Real change needed. Postwar Ukraine and its economy

15 June, 04:58 PM
Exclusive

Rebuilding the country and its economy is more than making a list of construction sites, but a wider effort to create comfortable environment for Ukrainian society

War is a movement in the first place. A movement toward victory – with victims, losses, and challenges.

Each shot fired by a U.S. M777 howitzer, each projectile launched by Slovak Zuzana 2 artillery system, each strike conducted by a Javelin anti-tank weapon move us forward during this war – the biggest challenge in Ukraine’s history of independence.

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To keep moving forward, we need to have a picture of our future. We need to see the goals that we are moving to. We need to notice things happening on the horizon which still seems distant, but that are there, and getting close.

So it’s timely to have a discussion about postwar Ukraine. We need to talk about it to get a better understanding of what we are fighting for. It’s needed by Ukrainian soldiers who are fighting through truly heroic combat in Luhansk Oblast. It’s needed for Ukrainian partisans in Zaporizhzhya Oblast who are sometimes sacrificing themselves in high-risk operations against the Russian occupation administration.

If we talk about the economy of postwar Ukraine, then we should start the analysis by recognizing all the problems that the Ukrainian economy had before the war.

In previous years, the economy of our country was nothing but a huge consumer market. Only a consumer market. The supply curve somehow managed to find common language with demand curve to intersect – and that’s why the consumer market was driving GDP growth, so it wouldn’t stay still. The key environment for economic activity was located in the shopping malls, which just needed to rent out space to as many companies able to import and sell goods as possible.

Such an economy clearly lacked depth. Well, if you take into consideration tricks played by energy distributing companies who were selling their receivables or weird routes traveled by tax credits incurred by transferring VAT liabilities to third parties – you can say the Ukrainian economy had a certain depth. But that’s not the real depth of economic environment that our country should have.

The Ukrainian economy can gain its depth from several sources. The first one is financial market. What’s the nature of the modern financial market? It’s a pocket. An endless pocket that business can put its hand into at any moment without any worries that the pocket will be empty.

But the existence of this pocket should be based on a very important principle: we’re all sailing challenging seas in the same boat. With no functioning financial market, the economy looks like a jungle where each animal only cares about its own needs. But when you have a financial market that is properly built, the economy becomes an ecosystem where different species constructively interact with each other.

Creating a full-scale financial market is a policy that has a lot of prerequisites and many requirements. Companies should be ready to distribute their own profits instead of amassing them in fixed income bonds issued by governments throughout the world, which leads to a huge amount of money not being put to any practical use for the country’s interests.

All of us should understand this: Ukrainian capital should be Ukrainian capital, and not just a random number of banking accounts where local billionaires keep their money, pursuing own egoistic goals.

In the meantime, a 40-year-old Ukrainian does look a little bit funny when talking to peers from Western countries when says that he or she doesn’t own any investments in any securities, doesn’t own any pension savings and doesn’t even consider taking up a mortgage loan. With such a financial reality, the Ukrainian economy would be losing its pace, moving mostly backwards. Billionaires would continue amassing capital, betting on commodity markets, while millions of consumers would stay hostages held between inflationary trends and anemic wage growth.

The second source for the Ukrainian economy to gain depth could be based on an extensive program of postwar recovery. This should include not only rebuilding the energy infrastructure in the Donbas area, establishing new logistical routes for Ukrainian exports and reconstructing the bridges which were damaged during the combat. For instance, Irpin bridge near Kyiv is already being reconstructed – and it’s not waiting for any big state infrastructure program.

That’s why we need deeper planning. Obviously, for the next 50 years we will be living in an environment created during the postwar reconstruction stage. We do believe that Ukraine will end the war successfully. What will happen to Ukraine in 100 years – is a different subject.

Probably, some common sense lies with those who say: well, we don’t need to build our country from scratch, a lot of positive developments were happening prior to war and those could become foundations for the reconstruction effort. Indeed, we don’t need to write a new Constitution and we don’t need to construct a new building for Verkhovna Rada, our parliament. And for having a victory parade, we don’t need to create a new Khreshchatyk street in downtown Kyiv.

