Internal Policy

2019 Elections: white-blue camp

Following the annexation of Crimea and the military conflict in the East, the white-blue or conventionally perceived "pro-Russian" electorate has decreased by at least 5 million potential voters, but it remains a solid part of all the voters in the country - not less than 20-25% of voters. For politicians competing for this election niche the key challenge in the 2019 elections will be the development of an updated ideological platform, their consolidation and the ability to organize and accordingly motivate their electorate. Internal squabbles and self-complacency can potentially weaken white-blue camp, while only modernization of its ideology and more active work with voters can ensure their success in the 2019 elections. “Oppobloc”: uneasy marriage of convinience "Opposition block" consists of different groups. Each of them has its own center of influence. But due to solid support in society (according to recent polls, 8.5%), these groups keep together, despite constant scandals within a single political force. "Oppobloc" is torn apart by internal contradictions. If earlier the main conflict was between groups of people's deputies representing the main sponsors - the oligarchs Dmitry Firtash and Rinat Akhmetov, now there are misunderstandings within all the groups. The controversy intensified after an unsuccessful attempt of the odious politician and Vladimir Putin's fellow sponsor Viktor Medvedchuk to enter the "Opposition Bloc". The reasons for the failure of this initiative were different - the toxic personality of Medvedchuk, the reluctance of the Bloc to let to its ranks a strong person who used to control everything, including contacts with Moscow etc. In any case his accession to the “Oppobloc” did not take place, and the "Oppobloc" is now experiencing increased disintegration processes. The most visible sign of disintegration has been establishment of such projects as "For Life!" led by Vadim Rabinovich and Yevgeny Muraev, "Christian Socialists" led by Mikhail Dobkin, together with Medvedchuk's longtime ally Nestor Shufrych, left the "Opposition Bloc". But even those who remained in faction have been preparing alternative platforms for participation in the elections: Peace Party of Vadim Novinsky, Republican Party of Yuriy Boyko, Industrial Party of Kolesnikov, Ukrainian Perspective of Vilkul and others. In their election programs representatives of "opposition forces" focus on the issues that are now of greatest concern to their voters: to end the conflict in Donbas, revise the budget to enable economic development and social justice, abolish pension reform, develop accessible and high-quality medicine and education, carry out tax reform, lower pressure on taxpayers, more incentives to revitalize the economy, create attractive conditions for investors, provide energy security of the country and ensure heating in Ukrainian homes, restore financial and economic stability, fight corruption, conduct reform of decentralization and local self-government reform, reduce tariffs etc. And if with the election slogans of the white-and-blue politicians’ positioning is more or less understandable, then the situation with the only candidate for the presidency or the parliamentary election list is much more uncertain. Yuriy Boyko has the highest rating: according to the latest polls, 8.4% - mostly voters of the East, the South and Donbas. Another possible candidate may be Vadim Novinsky supported by the Ukrainian Orthodox Church and business partners, primarily by Rinat Akhmetov. Another longtime associate of Akhmetov Boris Kolesnikov, who "manages" the oligarch's political projects, is unlikely to run at the elections, and will most likely support Novinsky. Kolesnikov has already revived his "shadow" government and will probably soon become politically more active. Despite the moderately critical rhetoric towards the government, the analysis of the "Opposite Bloc" actions allows experts to conclude that it cooperates with authorities and might lose the position of the main opponents of the current regime. In addition, such actions and moderate opposition rhetoric open a wide field for maneuvers for more radical forces - for example, "For Life!" Rabinovich and Muraev, who can take a significant part of the electorate. All this, together with internal conflicts in the faction, can deprive "Opposition Bloc" from the role of main opponent of the acting government and worsen the results at the election race. “Party of Peace” of Vadim Novinsky A potentially strong player in the white-blue electoral field will be Vadim Novinsky and his movement "Party of Peace". He can strengthen the “Oppobloc” split. Given the close relationship between Novinsky and Akhmetov, with whom they remain business partners, his group (Olexander Vilkul, Borys Kolesnikov and other "Akhmetov people") can go to parliamentary elections as a separate group. The main electoral effort of "Party of Peace" most likely will be focused on controlled areas of Donbas. Here, in addition to a fairly large electorate of the Party of Regions, Akhmetov's charitable foundation, which has for a long time and systematically worked with the population, will help them. The family of Vilkul will be able to ensure good result of the elections in the Dnipropetrovsk region. Novinsky has good chances in the Mykolaiv region, where he owns ship-building yard "Ocean", Mykolaiv machine-building factory and many other companies. It is not easy for Novinsky's party to win in the Kharkiv region, which is actively dominated by "For Life!" with the support of the Dobkin’s Christian Socialists. However, trump card of Novinsky for nearly the whole country is the support of the Ukrainian Orthodox Church of the Moscow Patriarchate. Novinsky made a good shot by naming his political project "Party of Peace". According to all social surveys, more than 40% of respondents consider the chievement of peace as the priority task. And this issue is especially actual for the residents of eastern Ukraine. Besides peace, Novinsky promises working places and care for the socially disadvantaged groups, while rigorously criticizing the current government, which increases the support of voters. “Who is whose Rabinovich?” On the background of conflicts within the "Oppobloc", the party of Vadim Rabinovich and Yevgeny Muraev "For Life!" is rapidly gaining popularity. According to the latest social studies, 8.1% of Ukrainians support it. Although both parties are of pro-Russian nature, they have financial and personal contradictions. Thus, they are unlikely to choose a single candidate for the presidential election. Vadim Rabinovich will obviously run for the elections separately. He is now supported by 5.5% of voters. He divides his main electorate with Yuriy Boyko - in the East, South and Donbas. Rabinovich tries to position himself as a "third force": he did not hold high government posts and, like many Ukrainians, is dissatisfied both with opposition and with the authorities. He blames the authorities for inefficiency, economic crisis, decline in the living standards, and the opposition - in flirting with authorities and lacking a constructive position. In foreign policy, he advocates Ukraine as "Switzerland of Eastern Europe", in other words, he supports the ideas of neutrality and independence. After leaving “Oppobloc” Rabinovich has strained relations with Sergyi Lyovochkin. Politicians continue to exchange compromising materials, accusing each other of the game in the interests of Bankova. "For Life!" and "Oppobloc" today are fierce competitors in the white and blue camp. Since both parties have a rather high rating, they are unlikely to unite before the elections, although under Moscow's pressure this option is possible. Inside the party "For Life!" there is also no agreement and trust between its founders. Muraev does not like unipersonal PR of Rabinovich and the way his is  making decisions without consulting with his partner. Muraev even suspects Rabinovich in obtaining funding from Bankova. He is also against the split of the opposition camp. The situation is still not critical, but, nevertheless remains rather intense. One can not help noticing the rapprochement of the party "For Life!" with Viktor Medvedchuk. Nestor Shufrych, Medvedchuk's loyal associate who left “Oppobloc” has joined Rabinovich's political project. The truth is, however, that Shufrych has not left the faction yet not to lose the mandate of the MP. Medvedchuk is advantegous for Rabinovich. He has serious financial resources, and also, he can create a good PR on the topic of war through close ties with the Kremlin, for example on the issue of the hostage release, and so on. The phenomenon of Murayev and Rabinovich is not so connected with media resources and significant investments of Medvedchuk, rather as with the fact that they took on a radical critique of the government. By doing so, they can get ahead of "Oppobloc" which is more playing at giveaway with Bankova than really criticizes it. In its current form "Oppobloc" is more a part of the ruling establishment than the