Week’s balance: EU completes ratification of Ukraine Association deal, Rada amends state budget before going on vacation
The Council of the European Union has approved the Ukraine-EU Association Agreement. Ukrainian legislators passed a number of bills before leaving for summer vacation, supporting the Cabinet's proposal to increase revenues and expenditures of the state budget. The Boryspil Airport has at first said goodbye to, but then resumed negotiations with Ryanair. The hryvnia continued to strengthen. These are the main economic news of the outgoing week.
On Tuesday, July 11, the Council of the European Union approved the Ukraine-EU Association Agreement, thereby completing its long-sought ratification. It is expected that the document will come into force on September 1, 2017.
The deal introduces at a legislative level the introduction of a free trade area between Ukraine and the EU, which will lead to trade liberalization, an increase in exports to the EU, an increase in foreign exchange earnings and, as a result, the development of the Ukrainian economy. In addition, the Association provides for the implementation by Ukraine of a number of reforms aimed at integration into the European political and economic space.
"From September 1, 2017, a qualitatively new stage of our journey to the European Union will begin. This is a stage of deep and comprehensive reform that will require maximum efforts and unification of all branches of the Ukrainian government, businesses, and civil society for the sake of building a better European future for the Ukrainian people. And along this path we will be assisted by the European Union and the entire civilized world," President Petro Poroshenko said, commenting on the historic event.
The EU Council ratified the Association Agreement on the eve of the Ukraine-EU Summit, held in Kyiv and dedicated to the implementation of further cooperation programs.
During the summit, the parties discussed the possibility of developing a new long-term plan for economic support, similar to "Marshall Plan" - a comprehensive U.S. assistance program for Europe after World War II.
In addition, Ukraine and the EU agreed that the successful implementation of reforms will allow Ukraine to receive from the EU by year-end a third tranche of macro-financial assistance in the amount of EUR 600 million.
The conditions for obtaining financial support will fighting corruption, continuing energy efficiency programs, and deepening cooperation in resolving the problems of internally displaced persons.
According to Valdis Dombrovskis, Vice President of the European Commission, it is important that Ukraine manage to complete everything by mid-November, in order to see the money before the end of 2017, that’s considering internal procedures within the EU that also take time.
To monitor effectively the process of key reform implementation, the government plans to develop the so-called “Agreement Pulse” - an innovative tool for monitoring the implementation of the Association deal. Volodymyr Groysman says the mechanism is set to be introduced in September 2017.
The head of government also wrote on Facebook that the indicator of positive changes in the state is the improvement of the forecasts for the economy growth. According to Mr Groysman, the World Bank improved its outlook of Ukraine's economic growth in 2018 from 3%, to 3.5%, and from 3% to 4% in 2019. At the same time, the prime minister has noted that now the main task is to transform the expected economy growth into the improved quality of life of Ukrainian citizens.
Summer tune of Ukraine’s MPs
Before leaving for a traditional summer vacation break, members of parliament did not support the Speaker’s proposal to continue the work of the session to consider key reforms expected by both the Ukrainian voters and Western partners, as well as the country’s key creditor, the International Monetary Fund.
But it is worth noting that in the last days of their work the deputies have actually passed several important economic decisions.
Thus, the Verkhovna Rada adopted in the second reading and in general the amendments to the state budget in connection with the growth of revenues, which became possible due to overfulfilment of target indicators and distribution of excess inflows.
The law provides for an increase in expenditures and revenues of the state budget in 2017 by UAH 26 billion, including of the general fund - by UAH 25 billion. The revenues of the state budget are set at UAH 757 billion and expenditures - at UAH 827.1 billion. The deficit ceiling is maintained at UAH 77.6 billion.
In addition, the cost of subsidies for housing and communal services was increased by UAH 14.1 billion, while defense and security spending - by UAH 2.7 billion.
Another important decision of the Verkhovna Rada was the approval of the draft law on increasing pensions, which is included in the package of bills on pension reform. However, the draft has passed only its first reading.
Minister of Social Policy Andriy Reva said, the bill will allow raising pensions of 12 million Ukrainian pensioners from October 1, without raising the retirement age. At the same time, Reva promised deputies that in its second reading, the bill will take into account the proposals of MPs, in particular, regarding the creation of a register of recipients of social assistance.
The government plans to increase pensions by UAH 200 to UAH 1000 per month from October 1 of this year, as well as to cancel the taxation of pensions for working pensioners.
Pension reform does not provide for raising the retirement age, at the same time introducing requirements for the length of the insurance period. To retire at 60, one will need to have gained 25 years of insurance period. With this period being within 15-25 years, citizens will be able to retire at 63. Insurance period of less than 15 years will force citizens to work until 65 before being entitled to retirement.
At the same time, people with no insurance experience will be able to qualify for social assistance once they reach 63. The amount of assistance will be determined based on the income level of the pensioner's family. At the same time, all standards of minimum insurance period will be increased every year until 2028.
