Ukraine can and should do a lot better in the economic sphere, - Oleksandr Savchenko
Leading economic specialist offers a frank and wideranging view of current economic challeges for Ukraine
Hello and welcome to this week’s episode of Ukraine Calling. I’m Tanya Bednarczyk for Hromadske Radio in Kyiv and we’re bringing you our feature interview, followed by some new music from Ukraine.
In this episode Bohdan Nahaylo talks to Oleksandr Savchenko, Rector of the International Business Institute.
Nahaylo: I’m delighted to have as this week’s guest on Ukraine Calling, Oleksandr Savchenko, a leading Ukrainian economist, economic expert, and banker. He was formerly the Deputy Director of the National Bank of Ukraine, former Deputy Minister of Finance, the Executive Director for the European Bank for Reconstruction and Development in Ukraine, and is currently Rector at the International Business Institute. But what impresses me most, as a former student at the LSE [The London School of Economics and Political Sciences], is that he also taught there for a while.
Savchenko: Yes, I used to be a Visiting Scholar, and Visiting Professor, there and at Harvard University as well.
Nahaylo: I think our listeners have grasped that you are an eminent economic expert. But what I like about your approach in recent times, is that you are making your own individual effort, through your own broadcasts on the net, through social media, to bring home key issues, to advise on strategy and solutions. And to provoke thinking about the serious economic challenges that Ukraine faces. So let’s start by asking you, how did you get into this public role, as opposed to simply doing things in offices?
Savchenko: That’s a good question. A couple of years ago I came to the conclusion that my advice to the government, to the President, to Parliament, was sometimes, if not always, ignored. So, I changed my mind, and came to the conclusion that I have to speak more to the public, to ordinary Ukrainians, to experts. I started my own programme. Just a few months ago, I also created a website. My subject – I concentrate on Ukraine’s economy, macro-economic issues, and globalization, the role of Ukraine in globalization. Why is this very important? Because a couple of years ago Ukraine suddenly appeared [found itself] in-between two civilizations: Moscow’s Orthodoxy and Western civilization. Twenty-seven years ago we became part of Western civilization. But not all of Ukraine. Parts of Ukraine, Crimea and Donetsk still belonged, in my view, to the Moscow Orthodox civilization. That’s why there is a war. The war is about civilizations, and Ukraine finds itself in-between [in the middle.]
Nahaylo: That’s interesting to hear from an economist. You’re suggesting that a hundred years later (after 1918), Samuel Huntington’s ‘Clash of Civilizations’ (1993) is taking place, in a part of the world where time was suspended, for artificial, political reasons.
Savchenko: Yes. He was a very good scientist [scholar] and thinker. And I incorporate his theory in my book.
Nahaylo: You have a new book?
Nahaylo: Briefly tell us about it. It’s called, “Anti-Ukrainets”?
Savchenko: Yes, that’s correct.
Nahaylo: “Anti-Ukrainian”, in English. What does that mean?
Savchenko: I ask the question, why is Ukraine always unsuccessful? Always, throughout our history, for a thousand years. The reason is very interesting. Because Ukraine combines the political system of the West and the religion system of the East. We combine these. And I came to the conclusion, after my analysis, that we have to change not our political system – we should belong to the West- but we have to modernize our religion.
Nahaylo: Our mindset?
Savchenko: Yes. I put forward two ideas that are very important: Ukrainianization of the Ukrainian Orthodox Church, and Westernization and modernization.
Nahaylo: But we still have in this country, and I think this is also largely to blame, several types of economies. We have the officially declared economy which is being reformed, which is supposedly in step with what the West wants; we have the shadow economy remaining, which allows people to get by; and we have the oligarchic setup, which is still pulling the strings. So we have at least three layers, a kind of “matryoshka” economy.
Nahaylo: And, I guess, this is what is not really being addressed?
Savchenko: This is also one of the key problems – in Ukraine the number of oligarchs per capita is the largest in the world.
Nahaylo: Larger than in Russia?
