the PoR consists of industrialists who need gas price cuts because this affects the prime cost of their products, while the Orangeists, i.e., Fatherland, are importers and it does not matter to them what the gas price is – moreover, it is even better for them if the price is higher. However, the Party of Regions is in the grip of its electorate to whom it has been projecting a pro-Russian image for many years on end.”
They have fallen hostage to the previous rhetoric. So this raises the main question: is the Party of Regions prepared for evolution?
“Undoubtedly, it is. For example, I can remember Vladyslav Lukianov speaking on TV talk shows three or four years ago – now he is completely different.”
Do you think the Party of Regions has passed the point of no return in a dialogue with the part of society that can accept neither the Kharkiv Accords nor the language law?
“November 2013 will be this point of ‘no return.’ If the government signs the EU Association Agreement, it will have to explain to its electorate why Yanukovych and the PoR did so. But I am sure that if the agreement is finally signed, the Regionnaires will find a way to explain this to their voter. Why? Because their voter is obedient.”
Is this an advantage?
“In general, this is the first time in the years of independence that the government fully controls the vertical and horizontal chain of power. If they wished, they could do anything, even work an economic miracle. But, unfortunately, the government has focused on political vengeance.”
It must stop before it is too late.
“It must stop. As for an economic miracle, it cannot emerge in a flash. It took Japan 30 years and South Korea 25 years to work their ‘miracles.’ The dynamics is much faster now, but still it will take some time. Goods can now reach any point of the globe within 20 hours thanks to aircraft, including the Ukrainian-made Mria [‘Dream.’ – Ed.], and money can do so in 15 minutes. Scientific dynamics is also higher than before. On the whole, a complex of systemic reforms needs not more than three to five years to materialize.
“There is a computer program method to curb appetites and reduce the level of corruption. Corporate management is far more effective than governmental because the former is based on the result and makes active use of computerized management.”
Electronic government has been talked about in Ukraine for at least five years.
“There has been talk but no action. Manual management and e-government are incompatible. The government will understand this when it feels a real danger to lose power and property. But so far they consider themselves almost gods.”
Is the Crimean government’s decision to return the well-known Kedr hunting preserve to the forestry administration an attempt to curb appetites?
“If this preserve belonged to the Russians, it is easy to explain. The Party of Regions has so far sold nothing to eastern neighbors – it has even taken something away from them. The root cause is, as I have already said, the very nature of economic interest.”
Economic nationalism, as they say in western Ukraine.
“Indeed, it is one of the principles that Svoboda has picked up.”
There are a lot of questions about this political force: they have already matured as a “street party” but perhaps not yet as a parliamentary party. There can be no nationalism, without culture, education, and economic program.
“As for Svoboda, they are also in a grip: on the one hand, they position themselves as a right-wing force, but, on the other, they pronounce left, socialist slogans. It is a split personality. Look at their members. They are recruited from among young obedient boys – what constructive actions are they capable of taking? They can only do what the electorate expects them to do – go to rallies, knock out doors, or saw off a fence in front of TV cameras. Likewise, Klitschko was elected so that he could use the fist. But he stopped short of doing so, and he just cannot do this.”
As a worldwide celebrity, he cannot stoop to such risky gestures. What do you think Klitschko means when he says European sanctions are awaiting the Ukrainian government?
“I think these declarations work for Klitschko’s international image. He is trying to show that he can mingle with Merkel and Obama and persuade world leaders to apply personal sanctions to Ukrainian politicians. But I do not know to what extent this is realistic.”
We have already missed a lot of good chances of rapprochement with Europe due to domestic squabbles. A Russian official said recently that Russia would join the EU sooner than Ukraine. This is connected not only with bypass gas pipelines, but also with bypass political projects. What should we put forward in this competition?
