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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

NDSC Secretary Yevhen MARCHUK: “Wishing Ukraine well is no excuse for the government’s mistakes”

3 October, 2000 - 00:00

We are gradually becoming aware that the state and the market cannot be regarded as interrelated notions. The state is an all-embracing system of sociopolitical and socioeconomic communications. The market is merely a system designed to organize commodity turnover. In other words, it is only the economy that must be made market- oriented, not society. Meanwhile, recent events in Ukraine’s energy sector show that not all high-ranking officials regard this assumption as axiomatic. Fakty asked National Defense and Security Council Secretary Yevhen MARCHUK to comment on the current situation in the Ukrainian economy.

ECONOMY RECOGNIZES NO ELOQUENT DECLARATIONS; IT REACTS ADEQUATELY ONLY TO PROFESSIONAL ACTIONS

Fakty: Mr. Marchuk, recent commentaries by Cabinet functionaries and even certain media outlet should inspire hope for improvements in the energy sector and convince the public that the government has worked out a mechanism making it possible, at least at this early stage, to coordinate all our great many domestic economic and foreign trade problems. Otherwise any progress becomes impossible.

Y. M.: Everything happening within and around the energy sector is evidence of the old truth that the economy recognizes no sentiments or pretty patriotic declarations; it adequately responds only to harmonized interests, professional systematic actions. Otherwise one will not have to wait long for the consequences of ill-considered decisions. And these consequences tend to be very painful, because the situation in the energy sector has an instant effect on all economic processes. Can you imagine what it means first to prohibit and then again allow offset settlements within six months? And then ban them again? Then allow them and prohibit future procurements of electricity, while imposing a 20% price reduction?

Fakty: How will all this experimenting in the energy sector affect Ukrainian society and our economy in general?

Y. M.: Judge for yourself. Cabinet Resolution No. 755, of May 5, 2000, ordered all consumers to buy electricity only for “live” money. Fine. A real state-building approach. Where’s the problem? The problem is that it is hard to expect such monetary settlements to be introduced in a single industrial sector overnight, considering the acute shortage of cash assets in other sectors just as important, and expect few if any losses. And any manager, even one working for exports, will tell you that this is precisely what’s happening.

While the transition to monetary settlements on the domestic market could be accepted as a logical approach in the context of a series of coordinated efforts to reform the nation’s economic structure, cancellation of barter deals with foreign partners is good only for those partners.

Fakty: And the negative consequences?

Y. M.: Above all, Ukrainian industries began to rapidly lose the Russian market. Compared to foreign companies, our enterprises prove especially vulnerable; they have no current assets, their credit resources are extremely limited, and what little they have is “mobilized” by the government to pay for imported fuel. As a result, the nation’s entire energy sector is being slowed down.

UKRAINE’S ENERGY CONSUMPTION BY PRODUCTION: ONE OF THE WORLD’S HIGHEST

Fakty: Does this mean that there people at the Cabinet not interested in the development of Ukraine’s energy industry?

Y. M.: I am not the person to answer this question. I use only hard facts. Say, on July 31, the Cabinet issued Directive No. 1342/96, ordering the State Treasury to give budget subsidies to regional energy distribution companies. Several days later, the National Electricity Regulatory Commission came up with Resolution No. 808 on August 2, transferring these subsidies to a distribution account and arbitrarily (sic) allocating them among enterprises. Perhaps this is how favors are curried with individual managers and union leaders who reciprocate by creating a positive backdrop, reporting successes on the energy market.

Fakty: What does this mean?

Y. M.: It means that the money flow through the distribution account is increased, using budget funds and a corresponding mechanism. An illusion is created of the growth of electricity payments. And the energy companies receive nothing by way of payroll or maintenance money. Nor can they make all those compulsory payments to the state budget.

Indeed, there is some increase in payments for electricity due to severe administrative sanctions that can be justified only as a temporary remedy and cannot turn into a steady trend without actual market reform. Hence we witness worsening basic domestic energy indices

Fakty: Are any steps being actually made to solve these problems?

Y. M.: On the contrary, additional problems are being created. Cabinet Resolution No. 1138 of July 19 actually proposes the Energy Ministry convince the generating companies to sign credit agreements with commercial banks using their property and property rights as collateral. It does not take an expert to predict that these companies, if they go along and considering their current financial status, will not be able to repay such loans. In other words, conditions are being deliberately created for the “debt privatization” of the generating companies that would be anything but transparent.

Now we have a presidential edict reading that the privatization process in the energy sector, involving strategic investors, must immediately be made transparent and fair. This is not only being ignored, but tried to be used by all those antimarket mechanisms dating from the times of War Communism.

Fakty: But there was no way Enerhoatom could avoid that credit ordered from above.

Y. M.: Completely right. They meddled in the nation’s nuclear energy company’s business and left the management no choice, simply ordering (!) them to take the Savings Bank’s loan worth UAH 141 million against company assets amounting to UAH 290.8 million, twice the amount borrowed!

