How this war impacts the economy of Ukraine and the world. A talk with Pavlo Sheremeta

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Despite the fall in tax revenues, Ukraine has to give freedom to businesses, so that new jobs are created and people who fled abroad have an impetus to return.
photo by Tvoe Misto/ Ivan Stanislavskyi

photo by Tvoe Misto/ Ivan Stanislavskyi

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Today in our studio, the former Minister of Economic Development and Trade of Ukraine in 2014, Pavlo Sheremeta, comments on the current and potential issues Ukrainian economy is to face. He is the founder of Kyiv-Mohyla Business School and the School of Public Management at Ukrainian Catholic University, former president of Kyiv school of economics, who owns a strategy consulting organization «Proryv«. 

- How does this war impact Ukraine and the world today? What consequences do you see as an economist in different areas of our social life?

- The consequences are heavy and harsh; it is natural for a brutal war. Ukraine has been the subject of a brutal attack. It is a barbarian and middle age type of attack. Sometimes I switch on Apple Music 1 and listen to the conversations, and these people are happy. I also used to dream, create, and enjoy life, but it was all gone. I am happy for these people, but we are in the war, Ukrainians dying in large numbers, and we don’t even know the real casualties. When the president says it’s 100 people a day, and one of his advisors says about 200, you can multiply it by 30 days and 5 months of the war. It is heavy. That is the human cost, and Russia methodically ruins our infrastructure too. It may be much worse in the winter because, in addition, municipal utilities will be targeted and destroyed.

One of the worst-case scenarios is the destruction of electric and heat utilities in a city like Kyiv, it will be a disaster. I don’t even know what is a disaster – this or people’s deaths. 4 million people in the wintertime in Ukraine will have no electricity and heat or water – this is a catastrophe, but at least, they are alive at the moment. We need to think about further actions. Do we need to create heat centers for people to at least come and have soup once a day? Are we talking about buses and trains to evacuate these people… and where? Who will be ready to host them? And what about other cities, not only Kyiv? My friends ask me whether I have relatives in the villages because that is what can save.

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Now we have from 5 to 6 million those who left the country, out of whom maybe 2 million return but 4 million will not. Let’s think of it in 5 or 10 years – we will have only pensioners because they are not leaving. The normal ratio is 3 to 2 and 5 to 1 of young people supporting the pensioners. Ukraine before the war had 1 to 1 and after the war, it will be the opposite, which means we will have very hard times. And yet – we will have to survive. When Ukrainians wish one another victory, I admire them and sometimes repeated it too, but honestly, first we need to survive as human beings.

- What do we need to survive as a state?

- Support the Armed Forces of Ukraine in the way you can – serving there or just supporting in other ways, including paying taxes, all the volunteer work, and all the aid we get from abroad. If the army loses – then there is no state anymore. We have to look at the government budget situation, which is gloomy. We already have a 5 billion dollars deficit, and it will be growing. We need from 2 to 4 billion dollars to buy gas for the winter.

The government needs to think about a more effective way to provide gas to the public. For now, there is the idea to subside gas to everyone. I don’t need it because I can pay for gas, and I guess I am not the only one. We need to figure out who needs subsidies and help them financially, but also we need to keep the market price. I hate this market price now – it is too high for everyone and it has also global consequences. We cannot argue with the market price – you pay or don’t pay. You can have wood, and coal, you could do whatever, but we need to figure out who needs help. We need to support these poor people with taxes, and government supports them with subsidies. Still, these people are not everyone, because companies will become bankrupt.

- We need quite a lot of people, who are able to pay this high price. What conditions should the government create to have enough people who have no subsidies? Back to the question that we have about 5 million of our people abroad.

- That is a solution. If the survival is to be in another country and in warm – then thanks to other countries that accepted and hosted our people. By the way, Europe decided that they will lower the temperature below the standard ones, it will be cooler for everyone, but not below zero. If one of the solutions for Ukrainians would temporarily leave for winter, it is ok. The fact that we lost so many people who went abroad doesn’t help indeed, but the main question now is how to survive and the solution to go abroad is a solution. The solution is also to go to villages. There are stoves, wood and coal, while urban apartments are not equipped with all that.

