Minister Valery Khoroshkovsky on systemic errors

FOREIGN VECTOR

“You were one of the few ministers who raised — professionally and argumentatively — very serious objections to the single economic space (SES) agreement initialed in Astana. Has your position changed now?”

“It hasn’t. Many politicians and ministers say now that Tuzla is a stumbling block to the SES project...”

“So does the President.”

“In reality, the President only said in an interview with Izvestiya that the very problem of Tuzla makes us review our attitudes again and move faster toward the European Union. Now comes a different interpretation or, to be more exact, different pronouncements. They sound as follows: as soon as we solve the Tuzla problem — the main reason why we are not moving toward the SES — everything will be OK. I beg to disagree. Tuzla is a separate problem. It is, of course, the background, but the SES document contains enough reasons why it cannot be implemented (even without taking into account our amendment). Tuzla is not a problem for the SES. The SES itself is a problem.”

“In other words, all that Ukraine can benefit from is the free trade area?”

“Undoubtedly so.”

“What are the prospects of this agreement? Can we say that the parliament will ratify it, and, if so, when?”

“I won’t hazard guesses. The ministry was instructed to form a group to be sent to Moscow for further talks. I do not know if they will take place. In my opinion that I have aired in the Cabinet of Ministers, it is now a wrong time to continue the talks — for a number of reasons, including the existing background. If we want to be consistent, we must adhere to the declared position.”

“Is there an economic component in the Tuzla crisis? Word has it that channel toll is one of the factors that caused it... Do you think this is true?”

“I do not even want to discuss this. If Panama collects about a billion dollars a year for passage through the Panama Canal, does it mean that somebody has the right to encroach on this canal? Tuzla island is our territory. Naturally, we observe all international agreements on the passage of ships. The existing fees are quite within the commonly accepted limits. That’s that. What is clear is that Ukraine should not cede even an inch of its sovereignty. There are certain lines that cannot be overstepped. From this perspective, I note with deep satisfaction that the Tuzla problem helped consolidate all the sound- minded forces in this country. This is very good.”

“Ukraine was recently visited by the European Union’s Foreign Policy Commissioner Christopher Patten. He said in no uncertain terms: Ukraine will receive no compensations for the EU enlargement (as is known, this organization’s new members have repealed free trade treaties with Ukraine). What is the Economy Ministry’s reaction to this? What tactic do you think Ukraine should employ in the economic relations with the EU?”

“The European Union lives and develops within the framework of a certain strategy and preset patterns. So Mr. Patten’s statement caused no ripples in me, for I was well aware that all would go this way. As we have not joined the WTO, any compensations to a WTO non-member country are, accordingly, out of the question. We are pinning hopes on the Partnership and Cooperation Agreement with the EU, but this brings little comfort. The problem is in fact difficult to solve in the current system of Ukraine- European Union relations. So we undoubtedly try to be as much pragmatic as possible, i.e., we are finding out what goods and markets we lose after the candidate countries repeal agreements. We also calculate what the EU enlargement will cost us economically and try to find ways and means to make some varieties of products available for supply. But this is not the main point. I recently discussed this matter with Baltic ambassadors. And they asked me: what do you want us to do aside from making concessions, what actions do you expect us to make, what further steps do you foresee? In my opinion, all we must do now is turn the candidate countries into our lobbyists in the European Union. There is no other option. We can be making all kinds of deals with them now, but it is up to Brussels to decide. The period of bilateral trade relations with these countries is over or is going to be, giving way to the period of Ukraine-EU relations. Accordingly, all we can do at negotiations with the candidate countries is show what each of them is going to lose and talk them into becoming our lobbyists in Brussels. This is quite an attainable and long-term task.”

“YOU MUST FEAR THE ABSENCE OF COMPETITION, NOT THE COMPETITION ITSELF”

“Once a Cabinet member, you said WTO membership had been thwarted. Did you manage to reverse the situation?”

“Very much has changed in a year. Firstly, I think you will agree that the WTO subject has received a new impetus at all levels — among politicians and business people alike. Secondly, membership dates have become more realistic. Thirdly, we have made a number of breakthroughs, signed a protocol with the European Union.”

“What dates and what breakthroughs?”

“We may be admitted in 2004. The breakthrough is that we have begun reporting. The No. 1 breakthrough are the results of working groups’ sessions, the No. 2 one is signing a protocol with the European Union, one of the most important strategic partners. Already discernible are outlines of the protocol with the United States, which clearly sets out the provisions under which we will sign it. A wide-scale debate is going on in Ukraine between businesses and the parliament about joining the WTO.”

“At present, WTO membership is being opposed by the Association of Ukrainian Banks. The banks are afraid of competition...”

