Ukraine's economy: what can businesses and entrepreneurs expect?

Mykhailo Kukhar is the founder and chief economist of the Independent group of macroeconomic analysis and forecasting Ukraine Economic Outlook.

In a recent interview with «News Factory», Mykhailo told what awaits Ukraine in economic terms in the future:

• Marshall Plan,
• whether the pension fund will be closed,
• how Ukrainian salaries will soar to 1800 euros,
• and how taxes will be changed.

The expert believes that Ukraine's economy is waiting for a remarkable rise, migrant workers will return home and the investments will flow into the country. Despite the general pessimistic background of forecasts, Mykhailo is guided not by emotions, but by numbers. And here's why. 

Exports in Ukraine: how to treat pessimistic forecasts of the Ukrainian economy recovery?

«Exports are the most vulnerable part of Ukraine's economy, says Kukhar, because of the war, Ukraine lost three quarters of its trade routes when it was deprived of air and sea. However, the drop in exports was only 39%. For comparison, Ukraine's exports grew by almost the same 39% in 2021.

The dynamics of recovery is also interesting (twice from the lowest point): thousands of small and medium-sized entrepreneurs have each made a small miracle in their place, building new logistics routes by rail and road to supply their products to Europe». 

Ukraine lost only one year of development

Before the war, the average salary in Ukraine was $500 (and even reached $600 with December bonuses), and GDP was $202 billion. These were record figures in the history of Ukraine. A month before the war, summing up the economic results, Mykhailo Kukhar said that 2021 was very successful for Ukraine. GDP growth went from $150 billion to $202 billion.

In 2022, it is expected to drop to $146 billion. «If we talk about how it happened before in different countries, large-scale wars or at least revolutions threw the economies of countries back decades in terms of living standards and economic income. But now macroeconomic figures literally confirm the theory that «God loves Ukraine». Because judging by the figures, we have lost only a year of development, — the expert says.

The modern economy is built not on how much production brings, as it was before, but on how much you can sell. And if the surviving 60% of our material base will be able to generate 3/4 of the revenue, then this is a very good result».

Prospects for Ukraine's recovery

«Military expert General Budanov made public statements and believes that we can expect the end of the war and victory in May-June 2023.

We all hope for this, but just in case, we make forecasts on the basis of the main pessimistic expectations, Kukhar said, So, even if the war in Ukraine lasts the whole next year, the country will still recover in 2023. GDP growth — by 10% of US dollars, or by 3-5% in terms of material base».

Mykhailo Kukhar explains where this «economic phenomenon» comes from: in the GDP structure of modern economies, including Ukraine, the production of services occupies 70%+. In Ukraine, industry accounts for less than 20% of GDP, agriculture — less than 9% of GDP.

70% of our earnings are in the service sector. Despite the relocation of IT business, despite the fact that many «bright minds» have left Ukraine since the beginning of the war and are now working in Europe, our export earnings from the IT sector have not fallen.

As Kukhar said in an interview before the war, Ukrainian IT exports exceeded bread exports two years ago. That is, Ukraine is no longer so much a breadbasket as one of the local leaders of the «new economy» in the form of modern IT technologies.

«Of course, this year we expected 20-30% growth in IT exports, but the fact that we did not lose this revenue during the full-scale war is an encouraging result, Mykhailo believes, — Yes, the enemy was able to destroy the blast furnaces of our heroic symbol — Azovstal, but not only blast furnaces in the modern world produce GDP and export earnings.

They caused us significant damage, but the part of the economy that survived — these sectors are coming back to life.
This does not mean that next year will be some kind of «economic boom», especially if the war lasts until the end of the year, but we can say that we have already passed the lowest point of the fall.

Since the beginning of the war, wages, as well as GDP, have fallen by 25% to $ 375, but in the first quarter of next year they will grow again to more than $ 400. We have already observed this growth trend since the middle of summer».

How will the Ukrainian economy recover after the war?

Based on what was said earlier, Mykhailo Kukhar believes that we have not returned to 5-7 years ago, neither in terms of living standards, nor in terms of revenue.

