article by Mykhailo Bno-Airiian,
Former Head of the Kyiv Regional State Administration, economist, and diplomat
As the war drags on, it is becoming increasingly obvious that the situation in the country will continue to worsen. Western partners mostly confine themselves to arms deliveries, trainings for our troops and a minor direct budgetary support, obviously insufficient for Ukraine’s complete recovery. We should count solely on the internal investor: Ukrainian businesses. This, however, offers great promise for the country.
Gap between business and government
Recently, while visiting a friend of mine, a serious industrialist, I accidentally got into an online meeting with Ukrainian industrialists, organized by the government together with the relevant ministries.
Let us leave out the topic of the meeting and its participants out of account. Instead, I will tell you about what impressed me the most.
I was deeply surprised by the gap between our officials and Ukrainian business. It was always there, but I wanted to believe that now it would be different, that the enemy would unite everyone for the sole purpose of liberating the country, but no. The chasm is there and unchanged. This is a visionary, mental chasm. It made itself felt as a cross-cutting theme of the whole meeting, with entrepreneurs seeking to get specific answers to their questions, and officials, naturally, not always willing to field them directly, simply hurling some sort of reproaches and even accusations.
This conversation is just a modicum of what you can hear almost every day, talking with real industry people, each of whom has tens, hundreds or even thousands of employees.
As a matter of fact, it is Ukrainian business that remains the only chance to save Ukraine from a total economic tailspin. Yes, the state and the state companies that employ hundreds of thousands of people. To a certain extent, government procurement could replace Ukrainian business, but not in our case: this requires a completely different level of training and qualification of the state management and apparatus.
It has been repeatedly said that the economy is in a tailspin. Simply look at the dollar exchange rate and the latest actions of the National Bank: just last week, the NBU sold half a billion dollars worth of currencies and bought one tenth of that amount. This means that the income from exports is meager, and the pressure of speculators and importers on hryvnia is enormous. Unemployment is measured in double digits, and so is inflation. Taken together, this offers a discouraging forecast for the future of the Ukrainian economy.
Business environment or entrepreneurs: what to bank on?
The Ukrainian government is doing its utmost to revive the stagnant economy and spur entrepreneurship. Sure thing, based on its outlook and worldview. Among the key initiatives, the following can be distinguished.
Financial:
- eRobota, a system of non-refundable grants: up to UAH 250,000 for new businesses, for recycling projects (up to UAH 8 million), for gardens and greenhouses (up to UAH 8 million). It is planned to issue 20,000 grants (to date, only 1,115 have been issued);
- the 5-7-9 loan system, when the state lends up to UAH 60 million at 0 percent per annum during martial law and for another month after it. Then the interest rate is 5 percent.
Non-financial:
- tax reduction for individual entrepreneurs of groups 1, 2 and 3;
- the Nazovni (Outward) initiative of the Ministry of Foreign Affairs, which is aimed at helping exporters enter foreign markets.
That is basically all there is. But if to look carefully at all of these measures, it becomes clear that they are aimed, in all but name, at creating an environment and incubating future entrepreneurs, not at supporting current ones.
Let me say it straight away: I support such initiatives, and I am unequivocally in favor of the need to create the environment because only in free and stimulated environments are new systems, industries and directions born. Some of my acquaintances have even applied for and already received funding, meaning that the programs as such are working.
Today, however, stimulating the environment is not the right emphasis.
Investing money in venture projects – and the grant story for those who have never run a business is, in fact, a venture investment by the state) is an unaffordable luxury for Ukraine, a country facing a monthly deficit of up to $5 billion due to the war.
In these realities, the emphasis should not be on the new, but on the preservation and, most importantly, scaling of what already exists.
People with purpose
This is where we return to the place where I started: to Ukrainian business and a new dialogue. For the only right way for the Ukrainian government today is to bet on the domestic investor, to rally around hundreds of bright and strong entrepreneurs who have successfully proven their effectiveness. Do not wait for new ones to grow; unite those who are currently successful and effective.