opposition to it. All this can lead to significant losses in their rankings while their electorate being taken away by more radical and determined political forces from the white and blue camp. “Osnova” of “technocrat” Taruta Partly Serhiy Taruta and his party "Osnova" will fight for the votes of the white and blue group. He and his party declare themselves as a constructive opposition to the system of state power in general, while offering alternative ways of development for the country. This party favors the idea of liberal market: state non-interference in the economy; maximum freedom of trade and competition; individuals are responsible for their own destiny, however important issues for the whole society should be resolved together; the government is equally distant from all religious confessions. The party leader positions himself as a technocrat, and his associates as people of action. The frame of his party consists of those who worked for serious positions under former President Yanukovych - Andriy Nikolayenko, former chairman of the Kirovohrad RSA, Yaroslav Arsiriy, deputy minister and director of the department in the Ministry of Culture and deputy chairman of the Kirovograd Regional State Administration, and Volodymyr Polochaninov, ex-deputy from “Batkivshchyna”. Taruta is a frequent guest on TV with his party being actively advertised on billboards. Serhiy Oleksiyovych tries to present his power as a progressive, liberal, non-populist and intelligent "third force". "Osnova" tries to play on two electoral fields. Reported ideas are closer to the liberal-democratic camp, but personalities are more understandable for the white and blue electorate. Taruta criticizes the Minsk process and Kiev policy for reintegration of Donbas. As for now neither Taruta nor his party have sufficient rating. "Technocrat" Taruta is looking for more influential allies. He has good relations with oligarchs Victor Pinchuk and Rinat Akhmetov, in politics - with Yulia Tymoshenko. Experts even discuss a possible alliance under the format of Tymoshenko being the president and Taruta - the prime minister. Prospects for such cooperation are rather dubious. But Taruta, obviously, may be useful for Tymoshenko in her struggle for the presidential post, for example, as an antagonist to Anatoliy Hrytsenko. “Our Land” (“Nash Krai”) "Our land" will also fight for votes of supporters of the white and blue. Vitaliy Kovalchuk, deputy head of the presidential administration, was engaged in its creation at one time. "Our land" basically includes former non-disbursed deputies of the "Party of Regions" "(Anton Kisse, Olexander Feldman and Sergiy Kaltsev) who position themselves as managers and patriots of their small homeland.  “Our land” does not have traditional ideology and can be hardly connected with either right or left political forces. It focuses on local issues planning to raise public support among voters for whom a beautiful school on a nearby street or an asphalted road is a top priority. Representatives of “Our Land” as a rule are loyal to the authorities, but at the same time adhere to moderately oppositional rhetoric in order not to lose the white and blue electorate. The given party has a number of problems. First, Igor Kononenko and Vitaliy Kovalchuk compete for control over it under the entourage of Poroshenko. Secondly, the party does not have a charismatic leader, therefore it will not probably reach the national level. Party “Revival” (“Vidrodzhennia”) Another political project, which publicly claims its opposition nature, but in fact, plays in favor of authorities and can take the votes of supporters of the white and blue is the party "Revival". Like "Our land", this party became a shelter for deputies from the Party of Regions who did not want to associate themselves with the former beneficiaries of the Party of Regions - Lyovochkin, Akhmetov, etc. The most well-known people in the "Revival" are Viktor Bondar, Anton Yatsenko, Viktor Ostapchuk, Volodymyr Pylypenko and Vitaliy Khomutynnyk. The main political messages of the party are limited to economic reforms (proposed introduction of the principle of economic nationalism) and changes in the taxation system. The party wins from having a deputy group in the parliament, but obviously loses in support of the population. In the upcoming elections, the "Revival" will bet on majoritarian candidates, while Bankova can help it with financing through the state budget. “Left Opposition”: risen from the ashes Among the white-and-blue electorate in the East and Donbas there is some support for the movement "Left Opposition". The given all-Ukrainian public association of left and center-left forces consists of five parties and 13 civic organizations. It is headed by the leader of the forbidden Communist Party, Petro Symonenko and his colleague, prominent veteran communist Georgy Kryuchkov, leader of the Progressive Socialist Party Nataliya Vitrenko, former director of the Ukrainian Institute of National Remembrance Valery Soldatenko, as well as athlete Rudolf Povarnitsyn. After the prohibition of the Communist Party of Ukraine and the collapse of the SPU on the left ideological flank, there emerged a vacuum, which the left-wing politicians would try to fill up with "political insurgents". The rhetoric of their "Left Opposition" is marginal, being pro-Russian and anti-Western. They call the revolution of dignity a coup d’état, after which Ukraine lost economic and political sovereignty. Normal development of Ukraine is possible only together with Russia and Belarus while the course towards Euro integration will lead to the degradation of the Ukrainian state. Thus, the movement "Left Opposition" proclaimed its purposes to be the restoration of good relations with Russia, the entry into the Customs Union, the recognition of Russian as the second state language. Using such a rhetoric, this political project will probably not receive many votes, but nevertheless will be able to take a certain percentage of votes from the “Oppobloc” and “For life!” The struggle between the opposition white and blue forces is disastrous to them and plays in the favor of Bankova. It is very important for President Poroshenko not to allow a single candidate for this part of the electorate. It is advantageous for him that they go apart and compete with each other. Poroshenko is also advantageous to play the scenario in the second round with a sparring partner Boyko or Rabinovich. When Ukrainian voter is offered a choice between two evils, Poroshenko will look obviously better and it is unlikely the voter will now choose a candidate from the white and blue. Despite the conflicts in the white and blue camp, the politicians who represent it are distinguished by some discipline, which is primarily based on the economic interests. Therefore, it is likely that most of the white and blue, including Novinsky and Rabinovich, will support Yuriy Boyko in the presidential elections in 2019. Others have weak ratings. Taruta, with his "Osnova", will most likely speak on behalf of Tymoshenko. Dobkin will act in the way Medvedchuk will direct him, and the new old "left" will move in the direction indicated by Moscow. In general, the white and blue politicum is a reflection of several oligarchic groups. First of all, there are big groups of Firtash-Lyovochkin-Boyko and Akhmetov, as well as small groups of Pinchuk and Kolomoisky. It is these shareholders who decide everything and determine the architecture of the relationship between the political groups and forces under their control. There is great controversy between these shareholders, as they cannot agree on distribution of their place in the Ukrainian economy, or concerning the person who should be the president - the arbiter in the relationship between the oligarchs and the guarantor of the implementation of the agreements reached between them. In addition, Poroshenko is able well enough to play upon differences among them. Previously, he clearly dented the position of the strongest oligarch after the Revolution - Igor Kolomoisky, while others are now precarious to enter into direct confrontation with him. All this is extrapolated directly to the white and blue opposition politicum, which is very versatile and unlike Tymoshenko, Hrytsenko and other politicians, has not decided the format for going to the elections (single candidate or several, united political force or several different). They could be an alternative to the current government, but because they are scattered and do not show proper activity, unlike the others, it may happen that in the second round of the presidential election they will not oppose Poroshenko, and there will appear completely different political figures. As a result, the situation may emerge when "Oppobloc" from the main opposition of the current government will turn into outsiders. And this will be the price they will pay for failure to negotiate, for targeting not the voter, but the sponsors and the expectation that they will win on the wave of dissatisfaction with the authorities, which, however, can currently pick up other players.

