The Day’s “scenarios for Ukraine”

The three scenarios of developments in Russia, announced at a special session on the first day of the World Economic Forum in Davos, are in a pessimistic vein. The first, presented by Aleh Tsyvinski, a Professor of Economics at Yale University, is that the rich regions will be getting still richer and the poor ones still poorer, which will widen the social gap and raise the already high degree of protest mood. The second, presented by Russia’s ex-minister of finance Aleksei Kudrin, is about an abrupt fall in oil prices (down to 60 dollars a barrel), which will, in the long run, reduce budget revenues and, hence, the government will stop funding the infrastructure and development. And, finally, the third one, by Sergei Guriev from the Russian School of Economics, is that oil prices will remain high, but the government will not dare carry out institutional reforms – in these conditions, the middle class will want to wield a greater deal of clout in the country’s sociopolitical life. The latter scenario of developments is the least clear. For academics admittedly do not know in what way the middle class will be striving for power.

Those who spelled out the forecasts noted that they had mapped out the scenarios after polling about 350 experts and businesspeople. Yet the Russian officials who were present at the forum do not share the pessimistic verdict. Particularly, the Saving Bank chairman German Gref criticized the researchers for disregarding the ongoing reforms and the changing situation. Commenting on the academics’ scenarios, Russia’s Prime Minister Dmitry Medvedev called them “not too realistic.” He claimed, instead, that another – of course, positive – scenario was in fact being implemented. “Its success depends on all of us: on Russian business, on civil society, on the people of Russia, and on our friends, now sitting in this room, who help us build an effective state and a modern economy.”

Commenting on the Davos forum scenarios for Russia, Razumkov Center expert Valerii Chaly sums it up on his Facebook page: much talk but no concrete ideas. “I have just seen the Davos report ‘Scenarios for the Russian Federation.’ Kudrin, Gref, and Guriev, even Deripaska showed up briefly… Medvedev made a special speech… It is about a dialogue with civil society and about political rivalry. They say the Customs Union is not resurrection of the USSR, and they also talk about partnership with the EU… All this looks like a generally accepted style by form and by content (there are even quotations of Laozi and Churchill), and so much was talked about, but it still remain unclear what is really in store for Russia even in the medium term,” Chaly says.

We have decided to launch a futurology debate club named “Scenarios for Ukraine.” But we chose a different way: instead of polling 350 businesspeople and academics, we turned to the “cream” of analytical talent. Here is what we got as a result. A positive scenario for the economy of Ukraine will be possible if the government: 1) pursues a more liberal economic policy; 2) simplifies taxation or, still better, cancels the tax on entrepreneurial income; 3) causes the National Bank to change its monetary policy or finds a reliable creditor, and 4) finally chooses the vector of movement.

SCENARIO No. 1

Oleksandr Paskhaver, president of the Economic Development Center, is convinced that a positive scenario for Ukraine in the current political and economic climate is the preserve of sci-fi writers. In his view, if the government does not change its approaches to managing the economic system, it will remain good for nothing. “Ukraine is now moving in the direction opposite to the one that leads to a liberal economy. 2012 was a year that showed how sluggish the Ukrainian economy is. It has been undermined. There is no pep to maintain development and respond to the current, rather serious, challenges. If nothing changes, the economy may get bogged down,” the expert points out. He warns that conditions like this usually foment social unrest with very unpredictable and, hence, dangerous consequences. “There can only be an alternative to this negative scenario if the state becomes aware of the anti-liberal deadlock that paralyzes people and the economy,” Paskhaver says. He is convinced that the government should change its face and “begin to take real actions to release the now suppressed energy of businesspeople and all individuals.” “However, this idea seems to be running counter to the personal interests of officials,” the expert says, making an unconsoling conclusion.

