October 2015
Igor Mazepa: An attempt to keep money inside the country turns off new, fresh capital inflow.
On the eve of the local election, journalists of Grushevskogo, 5 met one of the most influential investment bankers of the country.
Igor Mazepa, the investment banker and Director General of Concorde Capital, talks about the investment portrait of Ukraine, feasibility of the NBU policy and credibility of candidates’ election promises.
Igor, what is a sad condition of the investment climate in Ukraine?
I have mixed feelings. About two weeks ago here, in the Parus restaurant, I saw Chinese people. It was obvious that they were not tourists. They had no usual umbrellas, cameras and protective masks and looked seriously. Later on, I met the same guys at our office; my colleagues conducted a presentation for them. I was surprised because I have not seen the interest to Ukraine from Asians for about five years, I guess.
That says a lot. For example, in the 2013 Global Competitiveness Index the economy of Ukraine was ranked 84th, in 2014 – 76th, and now – 79th. In the 2013 Doing Business we were ranked 137th, in 2014 – 112th, and now 96th. On the one hand, it says that we have some minor improvements. On the other hand, we still trail behind. On the one hand, Ukraine looks like the country where the democracy has won, free elections are held and where the war has ended. On the other hand, we suffer the rampant corruption, inefficiency of the government, lack of reforms and liability for political and economic decisions, and as a result, we have lost about 20% GDP in two years in real terms. And if expressed in the dollar – 50%!
Perhaps we are expecting the future growth. I think, and it seems that there is a consensus of leading western and Ukrainian economists, that the country’s economy will grow up to 3%. This is data of the World Bank, the IMF, and Concorde Capital, but it is not enough. Growth should be more active. Everything related to Ukraine and how we look in the eyes of investors is a mix of different emotions: all the bad, at the bottom, on the threshold of growth. The first investors are trying to take an interest in Ukraine. I think the growth can be expected in those sectors that are of interest in the medium to long term. It mainly deals with domestic consumption, pharmaceuticals, medicine, IT, energy. By the way, this does not apply to commodities. Because all regards commodities likely will fall below, the lower and lower. I do not mean it’s bad. This means that Ukrainian businessmen, who were focused on commodities, will be forced to adopt more efficient technologies to reduce their costs. Because prices for ore, metal, and grain will continue to fall.
How the presence of occupied and uncontrolled territories diminishes the Ukraine’s attractiveness in the eyes of investors?
From the industrial standpoint, it is about 20-25% of export. It significantly reduces from the perspective of consumer markets, together with Crimea – for about 30%. In general, this adversely affects the economy of our country; in particular, this led to a drop in the dollar GDP by 50%. When we talk about the size of the country, most often, foreign investors think about the size of consumer markets. And it has narrowed. To a lesser extent this affects commodities, export, and mechanical engineering. Here Ukraine is more vulnerable to price changes. The fall in prices for the main export products is balanced by fall in energy prices (what we import) and a significant decrease in imports of luxury goods – cars, electronics.
May the election and impossibility to carry it out in the occupied territories hinder the economic growth?
The fact that the election cannot be held in the occupied territories is more a political issue, a social, not an economic one.
Does Ukraine have money to rebuild the economy of Donbas? Many political candidates build their campaigns on it.
No, we do not have the money. To that end, they try to convoke donor conferences, to implement the “Marshall Plans.” I believe that Ukraine will find donors or credits to rebuild the Donbas. Nothing wrong with it: by involving more people in public works you create effective demand. It stimulates, gives some life. For example, the European Football Championship, which took place in Ukraine, was a good incentive for the entire country during all five years of preparation. After 2012, this incentive expired, and the economy dropped down. America had the same experience in the 30s, Europe in 50s. And Ukraine has to go through. I believe in it.
Politicians may try to stabilize the situation, to calm down the people. Or it is a myth, what do you think?
I do not see any panic of the population, no queues at banks, post offices and shops. You may easily change hryvna for dollars. The only question is the question of price. Just like the National Bank should pay attention to liberalization of the foreign exchange market, people need to get used to the fact that the dollar’s rate it’s not a sacred cow, for which authorities will fight as for Stalingrad. The dollar exchange rate is just balancing the supply and demand. Politicians may often use it in their slogans, but even in Russia the dollar rate is not so politically sensitive topic, as we have here. Ruble dropped twofold – well and good. Bank depositors did not storm banks to withdraw their deposits.
Maybe the worst is still ahead?
Maybe, but people there go easy about this. I think that our election will be democratic one, and it will be another plus for the whole society. Another question, which will the people elect.
Maybe the problem is they have no option to choose?
In fact yes, in the words of our ex-President, “it is what it is”.
Igor, what will happen to Ukrainians after the election?
They will live a normal life. Little will change. I do not expect any shark movements in terms of tariffs. All that could be raised – have already risen. I do not expect sharp movements in terms of devaluation, inflation and rising prices. I do not expect the increase in effective demand – all wages and pensions, which were to raise – have already been raised.
What should be the sequence of reforms to stabilize the financial system and to make the economy grow?
It depends on the reformer’s goals. Certainly, it is necessary to improve the business climate, investment climate, in order to preserve domestic investors. In today’s world, money is very mobile. Investors, both domestic and foreign, want to see a few things: predictability, deliberately not saying “stability”. For what term I, as an investor, may predict the dollar exchange rate, tax rates, loan rates, and wages – for so I can feel comfortable. I want to have a business in this territory and not in the other.
