Arseniy Yatsenyuk: “The government is ready to implement real reforms, yet… it had to start with applying “painkillers … to rehabilitate the economy and prevent the country dying”

Dragon Capital held its 10^th Annual Ukraine Investor Conference on April 2-3 in Kyiv. More than 120 international investors from the EU, U.S. and Russia, as well as more than 100 local investors and Ukrainian companies attended the anniversary event to learn more about the economic and political situation in Ukraine and the newly appointed government’s reform agenda.

Below please find highlights from the keynote speech delivered by Prime Minister Arseniy Yatsenyuk.

On first month in office and macroeconomic situation

• The new Cabinet inherited a “completely dismantled government machine” from the administration of deposed President Viktor Yanukovych and its first immediate challenge was to restore governance. Yatsenyuk said he was leading a “war-time government”, referring to Russia’s invasion and subsequent annexation of Crimea, adding Ukraine still managed to prevent a broader Russian military intervention into eastern and southern regions.

• Yatsenyuk said the macroeconomic picture is “not as good as it could be, but not as bad as we expected”, adding the government projects a GDP decline of 3% and inflation of up to 14% for 2014 along with continued flexibility (but not “over-flexibility”) of the exchange rate. As part of planned spending cuts, the government will lay off 10% of public sector employees, which will affect unemployment but is the price that has to be paid “for the future of Ukraine”.

Reform agenda

• The government is “ready to implement real reforms”, yet, considering the dire state of the economy, it had to start with applying “painkillers … to rehabilitate the economy and prevent the country dying”. After these initial steps have been taken, comprehensive reforms would be launched across the board despite the approaching presidential elections.

• Some of the future (“post-painkiller”) measures to reinstate the rule of law and improve the business climate include passing new legislation on the prosecutor general’s office, reform of the judiciary system, prevention of corruption, and transparent public procurement procedures; drafting and approving a new tax code; and reforming the antimonopoly committee.

• While there is broad agreement on what reform steps must be taken economy-wise, the main political parties still lack consensus on the constitutional reform intended to restore the balance of power, including between the central government and regional authorities.

• A bill of constitutional amendments could emerge as early as in two weeks but (and this concerns further steps in the economic area, too) much would depend going forward on parliamentary factions mustering the will to approve sensitive and unpopular decisions.

Western support package and EU deal

• At the moment, “the key issue on the agenda is the IMF. Full stop.” Yatsenyuk said the government was committed to meeting underlying conditions for lending as quickly as possible, with parliament’s approval of a package of austerity measures last week marking an important step in this regard (a follow-up set of austerity measures has already been prepared by the government and needs to be urgently passed by parliament next week).

• Provided the IMF and other IFIs and foreign lenders disburse their aid as planned, the government would be able to proceed from austerity measures to employing tools intended to revive economic growth.

• Commenting on the association and free trade agreement (AA/DCFTA) with the EU, whose political chapters the new government and the EU recently signed, Yatsenyuk said preparations were underway to sign the document’s economic chapters (including provisions on free trade) after presidential elections set for May 25. In the interim, the EU made a decision to temporarily lift import duties on Ukrainian goods — this decision is expected to take effect from May 15.

Gas supply and prices and energy efficiency

• Slovakia has “all technical capability” to start reverse supplies of gas to Ukraine. The fact that Ukraine still has not signed a relevant agreement is purely a political matter and “has nothing to do with technical issues”. Ukraine could annually import up to 20 bcm of gas from the EU in reverse mode, its current price at $350/tcm being lower than the Russian gas import price. Yatsenyuk has sent a letter to the European Commission requesting accelerating the reverse flow deal.

• On gas relations with Russia, the newly appointed CEO of Naftogaz Ukrainy will shortly meet with the Gazprom CEO (the meeting took place Apr. 3) to discuss further relations after Russia increased the gas price for Ukraine by 44% to $385.5/tcm starting from April. Russia’s denunciation of the Black Sea Fleet agreements (and associated gas price discounts) with Ukraine means it is trying to pave the way for increasing the gas price by another $100/tcm to about $500/tcm. Ukraine is considering a number of options to deal with this situation and will employ “all technical, political and legal means to [create] a level-playing field between Naftogaz and Gazprom.”

• The previous administration’s project of renting an LNG platform and building an LNG terminal in the Odesa region remains on the table and the new government is fully supportive of it. Potential gas supplies could total “several billion cubic meters” annually.

• Concurrently with increasing gas prices and utilities tariffs for households, which is one of the IMF requirements, the government developed a new compensation scheme for low-income customers that covers an additional 3 million households (on top of 1.4 million households which have been eligible for subsidies until now). After fine-tuning this new subsidy system, the government will consider changing the current tariff setting system to introduce a single market rate for households without differentiating by consumption volume as is the case now.

Relations with Russia

• “I like our Russian [counterparts], they always tell us how to change our country, change our constitution … They know the best way for Ukraine to succeed,” particularly by moving to federalism and making Russian a second state language. Yatsenyuk added the government, together with its Western partners, developed a roadmap for “restoring” relations with Russia and expressed hope the two countries’ foreign ministers would meet again shortly and “some process will start”. He reiterated Ukraine will never recognize the annexation of Crimea and that Russia must realize Ukraine “is an independent state that … will become a member of the EU in the long term”.

Stock market

• First steps include reshuffling the securities and stock market commission and approving new regulations to make this body truly independent. The government counts on foreign technical assistance in developing domestic stock market infrastructure. However, its immediate priority is to carry out the aforementioned austerity measures, upon which broad-based reforms would begin, of which developing the stock market is an important element.

Agriculture

• A key driver of the Ukrainian economy which the government will continue to support with loans from commercial and state-owned banks. The government tried to abolish VAT refunds for grain traders, but its bid failed due to a strong lobby in parliament. Yatsenyuk also said he was a supporter of comprehensive land reform as a prerequisite for attracting investment into the sector, yet acknowledged this remained a politically difficult matter for the current parliament and “clearly not achievable before the presidential elections”.