Oleksiy Lyubchenko: “Our task is to reduce the current level of “shadow” in the economy from 30% to at least 25%”
Why Ukraine needs an investment map, how to stop being a raw material appendage to Europe and create 350 thousand jobs during a year
The government has many plans: to reduce the “shadow” in the economy, to attract large-scale investments in the regions, to create more than a million jobs in three years’ time, to launch a large-scale energy efficiency program, and to finally implement deregulation. ZN.UA talked to the First Deputy Prime Minister of Ukraine Oleksiy Lyubchenko about how realistic it is to implement all of this. However, we started with scandalous accusations against Mr. Lyubchenko regarding the protection racket and the “VAT scrolling”. Still, it is important for us to understand not only where we are going, but also who our guides are.
— Mr. Lyubchenko, there have been a series of publications in which you are directly accused of protecting/covering up the “scrolls”, causing the state losses of 40 billion hryvnias. I think it would be right to start by asking you about these accusations. Are you ready to comment?
— Of course, I’m ready. When we talked about “scrolls” last year, deputies voted for the sequestration of the state budget, when this year the topic of “scrolls” appeared again, deputies vote for an increase in revenues due to plans being overfulfilled for budget revenues. Therefore, I want to ask a counter question: do you, as a reasonable person, believe in these stories?
— No. According to the type, argumentation and intensity of placement (of the publications), these are clearly materials made by someone’s order. That our sources in advertising agencies confirm. But we want to know the customer who ordered them. Is it Shmyhal or Chernyshov?
— Non-sense! I tell you this precisely because I know the Prime Minister and the Minister for Communities and Territories Development from a very positive side. I tend to think of others… Look, have we seen in two years at least one organizer of the conversion center who was brought to court? Who was just brought to court? We are not talking now about a court decision being made. Did not see anybody. Where are the organizers of convention centers? It’s a big question for the law enforcement system. And I think that deflecting the fault “from a sick mind to a healthy one” is exactly the story that could prolong the existence of these “organized communities. “
— Meaning, do you think that the beneficiaries of conversion schemes are the ones to blame?
— One hundred percent.
— Are you threatening them in your current position?
— Of course. The Ministry of Economy formulates the policy of state ownership and that of procurement and also approves the financial plans of the largest companies. There are more than 3.5 thousand state-owned companies in Ukraine, almost 300 of which are under the direct management of the Ministry of Economy. At the same time, in the public sector most of the funds, more than 700 billion hryvnias, go through the Prozorro procurement system. I think many people are interested in repairing something, buying something at state-owned enterprises. And here the role of financial plans and procurement procedures is important. When we simply made an electronic matrix of economic activity and began to ask simple human questions to the heads of state-owned companies: “Why do you exist? Why are you placed there? Please show us the financial result. Where is the official salary, what is its growth?”. We often did not receive answers to those questions. Then the replacement of the heads began. Where do conversion centers work? They are happy to serve the public sector and are especially interested in lack of control. Therefore, for our part, we bring order and establish control. And those in turn defend themselves as best as they can. Especially since the environment is favorable. You have not heard any names of the organizers of the conversion centers who were brought to court. Does anyone understand what it is to «scroll» 30 billion? It is necessary first to create schemes for 200 billion, then find beneficiaries, then sell it all. And this is all a real economy. Only an organized criminal group with the ultimate beneficiaries is able to control all this. And with large beneficiaries who developed in an oligarchic environment. There are the results of the work of the TCI (Temporary Commission of Inquiry), which has established where these above mentioned 30 or 40 billion went. And TCI established it under the control of the Security Service, with my personal participation, after all, the Tax Service at one time «opened its doors» to TCI and gave it direct access to all databases. In principle, the state should not support the shadow economy by its actions.
— What’s the state of this money now?
— In the first nine months of this year, the tax service added 57 billion hryvnias. Most of them are exactly the same money from the TCI report. In total, TCI identified 2.9 thousand entities in the amount of possible losses of 31 billion hryvnias. Currently, inspections are being carried out, which, due to restrictions, began only in February of this year. And not everything is so simple, because the tax service confirmed the reality of transactions by more than 5 billion hryvnias.