“As far as I can understand, Europe has already seen through the Kremlin’s maneuvers. This clearly explains their favorable attitude to Yanukovych. The only demand is at least to declare progress. I think the Cyprus story further proves that the German leadership has at last understood that it was wrong to take a too liberal attitude to the Russian government. They checked where the richest Russians and Russia’s political leadership kept the largest number of offshore accounts. Germany killed two birds with one stone. On the one hand, it showed the Russians its capabilities, and, on the other, it is one more way to coerce eurozone countries to financial discipline. What southern European countries afford to do is inadmissible for north European states. This boundary between northern and southern Europe also consists in the attitude to finances. If there is a common currency, there must also be a common monetary and fiscal policy that will help retain the single currency. In my view, Germany is just forced, like a teacher, to give a financial rap over the knuckles of such bad pupils as Greece, Italy, Spain, and Portugal. I am in raptures over the Germans.”
Maybe, it is a particular national character? What traits in the Ukrainian national character are indispensable for carrying out reforms?
“There is a Ukrainian saying: ‘My house is on the outskirts, and nothing else is of my concern.’ Many are saying it is bad, but nothing can be better for the economy. What does this phrase mean? It is a deep-rooted sensation of private property. My house, my courtyard, my cherry orchard next to the house is a sensation of private property, the backbone of a market economy.”
In these conditions, we are supposed to have a very strong middle class and well-developed private entrepreneurship, but, unfortunately, we don’t have it.
“The middle class is not entrepreneurs. Entrepreneurs account for about five percent of a society. This percentage is approximately the same in different countries. What is the middle class? It is well-paid employees. Owners account for five percent and the middle class for 70 percent of a country’s population. We do not have 70 percent of owners.
“What is the problem? Ukraine has a bazaar-style economy. Everybody who used to be an engineer, doctor, or teacher went to the marketplace. So they seem to be small-scale entrepreneurs but not the middle class.
“The whole chaotically-formed economic system of Ukraine runs counter to the national mentality. It is not even a system but an economic medium that is not based on Ukrainian mentality. By contrast to the Russian, a collectivist, the Ukrainian is an individualist.
“What can be done in the economy? Every Ukrainian should become a juristic rather than natural person even within the limits of an enterprise that has the employee and the employer. This will allow a higher level of legal relationship. This mechanism should be also based on the principle of result-related wages. If the Ukrainian knows that his or her wages depend on the result, they will be willing to work.”
Has the opposition ever turned to you for consultations about economic reforms?
“I was an advisor to two prime ministers: Tymoshenko and Yekhanurov. I thought I had already come into the corridors of power and would be able to implement my trifunctional model of Ukraine’s economy. My project circulated over the Cabinet’s departments for five months. Even one critical remark was enough for the project to be immediately turned down. And I understood that you could not break this bureaucratic machine from below – it could only be broken from above, on the political level. This means that, to be able to convince society of this, one must be elected. What arguments should there be?
“Everybody is frowning today upon Shuster’s TV program, but still they all switch to this channel on Fridays. And our voters make their choice on the basis of who will outshine who. I hope that the 25 percent of the voters who ignored the latest elections will begin to listen to arguments. We must, first of all, work with an intellectual electorate. But there is also a problem here – the votes may scatter around.”
Does this mean you are in politics?
“When I was an advisor to two premiers, I saw that it was impossible to get things done from below – one must do it from above. But it is the political level, and there are two options here – you either go to one of the existing political forces or try something new. I tried to go to the existing seemingly democratic forces, and I helped them as much as I could in 2004-05. The reaction was as follows: ‘Where were you earlier? You know, there’s an election going on, we’ll do this later.’ And we have elections almost every two or three years. This means we never have time and place to make real changes. We need a critical mass of public and political figures that will rally around a new force, a new quality. A force of this kind is supposed to offer not only a new ideologeme, which all the present-day parties are doing, but also some cutting-edge economic models. There should be a competition of economic models on the political level.
“For example, there is a debate going on between the US presidential candidates. Every item in the candidates’ programs is being ‘put under a microscope.’ Obama says he will do this and Cheney that…”
Who would you like to debate with in Ukraine?
“In the beginning, with all the opposition leaders.”
But is each of them the one to discuss the economy with?