“You must fear the absence of competition, not the competition itself. Competition in the banking field is already so bitter that one must really be afraid of banks that have enough resources to swallow other banks, as was the case in Poland and other countries. I want to say that the greatest problem that I see is complete ignorance — in all walks of life — of what the WTO is. I always try to clarify this by means of some macroeconomic analyses: for example, 95% of the countries in the world compete within the WTO framework, with a mere 5% not being members. Let us not forget that we are still to be fully engaged in worldwide and European processes — otherwise, we would be stumbling over the WTO problem over and over again.”

“Is the simultaneous admission of Ukraine and Russia to the WTO still on the agenda?”

“It has never been on the agenda.”

“But it was suggested during the SES talks that the four countries try to synchronize their entry into the WTO...”

“Did you ever try to synchronize the teaching of a first-grader and a tenth-grader? Try please...”

“And who is the ‘tenth-grader’?”

“We are — compared to, say, Belarus, not Russia.”

“And compared to Russia?”

“They and we take diametrically opposed attitudes toward WTO membership... The way we are going is one of bilateral agreements and, at the same time, being part of a working group that draws up multilateral deals. Conversely, Russia in fact refuses to sign bilateral protocols, preferring to discuss general conditions. We have been applying this WTO membership strategy for a long time and are now trying to develop and finish this process. The Russian strategy is more perilous and, hence, unacceptable for us. In the absence of duly signed bilateral protocols, one can always stumble upon a changed position: there seem to be some agreements but no obligations at all. It is difficult to revise an attitude to Russia even after making an unsigned deal with it because the latter has quite a powerful political clout and resources. Ukraine does not have this kind of safeguards. I therefore think that entering into bilateral or sectoral agreements that automatically cancel some previous accords and moving step-by-step is a right, very sensible, and eventually successful way.”

IMPERIAL CRAVINGS ARE IRREVERSIBLE

“Did Ukraine make any oral or written commitments to be met if it joins the WTO before Russia does?”

“There were some proposals — I even put them forward when I met Russian Economy Minister Alfred Gref. Should either Russia or Ukraine be the first to join, neither of them must meet any additional requirements. On the contrary, we agreed that the country which joins the WTO first will help the other one to do the same. But there are no written obligations except for an article in the SES Agreement, where this is stipulated.”

“Does this mean that Ukraine will have no levers to normalize its economic relations with Russia? We often hear that these relations are nothing but trade wars. Take, for instance, sugar, caramel, metal, pipes...”

“It seems to me our policies badly need pragmatism. Is this unnatural? Our economies were built, let us say, with the same hands, brains, and means of production. Now these have been taken apart. So Ukraine and Russia have built additional facilities to close the production cycle in order to cut taxes, transportation costs, export/import duties, etc. They have in fact built two rivaling economies. I stress they are based on rivalry, not partnership.”

“Much less on ‘brotherhood,’ as politicians often say...”

“This also results from a lack of pragmatism. No one says that Russia is not a partner. On the contrary, I assert it is our closest economic partner. I could present a lot of arguments to prove this. But let us see the reverse side of the medal. We are no Siamese twins, each country has its own national interests. Besides, business is rational in general: its main goal is to gain as much profit as possible. Why should we think that this is wrong? This raises the problem of excessive or, say, active competition. Firstly, one should remember that both Ukraine and Russia have antidumping laws which I, as a minister, cannot and have no right to break. If the producer has filed a suit in compliance with the standing procedure and proved the damage caused, we are bound by law to take measures. The same applies to Russia. So this should not be considered as trade wars. No politics is involved here, at least, on the part of Ukraine.”

“Since we have touched on the Russia issue, it would be logical to ask you to comment on the positions of Chubais or Kokh who see their country as a liberal empire and explain this idea, Ukrainewise, as follows: buying up all things possible, controlling financial flows and power-supply lines, taking a more active part in Ukrainian privatization. Unfortunately, this triggered no reaction from the Our Ukraine bloc, Ukraine’s political counterpart of Russian SPS. How would you assess this ‘new’ Russian liberalism? What is it fraught with, as far as Ukraine is concerned?”

”Our two countries have absolutely different goals and objectives on both the political and the economic levels. Fortunately, we have built really different counties in the last ten years.”

“Fortunately for whom?”

“In principle, fortunately for the post-Soviet space. For, no doubt, it would be rather easy to create sort of a pseudo-empire if Russia and Ukraine maintained a firm political partnership. But we are now different countries with different economies. I have in mind trends, quality, etc., not quantity. Why have we always talked about entering WTO and the free trade zone? Because precisely this can demonstrate economic competitiveness. Russia usually pursues a protectionist policy because it has the basis for doing so. They are developing one way, we another. Do we have the right to do so? We do. So let us see what Russia is doing to establish its so-called liberal empire. Is it just an election-campaign slogan or, more seriously, an attempt to dominate in a neighboring country’s economy? In the latter case, this poses a threat to our national security.”