Savchenko: Yes, per capita, because we have a lot of shadow billionaires. It’s not only three, four, or five “official” big billionaires, who are involved in TV, in newspapers, and so on.
Nahaylo: And in politics directly.
Savchenko: Yes. But we have a lot of shadow billionaires, some of them civil servants. Unfortunately, it’s a very corrupt service. I calculate that approximately – right now it’s not a very big figure – that the outflow of capital from Ukraine into the hands of civil servants amounts to some 5-6 billion. Ten years ago, no 15 years, it was around 20 billion.
Nahaylo: US dollars?
Savchenko: US dollars. And the total outside of Ukraine? I calculate, we spend, or rather not “we spend,” the economy loses…
Nahaylo: “We” remove from the economy, we hide from the economy…
Savchenko: …$200 billion. Some of it comes back, but still according to my calculation, approximately $50 billion in cash is outside of Ukraine in the hands of oligarchs. But what is also good news is that approximately $100 billion is the in hands of ordinary Ukrainians. This is good, but it’s also bad because it’s outside of the banking system. And I ask why? Why is so much money outside of the banking system? We ask the IMF for one billion: “please, we need one billion.” And yet the population keeps $100 outside of the banking system, $100 billion! And we see in the banking system just $10 billion. Do you know why? Because of a very stupid decision of the National Bank: they banned credit in US dollars.
Nahaylo: And when was this decision taken?
Savchenko: It was after the crisis, when there was huge devaluation of Ukrainian currency. Instead of introducing the hedging of currency risk, they just banned. And banks don’t pay appropriate interest. On the other hand, while keeping $100 billion outside of the banking system, our government goes to the international market and borrows. And do you know at what interest? 7.4 percent! We are champions of the world in this respect. We pay an enormous amount of money. We borrowed 3 billion for 15 years.
Nahaylo: So we’re going to be in debt for generations?
Savchenko: Yes, and you are asking why we are so poor. Because of an enormous amount of irrational decisions. Success definitely will come to a country such as Ukraine when hundreds of decisions will be rational, appropriate, not corrupt.
Nahaylo: When we plan for the future, when there is policy formulation, not just ad hoc decisions to get us by on a day to day basis, particularly by those who want to make money, who are controlling the making of money? We cannot avoid mentioning the big issue of the day, Nord Stream II. President Poroshenko this week has been in Germany. He got at least an acknowledgement from German Chancellor Merkel that they are aware of Ukraine’s concerns, that they have raised them directly with Putin, and that Germany will insist that the flow of natural gas westward continues to some extent through Ukraine. For the longer term, in the worst case scenario, if in fact this conduit through Ukraine is cut, how damaging will that be? And, in another scenario, if the flow continues, but with a reduced volume?
Savchenko: This is really a very important question. We are talking about 3 per cent of our GDP. It is approximately 3 billion US dollars and our GDP this year will be around 100 billion US dollars. That’s why it’s very important. I am very glad Merkel mentioned this problem, but that was all. We have to be much tougher on this issue. My recommendation for the government is just sell 50 per cent, or 50 plus 1, or 25 plus 1 per cent, at any price to a very strong partner, preferably American, in second place, German. I can just imagine how Russia will dispute with an American owner over this transition. It’s a huge system, transit, storage, other facilities – the best in Europe. I have calculated, by the way, the value of this system. Prime Minister Marchuk [in 1995-96] asked me to calculate it because Russia pressured him to sell it for 1 billion, then 1.5.billion. I calculate through different instruments the value at approximately 30 billion US dollars.
Nahaylo: So is the value higher now?
