Once You Are Bailed Out, You Don’t Come Back!

One of the fundamental principles of economics tells us that people respond to incentives. In a free market economy, profit that is definitely the best incentive directs business toward activities that increase wealth. However, the 2008 recession showed that the Ukrainian government as well as the American government had different take on the key element of economics. I am taking about bailing out.

The Tymoshenko government bailed out couple private banks by purchasing around 90% of stocks in each privately-owned bank. For instance, state bough out Rodovid Bank. Everything seemed to be OK until a new announcement made by the Rodovid bank's administration. Rodovid needs additional $1 billion to restructure its debt. Ernst & Young will supervise Rodovid's debt restructuring. It looks like the Tymoshenko government is really good in turning any lucrative business in a bankrupt. I still wonder how did the government manage to let the state-owned oil company NAFTOGAZ go bankrupt?

The main problem is not even bailing out again. Now a main issue is that the Tymoshenko government has no money to finance a bail-out. A money-printing stunt thrown by the National Bank of Ukraine has already inflated domestic money supply to all time high of the last decade. Inflation is rampant in Ukraine! Moreover, the government budget resources are almost exhausted. At present moment, the government budget has less than $100 million at its disposal that is even lower than the dramatic 1998 level. Russia's prime minister Putin has already rushed to reprimand Ukraine's president Yushchenko for defaulting on payments for Russia's natural gas. Wait a sec, what does Ukraine's president have to do with this? Ah, it must be the politics.

So what does the Tymoshenko government do in search of external financial resources? The government announces sales of government bonds. The Tymoshenko government sells 6-month Ukraine's government bond with 30% yield! Even Brazil is more modest with 8.76% yield on its 6-month government bonds. Many domestic and foreign experts express their concern that the Ukrainian government can run a Ponzi scheme. I agree that it looks really weird.

Assorted Links

1. The most recent public opinion poll conducted by the Kyiv International Institute of Sociology shows that POR's presidential candidate Viktor Yanukovich has more than 40% of public support.
   
2. According to the Legatum Prosperity Index, Ukraine beats Russia in terms of economic development. Ukraine holds the 61^st place (out of 104 countries) in the Legatum rankings while Russia is only the 69^th. Here is a diagram that compares Ukraine with Russia.
   
3. Social capital improves in Ukraine. Car-owners join brand-based social clubs such as Subaru Kyiv, Daewoo Brothers, Mazda United etc. Members of car clubs call themselves brothers in wheels.

Taras Kuzio on Ukrainian Politics

Myroslava Gongadze, a leading anchorwoman of Ukraine's Voice of America, interviewed Dr. Taraz Kuzio, Professor of Ukrainian Studies at University of Toronto.

Overall, I agree with Dr. Kuzio except his take on "constitutional anarchy" in Ukraine. I believe that the 2004 Constitutional Amendment that delineated executive power between president and prime minister brought a very important system of checks and balances that Ukraine needed for a long time.

 

Assorted Links

1. A sin tax in Russia. Is it really Pigovian tax? Ukraine deals with national vice in a simpler way.
   
2. Media freedom is under threat in Eastern Europe. What about Ukraine?
   
3. Taras Kuzio with a superb preliminary analysis of Ukraine's presidential campaign.

Ukrainian Cuisine

People often ask me about Ukrainian cuisine. What's that like? What do people eat in Ukraine? What are the most popular dishes? Ukrainians are a very carnivorous nation. Btw, there's a really funny movie Everything is Illuminated with Elijah Wood who plays a vegetarian American Jewish teenager who goes on a heritage trip to Ukraine. This movie has a funny episode that shows how hard it's to be a vegetarian in Ukraine.

Anyways, Ukrainian cuisine differs across Ukraine. In the West, most dishes are very close to Hungarian and Polish cuisine. In the South, you can really enjoy food if you are piscatorial. If you like spicy and kebab-type cuisine, you should go to Crimea that is the most Southern part of Ukraine. In the Eastern Ukraine, food is closer to Russian cuisine.

So here are my top three dishes from the Eastern Ukrainian cuisine:

1. The Borscht. Topped with a sour cream. Main ingredients are sugar beets (they give it a red color), potatoes, carrots, and beef.
   
2. Any kind of blintz. This picture shows you blintz stuffed with ground beef. They are usually served with a sour cream too.
   