Why is it important?
Firstly, no foreign investor in the Ukrainian economy should be expected in the next few years (especially if the war drags on and becomes sluggish). The only hope is the internal investor. Only he will invest money in our country. And he will do it, by the way, despite the war, flawed judiciary and constant turmoil. It is difficult to explain it rationally. Many businessmen with whom I have done business during these months of the war have invested in Ukraine after February 24 and are ready to continue doing so, because they do not see themselves in another country. For most, this is a kind of personal challenge; for some, it is akin to waking up from lethargy caused by prosperity, when your business works as usual and you can enjoy life a little.
Secondly, and most importantly, all the accomplished Ukrainian entrepreneurs are people with purpose. They are at the helm of large management systems and pyramids of people; some have fifty employees; some have hundreds and some have thousands. And it's not just pyramids and chessboards. This is a very well-established, well-functioning mechanism that has evolved and become resistant to all kinds of external shocks. Some of them passed and survived the challenging 1990s; some resisted the pressure of the fiscal and the arbitrariness of the security forces; some were not afraid of the sons of members of the Party of Regions; some survived and scaled up their businesses at the time of COVID-19.
They are all hardened iron, a reinforcement without which the foundation of the Ukrainian economy will simply crumble.
Thirdly, they are extremely ambitious and very patriotic. This is a crazy mixture that allows taking on the most incredible tasks. The war has put everything in its place: absolutely all the industrialists I know have helped and are still helping the army on a large scale.
Fourthly, all of them mainly support the economic transparency. This may well evoke a skeptical smile on your face, but if to look at the majority of Ukrainian enterprises that have exceeded $10–20 million of annual turnover, all of them usually work transparently and pay their taxes – by the way, in wartime.
Fifthly, ecosystems of contractors have already formed and are functioning around them. In economic parlance, this is called a multiplier, an indicator that shows how many hryvnias in the economy are created by each hryvnia of investment.
Lastly, but no less importantly, they are the best marketers in the country. No one – least of all in the ministries – understands their markets and sees the prospects of new niches better than them. This knowledge, accumulated over decades and combined with the right approach, can be converted into concrete additional billions of dollars of gross domestic product – and very quickly at that.
But for them to scale up, a new government-to-business dialogue is needed, a more systematic and constructive one than now.
At the core of everything should be the state’s respect for Ukrainian business and unconditional recognition of everything written above. Officials who in one way or another determine the rules of the game in markets and industries should simply have basic respect for taxpayers. All those who despise business, who only want to continue milking it, must inevitably resign from their positions, no matter how high they may be. The system of interaction between government and business should be completely rebooted.
The considerable financial resources that the state owns should be given to entrepreneurs in the form of loans, grants, state procurement, export credits, insurance and other tools that work in the West but have never taken root in Ukraine due to corruption and bureaucrats’ contempt for business.
That said, money alone does not make one happy. The main thing is to formulate and set an ambitious goal for industrialists. They need to be involved in something more than just an offer to work further. This goal should be very simple to describe but difficult to implement. Someone can be entrusted with the creation of new industries from scratch; some with the revival of enterprises that disappeared many years ago; some can become a new pillar of the military-industrial complex. For instance, I often say that it is necessary to gather 500 successful owners (excluding oligarchs) and set the task of doubling the turnover in two years (a kind of a «two-in-two” format), giving them what is specifically needed for this, which they are sure to specify.
Nonetheless, there is one major “but” to this story. The scaling of Ukrainian entrepreneurs will inevitably strengthen and consolidate a new independent class of people who are still politically disunited. This new bourgeoisie may eventually challenge the current inefficient system of public administration. Since these are people with purpose and their own systems, the confrontation will inexorably end in the defeat of those who are trying to stall progress with all the might of their bureaucratic worldview.
That is when the necessary and much-talked-about environment will emerge to raise the next generation of Ukrainian entrepreneurs.
Read this article by Mykhailo Bno-Airiian in russian and Ukrainian.