“The person with whom you cannot discuss the economy should stay out of politics altogether. In Ukraine, all the problems tend to be economic. Just look at poll results. What is important for the Ukrainians today? What worries them? At least 12 items are connected with the pocket. The first is prices, the second is wages, the third is housing, the fourth is health care, the fifth is children’s schooling, the sixth is children’s vacations… Only from item 13 onwards are there such things as ‘language,’ ‘friendship or non-friendship with Russia,’ and ‘NATO: stop or go?’ But as our politicians are unable to offer anything in the first 12 items, they begin to speculate on the others.”
There is Viktor Pynzenyk who cooperates with Vitali Klitschko…
“This person used to hold topmost offices with all thinkable and unthinkable powers in the economic sphere. And where is the result?”
And Volodymyr Lanovy?
“The UDAR team has ‘dumped’ him very roughly. He had been preparing all economic texts for Klitschko for a year, only to get a raw deal.”
This does not create a good impression. And how would you rate the opposition parties’ economic teams?
“A zero for Svoboda, Klitschko has some experienced people, Batkivshchyna has Arsenii Yatseniuk. But, as far as I know, Mr. Yatseniuk used to hold all the thinkable offices except for president and prime minister. And there are ‘results,’ too.”
And what can you say about the ruling party’s economic team?
“The economy is not a team game. It is lawn tennis. There are no productive collective ideas. When an idea is being shaped by way of brainstorming, this gives way to compromises.”
Serhii Arbuzov, First Vice-Prime Minister, author of the Ukraine’s Economic Revitalization Program; Yurii Kolobov, Minister of Finance, Arbuzov’s colleague at the National Bank of Ukraine (NBU); Ihor Protasov, Minister of the Economy, also from the NBU team… What will you say about this economic team of the government?
“There is certain logic in the economic policy. The first element is economic strategy which I call economic model. Japan, postwar Germany, and post-communist Poland have or had a model of their own. To implement this strategy step by step, annual, biennial or triennial programs are mapped out. Then the state budget is adopted to sustain these programs. So the chain is as follows: model – program – budget. But in this country the economic policy begins and ends with the budget.”
There is a governmental Economic Revitalization Program. What can you say about it?
“How can a program be adopted for 2013, when the budget has already been adopted? There is no such thing as program for the State Treasury. The latter is guided by Ukraine’s state budget and, therefore, it will do nothing but what is envisaged in the state budget.
“Secondly, the program is intended for two years. What can be done in the economy in two years’ time? It is too short a period for profound systemic reforms.
“This program does not even hint at systemic reforms. To effect systemic changes, we need a new Tax Code, a new Budget Code, and a new Monetary Code. Having no limits set, the National Bank is doing just what it pleases: it may liberalize or fix the hryvnia, introduce a credit discount of 30 or 15 percent, increase the money mass by 30 or 60 percent… What is this policy about? How should the investor react if he does not understand the government’s logic?”
The IMF is playing the role of an “overseer” of sorts for the NBU.
“It is a shift-the-blame policy. When something is more or less stable, our government does not say it is the IMF’s merit, but when something is wrong, it blames the IMF. But when it comes to the crunch, they rush to the IMF – no matter what their political color is. Do you remember Azarov criticizing the Tymoshenko government’s cooperation with the Fund? And who is now the first to run there with an outstretched hand?”
Incidentally, what do you think will be the outcome of the standby program negotiations now underway with an IMF mission?
“This does not matter. Our economy will not be developing as long as we rely on foreign factors.
“What effect will the IMF money have? It will help us, for a short period of time, to close the financial gap called public debt payoff. 2013 is the peak of public debt payments. We need the IMF money to survive. What then? When the years 2014 or 2015 come, shall we run to the IMF again? The public debt is on the rise, for it cannot be written off.”
Does the Ukrainian economy have a potential to cure itself?
“Yes. All we have to do is pursue a logical economic policy: strategy – program – budget. What model of economic development do the Party of Regions, the Communists, Batkivshchyna, UDAR, and Svoboda offer? We need realistic parameters, calculations, and figures, rather than slogans.
“If we fail to demand an economic content from political forces, we play by their speculative rules.
“We must raise the criteria of rating politicians. And we should begin with appraising their previous activities. If these people had negative results in their political past, we should at least not vote for them.”