— Will the interdepartmental working group on de-shadowing that you have set up focus on such cases?
— Our task is to reduce the current level of «shadow» in the economy from 30% to at least 25%. Of course, primarily due to excisable goods: alcohol, cigarettes and fuel. But there are also surprises. For example, we have the highest level of shadowing in the financial sector. We have not paid attention to this before. But statistics are a stubborn thing. Therefore, our permanent partners now are the National Commission on Securities and Stock Market and the National Bank of Ukraine. We try to understand the reasons and eliminate them institutionally, review the legislation, and the regulatory framework.
— What specific changes are we talking about?
— Just do not be surprised, it is primarily about deregulation. We are currently considering the case of deregulation with the State Regulatory Service. And in the near future we will publicly announce the results. It is necessary to begin with it. However, not only bans but also an insufficient level of business culture drives normal businesses into becoming shadow businesses. That is, you need a stick — the effective work of law enforcement agencies, and a carrot — comfortable conditions for doing business.
— And if we talk about fraud in the financial sector, what exactly is it about?
— I would start not with machinations, but with not always correct implementation of constructive ideas, and I will remind one story — so-called clearing of banks. For objective reasons, most of them were insolvent. However, they did not take into account the fact that at the same time these banks had “living” cases. Both assets and liabilities of live businesses, which together were collected and transferred to the Deposit Guarantee Fund.
— Now they are selling these goods at a 99% discount.
— They are, but I know many examples of businesses that serviced their loans on a specific day — both body and interest. If the approach of the state was a little different then, these loans could be transferred to state-owned banks, the potential of which has not yet been revealed. But we went the other way and destroyed a lot of real business along with the banks. In reality, after voucher privatization in Ukraine, this was probably the most powerful redistribution of property. Whether they did it consciously or unconsciously, I don’t know. But then we created huge conditions for the growth of the shadow economy. This is one story. The second story is the stock market. Where is it? We do not have any active stock instruments. We have not heard the word «factoring» at all. We now have a wonderful project, already enshrined in a memorandum that USAID helped draft. And we are trying to transform this sector, translate adequate practices into Ukrainian realities and somehow launch the capital market. The liquid stock market contributes to the de-shadowing of the economy. To do this, in addition to building trading and post-trading infrastructure, it is necessary to attract assets of interest to the public. In this context, we consider the IPO (placement on the stock exchange) of state-owned companies.
— So, what exactly will your interagency group do? Do you have any performance indicators, for example, other than «shadow» economy reductions? After all, it is the Ministry of Economy that assesses the level of «shadow» economy in the country. And it is very easy for you to fulfill this standard, just without considering something.
— Hardly. Because Ukraine is being closely watched by partners, they will notice. But it didn’t even occur to me to count something wrong, to be honest.
We have, in fact, two performance indicators — GDP and employment. The rest revolves around them. Of course, all our goals are based on the National Economic Strategy 2030. Every policy we formulate has priority performance indicators.
PERFORMANCE INDICATORS for us — to make employment centers into modern recruitment companies.
PERFORMANCE INDICATORS for us — to ensure the protection of intellectual property rights at the level necessary to unleash our rich potential of human capital, to build an innovative economy.
An important Performance indicator is institutional change. The regulatory framework should be streamlined, and evaluations of the work of the law enforcement system, in particular the Bureau of Economic Security, should be introduced.
We also plan to bring order to the public sector, with an assessment of losses. We plan to put it all together with the State Treasury. Now our task is to build a hierarchy of setting goals for state-owned companies and control their implementation, so that there is no collective irresponsibility, ineffective supervisory boards, and corrupt managers.
— Once you mentioned the Bureau of Economic Security. When do you think the Bureau will start working?
— The bureau was supposed to start working on September 24, as far as I remember.
— What is the delay?
— The Government has issued all regulations to establish this Bureau. There are provisions, there is a staffing schedule. Now everything depends on the speed of the head of the bureau Vadym Melnyk, how operational he will be, in particular, how quickly recruitment will be completed. I would very much like them to start working by the beginning of the new year.