“What about the current bilateral economic relations with the US? There are two chief problems here: repealing the Jackson-Vanik amendment and US recognition of Ukraine as a market economy. The impression is that things go at a snail’s pace. Is the point only in compact discs and poultry?”

“I would say that in many, but not all, respects, it is.”

“In what else?”

“Take the European countries. Do you understand why they are called market economies? Now ask if we have done our best to say for sure that ours is a market economy country. To what extent does our state intervene in private business? For us, this is a rhetorical question. But, for example, the United States will find it difficult to assess the interference of the Ukrainian state in the economy because official statistics and real life say different things. Meanwhile, CDs are a very concrete example. It is clear in this sense that indicators and desired actions is not the same thing. But why do we pursue such a policy when we are able to change something only under pressure? So this should be and is a program of our own, not a program for us.”

“But what are the real prospects for solving the two US problems?”

“I think they can be solved.”

“Are there any concrete steps or dates?”

“We have already done very much: for example, in the case of CDs, we’ve passed several laws on intellectual property. I am aware of more and more new requirements, but I must note, unfortunately, that they are usually applicable only to the so-called white market. This means that when an attempt is made to curb the black market, this raises a real obstacle to white business, while the black market remains. This is why we will still have to resort to policing the black market for a long time to come. This will be duly appreciated because we are being told at the ongoing talks: even if you pass a correct law, we will be monitoring its application for some time.”

“Is it likely that the EU and US will grant us the status of a market economy country before the presidential elections in Ukraine?”

“It is possible that we will solve this problem with the European Union even sooner. As to the US, I would say it is not impossible. So much depends on us here.”

“Is stability the component of a market environment?”

“Of course, it is.”

“A low inflation rate was predicted early in the year. Today, the population is full of inflationary expectations.”

“I would not say this. If you take the targets set early in the year, we are expecting to exceed them by two percent. In my view, this is quite a normal thing against the backdrop of our rate of economic development. While we planned inflation at 4.8-5.2% (December to December) or, taking into account of basic figures, at about 5%, we will show 6.2-7% at most by the year’s end. This means that, in terms of inflation, nothing did or will happen.”

“But what about the food crisis, the bread price hike?”

“Bread accounts for 6% of the food basket. Therefore, even a 30% rise in its price will give no dangerous impetus to inflation, the more so that some other foodstuffs fall in price at this season. So, to answer your question to the end, I see no problem with inflation. Nor do I see any inflationary expectations.”

WHO GAINS?

“You have said so much today about forming a market environment and changing the principles of economic management. But do you think Ukrainian big business is prepared for this in terms of its structure and behavioral patterns? Is it mature enough to dance to the new political tune’?”

“There are business, and there are businesses. Business remains, of course, immature where monopolistic practices or something like them prevail. Here I would like to touch upon the shadow economy. When you work in a legal economy, your business can go up in price many times over after the environment has been formed. What is needed in this case is a mental revolution, when you must stop earning from operational activity and putting the resulting profit into a black box, thus further developing. You must earn off the stock value, i.e., earn incomparably larger money. Few businessmen understand that in this case (with a well-developed stock market) the cost of even a small business will rise many times over. Moreover, this will make the whole country richer. But we still do not have this kind of mentality. I had to participate in the crisis management of enterprises, and as soon as you began to make some urgent decisions, all would run up and say to you: it’s no use changing anything, all is OK with us. But then you look at the market and suddenly realize that everything is the other way around. The same sometimes occurs on a nationwide scale — and you see that everything around you is false, and only you are right when you suggest changing all this. Many think that what they are doing is really a successful activity because it enriches them personally. Then why is this country so poor? While Germany, comparable by territory, has a GDP of two trillion dollars, Ukraine has only 40 billion and change. Incidentally, the former has no oil and gas either. Here you begin to understand that maybe the domestic relations that bind you hand and foot, the system of management and decision-making are far from perfect. And, in my view, the government must first of all understand this situation.”

“In other words, the impetus must be given by those in power?”

“Certainly. There must be clear targets and ultimate objective.”

“Should business put forward its demands also?”

“Business is obliged to put them forward. But it often fails to provide a sensible expert opinion, maybe, due to lack of practice or a limited outlook. Not always, but very often. Then I only see its desire to protect its narrow interests...”

“But it is the state that makes these rules. Why consider the environment and rules when it is easier to make a deal with an individual official?”

“This means he forms this kind of environment. This is why it is the government that must carry out its overall mission and assign the country and business an overall task to form the environment. I am sure in this case that the task will be fulfilled.”