Concorde Capital's CEO Igor Mazepa five-year forecasts: Development and increased living standards in Ukraine

Concorde Capital's CEO Igor Mazepa five-year forecasts: Development and increased living standards in Ukraine

11 March 2021

– How would you outline the main issues that inhibit the economic development in Ukraine?

— In our country, the role of business, which is fair, competitive, independent, and market-centred, is extremely limited. The government itself is trying to be an operator in many areas, for example, privatisation is not going anywhere, and I see the main problem in this. The government still dominates entire industries: transport, banking, electricity production (hydro and nuclear power plants), and medicine. Its actions in these sectors are ineffective. Until an outdated cluster of post-Soviet bureaucracy dwindles, little will change in our country, unfortunately. As a result, today we are witnessing the lack of numerous transformations so much needed for the country. In this case, we are talking, among other things, about pension, medical, and land reforms, privatisation and the gas market’, says Igor Mazepa.

– How can a model of relationship between business and government look like?

— The government should be just a regulator, not a market operator. What I mean is that the public medicine system is now subordinated to officials, and most of them are incompetent and mediocre. Instead of being a regulator that would approve protocols, control the quality of services, and the like, the Ministry of Health operates independently. The same goes for many state-owned companies. Instead of privatising Ukrzaliznytsia, officials manage it manually. This is a common practice in a number of industries and large companies: mines, thermal power plants, etc. Public officials are the worst managers: the processes in state-owned companies and institutions are arranged in such a way that corruption prevails there. Even more so, the officials create corruption. This persists for years, even decades.

– Where can we see a good example to follow?

— There is a good example of privatisation of distilleries. Ever since the Brezhnev era, there has been an idea that this sector must be controlled by the government, as if it were strategic. Yet, this is just an ordinary moonshine still, only on an industrial scale. Finally, privatisation has taken place in the sector: vodka operators can now buy alcohol at market prices or produce it, honestly pay excise taxes, and sell their products. This is a success story. Such stories are hardly possible without privatisation.

–         What are the priorities for the government, in your opinion?

— To be honest, I have no expectations of the government. What they do is just “extinguishing forest fires” and promoting themselves. Therefore, I do not pin my hopes on either this government or the next ones.

– What is an ideal government, in your opinion?Imagine there are people whom you would support and you believe that they are capable of forming exactly the Cabinet you trust — what would you advise them?

— We have been advising for 20 years. My today’s recommendations will be little different from those I gave in the early 2000s or in the late 1990s. Privatisation, pension reform, and rural reform. As to the land and medical reforms in the way they have been implemented now, it would be better if they were not implemented at all. These transformations do not attract more money into the sectors, nor do they create new jobs or increase efficiency. What we see now is the imitation of activity.

– A healthy State acting in the interests of society must support business and, among other things, look for ways for business to enter foreign markets.Currently, the resource-based exports dominate our economy. Do you agree though that such a pattern does not lay foundations for further development and investment inflow?

— There is an inflow of investments in the mining sector and production of raw materials as well. We cannot say that we would definitely have more investment if our economy were not resource-based. It would be more correct to focus on the fact that private business is mobile and dynamic. A business picks a sector that is more favourable for it and offers competitive advantages and leaves the one where the conditions are worse for it. This is also the case with migration between countries: why would an investor go to, let’s say, Belarus or Ukraine, where the businessmen’s rights are restricted, the right to private property is not respected, and the security service agents feel like home in the offices of companies? It’s better to go to Vietnam, Cambodia, Senegal or Bangladesh. These markets are growing and developing rapidly in terms of both GDP and FDI. Unfortunately, Ukraine has never been even in the top thirty of such economies.

It is clear that the government could encourage this process by tax regulation and settlement of trade relations with Western partners. Indeed, some time ago it demotivated local businesses to sell sunflower as a raw material to foreign markets, and the entire industry of oil production have emerged in Ukraine. The government restricted wood exports, thus giving rise to sawmills and furniture factories. These processes have created hundreds and thousands of jobs in Ukraine, fuelling the economic activity and an increase in personal incomes. The government’s role was clear in this. Another example: in terms of localisation, Ukrainian companies are the biggest buyers of everything, from raw materials to high-tech equipment. All over the world, domestic producers enjoy protection and preferences. They are given the opportunity to grow to a certain level, only then they can go to the open market. In Ukraine, this process is stalled: the localisation law has stuck somewhere, despite that local entrepreneurs have been extensively raising this issue for three years now.