— Is there a risk that staff, such as former Security Service employees, will flow into this office, and we will create not a qualitatively new structure, but another “gravy train”?
— I am definitely against unconstructive generalizations. Relying on the existing tax police is the wrong approach. No wonder they decided to eliminate them. But there are also really smart and professional people. The Security Service of Ukraine also has personnel who are ready to perform the tasks assigned to the bureau, i.e., operational and analytical direction.
— I don’t think there will be any problems with the operational part, but will they have enough potential for the analytical component?
— Depends on how to use the resource that is available in Ukraine, and how to develop it. Problems with operational capacity can also be certainly created. I think that’s enough. Of course, there are few good analysts, but this is definitely not a purely Ukrainian problem. During the state visit of the President of Ukraine Volodymyr Zelensky to the United States, I had a meeting with the head of their Internal Revenue Service (IRS) Charles Rettig, and it raised the same issue of strengthening the analytical component. Unfortunately, very few people think analytically. But also, they need to be made into constructive groups.
— Preferably with a specialization.
— Not just preferably, but 100% with specialization. In addition, it is necessary to develop standards, risk profiles, so as not to question the work of these people. Because analytics that are controlled by someone or methodologically incorrect analytics are also terrible weapons. After all, if fabricated analytics are used to develop and make government decisions, it will be a disaster.
— When you talked about the work of the interagency group, you talked about changes, including legislation. But in reality, a lot will depend not on your initiatives, but on what these initiatives will become after consideration in parliament. Your interaction with legislators is very important here. Is there mutual understanding?
— The Ministry of Economy is an unconditional leader in terms of the bill work of the parliament. This is the substantive work of the government and ministries with parliamentary committees. The practice of the so-called troika, consisting of representatives of the ministry, committee and the president’s office, is successful. There is a plan of bill work. There is a clear schedule, deadlines, everything is calculated on time. Of course, we understand that making some decisions will not be easy, some can get «spammed out» with thousands of amendments. But we are preparing for this, we take everything into account. I can call our work with the Verkhovna Rada very constructive.
— Let us recall the resource bill №5600, which was to become anti-Akhmetov bill. As a result, the “anti-Akhmetov bill” was quite rightly taken in quotation marks. Don’t you think that this is exactly “the sand in the wheels” of de-shadowing, which is your priority?
— But this bill is there. He passed all the hearings, he was taken to the second reading, which will take place soon.
— It turns out that you are satisfied that the state, on the one hand, is trying to drive business out of the “shadow”, on the other — worsens the conditions of doing business, encouraging its departure into the “shadow”?
— It seems that after the parliamentary amendments everything has already been corrected.
— You think so?
— Yes. This is the quintessence of the Ukrainian social contract. Therefore, they have already cleaned up everything that was possible.
— Once we are talking about a social contract. There is not a «shadow», but monopolies, corruption in state-owned enterprises, embezzlement of state money. The Ministry of Economy is largely responsible here, you control state-owned enterprises, you can influence this part of the social contract. Where is this influence?
— So far, we have only two, but very capacious such cases — the State Reserve and the JSC «State Food and Grain Corporation of Ukraine». As soon as you look there, you understand the depth of the problems. Today we have started to put in order the State Food and Grain Corporation of Ukraine. This is a challenge. As we remember, the company has been using a $ 1.5 billion loan from the Chinese “Eximbank” since 2012. It would be nothing if it were not under the guarantees of the state of Ukraine. As a result, Ukraine already potentially owes $ 900 million in credit. It is good that the Chinese side wants to continue working and does not insist on returning. And the Ukrainian side fulfills all its obligations by paying the debt twice a year. But questions remain. We deal with them, from negotiations with the Chinese Embassy to the company’s audit.
— Now this is interesting. Are there results?
— An audit is being conducted. An unscheduled tax audit was initiated. A working group has been set up, which I lead. We began to streamline corporate governance. Finally, the creation of a supervisory board, to ensure transparency. Of course, there are those who do not like it all, perhaps they are among the «customers», which we talked about at the beginning. But we do not look back, we are in the time, this issue cannot be delayed.