Savchenko: Yes, still the same value. If Ukrainians are owners, if appropriate American or German investors come, the value will increase because the potential of this system generates 6 billion US dollars. It can be very profitable, maybe the best for the price in Europe. This is the best scenario. The worst scenario is that the gas supply through Ukraine is just cut. Such a cut is not possible in 2 or 3 years because I do not believe that the Russians with the Germans can build this [Nord Stram-2] pipeline in that time. I hope the Americans stop it. Because, just imagine if Ukrainians lost 3 billion US dollars: we can’t keep our armed forces in an appropriate state and basically there could be chaos in Ukraine. In my view, Ukraine would have to close all our programmes where Ukraine stops refugees from the east, from Syria and other countries, from moving to Europe. Sorry, Europe is still paying Turkey billions of dollars and zero to Ukraine. And, we will have give up other obligations because we have to be very tough. This is a very dangerous situation.
Nahaylo: What is often overlooked is that there is not only a threat from the pipeline going from Russia via the Baltic Sea which circumvents Ukraine, but that there is another one being built with Turkish help.
Savchenko: We hope the Americans can stop it. Believe me, if they introduced “normal” sanctions they can block these schemes.
Nahaylo: Which brings us to the latest US sanctions against Russia which seem to have caused something of a stock market crash in Moscow. Look at the sudden dramatic depreciation of the value of Russian oligarch Oleg Deripaska’s aluminium empire.
Savchenko: Still not enough.
Nahaylo: My question is whether now, as these latest US sanctions are beginning to bite, hit harder, will they adversely affect Ukraine too? Could there be a boomerang effect because of economic interconnectedness?
Savchenko: No. Any sanctions against Russia are useful for Ukraine not only politically, but economically as well… By the way, do you know that Deripaska has an aluminium plant in Ukraine, which is standing idle. We can nationalize it, no, better, pay him off, offer him a normal price, and start up this production in Ukraine. There is a lot we can do in Ukraine to slow down the Russian economy. But yes, these are the first sanctions that actually matter, because all the previous ones were more in the nature of messages…
Savchenko: Yes. These are real ones, but it’s still not enough. In my book “Anti-Ukrainian” I recommend to the US and Europeans governments to introduce new sanctions because economies are very adaptive, and the Russian economy as well. Russia has a brilliant team of economists. Putin has kept the old very bright economists in the Economics Ministry, National Bank, and they are doing everything perfectly, I have to say. That’s why new sanctions should break up the Russian economy. It will be useful for the West and for Ukraine.
Nahaylo: Okay, at the end I always ask my guest for last minute thoughts, messages they want to share with listeners.
Savchenko: It’s difficult to do this in one minute. Will just say then, that if Ukraine will be supported in the appropriate way by America, the European Union, etc., this land will be transformed into a “paradise” in a few years. What do I mean by “the appropriate way”? I’d like to recapitulate: by supporting private business, civil society, scientists, culture, and education. Because a lack of private institutions, civil institutions, creates a vacuum. Ukraine, as individuals, is a very interesting nation, very modern. But when we talk about organizations, non-profit entities, it’s very weak, and this is the problem. In such conditions oligarchs dominate and there is still no clear path to prosperity and progress.
Nahaylo: Where are positive changes?
Savchenko: Some of the positive things I can mention are, for example, that economic growth has started. Last year it was 2.5%; this year we expect around 3%, and that’s very good. Real income is also growing.
Nahaylo: Not dramatically though.
Savchenko: Not dramatically, slowly, at about 5-6%.
Nahaylo: But how does that compare with inflation?
Savchenko: No its real growth. Nominal income is about 20-25%, but you know inflation last year was 14%. Then another positive development: decentralization started. By the way, a very interesting fact is that last year local budgets accounted for 50% of the total state budget.
Nahaylo: Yes, this is a new development.
Savchenko: Yes for the first time.
Nahaylo: But do we think that the local officials and civil society there are equipped to manage these budgets?
Savchenko: Not yet. This is a huge problem. They keep the money, they deposit it in banks, they don’t spend as its intended. It’s all about education: what’s needed is education, education and education. Our governmentstill doesn’t understand why it’s very important. On the one hand we have an enormous number of universities. My point is that 50% of them should be closed immediately because they’re useless. Do you know that in Germany, 27% of graduates from secondary schools go on to university. In Ukraine, 90%! Right now it’s 80%,that’s huge – that’s three times more than even in the United States. We still keep have an enormous amount of so-called universities which it would be better to close and to start professional education. But, on the other hand, education levels for businessmen, for officials, is very, very low and that should be changed.
