April and May this year have become the period of activity related to European integration and synchronization of watches before a new step towards Ukraine’s rapprochement with Europe – the establishment of a Deep and Comprehensive Free Trade Area (DCFTA) as of January 1, 2016. During this period the Ukrainian League of Industrialists and Entrepreneurs (ULIE) – the country’s most powerful organization of Ukrainian companies – opened its EU-based representative office in Brussels on April 21, its delegations participated in the European Business Summit, including a discussion panel entitled “Trade – Europe in the Global Economy” in Brussels on May 6, and in the 3rd Eastern Partnership Business Forum, which was held as part of the Eastern Partnership summit in Riga on May 21.
We were frank with our European partners and stated that Ukraine appreciates Europe’s assistance and, what is more, it is anticipating its expansion and development. However, Ukraine has to take the first decisive step on its own – introduce global reforms, improve the performance of all branches of the government, and strengthen the role of civil society. This is our own assignment whose completion will help us achieve our European integration goals.
We have to focus on the development of the industrial sphere as well as small- and medium-sized businesses, which are the backbone of the economy, create jobs, and generate tax revenues for the national budget. Financial, taxation, and export policies also need to be improved. It is important to note that Ukrainian enterprises face changes connected to the full implementation of the DCFTA against the backdrop of the economic crisis. Europe should not be disappointed at a lack of results of Ukrainians’ fight against corruption and bureaucratic business environment, which are blocking investments and hindering the development of domestic businesses. It is our internal task to repel the invasion of monopolies and the influence of oligarchs, and make a breakthrough in the sphere of state procurements, etc.
We have also raised several important issues before our European partners regarding the improvement of financial and economic support.
The direct route is always shorter
The EU regularly helps Ukraine to develop entrepreneurship. As part of a EUR 11 billion support package allocated by the European Commission in 2014, around EUR 370 million was designed to bail out Ukrainian small- and medium-sized businesses. Unfortunately, it is a mere 3% of the total disbursement. In 2015, the EU announced the allocation of a further EUR 110 million bailout package for small- and medium-sized businesses. Will the local companies see these funds?
Effectiveness of these programs leaves much to be desired. The first reason for this is the complicated situation in the domestic banking system (when a Ukrainian bank obtains the funds, it can lend them to businesses at local [i.e. higher] interest rates, which are seen by the borrower companies as unacceptable). Secondly, these funds are actually received by foreign financial and consulting institutions, which spend them on consulting and training programs. Without doubt, this is a very useful asset to the businesses, but the latter also need start-up capital and loan funds. We propose that the European financial aid be directly given to enterprises. We think it is not a problem to directly control the use of the funds.
Could a loan be affordable?
In the EU’s newest member states local companies can borrow funds at an interest rate of 3-7%. Meanwhile, interest rates in Ukraine top 30-36% in hryvnias and 13-16% in euros and U.S. dollars. Obviously, there is no ground for fair competition in Ukraine and for Ukraine on the EU market. As a result of the economic crisis and the collapse of the hryvnia (estimated at up to 300% in 2014), many domestic businesses are in need of extra capital investment or credits in order to stay afloat, retain jobs, and ensure loan servicing and payment of taxes.
Ukraine expected that EU programs would stabilize the economic situation. Unfortunately, the allocated funds barely help to resolve its problems. So what is the way out? Credits should become more affordable. European institutions should provide them to borrowers at the rates that are used in the EU. Intermediaries that add extra percent on funds on their way to an enterprise should be eliminated. Let us consider this mechanism as temporary and extraordinary until the Ukrainian banking sector recovers.
We are also asking for help with the creation of a National Development Bank, which could become a platform to accumulate EU assistance with donor aid and credit funds, and ensure financing of capital investment, innovation projects, the creation of high-tech and industrial parks, support for small- and medium-sized businesses, etc.
Do we expect too much?
Look at the issue from a different angle. It was announced at the Eastern Partnership summit in Riga that Ukraine would be given EUR 1.8 billion in macro-financial assistance. It is very important how these funds will be spent. The economy, which is suffering from the crisis, badly needs support, and we hope the assistance will be timely and effective. A company is a major economic agent and it is the company that has to feel it belongs to Europe and the community it is striving to integrate with takes care of it.
New challenges ahead
Our meetings with the European Union member states have confirmed the commitments to introduce the Deep and Comprehensive Free Trade Area with Ukraine as of January 1, 2016. Entrepreneurs and industrialists are well aware of how difficult this task could be for the real sector of economy and local industries. The considerable wear and tear of fixed assets, high energy consumption in Ukraine compared to Europe, low labor efficiency, unfavorable crediting, taxation and industrial policies – this is a short list of the challenges that need to be overcome through modernization, investment and creation of a better business environment. By realizing their responsibility for preparations for the DCFTA, the Ukrainian companies count that their peers and partners from the EU will give them support. The ULIE representative office in Brussels has suggested opening an accredited laboratory in the EU, giving Ukrainian companies more rights of access to bidding in EU state procurement tenders, increase quotas for duty-free farm produce shipments onto the European market, etc.
To sum up, both the Ukrainian participants in the abovementioned events and our European partners believe that the establishment of the free trade area between Ukraine and the EU, coupled with reforms, will help deepen the partners’ economic integration on the EU’s internal market and achieve a qualitative breakthrough on the path of economic development. The fact that Eastern Partnership member states took into consideration and included the recommendations put forth at the business forum in the final declaration of the Riga summit and broadly supported EU cooperation programs for entrepreneurship development in Ukraine inspires hope.
Anatoliy Kinakh,
ULIE President