– You have probably also heard a lot from officials about “Ukraine’s huge growth potential”.Do you see an opportunity to make products with high added value and a high share of technology and innovation in Ukraine?

— Certainly. There are private Ukrainian companies that cooperate with, for example, Yuzhnoye State Design Office, and are even trying to launch spacecraft powered by domestic technologies. There are IT companies like Reface that have managed to develop a technology that is surprisingly complicated and competitive in the market. There are other examples of Ukrainian companies — Ajax, Makeup, and others — that are conquering European markets on the fly. All these businesses are growing thanks to human talents and human capital, rather than government regulation or preferences. A different story is what will happen to these companies later. Unless the government offers them relevant conditions in terms of tax regulation and the investment climate in general, they are most likely to migrate to other countries. Nowadays, we are witnessing the internal migration of businesses in Ukraine.

The decentralisation reform, one of the few successful reforms, is already bringing significant structural changes and consequences. For example, the idea has settled in among officials or in the business community that they are very important for businesses. Currently, some of Concorde Capital’s investees are holding tenders for tax residency. For example, if my company pays several hundred million hryvnias in taxes to the local budget, I can choose where it will be best for me. I see that city mayors compete with one another for place of registration for these businesses. It is clear that if you have one factory or store, it is difficult, but if you are a national company or a chain, it is absolutely real. I suspect that later we may face a situation similar to the one in the United States. In Silicon Valley, local authorities and populists hate the rich, to put it simply. They even go to rallies, carrying banners saying something like: We need to destroy the rich class and impose even higher taxes on them.  Wealthy, respected people who have made their own fortunes respond to it as follows: well, this is their position here, so I will relocate my company, for example, to Texas. By the way, relocating companies from California to Texas has become a trend: conditions are better there.

– Is there any chance Ukraine can create its own Silicon Valley?

— Absolutely. Clusters are emerging in Lviv, Kyiv, and Kharkiv. We have many talented IT professionals, especially engineers and developers. It’s another thing that Europe and the United States are all the markets: sales specialists are there, and product developers and engineers are here.

– Is it possible for Ukraine to raise national champions, say, our own Samsung?

— We already have them. For example, ATB, Nova Poshta, Dobrobut, although Dobrobut is rather a regional champion. New cool, bright, even huge, companies are emerging. If you ask about companies that will be able to compete in foreign markets, I can give Myronivsky Hliboproduct as an example. It is a leader in its segment, chicken production, and is definitely a European champion.

– Can we foster national champions in new, developing markets rather than in our traditional commodity markets, for example, in artificial intelligence, alternative energy, and the like?

— Again, these are stories based on human talents. These are highly creative industries. In these areas, the country should build a creative ecosystem, in addition to those basic regulatory factors we discussed above (the government, taxes, and cops). The government’s role in these areas will definitely be scanty or even non-existent, but the creative youth who will gather around creative clusters (like Generation or UNIT.City) will give a chance to create something similar. Clearly, we are decades behind the same Silicon Valley, Israel, or Asian countries. They had access to both capital and ideas much earlier. Moreover, capital markets are better there. For some time, Ukraine will stay a little behind, but this does not mean that there is no chance to foster European or even world-class companies here.

– Business driven by talent and human capital is largely dependant on the quality of education.What do you think of Ukrainian potential in this area, is it worth investing in it?

— Five years ago, I would say that this was a factor of influence. But now, as we are living through the pandemic and witnessing a colossal pace at which online education is developing, it is difficult to imagine that Western universities with their campuses and infrastructure will retain their dominant role in the education. Nevertheless, education is undoubtedly important. On the other hand, many talented people have dropped out from universities. Increasingly, we see highly educated people in their jackets and ties working for some dudes in shorts and T-shirts who often have no university degree at all. I am diminishing the role of education in any way, but I think that the ground infrastructure, schools and universities, will play a lesser role in education. Educational processes are migrating online. Now there is no need to travel to the United States to get a degree from local universities.