It is important to note that the implementation of pension reform is one of the key requirements of the International Monetary Fund for obtaining the next assistance tranche.
Another important decision that the deputies took in the last days of the session was the prolongation for a year, instead of two years (as proposed by government) of the increased export duty on scrap of ferrous metals at a rate of EUR 30 per tonne.
Parliamentarians also passed a law that exempts businesses from fines for late filing of tax and excise reports as a result of a recent massive cyber-attack on computer networks.
Meanwhile, a number of important bills still remained beyond the deputies’ focus. Thus, the Verkhovna Rada has failed to consider health care and education reforms, which, along with the pension reform, are key conditions for Ukraine to receive the next tranche of the IMF bailout.
Rynair lost its way in Ukraine
Unexpected came a statement by Europe’s largest low cost air carrier, Ryanair, on canceling its entry to the Ukrainian market, earlier scheduled for this autumn. The carrier accused Ukraine’s largest Boryspil Airport of frustrating the company’s expansion plans. According to Ryanair, the management of the Ukrainian airport violated the agreements that had previously been reached with the Ministry of Infrastructure of Ukraine.
In turn, the Boryspil Airport said that the carrier had in fact issued an ultimatum, complying with which could cost the airport about UAH 2 billion.
"I can declare as a manager of a state enterprise that this is an unprofitable contract for us. We will not sign a deal unless it is beneficial to the state enterprise. I am responsible for implementing the financial plans of the state enterprise and ensuring that its break-even operations, so I will never resort to making a decision against the airport’s interests," Boryspil CEO Pavlo Ryabikin said.
According to him, Ryanair put forward before the airport demands that fail to comply with Ukrainian legislation. Among them there are air navigation services, check-in desks, taxi stops, advertising spaces, and ticketing offices – all free of charge. Also, the air carrier requested the installation of a baggage claim system, the allocation of land for the construction of their hotel, as well as payment of 35% of the profits from duty-free sales.
Another requirement of the European air carrier, which the leadership of Boryspil did not agree with, was to fix a passenger fee at $7.5 per person for the next five years. Ryabikin stressed that in this case other carriers will be able to file claims with the Antimonopoly Committee citing unfair competition, and they will be right, too. At the same time, lower fees for all air carriers would make the airport’s operations unprofitable.
In addition, the air carrier demanded that all disputable issues be resolved in London arbitration, based on British law, while the Ukrainian side insisted on resolving such issues in Ukrainian courts.
Prime Minister Volodymyr Groysman immediately reacted to the conflict situation, vowing the resumption of talks with Ryanair. Mr Ryabikin wrote on Facebook that the format of talks will include the airport itself, the Ministry of Infrastructure, and the Office of Investment Support. In turn, the carrier confirmed that the negotiation process will be re-launched
Hryvnia beefing up, business activity reviving
The National Bank has recognized insolvent another financial institution, Novy Bank, insolvent. The bank’s key shareholder (18,33%) is the state-owned Yuzhnoye [Pivdenne] Design Bureau. It is the seventh financial institution since year-start where an interim administration has been introduced. According to the NBU, the reason for the bank’s bankruptcy is the inconsistency of its capital with the NBU’s requirements. Nevertheless, the regulator promised that 99% of the bank's depositors will be able to reclaim their funds in full.
Meanwhile, the national currency continues to strengthen, just like the confidence of Ukrainian businesses. According to the NBU, entrepreneurs for the third consecutive quarter have remained optimistic about the revival of business activity. The business expectations index among Ukrainian CEOs in the second quarter of 2017 increased to 114.3% from 113.3% in the previous quarter.
According to the survey, more than half of business representatives forecast the hryvnia exchange rate against the dollar in the next 12 months in the range of UAH 26-29 / USD. The average rate is expected at the UAH 28.68 / USD, which is better than the first quarter forecast (UAH 29.44 / USD). At the same time, the share of respondents expecting the strengthening of the hryvnia rate in the next 12 months increased to 24.6% from 13.5% in the first quarter of 2017.
Meanwhile, the Ukrainian agrarian market sees the rise of a harvesting campaign. According to the Ministry of Agrarian Policy and Food, Ukrainian farmers have collected crops from 2 million hectares (22% of the forecast) by July 14, yielding 6.5 million tonnes of grain.
The ministry predicts that the current year will not set any records in terms of grain harvest and export rates as a result of spring frosts and subsequent dry weather in a number of regions of Ukraine.
According to the forecast by USDA, the production of cereals in Ukraine for the 2017-2018 marketing year (MY July 2017 - June 2018) will be at 61.09 million tonnes, while exports will decrease to 38.31 million tonnes.
The next week promises to be less active in connection with the Rada’s vacation. But life goes on, becoming much more eventful for farmers.
On Monday, July 17, the EU Council intends to determine the allocation of additional trade preferences to Ukraine, the economic effect of which may amount to about $200 million. The State Statistics Service next week will report on the results of industrial production in Ukraine in the first half of the year.