‘Billions of dollars needed to revive pre-war Ukraine’ – NV interview with PM Denys Shmyhal

What is the price of each day of the ongoing war, and what will it take for national economy and country’s business to survive it – Prime Minister Denys Shmyhal laid out the facts for NV.

NV met with Denys Shmyhal, Ukraine’s prime minister since March 2020, on a recent evening in downtown Kyiv. The head of the government works in Kyiv every day, and has not left the capital.

The COVID-19 pandemic and resulting economic crisis, Russia’s war against Ukraine and another economic crisis – that’s what Shmyhal has had to cope with for more than two years now. 

Having changed his bureaucratic-style suit and tie for a khaki shirt, Shmyhal took an hour to talk to NV and explain important economic matters. The war economy, Ukraine’s losses over the war, the funds necessary to revive ruined infrastructure and ways for the country’s business to survive – the prime minister went into all of these topics extensively.

-        What is your assessment of the damage that Ukrainian economy has experienced as a result of Russia’s war against our country?

-        The regions affected by the ongoing war are a home to 30% of Ukrainian companies who used to produce more than 50% of our GDP. Now, as battles go on, we’re losing 35% to 50% of our economic output. This is a major, painful hit for the country. However, we have enough reserves. March was relatively calm, though the war and military action was on the rise. All the military spending, social spending were conducted properly. But April will be more difficult than March. 

-        What about the fiscal revenues – taxes, custom duties?

 -        Our planned budget revenues for the first quarter of this year are over-fulfilled. In January and February we (hadn’t been invaded) yet, and we managed to get better budgetary revenues than expected. March had some revenue coming from taxes going beyond the plan because many big companies paid their taxes in advance, while state-owned enterprises and banks paid their dividends early. Overall, our March revenues were at 95% of the plan.

 However, the Customs Office provided the budget with only 20% of what it was supposed to. This has to do with a much lower trade turnover that is a subject to custom fees. Now we’ve just made a break for those who pay these fees, this applies to all kinds of business. The Customs Office is working properly, humanitarian aid is delivered on time, with no additional bureaucracy. This is also why we have less customs revenue, but it’s critically important for us to get essential goods supplies for our country, food products included, so we decided to liberalize the Customs Office and its procedures.

In the future, we’ll be reviewing this policy depending on the developments. The war economy, an economy under the martial law, implies stronger state governance because conditions are constantly changing.

 And more on budget revenues. Customs Office collected those fees that it was able to. We did some work with state-owned companies so that they would fulfill their dividend obligations. They paid some. This is also a good source for the state budget. Responsible business made fiscal payments in March, not in April. It helped us to start paying the April pensions yet in March. For those regions which are affected by the war, April pensions have been paid starting March 25-27.

 -        Do you expect any problems with paying the pensions to citizens on the occupied territories? For instance, in Kherson, in Berdyansk and other places?

-        Of course, places that have been occupied might have those problems. We can’t say it’s all fine there. In the regions where we will be able to make payments via banking cards, it’s easier: a person holds a card, we transfer money there. But when an individual doesn’t have a banking card and he or she expects Ukrposhta to deliver the pensions – that might be a problem. We are doing our best to deliver cash to those cities and towns which have been occupied or operationally encircled. It goes with a huge risk and difficulty for those people who do this job. We can’t do this openly, so we’re using unofficial, secretive methods. We do all we can to help our people.

-        How is the exporting business going? Russians have blocked our ports. What is the way to export goods produced in Ukraine?

-        Indeed, you’re right, ports are blocked. We have really large stock of grain which was supposed to be exported no later than August. It’s stored in Ukrainian granaries, on elevators, in storage facilities. Almost 90% of Ukrainian exporting business that includes grain, ore, large-sized goods used to be delivered via sea ports. With the Russian blockade of its ports, Ukraine is facing a huge challenge. Exporting the remains of our grain will allow us to earn $7-10 billion. Today, in a mutual effort with our partners, we are looking for alternative ways to do the exporting. I don’t want to announce them in advance, but we are considering at least three alternative options – and exporting activity is already partially taking place. We will have growing amounts of exported goods and I’m sure that 80% of this volume will be delivered.

-        Do you have any calculations – how costly is the war on a daily basis?

-        As Ukraine goes through the war, our losses are changing daily. Final calculations will be prepared afterwards. Now, if we take Finance Ministry calculations on budgetary losses, then it’s UAH 2 billion (EUR 62.5 million) a day. If we take into consideration infrastructure losses, then one month under war conditions costs $119 billion. That’s $4.24 billion a day. 

If we add military spending, increased defense and social spending, support programs, economic losses and corporate losses, then it’s $565 billion.

I don’t even want to subtract this by the number of days. The losses are definitely huge. But we do have to be optimistic, we will be recovering with the same dynamics – I’m sure of this.

-        What will be the factors standing behind Ukraine’s economic recovery? Western support?