ICPS Press
04.07.2018
Economic Analysis

Privatization 2018: vital need or usual habit?

At the end of May - early June, the Ukrainian government announced the final list of small and large privatization objects. According to the acting head of the State Property Fund Vitaliy Trubarov, such list of enterprises for sale is the largest for the last 10 years. Is the abovementioned thesis really an "achievement of the government", what prospects and risks of such "comprehensive" privatization? What do we have In recent years, the announced privatization of 2018 has the most ambitious plans. Budget revenues from privatization in the current year are projected at the level of 22.5 billion UAH. The key features of the privatization in 2018 are the following: ● In January 2018, the list of enterprises for privatization did not exceed 335 objects. Later on, the list of privatization was broadened, firstly reaching 576 objects, and then - more than 700 objects. ● Small privatization. The list includes 716 objects and is divided into: 1) enterprises based on the combination of property of various forms of ownership; 2) single property complexes of state enterprises and their structural subdivisions; 3) separate property; 4) objects of unfinished construction; 5) objects of social and cultural purpose. The privatization process will take place exclusively through electronic auctions. ● Large privatization. The list for privatization was reduced from 26 to 23 enterprises. The Aluminum Foil Factory, the Agrarian Fund and the State Food and Grain Corporation of Ukraine were removed from it. Auction on sale of large privatization objects will have the following features: 1) in the absence of the second participant, the auction will not be held, and will automatically be considered to be not occurred; 2) the participants are obliged to make at least one step of bidding to exclude collusion attempt; 3) the information about the auction participants and their amount are not the subjects to be disclosed before the auction starts; 4) in the case that there is only one participant, a ransom is made at a price not lower than the starting one; 5) if during the auction with raising price sale, so-called British auctions, the object is not sold, a decision is taken to reduce the starting price by 25%; if this attempt is useless, then the price is reduced by 50%. If the object of privatization is not sold in the above-mentioned ways, a decision is made to sell it at auction by the method of studying price offers. ● The list of those who cannot be a buyer have been broadened by the representatives from the Russian Federation and by the persons under sanctions. ● The list of objects that are not a subject to privatization was also broadened: medical institutions and educational institutions have been added to it. ● The Cabinet of Ministers of Ukraine has refused to privatize or lease ports, they will be transferred exclusively under concession. Situation analysis At present, there are 3444 objects in state ownership. Table. Distribution of state-owned objects Type Number of state-owned objects, units Assets, billion UAH Percentage ratio, % Strategic objects 15 1175 69 Important objects 363 147 8,6 Objects with control lost 559 45,1 2,6 Inactive objects 1255 132,6 7,8 Concession (airports, forestry, highways) 359 14,5 0,9 Others 893 189,4 11,1 Total 3444 1704 100 Source: According to the Ministry of Economic Development and Trade of Ukraine The Ukrainian government plans to gradually reduce the number of state-owned objects and intends to leave only 15 particularly important state-owned enterprises and 363 objects that ensure the state's fulfillment of its functions. The list of 15 particularly important enterprises that should remain state-owned include: Ukrzaliznytsia, Ukrposhta, Naftogaz Ukraine; strategic enterprises of the aerospace industry - CB Yuzhnoye, Plant 410, Yuzhmash, Antonov, Khartron, Kharkiv Aviation Plant; Administration of seaports; energy companies - Energoatom, Ukrenergo, Ukrhydroenergo, Eastern Mining and Processing Plant; Ukrchimtransamiak. In addition to privatization, 359 objects are also planned to be transferred under concession. Despite the proclaimed goals of protecting strategically important enterprises, the analysis of previous documents, in particular the Resolution of the Cabinet of Ministers of Ukraine # 83 on March 4, 2015 "On Approval of the List of State Property Objects Strategically Important to the Economy and Security of the State", showed that a large the number of objects in this year "stopped to be" strategically important: 14 out of 23 companies included in the list are strategically important for the Ukrainian economy, in particular chemical industry enterprises. Table. Large privatization objects to be privatized in 2018 Code according to USREOU Name of the object The proportion of shares, % Strategic value (2015) Energy industry   22927045 PJSC "Tsentrenergo" 78,289 + 00130725 OJSC "Ternopiloblenergo" 50,999 + 00130926 PJSC "Zaporizzhyaoblenergo" 60,2475 + 00131954 JSC "Kharkivoblenergo" 65,001 + 23399393 JSC "Nikolaevoblenergo" 70 + 22767506 PJSC "Khmelnytskoblenergo" 70,0089 + 00131771 JSC "Kherson Teploelektrocentral" 99,8328   00130820 JSC "Dniprovskaya Teploelektrocentral" 99,9277   00130850 PJSC "Kryvy Rih Teplocentral" 99,9864   00131050 State Enterprise "Severodonetsk Teploelektrocentral" -   Mining industry   36716128 PJSC "United Mining and Chemical Company" 100 + 31599557 State Enterprise "Coal Company "Krasnolimanskaya" -   Machine and instrument making   30832888 PJSC Azovmash 50   05762269 JSC "Turboatom" 75,2241 + 00213121 State Enterprise "Plant "Electrotyazhmash" - + 32495626 State Enterprise "Dniprovsky Electroconstruction Plant" - + Chemical Industry   05766356 PJSC "Sumykhimprom" 99,9952 + 00206539 PJSC "Odessa Port Plant" 99,5667 + 38983006 Zaporizhzhya Titanium-Magnesium Combine Ltd. 51 + Manufacturing industry   05743160 OJSC "Oriana" 99,9988   Health, culture and sports   30058128 PJSC "President-Hotel" 100   21680915 PJSC "Indar" 70,7016 + Agricultural industry   30401456 State Joint-Stock Company "National Joint-Stock Company "Ukragroleasing" 100     What will we have? The privatization "successes" of the previous years show that the achievement of the goals set by the government will be complicated. Even though the government expects to receive the largest sum from privatization-2018 in the amount of 22.5 billion UAH in the last 10 years, the new consensus forecast of the Ministry of Economic Development already speaks of the probability of receiving only 1.25 billion UAH, which is twice lower of the amount of privatization sum in 2017. Accordingly, there is a risk of non-fulfillment of the revenue part of the budget, which is planned at the level of 913 billion UAH, by 2-3%. Table. Implementation of the privatization plan in 2014-2018 Year Plan, billions UAH Fact, billions UAH Plan fulfillment, % 2014 0,335 0,466 139,1 2015 17 0,151 0,9 2016 17,1 0,188 1,1 2017 17,1 3,4 19,9 2018 22,5 - - In turn, the following factors will contribute to the reluctance of investors to participate in the privatization-2018: ● Technical barriers to tenders and complexity of procedures ● Weak institutional capacity of the State Property Fund of Ukraine ● Limited competition and access to trading ● Significant dependence of enterprises on government decisions and the actions of the oligarchs ● Political and lobbyist games around enterprises ● Complicated "debt history" of enterprises and their unsatisfactory financial condition ● Pre-election turbulence ● Situation in the east and the risks of nationalization Thus, the interest of investors will depend directly on how the sales will be organized. Despite the fact that the privatization process will be quite transparent, a number of barriers remain: for example, there may be technical restrictions on trade access or price manipulations at bidding. And even if a diligent investor buys such enterprise, conditions can be created under which he will not be able to pull the company out of poor financial state. Therefore, the privatization plan of this year is unlikely to be fulfilled, due to foreign and Ukrainian investors are not in a hurry to invest in Ukraine without knowing how the development vector will change with the election of a new president and parliament. In addition, some investors are afraid of the threat of nationalization of purchased objects, remembering what happened to Privatbank. The results of the bidding can easily lead to a situation where "they sell for themselves" and, moreover, at low price. This is evidenced by the fact that biggest part of trades is planned to be held in fall and actually may begin much later with the aim to quickly sell the objects, fearing the arrival of the big investors. In turn, even if this "enlarged" privatization campaign succeeds, it should be noted that: ● privatization cannot serve to close the budget holes. ● there will be a threat to the country's economic security in case of situation worsening in the Eastern part of Ukraine: under circumstances of necessity to reorient the production it will be more difficult to conclude agreements with investors. ● individual interests of investors may contradict the national one: there is a risk that investors will dictate their conditions and will make the key sectors of the Ukrainian economy dependent. ● Ukrainian state-owned enterprises can be bought by those who aim at buying the assets cheaply (in the absence of large investors) or at eliminating the competitors. Privatization 2018 may simply turn into a simulation that will cover the pre-election activatisation of the redistribution process of the spheres of influence or the “giving the gifts” process. ● the issue of Naftogaz monopoly and the issue of the partial privatization of organization will not be resolved. Naftogaz will remain fully state-owned and its functions will not be divided between individual independent companies in accordance with the European requirements regarding the system of distribution of functions in the energy market. ● significant responsibility will delegated to the Antimonopoly Committee of Ukraine. "Wholesale" privatization of enterprises of the same sphere can lead to the creation of monopolies in the market, which is highly undesirable, especially in the chemical industry and other key sectors of the Ukrainian economy. ● the problem of Ukrainian enterprises is not in the type of ownership, but in poor management and excessive monopolization of the market. Any company can be managed well or badly regardless of its ownership type. On the other hand, the foreign investors could contribute to: ● redistribution of the market, increased competition, even greater demonopolization, weakening of the "dictatorship" of individual companies. ● receiving currency income and, as a result, strengthening the exchange rate of the Ukrainian hryvnia. ● increase in the number of relatively stable companies: stability will be due to foreign capital, which is not tied to hryvnia and to the economic situation in Ukraine. Thus, investments in privatized enterprises can provide significant support to the country's economic growth. However, this can only be done under condition of a sound public policy, which will be aimed at protecting the national interests, and not only the individual interests of investors. Otherwise, privatization will bring nothing useful to Ukraine - no money to the budget, no investments in production, no skillful management for enterprises, no implementation of recommendations of international donors and organizations.    

