Week’s balance: Yatsenyuk’s report, U.S. tips, return of inflation

The Ukrainian Cabinet reported on its results over the past year and agreed on the draft budget for 2016, as well as the principles of tax reform; the State Statistics Service said the inflation has returned; U.S. Vice President Joe Biden visited Kyiv, announcing allocation of $190 million for Ukraine and giving the Ukrainian authorities some good advice.

Prime Minister Arseniy Yatsenyuk and other Cabinet members dedicated the past week to reporting on the results of their management of the economy and social sphere over the past year. The ministers drew attention to their modest successes and pointed at the first shoots of economic recovery. Meanwhile, their numerous opponents and, above all, partners in the ruling coalition, drew attention to the Cabinet’s failures and shortcomings.

The outcome of the annual examination was rather contradictory. The government’s opponents, taking advantage of the completion of a year-long immunity of Yatsenyuk’s Cabinet, began collecting signatures among the MPs for the dismissal of the government, while Kyiv was flooded with billboards with an unambiguous warning: "Run, Rabbit, Run!" [hinting at PM Yatsenyuk, as “Rabbit,” or “Krolik,” is one of the official’s derogatory nicknames].

Yatsenyuk did not fulfill this request, and delivered his Friday’s address to the parliament in an offensive manner, telling the MPs and the public of the government’s achievements and plans of the central executive body for 2016. However, his speech ended in an ugly show by a deputy from a pro-presidential faction. The following brawl between lawmakers from the ruling coalition, on the one hand, showed the importance of a stable government in an unstable political environment, and on the other hand showed precariousness of the country’s current executive and legislative branches.

Yatsenyuk’s address to the Rada ended in a brawl / Photo from UNIAN

Friday's address by the prime minister to the MPs has once again drawn attention to the main problem of Ukrainian politics: the inability to unite for the purpose of building an economically powerful country with high living standards for the free citizens. The politicians always find some excuses for their fights and bickering, while failing most of the times to find any arguments for personal responsibility and uniting into one team. They only manage to do it in exceptional cases, as if before the execution.

The words of the leader of the presidential faction, Yuriy Lutsenko, have confirmed this paradox. He said that "the parliamentary arithmetic" allows dismissing Yatsenyuk, though not allowing to appoint a replacement.

"Therefore, such actions (voting for the dismissal of the government) would have been irresponsible. Because the government without a head, the parliament without a coalition, the country without a budget would mean an automatic halt to cooperation with the IMF, while the country would slide  into hyperinflation and anarchy within a month without a nearly $5 billion tranche. This is an unacceptable scenario," Lutsenko has told the reporters.

Thus, the situation with the failed dismissal of the government is developing by a scenario traditional for Ukraine: plenty of screaming and hysterics, with a complete lack of results. Rather, there is one result: strengthening the voters' desire to see some new, sensible and competent people in power, capable of teamwork. Besides, there is a well-grounded disappointment of foreign investors who are frightened by Ukrainian politicians demonstrating chronic inability to see the priorities and focus on work, and not squabbles.

This stormy Friday wrapped up with yet another outstanding event. Infrastructure Minister Andriy Pyvovarskiy and two of his deputies, Volodymyr Shulmeyster and Volodymyr Omelian, resigned.

Financial compromise

Cabinet approved the long-awaited blueprint of tax reform / www.rbc.ua

The Cabinet on Thursday finally approved the long-awaited blueprint of tax reform and draft budget for 2016. This event was preceded by several months of confrontation between the Finance Ministry and Parliamentary Committee on tax policy, both of which, creatively developing national political traditions, worked on two alternative drafts of the Tax Code.

Initially, government project stipulated a single 20% rate on key taxes -- VAT, the personal income tax, corporate income tax, and the single social security tax. In this case, the budget deficit was estimated under $60 billion.

In turn, the "liberal" project of the MPs involves a sharp decline in interest rates and abolition of some taxes. Some experts and businesses believe that such changes are indeed progressive. However, some analysts pointed out a major risk: the adoption of the deputies' proposals could form a $200 billion state treasury deficit.

The compromise (as the Finance Ministry assures) version of the draft Tax Code was first presented Tuesday at a meeting of the National Reform Council. This version has been approved by the government. It sets the rate of an income tax and an individual income tax at 18% in 2016 while in 2017 it will be 17%, the single social security tax rate is proposed to be reduced to 20% from 40%.

However, the MPs, authors of an alternative draft, refused to call this version a "compromise."

"We officially declare that there were no negotiations between our group of authors and the team from the Finance Ministry. Thus, the statements of officials of the Ministry of Finance on reaching a compromise on tax reform are a deliberate misrepresentation aimed at the Ukrainian citizens and our international partners," said the deputies.

