Mykola Azarov: Ukraine's Economic Policy

Mykola Azarov spoke at the Carnegie Endowment for International Peace on the government's achievements in economic policy and its strategies for reform in a session moderated by Anders Aslund. Azarov emphasized that the current government is Ukraine's first coalition government, representing nine factions in parliament. "[We] want to deepen market oriented policies," Azarov said, and have worked diligently to balance the budget, raise the population's income levels, and reform Ukraine's tax structure. The government's efforts have met with periodic resistance in Ukraine's parliament, he added. "For us, it is important to work constructively with parliament," Azarov said. "We need its support."

Ukraine can celebrate two major achievements in economic policy this year, including the passage of a balanced budget and, more recently, the FATF decision to lift its sanctions for laxness on money laundering. "The removal of the FATF sanctions," Azarov said, "was not an easy task, because it was connected with the crisis in parliament." To lift the sanctions, the government adopted strict legislation requiring banks to submit information on all financial transactions. Passing this legislation became possible only when the opposition, which had blocked the measures, Azarov said, because it wanted the situation for the government to be "as bad as possible," agreed to cooperate with government forces in parliament. These promising developments have stimulated first quarter economic growth, resulting in 7 per cent GDP growth and 11 per cent industrial growth over the past three months.

Extensive cooperation between the government and parliament also made possible the passage of a balanced budget for 2003 that, after several revisions and readings, allocates 52 billion hryvnia in expenditure and 50 billion in income. The 2 billion hryvnia difference will be made up by privatization revenues.

Azarov introduced a wide-ranging plan to overhaul Ukraine's tax structure, the salient features of which will be lowering tax rates and broadening the tax base. The parliament has already passed legislation decreasing profit taxes on companies from 30 percent to 25 percent, and lowering the personal income tax to 13 percent. A draft law has gone through two readings. The only exception will be dividends and bank deposits, which will be taxed at 5 percent. Azarov hoped to have a law on VAT passed in May, lowering it from 20 percent to 15 percent.

Azarov also proposed the introduction of tax amnesty for those Ukrainian citizens who have taken capital abroad, with a law decriminalizing the non-payment of taxes to take effect in 2004. "The draft of the law does not demand the return of all capital," Azarov said, but instead requires that citizens declare the volume of their capital abroad. The tax amnesty program will be administered by the state Tax Service with oversight responsibilities falling to the Ministry of Finance. "We are not looking at this with rose colored glasses, [thinking] that after the amnesty we're going to get billions of dollars back," Azarov said, "but we have to give our citizens and our companies a chance to declare fully what they have."

Azarov pledged that the government would be able to pass the tax package during the coming election year. "Tax reforms benefit all people, and the opposition should support us," he said, noting that parliament adopted the profit tax law with 300 votes.

Azarov addressed two pressing issues in Ukrainian trade policy: WTO entry and the decision in February 2003 to create a common economic space with Belarus, Kazakhstan, and Russia.

In recent months, Ukraine has made substantial progress towards WTO accession. Ukraine cleared a significant hurdle with the conclusion of a bilateral protocol on WTO accession with the European Union, and has made substantial progress in its negotiations with the United States, currently working towards an agreement on poultry meat imports. Ukraine hopes to sign a bilateral accord with the United States in the coming months, and has set 2004 as its target for WTO accession.

"The [unified economic space]," concluded jointly by Russia, Ukraine, Belarus and Kazakhstan on February 23, 2003, "is a wonderful opportunity for us to discuss and resolve problems in our trade relations," Azarov said. While Ukraine and Russia already have an agreement on a free trade area, the agreement excludes goods critical to Ukraine's economic development, including sugar, alcohol, candy, pipes, and others. Russia remains Ukraine's largest trading partner, but trade has dropped by nearly half in the last few years. "We have a constant growth, but we need as few obstacles as possible to sell our products," Azarov said. "For that reason, we positively evaluate the position taken by the Russian government to do away with trade barriers that exist between our two countries." As an example of such barriers, Azarov cited the current disparity between Russian domestic gas prices and the prices offered to Ukrainian enterprises. Ukraine has opened its market to Russian fertilizers despite the fact that Russian chemical plants obtain gas at the price of $20 per 1000 cubic meters, while Ukrainian firms are charged $80 or $90 per 1000 cubic meter. "Normal competition in fertilizers," Azarov concluded, is impossible "when basic prices are more than four times as expensive."

The idea of adopting a single currency among members of the free economic space was not raised in bilateral meetings, Azarov said, nor will it be.

Azarov also responded to a question about the unresolved investment disputes between American investors and the Ukrainian government with representatives at the State and Treasury Departments. He proposed the creation of a Ukrainian government committee to investigate the claims, along with a bilateral commission for each case, supported by the United States, that would hear the arguments of each side in the dispute. "If the American investor is right," Azarov said, "the Ukrainian government will always be on the side of the American investor. But you will admit that the American investor is not always right. We will listen to the situation objectively."

The question was posed about Ukraine's recent steps to return the grain market to government control and the arrest of Leonid Kozachenko, former Deputy Minister and leading agricultural reformer. Azarov assured the audience that the government opposes non-market methods of regulating the grain market. "All companies that work in the grain market can count on working in a free fashion," Azarov said. "The government does not plan to prohibit or regulate anything."

Kozachenko's arrest, Azarov clarified, was ordered by the Ukrainian court, not by the government, which does not have the power to make arrests. "As a Prime Minister, just like you, I found out about it in the papers," Azarov said, "neither you nor I have read the criminal proceedings…we do not know why the court arrested him." He expressed frustration that when Ukraine, so often chastised for failing to fight corruption, actually attempts to enforce its laws, it is still criticized. "Our position is simple," Azarov concluded. "If someone is not guilty, and this is proven in the court, then those who did this must be held responsible. I would not like to take upon myself the task of the court to decide culpability."

Summary prepared by Anne O'Donnell, Junior Fellow in the Russian and Eurasian Program.