ICPS Press
02.07.2018
Economic Analysis

Reliability and Indicators of the Ukrainian Banking System: Growth Driver or Burden?

The banking system is a source of economic growth in the developed countries, but in Ukraine not-efficient and badly managed banks became a burden for Ukrainian taxpayers – or even a tool for stealing the funds. The recent news on increasing number of non-performing loans and related NBU reports have been a new serious alert that urgent actions to fix the situation are on the agenda again. Current actions of Ukrainian authorities have not been effective so far, therefore new efficient strategy of how to develop  the banking sector is urgently needed. According to the quarterly "Survey on lending conditions", that was conducted by the National Bank of Ukraine on the results of the 1st quarter of 2018, the increase of banks' activity in approving the applications for loans to enterprises and for consumer loans was noted. At the same time, 76% of banks expect an increase in the loan portfolio of businesses throughout the year, and 69% of banks forecast an increase in loans to individuals. However, it should be noted that the volume of non-performing loans in Ukrainian banks remains unchanged and sometimes it even shows a tendency to increase, despite the NBU's requirements to solve the problem. Accordingly, even after the "purification" of the banking system in 2014-2016, the risk of non-repayment of loans has not decreased in any way. Moreover, 31 out of 82 functioning banks violate the norms set by the National Bank of Ukraine (data on compliance of banks with the economic norms of the NBU) that only complicates the situation and may lead to further actualization of the problem of non-performing loans, together with a growing distrust in banks. At the same time, instead of effectively addressing the issue, the government continues to writing off the non-performing bank loans. In particular, only "PrivatBank" in 2017 wrote off ₴ 5.863 billion of unpaid loans issued prior to the nationalization of the bank that became known from its financial statements. What do we have today? Traditionally, the leaders in terms of the amount of non-performing loans are Ukrainian state banks. Moreover, the ratio of "non-working" to "working" loans is also an issue. It turns out that while the standard is not more than 30%, in Ukraine, every second loan is not returned - in average, this ratio is equal to 56%. The total volume of such "assets" reaches ₴ 630 billion. At the same time, according to the deputy chairman of the National Bank of Ukraine Kateryna Rozhkova, almost 70% of "bad" debts are concentrated by 20% of borrowers. Banks, in turn, cover non-performing loans with an increase of interest rate on issued loans, which reduces their attractiveness and shallows the prospects for economic growth of the country.   Name of the bank Banking group (by origin of banks' capital) The percentage of non-performing loans Non-performing loans, thousand UAH 1 PJSC "BTA Bank" Bank of foreign bank groups 98,63% 753983 2 PJSC "VTB BANK" Bank of foreign bank groups (Russia) 94,60% 20108232 3 JSC "BM BANK" Bank of foreign bank groups (Russia) 94,36% 2095905 4 PJSC "JSCB Trust-Capital" The bank with private capital 88,90% 125562 5 PJSC "PRIVATBANK" Bank with a state share 86,69% 235555104 6 PJSC "UKRSOTSBANK" Bank of foreign bank groups 84,54% 36516685 7 PJSC "BANK FAMILNIY" The bank with private capital 80,89% 55850 8 PJSC "Prominvestbank" Bank of foreign bank groups (Russia) 76,65% 35445306 9 "CLEARING HOUSE" The bank with private capital 72,76% 803570 10 PJSC "CREDIT EUROPE BANK" Bank of foreign bank groups 68,50% 611500 11 JSC "Ukreximbank" Bank with a state share 64,92% 83072616 12 JSC "OSCHADBANK" Bank with a state share 64,38% 80235272 13 PJSC "BANK CREDIT DNIPRO" The bank with private capital 62,46% 4091593 14 PJSC "VS Bank" The bank with private capital (Russia) 58,40% 1179665 15 PJSC "SBERBANK" Bank of foreign bank groups (Russia) 56,65% 32835471 16 JSC "City Bank" The bank with private capital 54,53% 746337 17 PJSC "UNEKS BANK" Kyiv The bank with private capital 53,65% 276818 18 Polycombank The bank with private capital 47,80% 169758 19 PJSC "UNIVERSAL BANK" The bank with private capital 47,25% 2257838 20 PJSC "BANK FORWARD" Bank of foreign bank groups 46,70% 813759 Source: calculations according to the NBU data The NBU's actions to keep inflation under control is important  in this situation. As a result of NBU actions the discount rate has recently reached 17% and, according to the latest decision, remained unchanged, while affecting the interest rate on the issued loans. In turn, high interest rates frighten the business. Taking that into account, banks are lending money to questionable projects, which allegedly guarantee higher returns. Nevertheless, there is a hope that the increase of inflation processes will be stopped, resulting in the decrease of the discount rate over the next three years and, accordingly, in the decrease of interest rates on issued loans.   