As a result, financing preventive repair and maintenance work at the nuclear stations are in a disastrous condition. Current reports read that five out 14 power units are out of service, down for repairs, and one is operating at normal capacity. Only five years ago this would be regarded as an energy sector emergency, the whole Cabinet would be in a turmoil and many would lose their posts.

UKRAINE IS ON THE VERGE OF LOSING ITS SHARE IN ASIAN-EUROPEAN TRANSPORT ROUTE

Fakty: There is the old issue of Ukraine’s gas transportation system. Will it be privatized, handed over as so many concessions or allowed to be managed? There still nothing heard from the Cabinet, except political assessments of various options.

Y. M.: We know that the estimated cost of this system ranges from $20.5 to $28.5 billion US. Comparing these figures to the actual amount Ukraine owes for Russian gas supplies (about $2 billion) and considering that a large part of the liabilities is our public debt, it is perfectly safe to assume that proposals to surrender the entire gas transport system on account of our debt are simply absurd. Still, this is not an argument to avoid the issue of whether or not the gas pipelines should be retained as a state monopoly. Perhaps some should be privatized, but first all the pros and cons must be considered. It is necessary to find ways to solve this problem, rather than engage in political chatter.

After all, one must not overlook the fact that the mentioned cost of gas transport assets is based not on book value, a notion we have been long accustomed to, but on the actual and potential scope of blue fuel deliveries. An empty gas pipeline costs peanuts. Russia is aware of this and threatens to build a gas transport bypass traversing Belarus, thus acting in its own national interests. So how do we reply to Chamberlain this time?

BACK WAGES AND PENSIONS CURRENTLY PAID OUT ARE EATEN BY INFLATION AND UTILITY RATES

Fakty: All the developed countries are known to have advanced their economy by supporting and developing their own domestic market. In other words, they were primarily concerned about the population’s buying power. This year, Ukrainian citizens seem to have felt the same concern, as the government repaid practically all back wages and pensions and is trying to make all payments on time. Then why are we not aware of any increase in the living standard?

Y. M.: The government did well, making all those payments, carrying out the top political leadership’s directive. But let’s look more closely at the situation.

Considering that Ukraine’s residents have to part with two-thirds of their take-home pay to cover the municipal costs, the result is that two- thirds of the population is indirectly supporting the operation of the housing facilities. In reality, this sector employees not more than 6% of the Ukrainian able-bodied citizenry. To finally clarify this painful issue, the President of Ukraine instructed the Cabinet this March to analyze the municipal prime costs within two months and see to it that these costs are lowered. In fact, no one has even approached the problem and the situation continues to be aggravated. Paid wage and pension arrears are eaten by inflation and growing utility costs.

Fakty: What do you think makes certain Cabinet members lash out at the idea of the so-called Energy Island in Kharkiv, Sumy, and Poltava oblasts? This should benefit Ukraine, considering its chronic power shortages.

Y. M.: Indeed, the idea of joining the three administrative regions to Russia’s energy system would guarantee inexpensive electricity supplies to energy-hungry areas, yet this is politically ostracized in the government. Six months ago, Mr. Kuchma instructed the Cabinet to work out, jointly with Russian partners, a pattern of mutually advantageous settlements, mostly relying on increased deliveries of locally manufactured power-generating equipment to Russia. The advantage seems obvious, yet the Cabinet has in essence blocked the idea, using patriotic slogans.

The presidential order setting up a regionally integrated energy company in Donetsk and Dnipropetrovsk oblasts was likewise ignored. Does this mean that someone in the Cabinet decided not to support the regional initiative about activating local idle energy capacities, thus keeping the oblasts constantly supplied with electricity and the mining industry operational, using regional resources and financing?

ARE THERE MAILBOXES ABROAD TO HELP LAUNDER UKRAINIAN ENERGY SECTOR MONEY?

Fakty: Russia announced gas consumption reductions, meaning reduced exports. If so, will we make up for gas shortages using other resources like coal?

Y. M.: So far, the situation is like this. The President instructed the government this spring to allocate UAH 200 million to activate new capacities at mines where energy is actually extracted, so as to accumulate a sufficient reserve by the winter and stop importing coal. The problem is being solved very belatedly, while the extraction of power-generating coal has dropped by 7% since the start of the year.

The Cabinet does not solve problems relating to the improvement of domestic power-generating coal quality. Annually, some 2 million tons of rock are delivered by rail, so our coal can burn in power stations’ furnaces only when intensified by gas or fuel oil. This, of course, makes electricity cost more. Against the backdrop of all such drawbacks (mildly speaking), channeling all funds to miners’ pay, regardless of extraction level, looks very much like political coquetry. Are we back to that extremely unfair system of wage-leveling practiced under the Soviet administrative command system?

Fakty: A lot of money is spent on coal imports. Where does this money come from? In general, it’s strange to hear about Ukraine having to import power-generating coal.

