The President Factor. How Poroshenko will change the country’s finance sector

2014/06/02 • News

What the tax sphere, bank, investment and currency markets expect from the head of state.

May 27th, 2014

It seems the issue of Petro Poroshenko’s presidency has already been solved. On the eve of the announcement of the official election results, LIGABusinessInform found out the expectations of the market participants have of the future head of state.

What is behind him

The winner of the presidential race Petro Poroshenko already has experience in governing both commercial and state structures. His employment list includes two parliamentary member cadences, posts of the National Security and Defence Council Secretary, head of the National Bank Council, Minister of Foreign Affairs and Minister of Economical Development, as well as the creation of a successful business – the confectionary corporation Roshen and others. Such experience is viewed by the experts we surveyed as quite valuable. “A multi-millionaire who was able to create a legal business, not connected with the usage of extractable goods, cannot be a bad finance expert or governor,” notes the CEO of YKK de-jure Grigoriy Tripulskiy. “The most important thing is to transfer the experience of successful development of his business to governing the country.”

“Petro Poroshenko has formed a vertically integrated holding, with representations both in Ukraine and outside the country,” comments the director of PA IBI-Rating Grigoriy Pererva. “The international character of his activities testifies to the strive to build business according to the rules of the US and the EU. However, a number of Ukrainian oligarchs that employ Western stencils are successfully taking advantage of the Ukrainian legislation to get preferences.” Therefore the key issue for the new President will be the readiness to alter the corrupt system of business which exists in the country.

Tax expectations

The market expects that Poroshenko will first and foremost improve the business climate. “The experience of building competitive business without the employment of non-transparent schemes or a position of monopoly give the understanding of the significance of creating equal conditions for market participants to the future President, as well as the minimisation of involvement of regulatory bodies in the companies’ work, the independence of courts and transparent tax administration,” notes the chairman of the board of Kredobank Dmitry Krepak.

However, as the leading parter of the audit company PSP Audit Dmitry Sushko notes, the future President is a representative of big business, whose problems are different from those that medium and small business owners face. The LIGABusinessInform interviewee does not explode that the attention of the future President will be drawn to improving the investment climate first and foremost for big export-oriented companies. “Poroshenko’s program declared the decrease of taxes, lowering of rates, lustration of the Tax Service, fight with off-shores, retention of simplified taxation. However, taking the budget deficit into account, one can only count on abolishment of small taxes and lustration. Putting an end to work with off-shores for big businesses is improbable to succeed without offering some sort of compensation. And the retention of simplified taxation is disputable, as the IMF is fighting for its suspension,” analyses Dmitry Sushko.

Overall, experts don’t expect significant changes to the tax system during Poroshenko’s presidency. According to barrister, head partner of AK Kravets and Partners Rostislav Kravets, the fiscal policy of the government is unlikely to change, and the ungrounded pressure on business will not decrease.

Much of the harshness of the fiscal and financial policies will be conditioned by obligations to international loan-givers. “Having agreed with the international financial market regarding the cost of utility services and gas for end consumers, lowering of administrative pressing during price creation at the currency market, in return for the opening of customs barriers with the Eurozone, Ukraine has gotten stuck in obligations. And an attempt not to comply with them will lead to the failure of the budget policy, filling of the pension find and re-establishment of gold reserves,” comments the director of FIBO Ukraine Sergiy Poplavskiy.

It is most likely that Ukraine is to expect a transition from a centralised to a de-centralised model within the budget sphere. “This will lead to significant changes to financial flows within the country, but it is preemptive to predict the methods of solving this issue. First we need to wait until the President’s first trips to the regions and his further statements regarding the mechanism of structural reforms, which will have to be connected with the planned amendments to the Constitution,” concludes Sergiy Poplavskiy.

Regarding the hopes of finance experts

The future President is intimately familiar with the bank market. Between 2007 and 2012 the future President was head of the NBU, and until the end of January 2006, he controlled the bank “Mriya,” which was later transfered to the Russian Vneshtorgbank for $70mn. As of January 1st, 2006, Poroshenko’s bank was listed among the banks of the second group of the NBU classification of asset volume. Later the financial establishment underwent rebranding and now works under the logo of VTB Bank.

The presidential post presumes significant opportunities to influence the bank market. “According to the current Constitution the President proposes to the Verkhovna Rada the candidates for the post of head of the NBU and appoints half of the NBU council,” notes Grigoriy Pererva. “Such power is a significant trigger of influence in the bank sphere, from the perspective of general principles of monetary and credit policies and regulation of bank activity.”

However, not much is said in Poroshenko’s presidential program about the financial sphere. According to expert of the informational analytical centre FOREX CLUB in Ukraine Mariya Salnikova, one can expect the lowering of rates from Poroshenko and, in light of the European integration rhetoric, the continuation of currency market reform.

Finance experts await changes in regulatory policies from the new President. “We hope for a wider involvement of finance market representatives to legislation creation,” notes FB Perspektiva director Stanislav Shishkov. “As before we found out about cardinal changes to how the market functions on the eve of their realisation. Because of this we were forced to react swiftly to the somewhat inadequate ideas of the governors.”

The President has the task of improving the investment climate and attracting foreign investments. “It is necessary that the index of investment attractiveness which is now balancing between 2 and 3 on a scale of five to firmly establish itself above 4 points,” notes the direct of online broker I-NVEST Vladislav Revchuk. “As if only 20% of the funds that foreign investors give to the Russian market go to Ukraine instead, our market will be simply flooded with money.” The LIGABusinessInform interlocutor also hopes for the implementation of a free Hryvnia exchange rate and, as a consequence, the emergence of new financial instruments.

What the President influences

While businesses expect Poroshenko to solve their problems, experts speak of limitations on his power. “Strictly speaking the President does not have influence on the financial sphere. De facto his opportunities will depend on the formation of a stable pro-presidential majority in the Verkhovna Rada,” thinks economist of the International Centre of Prospective Investigations Olexandr Zholud. “In Ukraine, according to the old-new Constitution, the President’s powers are severely limited,” continues Rostislav Kravets. “However now he can influence the NBU’s policies, as well as the softening of the investment climate. Besides from this, the President can develop the national goods producers and increase export potential.”

The President’s power on the international arena should be noted separately. According to Grigoriy Pererva, according to the Constitution, it is he who has the power to govern foreign policy of the country and sign international agreements and contracts. Consequentially, it is the President who will define the course of foreign policy, key priorities and strategic partners. “Investments, loans and other financing options come to Ukraine, according for certain personalities,” concludes Stanislav Shishkov. “And today the personality of the new President can be seen by the majority of investors as an exceptionally positive factor when evaluating investment attractiveness and economy risks in Ukraine.”

Source: LIGA

Translated by Mariya Shcherbinina

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