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  • A New Generation Takes Over
  • PM Honcharuk Vows to Double GDP Growth to 5-7%
  • Low-Interest Rates Will Create ‘East European Tiger’ in the 2020s
  • US Grads to Run Finance, Economy, Ag
  • New Infrastructure Minister Promises Private Freight Trains, Toll Highways, Concessions for Ports/Airports and, Maybe, Chinese Investment in Post Office

In a generational turn of the wheel, the youngest parliament in the history of Ukraine history elected the youngest prime minister in the history of Ukraine – Oleksiy Honcharuk, a 35-year-old free-market reformer. The Rada, with an average age of 41, approved a pro-business cabinet of almost all new faces. Volodymyr Fesenko, an analyst with Kyiv’s Penta think tank, told Reuter the new government is “the most liberal … in the history of Ukraine.”

Setting an example for small government, the new Cabinet has 17 ministers – one third fewer than the 25 ministers of the outgoing Cabinet. Several ministries were merged. Near midnight, the new Rada voted to lift parliamentary immunity. A second, final vote is to be Tuesday.

Highlights of the day:

With this new parliament, President Zelenskiy said: “Now the country will finally be able to switch to fifth gear.” In a call for action, he demanded: “The liberalization of the economy, the creation of a powerful investment magnet to attract foreign investment. Building a digital state in a smartphone, where queues at state institutions and hellish bureaucracy remain in the past. Elimination of raiding, monopolies, and smuggling. Gaining real energy independence, energy efficiency and solving tariff problems.”

“A new generation has come to power,” Prime Minister Honcharuk told the Rada and the nation. Since 2015, Honcharuk, a lawyer by training, served as an advisor to Ukraine’s first deputy prime minister and was the director of the Better Regulation Delivery Office, an EU-funded consultancy dedicated to cutting red tape. Honcharuk was elected by 69% of parliamentarians present Thursday, 290 out of 418. In a recent interview with Novoe Vremya magazine, Honcharuk said he wants to make Ukraine “an Eastern European tiger.”

Ukraine’s new Prime Minister called for doubling the economic growth rate. “This government faces the task of accelerating economic growth,” Honcharuk told lawmakers, noting that 10 million Ukrainians lived below the poverty line. “We need to grow, but not to grow by 2-3%, but, at a minimum, by 5-7%.” Honcharuk said talks will start in September with the IMF to “negotiate a new 3-4-year cooperation program.”

Lower interest rates are key to economic growth in the 2020s, Honcharuk said. “Cheap lending is one of the tactical goals that we will set for ourselves in the near future,” he said. Today, Ukraine’s prime interest rate is 17%. Next year, Honcharuk says, he wants to see hryvnia home mortgage rates of 12%. “Interest rates on loans may fall this year,” he promised. “People will start doing business. It can start with construction and industry.”

On the central bank, he said: “Their independence is the basis of the country’s macro stability. It cannot be undermined.” That said, he added: “But the government should be in constant dialogue with the National Bank of Ukraine so that they are not too conservative.” In a preemptive strike, Yakiv Smoliy vowed Wednesday to cut interest rates in half over the next 18 months, hitting 9% at the end of next year.

A review of all agencies, followed by a major purge of ‘chiselers,’ will happen in September, promised Honcharuk. He told the Rada: “We want to analyze the activities of all bodies and dismiss all ineffective leaders in the coming month.”

Rada ChairmanDmitry Razumkov, 36 years old, spokesman of Zelenskiy’s Servant of the People presidential campaign last spring.

Of three major economic portfolios, only Finance Minister Oksana Markarova keeps her post. Working for four years at the Ministry, first as deputy minister, then for the last year as a minister, Markarova has promoted the opening of Ukraine’s local currency T-bill market to foreign investors. Holder of a Master’s in Public Finance from Indiana University, Markarova is a fiscal conservative who has pushed long term budgeting for the government.

The Ministry of Economic Development and Trade goes to Timofei Milovanov, honorary president of the Kyiv School of Economics a co-founder of the influential VoxUkraine analytical platform. Holder of a doctorate in Economics from University of Wisconsin-Madison, Milovanov, has lectured at the University of Pennsylvania and served as a board member of Ukraine’s central bank for the last three years. Last month, Milovanov organized a weeklong retreat for the 254-elected members of Zelenskiy’s Servant of the People, serving them a daily diet of free-market economics.