Data Forecast 2014 2015 2016 2017 2018 2019 2020 Interest rate for loans in national currency, at the end of the year, % per annum 16,6 20,4 15,2 17,5 17,0 15,0 14,0 Source: "Economic Analysis and Current Trends: Forecast for 2018-2020", ICPS, 2018     The problem of unprofitability of some banks also remains important. According to the results of the 1st quarter of 2018, the banking system of Ukraine in general reached the profitable level (₴ 8.672 billion), however 14 out of 82 working banks still remained unprofitable. Profitable banks, top 3 Loss-making banks, top 3 Profit, UAH billions Loss, billions UAH "PrivatBank" 3,654 "Prominvestbank" 0,294 "Raiffeisen Bank Aval" 1,381 "Ukrsotsbank" 0,290 "OTP Bank" 0,612 "Credit Dnipro" 0,117 Source: according to the NBU data In this regard, further competition for the profit and market share will push the banks to risk activities and will worsen their loan portfolio. In addition, there is a share of consumer lending in the portfolio of many banks. Under conditions of insufficient growth of the Ukrainian economy and high level of inflation, the prospects of returning such loans are worsening. On the other hand, such loans are the easiest way for the banks to earn money and therefore, in the absence of the required demand from the business side, the share of consumer loans is steadily increasing, although it is not yet significant. In general, according to the monitoring conducted by the International Center for Policy Studies together with the Independent Association of Ukrainian Banks, the most widespread and accessible Ukrainian banks are not ranked first in the financial health rating. This fact only emphasizes the systematic problems of Ukrainian banks.   Top 10 banks for compliance with standards   Top 10 banks for the ability to generate profits   Top 10 banks for the overall indicator of financial health 1 Ukr. Bank for Reconstr. and Development 1 PJSC "Idea Bank" 1 PJSC "Idea Bank" 2 PJSC "ALPARI BANK" 2 PJSC "A-BANK" 2 PJSC "A-BANK" 3 PJSC "AP BANK" 3 PJSC "SITIBANK" 3 PJSC "SITIBANK" 4 PJSC "CREDIT EUROPE BANK" 4 PJSC "MIB" 4 PJSC "CREDIT AGRICOLE BANK" 5 PJSC "SEB CORPORATE BANK" 5 PJSC "ALFA-BANK" 5 PJSC "ALFA-BANK" 6 PJSC "BANK 3/4" 6 JSC "TASKOMBANK" 6 JSC "TASKOMBANK" 7 PJSC CB "Center" 7 PJSC "CREDIT AGRICOLE BANK" 7 JSC "Raiffeisen Bank Aval" 8 PJSC "BANK" PORTAL" 8 JSC "OTP BANK" 8 PJSC "BANK AVANGARD" 9 PJSC "BANK FAMILNIY" 9 JSC "Raiffeisen Bank Aval" 9 JSC "UkrSibbank" 10 JSC "ALTBANK" 10 PJSC "KREDOBANK" 10 PJSC "BANK ALLIANCE"   Source: "The Rating of Financial Health of Ukrainian Banks", ICPS and NABU, 2018 What to do? It is clear that problem loans are the consequence of the careless and sometimes "purposeful" policy of the banks. The recent creation of a "Credit register" (where the debtors that owe the bank more than ₴ 372 300 will be listed) will simplify the client verification process for the bank. However, it will not solve the problem with the existing non-performing loans. The issue can not be also solved by the adopted law (in the first reading) "On Amendments to Certain Legislative Acts of Ukraine Regarding Restoration of Lending", since this document is more focused on simplifying the process of collecting the debts, rather than overcoming the root causes of the appearance of the "problem" loans. Therefore, as long as the banking market is not sufficiently transparent and open, the NBU's monitoring systems will be bypassed by financially unhealthy banks, that conduct risky operations, and businesses, that create "fake" companies or deliberately declare themselves bankrupt. Moreover, the share of such "bankrupts", according to the message of the chairman of the Committee on financial policy Mykhailo Dovbenko, has reached 80% of the total number of legal entities-borrowers. Accordingly, today, mainly the problem loans are the funds that companies have fraudulently taken out abroad through the banking system or consider not necessary to return. Taking into account the above-mentioned aspects and the insufficient financial health of the key Ukrainian banks, it is necessary: - to conduct in-depth monitoring and audit of not only the allocated funds, but also the borrowed funds; - to adopt the experience of sustainable foreign banks in risk management and loan portfolio management; - to invest in training of staff for proper assessing the solvency of bank clients; - to implement the corporate social responsibility practices; - to increase the market share of foreign banks in order to ensure the healthy competition; - to avoid the emergence of informational "fakes" that are created due to the "war" between debtors and creditors; - to implement legislative improvements that will improve the business climate in Ukraine; - to support the NBU's independence from political decisions and fraudulent actions of the market participants. Unless the banks will qualitatively invest in government securities instead of the business projects, while not being the "blood system" of the real sector of economy, and unless the banks will be used for money laundering and withdrawal, while undermining the confidence, the population will have nothing else but to keep its money in a "glass jar", thus deepening the "financial starvation" of the banking system and its burden of non-performing loans, as a result, slowing down the economic development of Ukraine. And the only way, in the absence of qualitative Ukrainian management, will be selling the banks with a portfolio of bad loans, while on the one hand, attracting investments, and on the other hand, losing the remedies to somehow positively affect the banking market and its development strategy in the long run.

ICPS Press
29.05.2018
Foreign Policy

How deep is transatlantic split?