SCENARIO No. 2

Oleksandr Kendiukhov, chairman of the All-Ukrainian League of Economists, is also one of those who see no grounds for optimism. Yet he views the problem on a wider scale: the negative will be brought to Ukraine by the wind from the US, the EU, and… China. “2013 will be, on the whole, a negative year for the Ukrainian economy. The US is likely to touch off a new wave of the economic crisis, for their overall foreign debt is reaching a critical limit. If the debt continues to rise, this will open the door to the increased emission and devaluation of the dollar,” the expert says. He also forecasts that the US debt problem may provoke other developments, but they are by no means better. “The US budget may be sequestered within the limits of 100 billion dollars. This will suppress business activity, lead to stagnation, and reduce imports,” Kendiukhov forecasts. The academic says the situation in Europe is no better at all. “Debts are on the rise, the governments of European countries failed to find a viable mechanism to overcome the economic crisis. It is not ruled out that the last year’s experience of the introduction of ration cards in Portugal will be applied in 2013 in Greece and Ireland,” the expert notes. And, finally, a third factor that does not bode well for the Ukrainian economy – it is the situation in China. “The year 2012 saw a downfall of prices on the Chinese real estate market, which triggered new negative tendencies on the construction and metal markets. These events will also continue to develop this year,” Kendiukhov forecasts. The expert concludes that, with this in view, Ukraine’s export potential is unlikely to improve in 2013. Therefore, it would be wrong to expect the trade balance to level off, state budget revenues to rise, and the state to encourage economic growth.

But Kendiukhov notes that, on the other hand, Ukraine can cash in on the problems of the US, the EU, and China, and even hit the jackpot. “The richest people of Europe and the US have seen a steep rise of taxes on their incomes, so they are looking for other places (they are even prepared to change their citizenship) in order to keep their earnings intact. For example, 4,500 French businesspeople have promised to renounce French citizenship if the government imposes a 75-percent tax on incomes. If Ukraine managed to seize this historic opportunity and establish a favorable, liberal, simple, and transparent tax regime on its territory, capitals from all over the world would rush to this country. This would show the world a new economic miracle. This would produce a boom in investments and entrepreneurship,” the expert says convincingly. In his words, Ukraine should set the precedent of building an economy in which business does not in principle pay the tax on entrepreneurial income.

SCENARIO No. 3

Conversely, the former acting Minister of Finance, Ihor Umansky, suggests looking at the future of the Ukrainian economy through the prism of its own debts – it is futile to hope for a positive scenario if you have a hole in the pocket. “Ukraine will not manage to pass the peak year, when the borrowed money is to be refunded, without foreign assistance,” the expert claims. For this reason, Umansky suggests pondering on where the creditor may come from. “The prospects of signing an agreement with the IMF and, what is more, of it being approved by the board of directors look very dim so far. There is an alternative in the shape of the Customs Union and Russia. But nobody on the part of Moscow has yet given hope to Ukraine. So it is not a fact that we will receive a financial resource from there at least to settle the current problems. What is left is the open market, but it will be limited by the size of funding, Umansky reflects. He is convinced that it is futile to count on the domestic market of borrowings, for Ukraine is now short of both a hard-currency and a hryvnia resource. “If the National Bank does not alter its policy, this resource will not emerge either for the budget or for the economy,” the former acting minister of finance says at the end of his gloomy forecast.

(NON-)SCENARIO

At the same time, the ex-minister of economy, Serhii Teriokhin, is convinced that it is an ungrateful thing to make today even a short-term forecast of the development of the Ukrainian economy. “To make forecasts about economic development or stagnation, one should at least know which way Ukraine will be moving – towards the EU or the Customs Union – or whether it will be marking time,” the ex-minister notes.

“There is a science called econometrics. It is sort of a mixture of economics, mathematics, and sociology. So this science says that, to build at least the simplest forecast model, one must at least know a set of variables and at least one constant,” Teriokhin says. “Suppose we will assume as constant the fact that Ukraine will exist as an independent state in the course of the next n-years. But what shall we assume as variables?” he asks. In his words, making forecasts on the basis of the macroeconomic indicators that are part of this year’s budget “isn’t worth the effort.” “Firstly, they are all fictitious, and even the basis on which they were assessed was phony. The proof of this is the last year’s statistical data. Secondly, they are discrete. Figures for a year will not even show a trend,” Teriokhin says.

Summing up his comment to The Day, Teriokhin joked: economists are no longer the right people to turn to about scenarios of the development of the Ukrainian economy. In the current situation, this question should be addressed to psychiatrists or soothsayers.