The tax committee of the Verkhovna Rada emphasized that they insist on the immediate submission to the vote and endorsement of their version of the Code. They also insist on adopting a state budget for 2016 based on their version of the Tax Code.

Realizing that the New Year holiday season is coming, the government decided this week to involve "heavy artillery" to the tax issue. Prime Minister Arseniy Yatsenyuk said that the final draft will be submitted to Ukrainian President Petro Poroshenko, and then the Head of State will forward a draft Code to the Parliament. The pro-president faction has declared, even before the meeting of the National Reform Council that it would support a draft Tax Code by the Finance Ministry only if it provided for a phased tax reduction, which later actually appeared in a text of the "compromise" version.

An important detail is that the government’s project is coordinated and supported by Ukraine’s key creditor, the International Monetary Fund, so experts believe that the Cabinet and the President used this leverage to influence the MPs.

God Bless America

REUTERS

Earlier this week, Ukraine welcomed a high-profile guest from the U.S. Vice-president of Ukraine’s strategic partner, Joseph Biden has met with the President, the Prime Minister and the MPs. He did not come empty-handed. At the meetings, Biden said that the U.S. Government has allocated $190 million for projects in the field of Ukraine’s internal security, including the National Police; and is ready to allocate another $300 million on defense.

During a historic address to the deputies in the Verkhovna Rada, Biden stressed that a strong economy would help protect Ukraine’s European choice and not allow other countries to undermine its stability. He said that the U.S. was ready to assist the country on its path of building this strong economy, a major obstacle to which is corruption, still thriving in Ukraine.

"Corruption siphons off resources… You know this,” said Biden, adding that these elements of corruption are being used to undermine Ukraine.

Many analysts have noticed that, while voicing the word "corruption," Biden gazed at the government box in the Rada.

America sees the need for Ukraine to continue launched reforms, according to the U.S. top official and is doing its best to support the government, which is now in a precarious position. The logic is clear - the United States sees that the Cabinet fails to implement reforms perfectly, but, at least, this government remains loyal. And while as long as it does, the U.S. will support Ukraine.

The U.S. is ready to increase financial aid to Ukraine if it implements successfully the program of cooperation with the IMF. One of the structural lighthouse marks of the program is tax reform and the adoption of the budget on its basis, with a minimum deficit. Biden advised the government not to get involved in squabbles and get to work. This means agreeing with the IMF the draft tax reform and the draft budget. Obviously, the U.S. Vice President managed, to some extent and for a short period of time, to channel in the right direction the energy of the President and the Cabinet.

The return of inflation

The inflation has returned to Ukraine / telegraf.com.ua

The last week’s news on the return of the inflation was a fly in the ointment. November’s consumer prices increased by 2% compared to October (when Ukraine even enjoyed a 1.3% price decline). In the previous months the dynamics of consumer prices varied: they increased in September by 2.3%, falling by 0.8% in August and by 1% in July.

Inflation accelerated 46.6% from 46.4% year-over-year (Nov 2015 to Nov 2014).

The National Bank of Ukraine blamed vegetables and heating tariffs for the resumed inflation. The growth of consumer prices in November was due to a seasonal rise in a price of a "Borshch set” of vegetables by 20.5% and a 19.7% increase of heating tariffs compared to October.

However, the Ministry of Economic Development and Trade forecast in October the expected annual inflation rate at 43%. But it is already clear that this will not happen.

Electricity to Crimea, coal to Ukraine

REUTERS

It has been three weeks since the activists blew up the pylons at the power transmission lines in Kherson region, cutting power supply to the Russian-occupied Crimea which resulted in a so-called “Crimea Blackout.” However, on December 8, state-owned Ukrenergo repaired the Kakhovska-Tytan power line, which started providing half of the previous volume of electricity supplied to the annexed Crimea.

The aggressor state’s response was immediate. Russian President Vladimir Putin has given the “go-ahead" to his puppets, the leaders of Donbas gangs, to resume unhindered supplies of coal from the occupied territories of eastern Ukraine to the Ukrainian thermal power plants. Meanwhile, another ship loaded with South African anthracite coal arrived in Ukraine.

Earlier, while announcing diversification of supplies, Ukraine’s Energy Minister Volodymyr Demchyshyn said that coal from South Africa will add another 1.25 million tonnes to the existing stocks of "black gold." The minister said that this amount should be enough for the stable operation of Ukraine’s power grid at the beginning of winter, provided the weather would be relatively warm. And the forecast is really promising at the moment.

Alina Zimenko (UNIAN)

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