The Economy and Trade Ministry will be bolstered by the addition of the Ministry of Agrarian Policy and Food. A pillar of Ukraine’s economy, farm output accounts for 40% of Ukraine’s exports.

In charge of trains, planes, ships, roads, and the mail, Vladislav Krikliy will be Infrastructure Minister. Last week, in an interview with the Center for Transportation Strategies, Krikliy predicted the Rada will pass in September a concessions law to allow private companies to build toll roads. After that, the government wants to pass a wider concessions law setting rules for private administration of airports, rail stations, and port terminals. Another law change would allow private freight and passenger trains. Shares of Ukrposhta, the state postal service, could be sold to strategic investors, such as AliExpress, China’s online retail group.

We want to pass nine bills by the New Year that relate to the implementation of the agreement with the EU,” he said. These include the Law on Rail Transport, the Law on Inland Waterways, the Law on Road Concession, and laws on vehicle weight control and safety inspections.

Key Cabinet Positions:

Foreign Minister – Vadym Prystaiko, a diplomat since 1994, he was Ukraine’s Ambassador to Canada 2012-2014 and later led Ukraine’s mission to NATO. This summer, served as a deputy presidential chief of staff.

Vice Prime Minister for European IntegrationDmytro Kuleba, a veteran diplomat who is currently in Ukraine’s envoy to the Council of Europe.

Defense MinisterAndriy Zahorodniuk, 44, former head of the supervisory reform office at the Defense Ministry, and a member of the Supervisory Board of UkrOboronProm, the state-run military production conglomerate. In addition to raising the Army to NATO standard to defend against Russia, Zahorodniuk vows to fight corruption: “Everybody knows thievery take the place in the army, and the people are tired of his issue. There must be no corruption in the army.”

Interior Minister – Arsen Avakov, retains the post he has held since 2014, despite criticism for not solving high profile crimes; Zelenskiy media backer Ihor Kolomoisky claims to be a close friend of Avakov. On Wednesday, 24 civil society groups and anti-corruption watchdogs urged Zelenskiy and the Rada on Aug. 28 not to re-appoint Avakov. David Arakhamia, Servant of the People fraction leader in the Rada, said Thursday Avakov would stay in office for another 6 months “for a transition period.”

Prosecutor General – Ruslan Riaboshapka replaces Yuriy Lutsenko, who also had a hard time prosecuting high profile crimes. A top official at the National Agency for Preventing Corruption 2016-2017, Riaboshapka quit saying that then-President Poroshenko was interfering in an independent anti-corruption body.

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Health Minister – Zoryana Skaletska, healthcare expert and lawyer, deputy dean of the faculty of law at the National University of Kyiv Mohyla Academy.

Energy and Environment minister – Oleksiy Orzhel, 35, Servant of the People MP, head of the energy sector at the Better Regulation Delivery Office. 2006-2014, he worked at the national commission that regulated energy and utility services.

  • Farm Land Market Bills Take Shape
  • Small Hydro Privatization Starts
  • Salaries Grow Twice as Fast as Prices
  • Internet Ad Revenue Doubles
  • Ukraine Has 2nd Largest Air Traffic in Eastern Europe

With the political transition to be completed, the central bank does not see a threat to its independence. “Today, I do not see a threat to independence, nor do I hear statements from new political forces about the need to change the course of the National Bank,” Yakiv Smoliy, the central bank’s governor says in an interview posted on Facebook. With inflation trending down, Smoliy promised to cut Ukraine’s 17% prime rate almost in half – to 9% at the end of next year: “Low inflation is the foundation for future economic growth. If there are appropriate economic conditions, the NBU will reduce the discount rate to 9% in 2020 and 8% in 2021.”

By mid-September, a package of seven bills to create a farmland market will be introduced in the Rada, Olga Trofimtseva, minister of Agrarian Policy and Food, predicted to reporters Wednesday. Covering all aspects of what could be Europe’s largest farmland market, bills would protect tenants, combat raiding, ensure affordable financing for farmers, identify final beneficiaries of buyers, and provide a transitional period of floor prices to allow the market to set prices, protecting initial sellers. To be decided are possible restrictions on the quick resale of land, sales to foreigners, and sales to companies. On sales to agribusinesses, Trofimtseva said: “The president’s position regarding legal entities is quite liberal – and this is just one of the disagreements that exist between us.”