Do you think the price that Ukraine is currently paying for Russian gas is beneficial or harmful to our economy?
“Extremely beneficial. I would like Russia to set a price of 1,000 dollars. For this will undoubtedly force our industrialists to demand that the government work for diversification of supply sources, reduction of energy costs, and mass-scale introduction of the renewable sources of energy. And, secondly, this will finally streamline the domestic development of Ukraine. A high price for imported gas is a signal that we must change the way of our country’s economic and political development.”
Do you think the ones to whom this signal is addressed have already “decoded” it?
“Yes, the industrialists who are the core of the ruling party have at last understood that it is impossible to have the gas price reduced unless some of our property is handed over to Russia. And this forces them (for the first time in Ukraine, none of the previous governments did so) to launch some real diversification and increased domestic production projects. This follows from the direct industrial-economic interest of those who are shaping the government now.
“Never before has Yanukovych held so many negotiations with Azerbaijan and Turkmenistan. Most of us must have noticed that, following these visits, Ukraine was covered in a flash with a huge network of SOCAR filling stations. It is going to be Ukraine’s largest network soon.”
But it is the achievement of Tymoshenko, for which she is doing time.
“It may be interpreted like this. This 2009 agreements lesson prompted the Ukrainian economic and political elite to understand that they should pursue their own energy security strategy instead of relying on good personal relationship with the Kremlin leader. It is the nature of economic interest that determines everything. This gradually becomes a dominant feature in our government’s policies. But there is also a downside: they have focused too much time, efforts, and attention on political vengeance. But for this, our economic relations with Europe would now be on a different level.”
Incidentally, about distribution of funds. Would you comment on the current situation with the formation of national and local budgets? What danger does this represent for the economy?
“Whenever the Ukrainians speak about administrative reform, they misuse the term, calling territorial reshaping a reform. In reality, everything boils down to one question – restructuring the budgetary system. Today, the Cabinet commands 80 percent of this country’s finances, with a mere 20 percent remaining for local budgets of all levels – in the oblasts, districts, cities, and villages. It is hypercentralization. With this pace, we might as well reach 100-percent centralization soon. The prime minister will be pointing an accusing finger at even the slightest expenditures at a village. This tendency has been shaped in Ukraine in the years of independence by all the political forces in power no matter what the color of their ideology was.
“Centralization is considered to be one of the factors that caused the Soviet economy to stagnate. In reality, the ratio between the central and local budgets in the USSR was 52/48 percent in 1990. The central budget at Moscow’s disposal accounted for 52 percent, while 48 percent remained in the hands of Soviet constituent republics. The conclusion is that the whole country worked, but Moscow ministers commanded half of the earnings.
“But in the 22 years of independence, when it was supposedly switching to a market economy, Ukraine has increased the inter-budgetary ratio fourfold in favor of the center.
“I was searching for a similar situation in history, when a dictator could appropriate 80 percent of the country’s budgets. I found none.”
What is your program of Ukrainian economic salvation?
“In my book How to Revitalize the Ukrainian Economy, I wrote about three functions of the economy. Any economy of any country rests on the interaction of them. The first function is production of commodities or services. The second is the sale of this commodity or service. And the third is distribution of the earned money. In brief, I have produced, sold, and distributed.
“But in Ukraine none of the three functions works. You should take a magnifying glass in order to find Ukrainian goods at retail outlets.”
And can you imagine how our producer, who manufactures a really high-quality commodity, feels today? We have tremendous problems due to the ruined sale networks, deformed tastes, and societal disorientation. There is a huge wall between us and our consumers who want to have a quality product, which is to be surmounted with the help of mental, informational, and economic instruments.
“This results from the absence of interaction between economic functions. Take our GDP, for example. There are two approaches to assessing the GDP. The commodity-based approach is that the product output is multiplied by the mean indicator of prices, while the money-based one is that the money supply is multiplied by the rate of its turnover. In the developed countries, every banknote changes its owners seven or eight times on the average. In Ukraine it was three in the best times. Our economy is not just slow – it is impeded.”