The unity of the West has always been a kind of an axiom for Ukrainian foreign policy. The West is associated with democracy, prosperity, stability and, among other things, unity, based on common values, history and strategic interests. Such a West requires Ukraine as a guide, a field of gravity and a counterbalance to Russian influence. Integration or even cooperation with such a West today - when non-alignment and multipolarity are discredited, and Russia has become a systemic threat - looks like a foreign policy paradigm without serious competitors. It is within its framework that the talks and declarations of accession to NATO and the EU, which largely replaced the complex foreign policy planning, fall into place. Under such conditions, the least that Ukrainians would like is a violation of the unity of the West. It generates a number of unpleasant questions, from the capabilities of NATO to maintenance of an anti-Russian sanctions regime. In the long run, the probability of facing one of the largest difficulties which is the choice between those who we consider allies is increasing. If the strategic interests of the United States and the European Union are dispersed, then, of course, not only Ukraine will feel the consequences. A strategic alliance between the two poles of the modern world remains a guarantee of global stability and security, or at least that they have been left behind. In this context, events of recent months gain added value. The sharp difference between the positions of the United States and major European powers over the agreement on Iran's nuclear program, the US's decision to relocate the Embassy to Jerusalem, and the real prospects of a US-EU trade war make us recall the last-year events and declarations. Donald Trump gave a lecture to NATO's European allies on how they should consider security; and Angela Merkel responded by saying that the times when Europe and the United States could rely on each other went by. This march, Donald Trump announced the imposition of a duty on imports of steel and aluminum, postponing the entry into force of this EU decision by June 1. Such a step could be the beginning of a conflict between the two largest economies in the world, trade between which reached a mark of 1.1 trillion dollars. Interdependence among them is even better illustrated by the impressive volumes of total sales of American companies affiliated to Europe and European companies affiliated to those of the US, reaching 5.5 trillion dollars. If the decision on the imposition of American duties will come into force, and Europeans will respond symmetrically - we are talking about the imposition of mirror-image duties on American goods, so far on clothes, orange juice, motorcycles, but the list can be expanded - the effect will be even stronger than the one, which was accompanied by the collapse of the Transatlantic Trade and Investment Partnership project (TTIP). Of course, this effect will be negative for a strategic partnership between the United States and Europe. But will it affect political cooperation? To this end, it is worth adding exceptionally deep differences in the views on the issue of international security. Europeans have responded critically to the transfer of the American embassy to Jerusalem - a step that, in the opinion of many, violates the balance and prospects of the Middle East conflict settlement. The situation with a nuclear deal with Iran deeply criticized by Trump, which has not, however, stroke a chord among European partners, is even more potentially dangerous. As a result, the United States came out of a multilateral agreement, providing Iran with an opportunity to set uneasy conditions for Europeans if they want to keep it in place. In some way what has happened can be seen as a shifting the problem from the US to the EU. This is rather risky not only concerning the Middle East, but also in the non-proliferation regime. Differences in the views and attitudes of Europeans and Americans seem to become commonplace. To what extent can they cross the line? For Ukraine, this issue is of practical importance in view of at least two factors - the effectiveness of NATO and support for the anti-Russian sanctions regime. They are the basis of a non-alternative foreign policy strategy of recent years. The good news is that NATO will remain as effective as it has been, even in the wake of the deteriorating global climate of transatlantic relations. Saving a uniting front of anti-Russian sanctions will be harder. But - and here the news is not so good - a simple strategy "trying to be friends with the West against Russia" will work worse. Despite the deepening of the contradictions in certain spheres, the transatlantic alliance holds together strategic interests. The balance of power in the world is changing rapidly: in the 15-20 years, China and India will play a leading role, and the EU will try to keep its place in the club of great powers. Historical and normative unity makes the United States and Europe almost natural allies, and a long period of peaceful and constructive cooperation gives reason to trust each other. NATO, as an embodiment of this trust, is also beneficial to all, as it creates a sufficient deterrent potential. For Europe, NATO is the best way to strengthen its own security. The US, no matter how much talk about the burden of spending on the common good, also gets from NATO more than it spends on it. Pragmatic interests will ensure the continued functioning of both NATO and other key institutions of the West. Truth be told, this does not mean that Ukraine will easily join them. The future of the anti-Russian sanctions regime looks vaguer. Intensifying disputes between Europe and the United States will lead to a revision of priorities and a temptation to turn positions on sanctions into a subject for trading on other issues. Europe is likely to suffer more from the imposition of trade duties, and the US position on sanctions looks more coherent and consistent. Against the backdrop of worsening relations and economic losses in Europe, demand for rhetoric about weakening or abolishing sanctions imposed on Russia may well increase. The danger of a tariff war between the United States and the EU for Ukraine is precisely the fact that, struggling for the economic interests of Europeans, it will strengthen the positions of those who want to compensate loss by deeper cooperation with Russia. The civilization split in the West or the destruction of its key institutions will not happen: even the Kremlin is unlikely to dream about that. However, concerning temporary exacerbation of contradictions and contradictory positions on important issues for Ukraine it is quite possible. In these circumstances, we will probably need a more subtle approach to the western vector of our foreign policy.