Spring will come, and there will be an issue to bring people back from abroad, especially youth. And my answer is to give economic freedom to Ukrainians to do business. If you do business and do it successfully you create jobs. It is a practice for all the time mankind live and use money and pay salaries. That’s how it works: you establish enterprises, create products, compete, sometimes lose, create another one, win. You get revenue, invite other people, and pay them. You have the headache of how to pay the salaries, especially in the situation like this, when the whole market is going down. And then, we have the problem with the tax and security authorities, but we are not enemies, we are saving the nation, entrepreneurs are saving it. Now the country needs to create better conditions for business to flourish in the country.

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- What do you mean by these conditions? Defiscalisation? What else?

- There are two rankings for freedom. One is the Heritage Foundation, another is the Atlantic Council. They give specific criteria for what needs to be done. We are talking about monetary freedom as well. When we have inflation of 20%, as we have now, our savings are devaluing. We don’t have much choice. National Bank has to print Ukrainian currency for us to pay money to military people and buy equipment. Another alternative is to get more aid into the country. We need to work more precisely with the budget both with the income and outcome, and have a smarter tariff policy to optimize spending.

The country needs investment and financial freedom; we have poor grades there. Our people left the country and now they start to appreciate everything good about Ukraine. They still say «we are not interested, we don’t know who is the tax authority in that country, we don’t see it». Well, you don’t need to see it. You don’t need to see it in Ukraine too. 99% of taxes in Ukraine are paid automatically by businesses, it is only in 2% of cases when tax inspection comes and «squeezes» a business. It is a fact everywhere, but other countries understand this. In Ukraine, we have a heritage of the Soviet system where entrepreneurs are considered speculators, and it is still in the heads of so many people and this is not the way to develop the national economy. The help that we need is more examples of the role of the private business.

For example, the Marshall plan [an American initiative enacted in 1948 to provide foreign aid to Western Europe – ed.]. So many Ukrainians think that this is the government’s help that saved Europe. This plan is very important, but it was 2.6% of GDP on average of each country, meaning 97.4% was something else. We take a public part which, let’s say 35 to 40%, the rest 60 to 65% which is the private economy. So private economy rebuilt Western Europe after the war and it was not George Marshall.

- So, it was not the US?

- The United States paid the same amount of money from 1945 to 1948 and from 1948 to 1952, obviously from 1945 to 1948 it was not very successful, a lot of money was used ineffectively. Suddenly, 1948 to 1852 were highly successful. The idea of the Marshall plan was to strengthen free institutions.

The same thing about Singapore, they see one person, who created a Singapore miracle and this is Lee Kuan Yew. With all true respect for him, I don’t think that he knew how to cook chicken rice because he didn’t need it, someone did it for him. And this person created Singapore, as well as millions of other similar citizens. We need to enlighten, protect and nourish these people.

We need to work together to ensure comfortable conditions for businesses, and not to create standards of what these businesses need to be. With freer conditions, businesses can scale up, become successful, and start to export. That is what means development for me.

- Before Russian aggression, we had around 20% of the world’s export of grain. We were strong in export metallurgy, and these are markets that we are losing. How will it impact our economy? Will it be enough to create conditions only for a free economy?

- It is a free economy. The ability to export our grain from Odesa into the world is about economic freedom too, but here we talk about external freedom. Our place in the world with it is secure for around 5 years, Ukraine is very important to replace it so quickly. I worry about the different industries, metallurgy and agriculture are in trouble, but IT is prospering. Last year, for the first 5 months according to NY Times numbers, IT brought 2.5 billion dollars, this year IT brought 3.1 billion dollars to Ukrainian GDP. For IT business leaders, it is a problem with crossing the border [Now in Ukraine, there is a ban for men to cross the border except for some categories – ed]. So many things are still decided face-to-face. There are reasons for the meetings in person, especially after the COVID pandemic. People miss personal meetings. If Ukrainians are not there, some businesses from other countries are. That is where we lose, and we lose now. I understand the Ministry of Defense put this ban, but my suggestion is to get some exemptions that allow people from different industries to go and meet partners and potential clients abroad. You need to figure out the tastes of different countries, and you cannot do this via Zoom.