Y. M.: It is. The Cabinet makes every effort to find mechanisms to mobilize domestic financial resources and uses foreign loans to procure over 3 million tons of power-generating coal in Russia and Poland. So far, only 1.5 million tons has been purchased, and this includes money that had to be transferred from the energy market to the Ukrainian miners’ payroll. The Vice Premier responsible for the energy sector issued special Directive No. 37 of September 1, ordering (sic) the public joint stock company Zakhidenerho to immediately sign a contract with the commercial firm Orsial, to secure supplies of the “maximum possible amount” of power-generating coal. What an accurate formulation! And the company had to report on its performance directly to the Vice Premier. And the other party to the contract is R. Holding, an obscure Western company that has never before operated on the highly competitive energy market. All of a sudden it is allowed to open credit lines against the Ukrainian Cabinet’s (sic) guarantees and deliver hundreds of thousands of tons of coal to Ukraine. Another company, Bear, managed to sign a contract worth some UAH 106 million, although its solvency does not exceed UAH 30,000! The whole thing defies comment. To use the shadow economy parlance, what we have in this case are mailboxes to help launder Ukrainian energy sector money abroad.

ENERGY MARKET REFORM IN UKRAINE: A TEST SHOWING WHETHER ECONOMIC REFORM IS POSSIBLE

Fakty: Don’t you think that such massive criticism of Cabinet performance on the energy market could paralyze the government’s initiative in this direction?

Y. M.: No one doubts the complexity of the energy problem. There are great negative vestiges from the previous system of management. Viktor Yushchenko’s Cabinet received an extremely burdensome legacy in the energy sector, including conflicts of interests between various commercial groups and regions, mass malfeasance, and mass nonpayment.

Hence, energy sector reform is a test showing whether the economic reform is possible in Ukraine. That was why Leonid Kuchma declared in January that he would personally supervise the problem, and that the entire government machine would be activated to straighten it out. Without exaggeration, this is a problem of national security.

Fakty: What kind of manipulation do you have in mind?

Y. M.: Take Enerhoatom, for example. It can be ordered to sell electricity to several chosen enterprises half a year ahead of time at almost its prime cost and present the money received on a one-time basis to the general public as a sharp increase in electricity payments, without mentioning that by the end of the year the enterprises in question will pay nothing, and that they bought that electricity at a 20% discount. Precisely this pattern was used.

Or one can cut electricity supplies to half of Ukraine precisely on the date of the republican energy conference chaired by the President and then, after increasing the power grid frequency to 50 Hz, declare that the energy crisis has been overcome once and for all. And again refrain from mentioning that the very next day the frequency would drop to its previous level threatening collapse of the entire national energy system. Precisely this happened not so long ago.

Also, one can declare that the winter coal reserve has been increased, without mentioning that this increase was achieved by burning an additional amount of gas imported for dollars.

Fakty: Does this mean that you are not very impressed by the Cabinet’s performance?

Y. M.: I am not assessing the Cabinet’s performance. There are others to do precisely that. I am officially in charge of control over the implementation of the President’s order to bring order to the energy sector. Of course, the Cabinet’s efforts to increase payments for electricity is in every way supported, and no one can deny progress there, but it is not yet stable. Besides, in many cases its origin is controversial. For this reason it is not worth using it for propaganda, the more so that there are so many shortcomings.

One cannot help but regret the fact that it is from Cabinet corridors that the energy topic gets into the political domain, being subject of political declarations, pickets, and rallies, using vocabulary dating to the (Russian) Civil War. There is also an obvious trend to reduce the problem to a number of primitive schemes: see, we have a reform government, so whoever discusses its drawbacks is its enemy and no patriot.

A primitive scheme, yet some national democratic forces and their prestigious leaders swallowed the bait, not troubling themselves to familiarize themselves with expert findings or weighing the pros and cons. And so we hear about unconstructive criticism of Yushchenko’s government as a whole. Once again, as at the dawn of independence, patriotic verbiage is the main criterion, not concrete results.

Actually, even if all those “patriotic advocates” will have to admit they were wrong, they won’t be hurt much. So we were wrong, so what? To err is human, they will say. Precisely they way they did quite recently.

In a market economy, patriotism is an extremely multifaceted notion, with positive results benefiting the entire nation being the main criterion. And the specific consequences of patriotic deeds come down to the creation of truly equal conditions of doing business for entities under all patterns of ownership. Then it will no longer be necessary to cut off electricity in half of Ukraine to save the national energy system from total collapse, Ukrainian money will be directed to Ukrainian miners, not to their foreign rivals, the public debt will not suddenly increase because of top-level mismanagement, and domestic producers will have reliable protection both at home and abroad. After all, wishing Ukraine well is no excuse for the government’s mistakes.

© Abridged from Fakty i kommentarii,
September 29, 2000

By Svitlana KORYNEVYCH, Fakty i kommentarii
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