However, the Ukrainian reconstruction policy should be based on a principle that is well known to construction startups emerging in western Ukraine – “we build 100% from zero ground.” Those who have had the opportunity to travel around, say, the Chortkiv area in Ternopil Oblast, might well know that western Ukrainian construction workers are able to do miracles, creating comfortable houses for several generations of families.

Meanwhile, villages in Cherkasy Oblast, unfortunately, still don’t even have a proper water supply – despite the fact that western Ukrainian villages have learned rural water supply solutions.

We should focus on creating a Ukraine that will truly look like a European Union member-state. So that walks around its cities would be full of high-quality consumer and emotional experiences. So that travels around its famous natural parks would be an exclusive tourist attraction. So that this country would finally have a housing economy that worked properly.

There have been problems with access to quality housing with enough space for the family that have led to a long-lasting demographic crisis where families couldn’t afford to have more than one child. And many just migrate abroad.

If we have 30 more years of living in the demographic situation where 1-child-families prevail – then we’re going to have not a 40-million, but a 20-million nation. Then, we will have problems with the quality of our air, the quality of our water, the quality of our vacations that by the end of the day cost us millions of euros for medical expenses to treat cardiovascular diseases.

That’s why the reconstruction program should be treated as the biggest economic stimulus that Ukraine has ever had throughout its independent history. This reconstruction effort should be connected to all the aspirations we have to change our country for the better. War is, first of all, a reason to build a strong country – such a strong economy that existential threats for the future Ukraine would never emerge again.

Modern history proves that most military risks emerge for those countries that either have widespread poverty or lag behind in their development. An aggressor realizes that in poor countries people are really unhappy about the economic conditions of their own lives, which might be used for invasion purposes.

The reconstruction program for Ukraine has every chance to become the basis for changing a lot of things in how our economy operates. How employers treat their employees, whether the business does long-term planning or not, using the principle of the so-called “Occam’s razor.”

Occam’s razor is a concept that emerged within Medieval philosophy and it’s quite a simple one: if certain theory or a word doesn’t have any purpose, then this theory or a word shouldn’t even exist. In the economic context this means: if a company doesn’t create any added value, but absorbs certain amount of capital, then its impact on the economy is rather harmful. In the Ukrainian economy, there used to be a whole industry of commercial intermediaries, suppliers of various services which weren’t creating any added value. And this was a major problem.

During the pre-war era, the Ukrainian economy learned this very basic algorithm: you create a service, then you use modern advertising technologies to get people used to think that they really need such a service – and that was a profit-making business. While Uzbekistan, for instance, launched its own production of smartphones which is based on cooperation with Samsung, a South Korean technology conglomerate. Obviously, such a business contributes much more to the economy.

When we talk about long-term planning in business, we shouldn’t be just paying lip service to this. It doesn’t look good when the most profitable investment across the economy is simply buying sovereign bonds, sometimes to sell later. Such a situation is able to create millionaires and even billionaires but doesn’t make Ukraine richer. It may even create more poverty.

Buying bonds is a very simple and quick operation. There’s nothing really sophisticated about it. While constructing a cement factory, for example, in Kharkiv Oblast is a much more complicated project which has several stages. Obviously, if you earn a 15% yield on your bonds, why would you go to all the bother of building a cement factory that will still only provide 15% in annual returns.

That’s why Ukraine needs a new generation of businesses that will have a more practical approach based on long-term planning. This generation should be doing construction projects, it should create added value and fill in the gaps on Ukrainian commercial scene.

It’s a well-known fact: the iPhone covers that sell in Ukrainian shopping malls are produced in China, while Russian companies put funny drawings on them to attract a younger audience. That’s what we need to do: firstly, learn how to create funny drawings for iPhone covers, and then learn how to produce covers as such.

Clothing, household equipment, construction tools, furniture, even fishing utensils – these are all products that we need to learn how to manufacture in Ukraine and finally stop focusing on this very primitive importing strategy: we bring products from China or elsewhere, calculate the incoming price, add VAT to that price, do a mark-up and sell it to customers to gain profits. Ukraine shouldn’t be just a consumer market. It should be an economy where added value is created, where well-paid jobs are created and all of this contributes to better financial stability for the new generations of Ukrainian men and women.