Nahaylo: I’m surprised you say that, because I get the impression that despite the huge brain drain, that there are people coming back who are involved in teaching, raising standards, and provoking different ways of thinking. You’re doing something along those lines yourself. You’ve stayed.
Savchenko: Yes, I am staying and I appreciate that there are some, not a lot, of people who are coming back. Unfortunately, at some point they had left Ukraine. Nevertheless, there are some positive features. Decentralizing, I told you, is a good point. Some stabilization of the currency is also good point.
Nahaylo: But is that dependent on bailouts by donors, by the IMF, by the EU, and others?
Savchenko: No, not entirely. It’s bad that we stopped real operation with IMF last year. For more than a year we did not receive any US dollars from the IMF. It means that other institutions also blocked support for the Ukrainian government. On the one hand this is bad, but on the other, I came to the conclusion that it’s useless to support the Ukrainian government.
Nahaylo: I heard you say today, in your latest broadcast, “don’t give the money directly to the government, give it via the private sector.”
Savchenko: Yes. First of all, small and medium size business, then later on a little bit later to larger enterprises. It’s a credit line on the European standard.
Nahaylo: And you referred, to the Marshall Plan, the way it was done then.
Savchenko: Correct. But not even the Marshall Plan, so much. I just remembered my time in European Bank for Reconstruction and Development. My first project concerned Boryspil airport. If you remember, it was terrible under the Soviet regime. We invested and organized, and I participated, in obtaining the first large credit to Ukraine. 10 million US dollars. It was the largest credit at that time. But my last project was an SME credit line for 300 million Euro.
Nahaylo: SME, please decipher.
Savchenko: It means for small and medium sized business. It was in 1996. Right now, our total credit line for SME is much less than 50 million. 20 years later, can you imagine? This is our support of small business. That’s why it’s much better to supply money to real business, to the real economy, in my view, than to the state.
Nahaylo: In a nutshell, for the longer term, are you hopeful or are you pessimistic about Ukraine’s future?
Savchenko: I’m a realist. The Jews were looking for a better life for 40 years [in the desert]. We have only been at it in or own way for 27. If we are smart as a nation we can reach our destination, our place in the developed world, sooner.
Nahaylo: The land of milk and honey!
Savchenko: Yes. As realist I think that in 25 years or so everything will be okay.
Nahaylo: I’m envious of those who will live to those times. Thanks very much for the stimulating discussion. I’ve been talking to Oleksandr Savchenko, an eminent economist, who, professionally, has worn may hats. I’ve been particularly impressed by the fact that Professor, Dr., Rector, Mr. Savchenko is not just an economist, but also a strategist, a political philosopher, and the author of a new book called “Anti-Ukrainian.” This is something which I think has been lacking in Ukraine – people who are visionaries, not just managers. Again, thank you very much.
Savchenko: Thank you.
Because of the length and wide-ranging nature of the interview, the transcript is presented in an abridged form.
This week we have an instrumental piece for you. It’s called Mutual Love, and was just released by a group from L’viv called ROCKOKO, which is a bit of a play on words in Ukrainian. It could be interpreted as Rock Eye. Enjoy!
Next week we’ll be back with more commentary on events in Ukraine, a new feature interview and some more music. So tune in again for another edition of Ukraine Calling. We would be happy to receive any feedback from you. Write to us at: [email protected]. This is Tanya Bednarczyk in Kyiv. Thanks so much for listening.
Interview transcribed by Marta Dyczok, Nykole King, Bohdan Nahaylo and Caitilin O’Hare. Music by Marta Dyczok. Sound engineer Andriy Izdryk. E-mail distribution Ilona Sviezhentseva. Web support Kyrylo Loukerenko.