- Where do you see the blue ocean for Ukraine during wartime? [Pavlo Sheremeta was a part of the team of the «Blue Ocean Strategy Institute» of Malaysia, which advised the Malaysian government on economic reforms – ed].

- It is so difficult to talk about the blue ocean in the red, bloody ocean of the war. [Blue ocean is the simultaneous pursuit of differentiation and low cost to open up a new market space and create new demand – ed]. Again, it is a matter of survival. I think your editorial office is an example of a blue ocean, you work with different audiences and formats, it’s almost as if you are working in different industries. You are trying to combine a specific unique mixture, this is your innovation. You keep even some monopoly, but it’s not a bad government-granted monopoly.

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The essence of the blue ocean is value innovation. You deliver specific value for free, but still find money to pay your colleagues. You need to work with the assumption that you will have half of your prewar lines with half of the money, and it seems a valid assumption even for energy giants in Ukraine. And entrepreneurs survive through the creative part. They are looking for alternative sources of energy, green energy, and Ukrainian gas. The essence is how to deliver the best value to the client. Ukraine has a good condition at the moment, and those who survive this survive everything.

- Many people in the world feel fatigued about Ukraine. Why should the world care about Ukraine? How the war impacts the world?

- Ukrainian neighbors in the west understand us, except for one country, others have a very keen understanding of what going on because they can be the next. They want to have Ukraine between them and Russia. We are protecting our neighbors in the west from the hit and if we lose, the next hit will be on them.

The world at large is more difficult. Why does Singapore support Ukraine so much? They are in the other part of the world from Ukraine and can be neutral as many countries in Africa or play games like India. However, Singapore takes a strong position that invasion is bad because if Russia wins, that means the end of the rule-based order in the world. Even China is concerned about it. China is prospering for the last 30 years, and hundreds of millions of people moved from poor to the middle class. It was possible because the world has rules of the game, but now Russia brutally breaks them. For big players, it is not such a big concern, but it is – even for the US it is a concern, for China too. You cannot predict what will happen next, and you simply don’t know what the game is.

- Does it mean that helping Ukraine and being really united all over the civilized world today and being proactive in supporting Ukraine is much more important for future European development than these prices that are going high today? I just heard in Germany that people discussed that bread price is a few cents up. They feel that there is almost tragedy. Does it mean to Europe itself that if the rules are allowed to be broken, it will be a much bigger economic disaster in the future?

- Yes. If Ukraine ceases to exist on the map, and it happened to the next line, and they cease to exist, that would be remembered. We in Ukraine need to be humble and empathic. We need to feel the pain. It is a pain for Germans, for example, who like saving up so much. We can’t say them to forget their sense. What makes Germany such economically powerful is that they are saving cents. We need to appreciate every cent we get because those cents are meaningful for them. Because of that, it takes so much time for them to decide about the aid – they are counting cents. That is their nature. We need to understand and appreciate it. We need to remember that these are, for example, the parents who can buy a toy for the kid, but they are allocating this money to help Ukraine. This cost is still lower than the full-fledged war which is coming if Ukraine falls.

By Kateryna Bortniak

Photo by Tvoe Misto/ Ivan Stanislavskyi

Follow us on Facebook and Instagram. Lviv Now is an English-language website for Lviv, Ukraine’s «tech-friendly cultural hub.» It is produced by Tvoe Misto («Your City») media-hub, which also hosts regular problem-solving public forums to benefit the city and its people.

 



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