3. The potato pancakes aka dranniki. With a sour cream again.

From UkraineWatch

From UkraineWatch

From UkraineWatch

Ukraine’s Gambling Industry Goes Online

Ukraine's Prime Minister Tymoshenko has already built a reputation of anti-market politician. Few Ukrainians were surprised when the Gambling Bill introduced by the Tymoshenko government went into effect last month. In brief, this bill outlaws operations of gambling industry within metropolitan areas except in the specially designated zones for gambling. The gambling zones will be established in suburbs farthest from the downtown. It's not clear how the government will regulate a size of the gambling zones. Will all gambling business be able to fit in these still-to-be-built zones? Neither anybody knows whether owners of casinos will be compensated for business liquidation and relocation. By the way, who is going to build the gambling zones? There are too many unknown variables in this equation.

Why would you do it at all when Ukraine's economy is going through a deep recession? Don't you need to support business instead of shutting it down? What about other jobs which are related to the gambling industry? Btw, the gambling business generates more than 30% of local tax revenues in Ukraine. For instance, tax revenues from the gambling business made up 60% of a city's budget in Kharkiv, the second largest city of Ukraine. However, Mrs. Tymoshenko proudly uses the Gambling Bill in her presidential campaign. One of her campaign ads says: "Gambling Business is Outlawed: She (Mrs. Tymoshenko) Works!"

But Ukrainian entrepreneurs strike back! The owners of gambling business found a way to keep their operations at the old establishments. The entrepreneurs swapped casino's license for internet café's license. The former casinos became the internet cafés. Brand new desktops with internet access replaced slot machines and poker tables. Now the former card dealers introduce themselves as IT consultants. Btw, you can still buy buzz there. So how does it work? It's simple. You just play the same games online. Instead of buying chips, you deposit $100 to your internet-based account and then play black jack, throw a dice and so on. The owners of "internet cafes" say that after all they benefited from the Gambling Bill because they found ways to cut down their costs. One, internet café license is cheaper than the gambling license. Two, Ukraine's Tax Administration classifies internet café as a sole proprietorship for tax purposes so that the entrepreneurs just pay a flat income tax of 300 hryvnia ($40) regardless of their total revenues. Three, they also cut down on their labor cost because the internet café needs much fewer workers than a small-scale casino. Overall, the Gambling Bill is a really bad idea. It definitely hurts a gambling business that is one of the major sources of tax revenues in Ukraine. So far the effect of the government regulation was partially cancelled out by emergent entrepreneurial response. Let's hope that the internet café business is not the next on the Tymoshenko list.

From UkraineWatch

It’s a Final Countdown

For the fourth time in its history, Ukraine will have the presidential election. It will be less than in 90 days. The main competition will be between both pro-Russian politicians: prime-minister Tymoshenko and POR's front-runner Yanukovich. The Central Election Committee of Ukraine estimates that the government will have to spend at least $160 million on the elections. A registration fee for each presidential candidate is $314k.

According to the most recent public opinion poll SOCIS, the most popular presidential candidates are 59-yo Viktor Yanukovich (28.7%), 48-yo Yulia Tymoshenko (19%), and 35-yo Arsenyi Yatseniuk (8%). Ukraine's president Viktor Yushchenko enjoys only half of public support of another Orange Revolutionary, Yulia Tymoshenko. In terms of political ideology, Mrs. Tymoshenko represents the left-wing of Ukrainian politics, while Mr. Yanukovich poses himself as the right-wing and Mr. Yatseniuk is in the center. If we use analogy with the American politics, Ukraine's prime-minister is a socialist democrat where Mr. Yanukovich is a republican and Mr. Yatseniuk is independent.

Assorted Links

1. Only 57% of Russians say that their country needs a democracy. Ukraine's big brother demonstrates the path dependence at its best!
   
2. Russia and China strengthen their strategic partnership. Russia diversifies its energy sector by selling 70 billion cubic meters of natural gas to China.
   
3. The Russian government bans Stalin-era research. History Professor Mikhail Suprun is arrested for conducting a research on ethnic Germans deported by Stalin. Don't major in Soviet History!
   
4. An outrageous case of child molestation in Ukraine, in the world-known summer camp Artek. Several BYUT members allegedly committed child molestation.

Ukrainians Are Getting Poorer

According to Ukraine's State Statistics Committee (UKRSTAT), a real wage rate dropped by 11.3% as compared to the Q2 of 2008. A rising unemployment (9.9%) and a rampant inflation (16%) seriously damaged real incomes of Ukrainians. UKRSTAT reports that a real disposable income shrank by 8.3 in the Q2:2009 as compared the Q2:2008. If you look across provinces (oblast'), Kyiv province has the highest level of work compensation with average monthly salary of 3,126 hryvnia or 390 USD. The lowest level of salaries is in Ternopil province where on average you can get paid 1,443 hryvnia ($180) per month. UKRSTAT also reports that a construction industry that was severely hurt by the 2008 recession experienced the sharpest decline in the real wages among all industries. On average, the monthly wage rate dropped by 23.2% in the construction sector. Here is a graph that demonstrates a percentage change in the real wage rate in Ukraine between 2000 and 2009.