– Now back to the pandemic.“Crisis is a time of opportunities” is another buzz phrase.Do you agree with this or do you think this is just a way to distract attention from the negative agenda?

— No doubt, this is an ideal chance for politicians not only here, in Ukraine, but also globally to divert attention from their incompetence or inactivity. Everything can be covered up with either a war or a pandemic. For me, three quarters of all the hype created around the pandemic is a way to distract people. In November-December, we saw peak rates of hospitalization and soaring numbers of seriously ill patients in Ukraine. Our many citizens could not access medical care. This once again confirms this statement. Ukrainian medicine is a huge market, but it is run by post-Soviet officials who have been in office for 30 years. At the moment of crisis, this sector has simply collapsed.

– Has the pandemic opened up any business or investment opportunities in Ukraine?

— Certainly. E-commerce, online education. The pandemic has become a trigger for the real estate market: the usual shopping and entertainment centres have lost their former attractiveness indeed, but the suburban real estate market has perked up. The United States went this way about 90 years ago, during the “one-storey America”. We are witnessing the same now in our country.

– In your previous interviews, you said that a serious economic downturn should be expected in autumn.Is it delayed or perhaps has already happened?

— The economic crisis has not happened. From the macroeconomic perspective, we see that the officials — although I rarely praise them — did the right thing competently, investing in the construction of roads, airports, and bridges over the whole of last year. This has brought about a slight increase in inflation (up to 7%, according to Concorde Capital’s analysts), but many people have got jobs, and the economic growth is expected at 4% this year. The current account of the balance of payments will also be positive. It was record high last year, +US$ 6.6bn, and this year it will be significantly lower, but still with plus. These are two exceptional years in the entire 30-year history of Ukraine’s independence. I have no concerns at all about the exchange rate: it will be stable and, possibly, will get somewhat stronger. We saw an increase in consumption both last and this year. After inflation, salaries rose by 10%.

–         Do you consider workforce migration and outflow a big risk?

— This is always the highest risk. But it is not something new: the entire Europe has gone through this, in particular our neighbours, Poland and Romania. The smartest solution is to open borders for entry: if our specialists leave for Germany, the UK, or Poland, it is because those countries have the best infrastructure and incomparably high salaries. There is no way to influence this, but you can open borders for the citizens of India or Bangladesh, where there are more than enough skilled specialists who would gladly work in our country. To this end, the government should change its migration policy.

–         Could you give optimistic and pessimistic outlooks for Ukraine?Let’s say, pessimistic outlooks: Ukrainian population would shrink to 20 million, and the economy at the current level would be fairly enough for life.Optimistic outlooks: a new modern economy will develop, powerful corporations will emerge, the public monopoly will be eliminated, and we will have the GDP of US$ 1 trillion…

— I think the country will develop and improve the standards of living over the next five years. GDP will grow 3% to 5% annually. As to the bureaucratic culture and Soviet-era mindset, little will change, unfortunately. If the government will pursue and complete all the reforms that have started in the government digitalisation, this may have a certain impact, but limited. The rest of the world will develop much faster though. If we look at pre-pandemic reports of the IMF and the World Bank, we will see that the weighted average growth rate of the global economy was 3.5%. Running fast is not enough to be competitive globally: when you look back and raise your head, you can see that the whole world is running much faster. You need to go the extra mile at least to keep pace with the global growth. But we should go this extra mile in some selected industries only. Our bureaucratic culture and corruption are most likely to slow down our country over the next
5-7 years.

– Poland has evolved into a regional economic and political leader, I mean among the countries of the Eastern Bloc.Do you see an opportunity for Ukraine to become such a leader among the Eastern Partnership countries?

— I hope so. A heavy price we paid during the last revolution and the war with Russia has had an impact on the development of civil society in Ukraine. In this sense, we have gone far ahead of many of our neighbours, and it will bear fruit in the long term.

Biographical note

Igor Mazepa was born in 1976. He holds a degree in law and economy from Kyiv National Economic University. Igor Mazepa has been in investment business since 1997. In 2004, he founded Concorde Capital investment company and is still at the helm of it.

Source: interview of Igor Mazepa, Concorde Capital CEO,  for the Ukrainian Week https://tyzhden.ua/BusinessAndState/251536

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