-        Three sources. Frozen Russian capital, its confiscation and reparation. Secondly, analogously, Russian assets. Thirdly – financial assistance from our Western partners. We’re already in talks about creating a recovery fund. We have already received more than $3 billion. This is the first step to fill our state budget, fulfill our liabilities. As of now, we are talking about daily losses that the government experiences due to increased defense spending, social spending, and food programs for the nation. The rest will come after the war ends – that’s out next step. But we’re already preparing for this together with our partners.

-        You’ve mentioned $3 billion – that’s what our Western partners provided for our economy to perform. What are the conditions for this funding? Are these grants or funds that will create liabilities including interest payments?

-        It’s both. These are grants by our partners, which is (humanitarian) help. For instance, the EU provided us with EUR 120 million. And then there’s a part of the money that are loans – these loans have been discussed with the International Monetary Fund and EU, they’re called macrofinancial assistance. Such an assistance has pretty long timelines – five to 18 years – and very low interest rates. In the future, we will be working to make these payment timelines even longer and interest rates to go closer to zero.

-        Now we do understand that when Russia pursued a full-scale invasion, their plan was to occupy Kyiv and then all Ukraine. The Russians failed to achieve this. Now they are changing their strategy – exiting the Kyiv region, possibly for regrouping. The war can go on and on for a long time. Are we preparing for the long-lasting war?

-        You are right on the matter of Russian plans. Their plans didn’t work well with our plans to protect our land and live in a civilized and independent country. Their plans were broken and broken completely by the bravery and boldness of our warriors, and by the decisiveness and solidarity of our people.

I will tell you what a long-lasting war means. You might see that sanctions (against the Russian Federation) are getting stronger. Four sanctions packages introduced by our partners – the EU and the United States – are in effect. The Russian economy is deteriorating. They have tensions rising among the population that experiences deficits (of goods) and all kinds of restrictions that Russians are not used to.

This is why long and exhausting war will hit the Russian economy in the first place. Now there’s a fifth sanction package being prepared. The longer the war takes, the worse the consequences will be for the aggressor itself. Of course, we’re ready for different scenarios and in any case we will be fighting for our freedom, our independence. We are fighting for our life, for our land.

-        How is the situation that Ukrainian heavy industry and big business are experiencing?

-        Ukrainian heavy industry has experienced its first shock – just like all of us. Today all (of our heavy industry companies) are coming back to work where it’s technically possible. I call on all the companies to perform their job, because our economy as of today has to be a reliant basis for the military front, first of all.

A lot of companies on the temporarily occupied territories or on the territories with battlefields have applied for assistance – and we are helping them to relocate to safer places, safer regions. We’ve received 1,100 of those applications as of today. Over 350 companies are going through the relocation process, 90 of them have already started their work (after relocating). 

Right-bank Ukraine is working almost at a full scale today, paying its taxes and preserving jobs.

Most of our plants have re-started their work as well. We’re calling on the services sector to do the same. Shops, cafes, restaurants, haircut salons, manicure salons – all of them should be working. We’ve created the best possible conditions for business. Please, (pay) the flat tax rate of 2% on your revenue – and you may start working, earning money, covering your own needs and creating jobs.

Internally displaced persons should also work. You can obtain a FOP (individual entrepreneur) status, pay the same flat rate of 2% on your revenue, then also receive UAH 6,500 (EUR 200 euros) per refugee that you’re providing job with – and that’s a DIY-model for small and medium enterprises.

We’ve done a lot of deregulation, only couple of dozens of licenses are still needed. The 5-7-9 loan program is available almost to anyone, with a 0% interest rate – up to UAH 60 million (EUR 1.9 million) per borrower.

-        Are banks prepared for this? I’ve heard complaints that the banks in the areas where there a re hostilities are not prepared for this.

-        Here’s what needs to be said. Despite the ongoing war, our banking system managed to remain sustainable and resilient. It’s behaving properly and has all the stability that is needed. It has become a foundation for the stability of Ukrainian economy as a whole. Of course, bankers will always be calculating the risks, they want to provide loans only if there is a reliable and liquid collateral. If they think that collateral will be gone tomorrow, that its’ going to be hit by a Russian missile, then they won’t be issuing a loan.

That’s why we are ready to provide state guarantees to stimulate corporate lending not only in the regions that enjoy relative safety, but also where there are higher risks. Risky regions also have their own businesses who want to do work, produce something, do trading, create jobs. We are working very actively with banks, taking away bureaucracy which is an obstacle for lending activity.  

There are thousands of applications filed to get access to new lending, which is why I’m absolutely positive that the next week or two we’ll be seeing intensive development.

 What does it take – in terms of time – for the economy to shift to a war mode?