The tax system should be simple and stable. For example, only in the oil and gas industry tax rates were changed three times over the past five years. This is a sector where any result is achievable in 3-5 years of investment only. I need a horizon of ten years, during which the conditions and tax rates would not be changed. The same applies to the currency market – the three-time devaluation of the hryvna had a detrimental impact on many industries. In addition, it adds destabilization and nervousness to the investment climate. It should be either predictability or foreign exchange risk insurance instruments.
The next sphere is the stock market. This is the place an investor comes to. Industrial companies compete for cheap money, and investors compete for the return on investments. Unfortunately, Ukraine does not have the stock market. And this is also an area to be observed.
We have been talking about the pension reform for more than 20 years. The budget of the Pension Fund is always deficient, and no one did anything to fix it. This is a politically sensitive area and this explains everything.
Privatization should be a trigger or add a critical amount of factors to run our economy. Privatization always means arrival of better, more technological, more efficient investor who, to a greater extent, cares about a company, factory, ship, newspapers and others. In this regard, it is jobs, wages, and increase in effective demand. This is taxes that private companies pay to the budget. It is the whole chain of mechanisms, which works very well and leads to the GDP growth.
And what is the place of fight against corruption in this chain?
It is in the first place. It can produce results right now or in the foreseeable future. Everything else will give an effect later, but it is no less important. Pension money, for example, are the drivers of investment in all countries – they have long-term and cheap loans, because pension money work in the market. Fight against corruption is not enough.
From what sources would Ukraine repay the foreign debt?
As of beginning of 2010, the external debt was about $ 40 billion. As of beginning of 2014 -$73 billion. Oddly enough and surprisingly, this entire debt load originated during the reign of Yanukovych. As of the end of this year, the debt will be about $ 74 billion. It remained essentially unchanged over the past two years. It is nothing strange that Ukraine has debts. The vast majority of countries have debts. The problem is the amount of debts and the amount of the economy to cover the debt. By the way, debts are not always repaid. America lives with a breakneck debt load – 18.1 trillion dollars as of September 2015, which is more than 100% GDP. At the same time its economy is growing at 1.5-2.5% per year. America can afford this fabulous debt. The figure of $ 74 billion on the one hand is scary, on the other – working. Let’s count. That’s about $ 1720 per every citizen, but to be more statistically accurate, and take away the Crimea and Eastern citizens, who are now, for obvious reasons do not add to GDP, it is about $ 2000 per person. An interesting statistic, until you start thinking at what expense to repay these debts. I would not say that Ukraine is on the verge of a debt hole or the debt crisis. I would argue that the situation with our debt is a working one, provided the economy will grow. Any debts are repaid from the growth of the economic base.
Another issue is that the country is unable to effectively service its debt now. By the way, it caused the restructuring initiative. I take it neutral-positive; I believe they could better negotiate, but time did not help us, unfortunately. Provided the economy will grow by 3-4% per annum – this is all reasonable and realistic. I think that 2016-2017 years will be difficult; growth will not exceed 2-3%. Starting from 2018, 5-7% growth is possible, under the best of circumstances – up to 10%. Therefore, in terms of external debt repayment, the situation is a working one.
How do you assess the policy of the National Bank?
Even in the most difficult times, when everyone challenged the policy of the National Bank, I spoke neutrally-positive. First, the controller is currently withdrawing dump banks and banks having no economic functions from the market. This is a huge plus. This is nonsense to have more than two hundred bank licenses, of which only 40-50 – operating banks, for such a small country, as ours. Three-quarters are dodgy banks. Now we see the struggle with such lumber, and many bankers support this initiative. Secondly, it is recovery of the banking system, stress testing mechanisms, which were launched eighteen months ago. According to many bankers, we have very strict criteria, correct, market. This is only the beginning of the process, but slow and steady wins the race. Here, for example, the fight against captives. This deals with the oligarchic banking. In this sense, the National Bank has passed a quarter of the route. I think the most publicized and sensational cases are still ahead.
Regarding the fight against devaluation, my opinion remains neutral. When targeting the inflation, the National Bank sometimes switches to targeting the devaluation. A year and a half, the country is living in strict conditions of exchange control. It definitely does not promote investments, and I think that in the future the National Bank will reject the practice of administrative regulation, because it is really hard.
I can understand officials of the National Bank. When sitting there and being responsible for the banking sector across the country, one has to make responsible decisions. The point is that excessive devaluation kills the banking sector and the consumer market. On the one hand. On the other – the National Bank, according to any economic theory, can only temporarily affect or smooth out imbalances in the currency market, it cannot effectively maintain the national currency for a long time. Our strict currency limitations were implemented almost a year ago, and this is the factor of imbalance in the economy. The National Bank should adopt more liberal approaches to movement of capital. An attempt to keep money inside the country turns off new, fresh capital inflow.
The National Bank’s policy proved to be efficient over time. Until recently, many challenged it, but now I see the inflow of deposits in the system. Even money received from the Deposit Guarantee Fund, – almost half remains in the banking system, people do not withdraw all the money even after all stresses and defaults. But, unfortunately, it does not stimulate the economy to grow. Maintaining the stability and stimulating the growth in these conditions, are inconsistent.
Did you visit the parliament’s building on Grushevskogo Street?
I was there a long ago. This is a gloomy, boring, tedious, riddled with corruption building.
What books would you recommend to read?
Of the latter, which I liked – Robin Sharm, “The Monk Who Sold His Ferrari” and “Holy, Surfer and Director.”
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