The second case — State Reserve…
— The previous head Yaroslav Pohoriliy returned there.
— Mr. Pohoriliy was reinstated by a court decision, but he has no desire to work for the State Reserve.
— I remember the story of how he was fired after audits in the State Reserve. There is a lot of very interesting information revealed as a result. Will you use this data?
— I have heard positive reviews about Yaroslav, and we now use the array of information that already exists. According to the State Reserve system, we have more than 35 criminal cases. In addition to this bunch of criminal cases, almost all elevators of the state reserve system are in the executive proceedings of the Ministry of Justice.
— That is, state elevators were arrested?
— Arrested for debts. And we also deal with this. We started by developing a plan to reform the State Reserve system itself. We thought about it carefully if we needed tea and stew.
— We have a war, perhaps it’s needed to supply the army?
—To do this, there is the Ministry of Defense with warehouses, which is able to buy it. And in case of war there are mobilization reserves that can be booked at the enterprises directly. If we talk about the same stew, then in Ukraine there are its producers, but we buy this stew from intermediaries. Therefore, we need to reconsider the approaches as a whole, the system itself.
In general, the state reserve system can be divided into three parts: grain and food, oil hub and refrigerators. We must first see what we need from all this. Maybe it’s easier for us to book some non-declining remnants of the same fuel from companies that have it…
— From Kolomoisky??
— You can also book fuel at «Ukrtatnafta», no problem. It is important that without distortion and at the same price for storage. Grain can be taken from the State Enterprise “AGRARIAN FUND”, which normally operates under the management of the Ministry of Economy. It works, loads, dries grain, rotates. The rest? In this particular case it is necessary to develop a new nomenclature of the State Reserve in general. Strictly speaking, we have already done so.
— And what about reserves? The previous scandal with the State Reserve, among other things, revealed that the reserves are almost empty. Then called the amount of about 60 billion hryvnia, necessary to fill it according to existing standards.
— Definitely not 60 billion. 20 would be enough. And again, everything fits into one story. If we talk about the evolution of the State Reserve, we need to understand: should we provide something in reserve for a month, or for two months, or for three? Or maybe a week will be enough for us to mobilize resources in case of an emergency? Therefore, there are completely different figures, but they are not small either.
— How is the filling now?
— There is a concept of non-decreasing balance. The state reserve is provided for almost the entire range of nomenclature provided for in the resolutions of the Cabinet of Ministers.
— When to expect a new head of the State Reserve?
— The competition is currently underway, and I would very much like professional people to respond. This competition has already been canceled twice or thrice, because the candidates who applied are clearly not meeting the requirements or challenges.
— In terms of integrity or any managerial qualities?
— Starting with managerial qualities. Although integrity is no less a priority.
— Yes, we somehow have problems with this priority. How do you assess customs reform, for example?
— They are doing a reform?
— It’s being declared. Integrity was taken out in the headlines, and as a result then we saw completely different people that enter the system.
— At the last meeting of the National Security and Defense Council, the issue of customs was examined again.
— It will be examined indefinitely; it seems to me. And in this case, I would like to ask how much, in your opinion, the government lacks the tools to fight corruption within itself? Because the National Security and Defense Council will not be enough for everyone. This is not the best way to solve this problem.
— Customs service is not a dogma. This is the last outpost on the way to some state mechanisms that exist primarily within the country. For example, the free trade zone with Turkey, which is now almost on the way out. We remember that for all 30 years we have had the idea that Turkish goods are flowing and the country’s light industry will be destroyed. And I am firmly convinced that this story was lobbied by famous people from the sanctions list. Because there was a free trade zone for them for a long time, they imported fabrics here and everything in circumvention of the rules and without looking back. Therefore, when there is a free trade zone, there will no longer be a need to catch smugglers. There will be no shadow business, it will be unprofitable.