We should take a separate look at the agriculture industry. My personal belief is that Ukrainian agriculture market could be at least three times bigger than it is. It’s not only a case of introducing all the modern technology to agricultural production – like drones which analyze soil condition or artificial intelligence that helps to plan to harvest. It’s mostly about widening the menu of agricultural products.

Having occupied a solid position on the global market with its own grain supplies, the Ukrainian agriculture sector got used to harmful stereotypes which say: producing pork, beef, vegetables and fruits don’t have much of a commercial potential, such a business only has a certain role for the local market and this role is relatively minor. I always get surprised when I go to Silpo grocery store and see top-notch Spanish pork on the shelves when there’s no Ukrainian pork of such a quality among the buying options. Same thing with tomatoes – I still can’t get why I have to buy Turkish tomatoes, while even soils of Kyiv region, which is in northern Ukraine, are able to produce tomatoes.

Take the construction sector. The Ukrainian reconstruction program should attract globally known companies from the construction industry to contribute to creating a better-looking country. Of course, having the Natalka park in Kyiv’s Obolon district is a good thing, but if you take into consideration how developed the modern urban construction industry is, you might come to the conclusion that we’re getting used to small, very minor improvements in the environment sof our cities. Ukrainian cities need modern-day airports, public transportation systems, and entertainment centers.

Certainly, you may still take your kid to jump on trampolines at Dream Town, a shopping mall in northern Kyiv. But wouldn’t it be better to construct a real Disney Land for Ukrainian kids who have experienced the war and now need their own share of positive emotions.

For instance, you can’t call the Dominican Republic a country which is much richer, much more developed than Ukraine. But when I visited it in 2017, I saw there enormous entertainment resorts for kids, where they can enjoy all the trampolines and all the swimming pools that they’ve been dreaming about – and spend their own endless energy there, day and night.

Most of us probably understand by now the need for Ukraine’s energy security. Constructing new electricity stations – which would include all the latest technology developments, including safety measures – is critically important.

If you take into account that the Ukrainian energy system is now connected to the EU electricity market, you can bet Ukraine will be exporting electricity to neighboring countries. With the huge opportunities of the European energy market, building a new electricity station, or several, could be a very successful business.

It would improve Ukraine’s domestic energy industry where the most popular commercial moves so far have been making aggressive bids in a privatization auction to obtain a stake in one of the country’s electricity distribution companies.

We have to admit that a substantial part of the Ukrainian economy has been ruined – factories, plants, and various industrial assets. Lots of civil infrastructures and residential property are ruined as well. That’s why any macroeconomic analysis can’ be based anymore to comparing modern-day Ukrainian economy to what it was yet back in 2021.

Ukraine’s 2021 economy doesn’t exist anymore – Azot chemical factory in Siverodonetsk has been severely bombed, Azovstal steel plant in Mariupol has been critically shelled, Kramatorsk railway station fell victim to Russian rockets, and a number of Ukrainian airports have experienced vast damage. Besides that, the Russian army has plundered this year’s harvest in the Ukrainian south.

Our macroeconomics should be based on our vision of the future. We indeed can become richer if we let ourselves dream big. We should stop accepting the economic ideology of “let’s just do something.” We should do projects, programs, and commercial ventures that would create a rich, highly developed, economically efficient Ukraine. If anyone thinks that this is easy – then no, it’s not easy at all.

Giving up the shadow economy, a refusal to be okay with millions of Ukrainians having monthly wages not sufficient to cover basic needs – that requires some degree of bravery. This matters to each of us, for all the Ukrainian men and women.

Before the war, we would often tell each other: “Come on, dude, we’re in Ukraine.” This was the most popular explanation for why things around don’t work properly. We had these three-week-long hydraulic tests when we had no hot water supply in May.

We had mortgage rates reaching 18%, despite a totally different figure being given in the advertising promoted by the bank. We had MacBooks, imported to Ukraine through shadowy channels, and when you would go to a store for gadgets, a sales manager would offer a special cheap price with a wink of his or her eye which implied that you agreed to buy an illegally imported product.

Yes, we are in Ukraine. But that should be the reason for our economy to become a comfortable environment for us, our families, our dreams, our plans, our ideas, our views on what the good life should look like. Otherwise, all the sacrifices of the current war would be senseless. The cost of war that Ukraine is paying now should be justified by the amount of effort that we put into rebuilding our country.

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