Opening a farmland market will add 2 percentage points to Ukraine’s annual GDP growth during the 2020s, predicts Satu Kakhkonen, the World Bank’s regional director. This year, Ukraine’s GDP growth is to be about 3.5%. If farmers can post land as bank collateral, billions of dollars will be injected into Ukrainian farms, boosting crop yields toward EU levels. Trofimtseva predicts the immediate annual inflow of capital would be $700 to $1.5 billion.

Norway’s AICE Hydro A.S. is expected to bid on Ukraine’s first of several small scale hydro plants to go up for privatization: the 2 MW plant at Pervomaisk, northern Mykolaiv. According to ProZorro, bids are accepted until Sept. 17. Put up for sale by the State Property Fund, the 90-year-old hydro plant has a floor price of $2.6 million. Ukraine has 64 operating small scale hydro plants and 100 more that can be restored, AICE says. Dedicated to modernizing existing plants, AICE aims at “combining Norwegian and Ukrainian competence within hydro energy.” Norway is Europe’s largest user of hydropower, getting 98% of its electricity from dams.

Ukrzaliznytsia has started to use ProZorro.sale to work through its scrap metal mountain. In three days of auctions last week, it sold 65,000 tons of scrap for $14 million. Interpipe, the pipe and rail wheel manufacturer, bought almost half of the scrap. Unblocking sales, the state railroad shifted from placing the onus for delivery on the seller, rather than the buyer. With 16,000 decommissioned freight cars ready for sale, metallurgical companies prepare for more auctions this fall.

Over the last year, salaries went up by 20%, while inflation was 10%.  In July, the average monthly was 10,971 hryvnia, or $439, reports the State Statistics Service. In terms of regional disparities, wages in the highest region, Kyiv, are $650 – almost double the $371 monthly pay in the poorest region, government-controlled Luhansk. In July, the biggest y-o-y wages jumps were 25% – in agriculture and industry. Both sectors fight to keep workers, competing with the ‘brain drain’ to Poland.

Internet advertising market nearly doubled during the first half of this year, hitting $79 million, reports the Ukrainian Internet Association. Almost 37% was on social media and instant messengers – Facebook, Instagram, Twitter, YouTube, Skype, and Viber. Of the total amount, the segment breakdown is: in-stream video – 41%; banners – 34%; in-page video – 11%; pop-up and other ‘non-standard’ techniques – 9%; sponsorship – 5%.

For air traffic, Ukraine rose to 2nd place among the 10 nations of Eastern Europe and the Baltics, reports Novoe Vremya Business. In the first half of this year, air traffic in Ukraine jumped by 20% to 10.7 million passengers, displacing slow-growing Romania, which had 10.5 million passengers. Although Ukraine had the region’s fastest growth rate, its volume was still less than half the 22.3 million recorded in Polish airports. Ukraine has the region’s largest population, about 40 million people.

  • World Bank Loans $200 Million for Farm Land Market
  • IT to Catch Over-Weight Trucks
  • Wage Remittances = 11% of GDP
  • Commercial Construction Jumps 35%

Malpass calls for establishing a farmland market and breaking a monopoly where “one oligarch controls a group of companies which produces over 80 percent of the domestic output for several varieties of mineral fertilizer.” Malpass, a former Treasury official for three Republican presidents, writes in the Financial Times: “Establishing an efficient market for agricultural land will encourage improvements, including more investment in mechanization and irrigation, a shift to higher value-added products, and better access to finance for smaller farms.”

The World Bank will loan $200 million to help Ukraine to use 21st-century technology to create a fair and transparent farmland market. The loan will pay for satellite mapping of Ukraine, creation of a publicly accessible State Agrarian Register, and creation of a publicly registered inventory of state-owned farmland, about one-third of Ukraine’s 32 million hectares. The loan will also pay for an automated trigger system to alert landowners to changes in their properties on the Zemkadastr, or Land Cadaster. Designed to promote private investment in farming, the loan agreement was signed Tuesday by Finance Minister Oksana Markarova and World Bank regional director Satu Kahkonen. The World Bank estimates that the creation of a private land market will generate up to $1 billion in additional annual economic activity.

The World Bank’s International Finance Corporation may provide Ukraine with a $40 million loan for energy efficiency and renewable energy projects, reports Energoreform. The loan would be administered by OTP Leasing Ukraine LLC. Last December, IFC launched a four-year Green Finance program to attract investment in energy efficiency and renewable energy in Ukraine. A legacy of the cheap gas era of the Soviet Union, Ukraine still has one of Europe’s most energy inefficient economies.