— Let’s hope so. Let’s move on to some global issues, because we have not solved the visionary problems in the country. Any of our economic forecasts begins with an analysis of the international commodity market and, as a rule, ends with it. And Ukraine is such a small, open and export-oriented country. Will your idea of growth points help us get out of this impasse?
— Thank God, we have a political framework — a plan for the transformation of Ukraine. Under this political framework, the National Strategy “Ukraine-2030” is written with clear parameters of where we are going and what we want. For the first time, we have two approved medium-term documents: a three-year socio-economic development forecast and a three-year budget declaration. With clear parameters, red lines, which the state will not go beyond. Especially in terms of redistribution of money through GDP. What did we do next?
We have carried out a brainstorm on the choice of the restructuring strategy needed to implement the Ukraine-2030 strategy and the growth points you mentioned. Growth points are those clusters, specific areas of production that give the greatest multiplier effect on the economy. Because speed and fast results are important to us. Concrete implementation of these plans is already underway. And the Ministry of Economy should become a kind of general manager of these changes in close contact with the Verkhovna Rada Committee on Economic Development.
What is this implementation? We have created an investment map of Ukraine. This is a matrix that is almost ready, at the final stage of its filling with content and specificity. The matrix takes into account territorial communities, regions, each of which knows how many jobs it needs to create. 350,000 jobs a year is not an abstraction, but a concrete task. Regions in terms of territorial communities divide these tasks among themselves, filling the matrix with investment projects that they have or may have. We see the amount of investment in each region, we see the responsible ministries. There we have «Big Construction» and other projects, in particular related to nuclear energy. We implement all this in one investment map.
It is important to see the fulfillment of the goal. We do not see this at the moment. But it’s not critical. With the degree of decentralization that has taken place in Ukraine, the regions have a lot of opportunities. Now they have to create investment conditions within the framework set by parliament and government. Industrial parks, network connections, roads. These are also not abstract, but specific tasks. “Investment nannies”, no matter what anyone says, are also an interesting story in terms of investor support. They react to it. Therefore, we support this initiative and bring it to a logical conclusion.
— — There are a lot of questions. For example, about growth points. This is not a novelty for Ukraine, and our “growth point” is a phrase with a negative connotation. Growth points are always some non-competitive conditions that allow certain people, certain companies to earn, due to some benefits. But they did not benefit the Ukrainian economy in particular. What will change this time?
— I have no negative attitude towards growth points.
— This is because you are not an economic journalist.
— Maybe. There are a few points. We are not talking about any exceptions. This is not the point. These are the five clusters with the largest multiplier effect. These are recommendations primarily for governors, who transfer all of this to local communities, drawing their attention to incentive priorities. Through loans under the program «5-7-9», through the creation of industrial parks and more. But the community chooses the path itself, it is better to see on the spot what to place production, what infrastructure to develop, what human resources it has. Our task is to organize and control these processes.
— Control is very important, because at one time we discussed with the head of the World Bank the reasons for the failure of their projects in Ukraine, and when they reached the community level, the reason was one — total corruption. Do you take this risk into account?
— We take that into account. To do that, the entire control matrix is created.
— How? With reports and inspections?
— Yes. Now the stage of working with the regions is over. The commission worked with specialists from the ministries. Each ministry has a deputy responsible for investment. A responsible deputy governor has been appointed in each region. Recently they all came with their work, presented and defended their projects. Now we are collecting it and forming areas of responsibility and their vertical from the ministries to the appropriate places “on the ground”.
— Conventionally speaking, communities should justify to you why they need, for example, a milk plant rather than a textile factory. Do I understand correctly?
— No, it is their right to choose a textile factory or a dairy. But they have to convince us that this project can be implemented and it is profitable.
— Just then it turns out that the owner of the textile factory is the governor’s godfather, and the owner of the milk plant is not.
— This is their money, the money of investors. They need to convince us that this is a real investment that will create the right amount of jobs.
— How realistic is your 350,000 indicator per year? Where to get these people considering current labor migration? In fact, we don’t even know exactly whether these people are still in Ukraine.
— People are there, we understand that.
— Are you hoping that the lockdown will keep them here?
