Tigipko - A man for all seasons

By bne IntelliNews November 3, 2010

Ben Aris in Kyiv -

It was as if the crisis had never happened. More than 200 investors made their way to Kyiv in September to attend BG Capital's inaugural investment conference, "Catch the B.U.G", which refers to Belarus, Ukraine and Georgia.

At the conference, Ukrainian Deputy Prime Minster Sergei Tigipko laid out a vision of reform that if he pulls it off, could transform his country and finally break its link in most investors' minds with Russia.

Tigipko is an impressive act. He was a founder of Privatbank, now one of the major business groups in the country, before leaving to head the National Bank of Ukraine, the central bank. More recently, he went into politics, first backing President Viktor Yanukovych's Party of Regions, before running on his own ticket in February's presidential election, coming in third. Yanukovych invited Tigipko into his government to lead the economic reform charge; tellingly, when the state organised a road show to market its $2bn Eurobond to foreign investors, Yanukovych sent Tigipko, not the finance minister, to woo investors.

"The new administration has been in the driving seat for six months now and we faced a difficult task when we took over," Tigipko told delegates at the conference. "The previous administration was off balance, there was a rolling political crisis as the president and prime minister were permanently squabbling. At the same time, the state was running a deficit of 5% of GDP and public debt had risen from 12% to 36% of GDP."

Tigipko says the government has an aggressive three-point plan to retake control of the economy that includes: stabilising public finances, working on "aggressively" repairing the damage to the banking sector; and making a "breakthrough" for foreign investors.

Three-point plan

The first job will be to reduce the deficit and the government has set an aggressive goal of 4.9% for the end of this year, well below the International Monetary Fund's (IMF) recommendation of 6.0%. The main focus will be cutting state spending by 10.0% a year for the next years. And the state hopes to get the deficit down to 3.5% by the end of next year, says Tigipko.

Raising domestic gas prices by 50% in the summer was a big step toward achieving this goal and this reform is already in the bag. As the state and industry was effectively subsidising the population's fuel bill - the county pays about $250 per 1,000 cubic meters of Russian gas, but the people were only paying about $100 - the state was bleeding money to prop up the national gas company Naftogaz. The subsidy was costing the budget about 3% of GDP a year, but Tigipko says that Naftogaz could actually go into profit next year.

Another budgetary black hole is the pension fund where there will be a UAH26bn (€2.4bn) gap between what the fund takes in and what it pays out, up from UAH17bn in 2007. This is expected to rise to UAH37bn next year if nothing is done to curb the rise. "The first steps towards pension fund reform are being drawn up now and we hope they will be in place by the end of this year," says Tigipko. "Certainly, we hope to stop the rising deficit in pension funds and hope that we can transition to a fully funded system by the end of next year."

A second plank of the reforms is to stabilise the financial sector. Tigipko admits that the domestic capital market is in an "embryonic" state and promised reforms to develop the breadth and depth of the market, where the main effort will be on the banking sector. The most important things have already been done. The state has nationalised five banks in all and only one, Nadra Bank, remains in need of recapitalisation, a decision on which will be made soon, says Tigipko.

In the meantime, there are draft laws in the Rada to increase the independence of the NBU as well as enhance the transparency of banks, their owners and the groups of the owners. Another draft law will improve the protection of creditors. "Many of the problems we have today stem from creditor rights not being sufficiently protected," says Tigipko.

Georgia on its mind

The third plank - and Tigipko rattled off his speech bullet point-style complete with a), b), c) sub-points in each category, speaking entirely without notes - is to make life easier for investors.

Tigipko shared the stage with Giorgi Baramidze, deputy PM of Georgia, which the World Bank ranks as the 11th easiest place in the world to do business. Tigipko recently went to Georgia to look at what they have done (a lot) and came back with two new Georgian advisors to help reform the Ukrainian bureaucracy.

The main thrust is to emulate Georgia's slash-and-burn approach to state regulation. Currently, there are more than 70 government oversight or regulatory offices, but Tigipko promised to cut this to 40 (Georgia now has only 20).

A new draft tax code will be the first real test of the administration's ability to make business-friendly change. bne's correspondents in Kyiv report that while the government has been consulting with local business, they have not listened to the advice and many small businesses say the new code would hurt their businesses, if not kill them off entirely. The more extreme end of the criticism claims that the oligarchs, who dominate the Rada, are pushing for a harsh tax regime, but wrangling exemptions for themselves, so they can use the tax code to grab more businesses. It is hard to tell to what extent the complaints are just the normal gripes over tax hikes or constitute real fears.

However, Tigipko promises that the reforms would soon lead to tax cuts. "By 2014, VAT will be reduced from 20% [now] to 17%, and by expanding the tax base we can afford to reduce the tax rates," says Tigipko, adding that key industries like aviation, shipbuilding, hotels and education will receive tax breaks.

"We wasted the public trust invested in us during the Orange Revolution. Georgia didn't. We will borrow from Georgia in things like the reduction of the number of licenses and we will create a regime that is even more liberal than that in Georgia. We are not afraid of unpopular reforms, but I know investors look first at deeds and not words but I am sure you will see our words translate into action," said Tigipko.

Now that would be nice.

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