At the request of President Zelenskiy’s office, Ukravtodor is drawing up a five year, $20 billion, 24,000 km road building and repair program, reports Slawomir Nowak, acting head of the state highway agency. Nowak, a Pole, said he hopes to attract EU and World Bank funding for much of the program. Ukraine has about 165,000 km of paved roads, many unrepaired since the 1970s.

In October, the five main highways leading to Kyiv will have “Weight-in-Motion” systems for detecting overweight trucks. Building on this €7 million, World Bank-funded pilot project, Ukravtodor wants to install 100 more of the sensor systems, with a priority to protecting newly rebuilt roads. Using Canadian technology, Weight in Motion sensors calculate speed, the total mass of a vehicle, and weight on axles. A camera records license plates for identifying owners and for mailing fines. Violations are also sent to transit police who are to escort trucks to unloading areas.

Borrowing another technology popular in Europe, Ukravtodor plans to introduce an electronic system of collecting tolls from trucks and buses traveling on Ukrainian highways. The tolls would go to the Road Fund. Enabling legislation is expected to be passed this fall by the Rada, Nowak tells Interfax-Ukraine.

With farmers moving bumper wheat and barley harvests to the Black Sea ports, July truck freight was up 25% y-o-y. The June-July grain harvest was 33.5 million tons – 33% higher than the same period last year.

Trading places: since 2015, remittances from Russia have almost dropped in half, while remittances from Poland have tripled, according a graph by RFE/RL, based on National Bank of Ukraine data. Rivalling Russia for second place, remittances from the Czech Republic have increased 5-fold since 2015, to almost $250 million in the first quarter of 2019.

Construction was a pillar of Ukraine’s surprise second quarter 4.6% growth, new number indicates. While retail grew 10% and agriculture grew 12%, construction was up 22% through July, compared to the first seven months of last year. The performance was uneven across the country, ranging from a 12% drop in Ivano-Frankivsk to a 117% growth in Vinnytsia. In Kyiv, home to almost one-quarter of national volume, construction was up 23%. Fueled by consumer and business confidence, commercial real estate construction surged 35%.

Ukraine’s export of services – often an indicator of IT outsourcing – grew 8% during the first half of this year, compared to the same period last year, reports the State Statistics Service. The exports hit $5.9 billion, making for a half-year surplus of $2.9 billion.

Investors bought $71 million worth of hryvnia T-bills at Tuesday’s auction, two thirds more than the previous week, reports the Finance Ministry. In keeping with the Ministry’s strategy of pushing investors toward longer-term bonds, 77% of bonds sold were five-year notes. The weight-average yield was 15.30%. As of last week, short term borrowing accounted for 61% of outstanding bonds, down from 97% at the start of the year, reports ICU.  

  • Dubai Fund Eyes $1 billion for Ukraine
  • US Makes Last-Minute Bid to Block China’s Purchase of Motor Sich
  • In China, Ukraine Dethrones US as King Corn
  • Electronic Auctions Set Prices for Future Farm Land Market
  • The Price of a Strong Currency: Counterfeiters Print 500 Hryvnia Bills

A Dubai-originated fund, Marquis Holdings, is studying investing over $1 billion in Ukraine through the end of 2020, Amer Kharb, the fund’s Ukraine country representative, tells UBN. Kharb, who plans to open an office in Kyiv this fall, targets investments in infrastructure, construction, logistics, agriculture, defense and energy. “We consider this first $1 billion seed capital in anticipation of much more investment in the future,” he said in Kyiv. “A well-governed Ukraine presents Europe’s best opportunities for growth and development.”

U.S. national-security adviser John Bolton comes to Kyiv in a bid to torpedo China’s purchase of Ukraine’s Motor Sich, a leading manufacturer of helicopter and airplane engines, reports The Wall Street Journal. Bolton seeks to meet with Vyacheslav Boguslayev, the veteran CEO of the Zaporizhia-based company. After Motor Sich lost the Russian market, China started negotiating to buy the ailing company, once the highest valued the company on Ukraine’s stock exchange.

“The acquisition of Motor Sich would boost China’s military buildup and civilian aviation capacity, which Washington has taken pains to retard in a near-total Western embargo on selling military goods to China,” writes the Journal of a deal now before Ukraine’s Anti-Monopoly Commission. A US company reportedly is in talks with the US Overseas Private Investment Corporation, to get financing and insurance for a joint venture. Notoriously slow-moving, OPIC gets a facelift Oct. 1, rebaptized as the U.S. International Development Finance Corp.