What’s needed for this – that’s public procurements that would be supportive of local producers. It’s a very important segment of the Ukrainian economy. The Defense Ministry as of today procures goods for the army’s needs. It’s not only weapons, but also all things that soldiers need: clothing, food, individual protection solutions etc. All these are produced in Ukraine – all that we can order. Of course, the Defense Ministry is priority number one right now. Since Feb. 24, this ministry has signed 68 contracts with Ukrainian suppliers with a financial side reaching UAH 3.2 billion (EUR 100 million), that’s only for producing clothing (military uniforms, camouflage). So that’s only for the clothing industry.

Ukrzaliznytsya, the state-owned railway company, has been defined as a major procurement and delivery facility, along with another government-owned company Ukrposhta, for food supplies in Ukraine. That’s deliveries for supermarket chains, for humanitarian cargo that has been purchased with the budget funds or provided by our partners. Ukrzaliznytsya is doing this within the budget of UAH 5 billion (EUR 156 million) as of today.

And the rest is about stimulative lending. Agriculture loans with low interest rates for those businesses that need to start their seasonal work – that’s around UAH 20 billion (EUR 625 million).

We’re doing separate work with fuel suppliers. We’ve cancelled the fuel excise tax completely for gasoline and diesel, then we lowered the value added tax – down to 7%, while it used to be 20%. When this decision became effective, the gasoline price dropped by UAH 10 (EUR 0.31) at gas stations. The enemy destroyed some gasoline storage facilities, so in some places we can see shortages  of fuel, but, overall, the fuel supplies all over the country are well balanced.

-        You mentioned seasonal work for the agriculture industry. Do you have any forecasts for this? 

-        Last year, we used 5% more winter grains for preparing the harvest than what we used in 2020. That was a pretty good accomplishment for getting a better harvest. Of course, now in the regions that host battlefields, where land might be mined by the Russian army or damaged by explosions, it remains almost impossible to do any field work. We are expecting our harvesting area to decrease by 25-20%. But, overall, if you take a look at the dynamics of spring agriculture work, it tells you an important story.

Last year at this time only 15 Ukrainian regions had started their seasonal field work, while now that’s 21 regions. We have enough fuel, money for that purpose. We’ve launched a major lending program for agriculture industry, it has 0% interest rate and state guarantees.

80% of the loan size is guaranteed by our government, so an agriculture entrepreneur could obtain it even if he or she doesn’t have a proper collateral or the collateral doesn’t have a proper balance sheet value. Under the war circumstances, spring agriculture work has started on time, but its complexity is clear – risks for people’s lives, bullets flying around, missiles, mines in the soil. Agriculture workers – just like all of us, Ukrainians – are really brave in what they’re doing.

-        A lot of people these days are losing their housing property. In Mariupol, there is likely not a single apartment left that doesn’t have any damage from shelling. The government has already announced that it will be rebuilding the damaged housing areas. How will this be done?

-        That’s where we go back to nationalization and confiscation of the Russian assets, where we go back to the support we’re receiving from our partners. As a state, we do guarantee that people will get their homes back, if their houses or apartments were destroyed. For that purpose, there’s a special application process in the Diya mobile app where each affected individual may file his or her claim. President Volodymyr Zelensky and our government made their pledge to reconstruct all the damaged housing – damaged by Russian aggression, by occupants and invaders.

State institutions will find way to do this – through confiscating Russian assets, confiscating frozen assets, support from our partners. That’s the way to do this.

-        Do you think it’s likely Ukraine will receive funding from the so called Marshall plan initiative focused on reviving our country’s economy? Do you have any details on this? 

-        We are working on this. What we know for sure – such a plan must exist. With all the damage we have, with all the risky situation that we have now, Ukraine does need a recovery plan, otherwise our economy won’t be able to regain ground in the future. We understand – today we need to record all the losses to get a better assessment of what it could cost us. It could be just a balance sheet value of all the ruined infrastructure, housing property, all kinds of assets that we’ve been losing. Then, we need to find out where to get funding for recovering what we have lost. I already mentioned this – that would be a state recovery fund which will provide financial support for all our needs – reviving the infrastructure, reviving the housing real estate. That would be a big amount of money. Billions of dollars will be needed to help country go back to its pre-war condition, before Russia’s full-scale military aggression happened.

-        Each Ukrainian has had their changed by the ongoing war. How has your life changed, Mr. Prime Minister?

-        Today my life is focused solely on this horrible war, as I can’t make mistakes, I can’t delay anything, postpone anything. Everything needs to be done in a proper and timely manner, because people’s lives, hundreds of thousands of lives depend on it. Certainly, this is a huge responsibility for me. Such a responsibility doesn’t allow me to relax, to sleep as well as I used to. I don’t count the days now – whether it’s Monday, Wednesday or Saturday. All life is like one day now. One day of war. If you ask me if I talk enough to my community, to my loved ones, to my friends – of course, not. All my efforts are focused on my work – just like efforts of Ukrainian soldiers who are fighting on the frontlines. That’s not the relaxation needed, but victory. We want only victory.