From UkraineWatch

Odessa Chemical Plant's Privatization: To Be or Not To Be?

Ukraine's State Property Fund (henceforth, SPFU) fails to sell the Odessa Chemical Plant that is a monopolist in Ukraine's chemical industry. Moreover, Odessa Chemical Plant is the largest producer of ammonium nitrate in Eastern Europe.

Here are the events behind the failed sale. First, the privatization was mission impossible from the start because it was outlawed by Ukraine's President Viktor Yushchenko. Presidential Decree #200:2007 prohibited a privatization of the Odessa Chemical Plant because it held strategically important position in Ukraine's market for chemical products. Nonetheless, prime-minister Tymoshenko and SPFU persuaded bidders and public that it could overrule the presidential ban on privatization. Then the ban should be overruled before the start of auction, right?

Anyways, several bidders decided to participate in the auction and paid upfront 400 million hryvnia ($50 mln) in auction fees. One of the bidders was GAZPROM-owned Azot-Service Company. The auction was broadcasted on several national TV channels. SPFU offered a starting bid of 4 billion hryvnia while all experts including SPFU agreed that the real market value of the Odessa Chemical Plant was at least 8 billion hryvnia ($1 bil). Then Ukraine's Nortima Company that is a part of a Dnepropetrovsk-based corporation Privat offered the winning bid of 5 billion hryvnia. Privat's CEO Ihor Kolomyisky said that he was ready to offer up to $1 billion. Little did he know that SPFU would refuse to recognize the legitimacy of the auction? SPFU's official statement is that the winning bid was much lower than the real market value of the auctioned item. So the deal is off.

It's hard to understand the true nature of all commotion around the Odessa Chemical Plant. Prime-minister Tymoshenko who makes a rule of law as a cornerstone concept of her presidential campaign does not really show a lot of respect for the rule of law. It's also not clear why president Yushchenko refuses to auction off the Odessa Chemical Plant that he was very eager to sell three years ago. Perhaps, the failed privatization best illustrates only the Tullock rectangle.

From UkraineWatch

Assorted Links

1. EU-Reporter features my op-ed "Post-American Ukraine?"
   
2. A direct sale auction for Ukraine's largest chemical plant goes awry. The Tullock rectangle is at its best.
   
3. Ukraine's Oil-Gas State-Run Monopolist indicates default on bonds. A coordination failure!
   
4. Since January's elections get closer, you can find the following web-sites very interesting:
   

   Web-site of President's administration
   

   Web-site of Ukraine's Parliament
   

   Web-site of Ukraine's Constitutional Court
   

Ukraine's Prime Minister Calls for Dictatorship

First two weeks of presidential campaign show that it ain't gonna be pretty. Ukraine has a real shot at sliding back to autocracy!

Ukraine's leading TV show SHUSTER-LIVE hosted prime-minister Tymoshenko. Mr. Shuster announced that he invited Ukraine's prime-minister to have public policy discussions with domestic and foreign journalists on live TV. Several members of POR party also showed up though their front-runner skipped the improvised face-off. Mr. Tymoshenko expressed her disappointment that she could not debate with POR's presidential candidate Viktor Yanukovych.

Anyways, Mr. Shuster started a discussion from the government ban on black (negative) PR. Last week the Tymoshenko government issued a ban on using black PR against Mrs. Tymoshenko in the presidential campaign. In other words, you cannot use mass media to criticize the government. At least internet is still free from the government censure. Ukrainian mass media expressed concerns that the ban would slide Ukraine back to Putin's standards of independent media. In contrast, Ukraine's prime-minister says that it will only improve the political competition. Oh, really?

Then Mr. Shuster moved the discussion to the 2004 constitutional amendment. In brief, this amendment separates powers between president and prime-minister where the former is responsible for foreign policy and the latter takes on duties of domestic policy. And then something happened that shocked everyone. Mrs. Tymoshenko said on live TV that Ukraine needs dictatorship! In her own words: "People are tired of a chaos. I am also tired of this chaos in Ukraine. Sometimes I really think that Ukraine needs dictatorship and rule of law. Only dictator can maintain the rule of law in Ukraine". Her words were a cold shower for all journalists present in the studio. Later in the show she tried several times to explain that she meant the rule of law when she referred to the dictatorship. Then one journalist asked her whether she would try to change the constitution to increase the presidential power if she were a president. She said that it would depend on a public opinion.

Well, when you hear something like that from the top government official, it must raise your concerns about Ukraine's political development. Ukraine is one of the few consolidating democracies among the FSU countries. But I am afraid that Ukraine might follow the path dependence of the FSU political development in the aftermath of the presidential election.