We will come to victory with 150 - 170 billion dollars of GDP, and an average salary of more than $ 400. And this is about official salaries, but at the same time we understand that there are unofficial ones, the coefficient of which is higher.

In addition, according to the already announced official data of our partner countries after the conference in Lugano with the participation of the Ukrainian authorities and representatives of the European Commission, the leaders of many countries that have taken patronage in a number of regions, $ 200 billion has been allocated for the restoration of Ukraine for the first three years.

«As an economist who has been engaged in such calculations for many years, I can say that in the best years Ukraine received a maximum of $ 3 — 4 billion in foreign direct investment per year — said Mykhailo Kukhar — Now much more money will flow into our economy. For the sake of curiosity, we looked at what level of economy had similar experience of foreign direct investment. It turned out that China received $ 50 — 60 billion of direct investment per year when its GDP exceeded one trillion dollars. This is normal for a trillion-dollar economy, but for a GDP of $ 150 billion it is «Dubai», it is a screaming growth that is even difficult to calculate».

Nevertheless, the calculations still show that while the pre-war wages will be restored, in the first year there will be a huge shortage of labor. That is, the labor force will become a premium, so all our workers, who previously sought a better life abroad, will return to work in Ukraine. The salary of a builder in the country will start from 1500 euros with the start of the recovery plan.

«According to the trends we see, by 2030, we will double our dollar GDP, it will definitely exceed $300 billion. And average salaries will reach 1800 euros, which exceeds the level of salaries of all Eastern European countries, including Poland. These are the inevitable consequences of only these $200 billion, and as we know, the financial support that Ukraine can count on is greater,» the expert adds.

Reparations will accelerate economic growth

First, there are still at least $300 billion of arrested Russian reserves only in cash - dollars and euros. Secondly, according to the latest information, there is at least 300 billion of monetary gold from Russian reserves. So far, only a third of this money has been found, but the search continues, according to the Financial Times.

«We also have 200 billion from Russian oligarchs linked to the military industry and the government, although this will be a longer story», Kukhar concludes.

It should be fairly noted that the payment of reparations may take years, and the formulas for calculating losses may be different. For example, the calculation of losses from the destruction of the «Azovstal» plant should not be limited to the reconstruction of the premises. The lost profit for the period of absence of the facility on the economic map of the country will also be calculated.

Foreign investors and Ukraine: who will invest in a country with a crazy neighbor?

What is the point of investing in problem areas? Only significant profit. This question is not new for the world economy, which has a history of other countries that have suffered military aggression.

«Here is an example: after the powerful invasion of Turkey, Cyprus suffered huge losses. The banking system went into default, the population became impoverished. Everyone was sure that there would be no more investment in this country, given the fact that Turkey stated that it was not going to stop and had ambitions to conquer the whole of Cyprus. In less than ten years, Cyprus' GDP has tripled, incomes have increased sixfold and the banking system has become one of the leading in Europe.

The recipe is quite simple: Cyprus has become an official low-tax jurisdiction. I think that Ukraine also has no other way to compensate for the natural desire of foreign investors to get higher profitability than to reduce taxes», — says Mykhailo Kukhar.

He also emphasizes that Ukraine is already developing a new liberal tax code based on the 10/10/10 system. Where 10% is the tax on citizens, 10% — corporate tax and 10% VAT. In addition, it is planned to remove the contribution to the pension fund, which even before the war «felt bad», and during the large-scale invasion it became finally clear that the pension fund is held only by subsidies from the state budget. It is bankrupt and therefore it is pointless to burden contributions to it from salaries.

The expert is confident that the new model of the tax code will interest foreign investors and make the country ideal in terms of business development conditions. Of course, it is also necessary to continue the fight against corruption, and in this area Kukhar already notices some positive results.

As a conclusion, the Government, of course, needs to make targeted efforts for the economic take-off of Ukraine, but this is greatly facilitated by human capital, common borders with the European Union and the free trade area with it. «So, success is inevitable even without the Marshall Plan, which no one has seen yet, but which, I hope, will multiply the pace of Ukraine's economic growth», concludes Mykhailo Kukhar.