Even before President Trump’s trade war with China, Ukraine and the US had traded places as corn suppliers to China, reports Successful Farming, an Iowa-based news site.  Six years after shipping its first load of corn to China, Ukraine now is the largest supplier. This year, Ukraine is to ship 4 million tons of corn to China, supplying 80% of its import needs. In 2011/2012, the US shipped 5.1 million tons of corn, accounting for almost 100% of all Chinese imports. “The Black Sea country is expanding corn exports fast,” writes Andrey Sizov Jr., a regional expert. “Ten years ago, Ukraine shipped only 5 million tons of corn to other countries, while in the current 2018/19 season exports are expected to reach 30 million tons, with EU, China, and Egypt being major buyers.”

China’s Norinco will invest $6 million in new equipment and technologies at two Lviv region production plants of Ukrspyrt, the state alcohol producer. The goal is to produce high protein feed additives and liquefied carbon dioxide for export to the EU.

Once a niche producer, Ukraine is now the world’s sixth largest producer of soybeans. After growing by 14.5% last year, Ukraine’s soy harvest is expected to hit a record 5 million tons, approaching Canada’s forecast 6.5 million tons. Exports of soybeans dropped by one quarter in last two years. But, due to a change in Ukraine’s VAT rules, exports of soybean oil and soybean meal doubled in the marketing year that ended in June. During the first half of this year, soybean processing volumes are up 1.5 times, compared to the first half of 2018, reports Leonid Tulush, of Institute of Agrarian Economics.

Thanks to climate change, rice cultivation can expand northward in Ukraine, from Odesa and Kherson to Poltava and Dnipropetrovsk, says Viktor Sheremeta, deputy minister of Agrarian Policy and Food. “Today, only two regions are engaged in rice cultivation,” Sheremeta told a meeting of the National Academy of Agrarian Sciences. “Given climate change, Ukraine has every opportunity to increase its rice crops to meet its own needs and, in the long run, to develop new markets.” Currently, rice is grown on only 13% of the 100,000 hectares appropriate in Ukraine’s southernmost regions. Lack of irrigation and competition with imported rice are the top two obstacles.

As electronic auctions of state farmland lease set indicator prices for a future farmland market, a picture emerges of sharp regional diversity, reports the Institute of Agrarian Economics. From the sought after black earth of central Ukraine’s Kirovohrad region, the annual lease payment of $336 per hectare plummets to $36 a year for a hectare of the rocky soils of Zakarpattia. In addition to Kirovohrad, six regions were above or at or above the national average of $144 per hectare per year: Poltava – $300; Vinnytsia – $292; Odesa – $264; Cherkasy – $216; Kyiv – $192; and Khmelnytskyi – $144.

Preparing for a national farmland market, SETAM, the state-owned Center for Electronic Trading, has conducted 2,097 auctions for 90,124 of hectares of state-owned farmland since a pilot program for competitive bidding start fall. Using Blockchain technology and working with the national land Cadaster, the auctions netted $5.6 million, almost triple the starting prices. Of this money, $3.5 million went to local budgets, reports Victor Vishnev, director-general of SETAM.

The Cabinet has authorized UkrGazVydobuvannya, the state gas producer, to take a €52 million loan from the EBRD. Expected to win EBRD board approval in October, the money will go to buy 10 new makeover drilling rigs to improve gas recovery and to buy a waste heat recovery unit to produce electricity from heat wasted by gas turbines. Marina Petrov, EBRD’s Ukraine energy expert, said: “It is very important because it aims to increase the company’s production efficiency and finance equipment that helps rehabilitate existing wells.”

As the hryvnia increases in value, counterfeiting has increased of 500 hryvnia notes, now worth $20. This month, about 60 fake 500 hryvnia notes were withdrawn, largely from gas stations across the country. Printed with inkjet printers, counterfeits of the 2006 version of the banknotes have imitation ultra violet protection. About half of all counterfeits withdrawn are of the 500 hrynia denominations, reports the National Bank of Ukraine. On Oct. 25, the central bank will put into circulation 1,000 hryvnia notes.

The original English version is from our partner UBN – Ukraine Business News. For more information and news archive, go to: www.ubn.news.