ICPS Press
25.05.2018
Foreign Policy

Nuclear disarmament: Ukrainian-Korean lessons

Ukraine and North Korea which are so different and distant were connected within the context of nuclear non-proliferation. There was a time when Ukraine made a significant contribution to strengthening this regime by nuclear disarmament. On the contrary, North Korea consistently undermines this regime by demonstrating to the whole world by its own example, the opportunities and risks of the acquisition of nuclear weapons. In recent weeks, given the rhetoric of nuclear disarmament on the Korean peninsula following the summit of the leaders of the DPRK and the Republic of Korea, the parallels have become too obsessive; and the question of whose choice will eventually turn out to be the right one is a matter of interest to many. According to the conditions of the Budapest Memorandum of 1994 which has been so often mentioned in the last years, Ukraine has acceded to the Treaty on the Non-Proliferation of Nuclear Weapons as a non-nuclear-weapon state, thus getting rid of the nuclear arsenal that remained on its territory after the collapse of the USSR. Ukraine, Belarus and Kazakhstan were not the pioneers on this complicated and controversial path: several years ago, the South African republic rejected the nuclear weapons. Unlike the post-Soviet republics, South Africa fully controlled its small nuclear arsenal - for this reason it could be considered a model for future nuclear disarmament cases. Current nuclear states are primarily interested in increasing the number of such cases, but the paradox is that they are often seen as a source of threats pushing other states to obtain nuclear weapons. In case of Ukraine this paradox transformed four years ago from an intellectual puzzle to a key issue of foreign policy. The strategic challenges faced by the leadership of the DPRK today differ significantly from those that the leaders of the Ukrainian state tried to resolve a quarter of a century ago. The international environment and the international security situation are fundamentally different. Thus, such cases are more interesting to compare. Could Ukraine get the best, in words of Donald Trump, deal? And will North Korea follow the example South Africa? What are the starting points for a serious talk about nuclear disarmament in the modern world as a whole? In the early 1990's, optimism and faith in the future without conflicts prevailed worldwide. Against this backdrop, nuclear weapons seemed not to be the relic of the past, with which it is impossible to solve the challenges of the future: to accelerate economic development, to change the social model, or to build an effective democracy. Membership in NATO seemed rather reachable, moving towards Europe simple, and the neighborhood with Russia good. Rejecting nuclear weapons was much easier twenty five years ago: the deal seemed to be to exchange of unnecessary military resources for such necessary legitimacy, Western support and money. North Korea makes its decisions in other circumstances. The period of romantic perception of international security has past long ago, and events in Ukraine have considerably deepened the crisis of world order. The demand for hard power has suddenly emerged again, and nuclear weapon is considered by many as a "great counterpart" in the military capabilities of the various potential states. It seems that Ukrainian experience has been useful for many, including the DPRK. Its key lesson is that exchanging nuclear weapons is reasonable only if reliable security assurances are provided. A number of states which were technologically capable of creating nuclear weapons, from Australia to Japan, and from Sweden to South Korea used to go that way. The fact is that for the United States, the non-proliferation of nuclear weapons is a priority of the foreign policy strategy since the 1940s. Sanctions and preventive military strikes appeared to be less effective instruments than the proliferation of security assurances: and over the past 70 years, US security commitments have been expanded exponentially, in both multilateral formats, such as NATO or ANZUS, and in bilateral agreements concluded with Japan or South Korea. Nearly always the motive behind such commitments is the desire of the United States to prevent their allies from gaining nuclear capability. Ukraine in its time did not learn this lesson. Nuclear weapons should not be exchanged for money or for any other non-security related resources. Indeed, Ukraine did not control nuclear weapons on its own territory and it weakened its position in negotiations with Washington. However, it didn’t mean that Ukraine could not demand more. In 1994, this could be a security treaty with the United States, which including an obligation to protect Ukraine, which is not provided in the Budapest memorandum. Today, in a crisis of international security and lack of trust, such an agreement is not enough.

ICPS Press
04.05.2018
Internal Policy

ICPS will start accepting applications for participation in the project "Integration of Internally Displaced Persons into local communities. Workshop program in Germany"

The International Center for Policy Studies, in cooperation with Cultural Vistas (Germany) and with the support of the German Ministry of Foreign Affairs, is launching a project to support Ukrainian activists and experts involved in the integration of internally displaced persons (IDPs) in local communities in Ukraine. To this end, 13 participants from different regions of Ukraine selected on a competitive basis will attend a six-day training course in Berlin where they will have the opportunity to improve skills of promoting the integration of IDP into local communities. Since 2015, Germany has been actively testing various initiatives to improve the integration of migrants, many of which are based on cooperation with local or regional organizations and the commitment of individuals to help migrants to adapt to new environments. At the same time, Germany faced a wave of negative perception, which caused many misunderstandings and cultural stereotypes. To minimize the effects of such trends, civil society representatives have been actively involved in Germany to support "newcomers to society", regardless of their native region of origin, political preferences, religion, etc. In order to exchange experience on this issue, ICPS initiates a training program for Ukrainian colleagues. Participants will be able to get acquainted with the experience of German colleagues in overcoming the perceptions, stereotypes, misunderstandings, and to develop their own decisions to improve the integration of IDP taking into account the Ukrainian context. In addition, the curriculum provides for the study of the German reunification model of 1990-1991 and the implementation of decisions aimed at bringing together two socio-political cultures (East and West Germany) of that time. Duration of studies in Germany: September 24-29, 2018 Upon returning to their communities in Ukraine, participants will have to organize events involving the IDP and representatives of host communities to discuss their experience and find ways to overcome the challenges faced by IDP in Ukraine. Language of training: English, German. Synchronous translation into Ukrainian is provided. Transportation costs as well as living expenses are covered by program sponsors. In order to participate in the project you need: - to be involved in the process of integration of the IDP in the local community; participate in projects aimed at improving the integration of the IDP; to be actively interested in and explore this issue; seek to improve the situation with the interaction of the IDP and host communities in Ukraine; - to speak English at the basic speaking level; - have a valid biometric passport. Otherwise - the participant will have to undergo the procedure for obtaining a German visa on his or her own; - send a resume and a motivational letter justifying your interest in the program and describing the relevant experience by e-mail office@icps.com.ua. Limitations on participation in the program: civil servants and representatives of local authorities cannot be participants of the project. Deadline for submitting applications is June 4, 2018 If you have any questions, do not hesitate to contact us: +38 044 253 52 29; +38 068 194 94 04.

ICPS Press
02.05.2018