— Here we will carry out the population census, you will see. Today, by the way, Deputy Prime Minister Mykhailo Fedorov uses very correct approaches. He just started modeling a new census. In a new way, not with billions of hryvnia costs, as planned. Here we will see how many people we have. We want to honestly answer the question, what is our investment potential; do we have at all those business engines, business ideas, people who are able to generate economic growth. Because there is a lot of money in the world, but to attract it we need to make every effort to create a fertile ground.
— To attract them, probably, the “investment nanny” is not enough. Still, something is wrong with our business climate at the moment, as state-owned banks deliberately issue problematic loans to dubious borrowers secured by real estate seized by raiders. What to do with it?
— Let’s be silent for a split second and think about the law enforcement system, the judiciary, guarantees and protection of property rights. Here I agree with you. But I alone cannot embrace every problem there is. To do this, we have government officials in the regions — heads of regional administrations. On the territory of each region there are heads of territorial communities, who were elected by the people, which means they are trusted. Our task is to combine them, show them, teach them, give them tools, bring them together with investors, find opportunities for consulting and auditing decisions.
And control in this case is publicity, and we want to make this investment map public. Everything will be in the palm of your hand. And when everything is transparent, everyone works happier, works faster, works more honestly. I am all for transparency.
— Unfortunately, we have «Big Construction», we have a transparent Prozorro system, in which we see purchases of «Big Construction», we see a cartel, we see how the price of cartel bidding is reduced by one and a half percent, not by 15-20%. We have been talking about this cartel for several years, but nothing has changed. Although it seems that the state should be interested in saving their own money, our money. And everything is obvious and transparent, but this transparency does not help.
— If the bidding is through Prozorro, then I think everything is within the law. We made Prozorro even more transparent and saw the imported component for the first time. It is not necessary to indicate it yet, but 90% of all bidders already indicate the country of origin. And this is very important from the point of view of the Ukrainian component in all projects. As for the «Big Construction» is applicable. It is clear that control is needed. To do this, there is a system of regulatory authorities, ranging from the financial inspection and ending with law enforcement. I think that they record obvious violations. It’s just that the project is so large, the sums are large, so the possible «losses» are considerable.
— Speaking of possible losses, I can’t help but ask about the situation with the gas price and its impact on both GDP growth and inflation.
— At an average annual price of imported gas of about $ 900, we will begin to lose GDP. We have already modeled this.
Before that, everything will be normal for us, in terms of GDP, but not in terms of individual industries. It is clear that in 2016, in my opinion, the concept of development of the oil and gas industry of Ukraine was approved, and in 2020 we had to produce more than 20 billion cubic meters. Naturally, we did not reach this figure even in 2021 and now we know well the price of unfinished Ukrainian gas. And the problem with the price of gas for industry remains. And producer prices in certain industries may be forced to rise, and this growth will largely fall on the shoulders of consumers.
— How much will this affect inflation, which is already far from the National Bank of Ukraine’s 5% target?
— The “inflation canopy” should be expected next year. This year we undergo without surprises. Frankly, such a price for gas is our chance to change once and for all. Now it’s time to talk about energy efficiency, insulation, and savings. The whole of Europe, the whole world is saving, and we are just planning. I know that a large-scale energy efficiency program will be approved, which includes renovations of residential buildings and communications, which will allow us to save up to 20-30% of energy in the future. Today, roughly speaking, a billion cubic meters of gas is a billion dollars. Saved 10% of consumption — it’s two billion dollars in savings. Is it worth spending on energy efficiency in this case? I think it’s worth it.
— What are the specific amounts of funding in question?
— The President announced the figure of 300 billion hryvnias for three years. In a year, Ukraine is able to modernize itself by 100 billion, not more.
— Will it be money from the central budget or local budgets?
— It will be different money. Both local and state budgets will be used, and great hope is placed on the banking system. We are even sure that the banking system will respond if the state guarantees interest compensation for such loans. “Naftogaz of Ukraine” can even act as a co-investor here, because it is in its direct interest.
In fact, any crisis is an opportunity. It is at critical moments that there is a chance to rebuild the system globally and find new ways of development.