Ukrainian capital market reformers seek Croatian experience
September 3, 2022 – The war in Ukraine is still raging after the horrific Russian invasion that began in February this year. Hope, however, still lies in this tragedy, and some Ukrainian capital market reformers are eager to hear about the postwar Croatian experience of the late 1990s and early 2000s.
As Poslovni Dnevnik/Ana Blaskovic writing, now having official status as a candidate for membership of the European Union (EU), Ukraine is slowly beginning to align its legal acquis with the common European acquis, despite the ongoing war. The country is pretty much where Croatia was back in 2004 in this sense, although it is impossible to predict the political will of the European Union to genuinely open negotiations with Kyiv. Whatever the circumstances, Ukraine is wasting no time and representatives of Ukraine’s capital market regulator, the National Securities and Exchange Commission, this week made a study visit to the Croatian Services Supervisory Agency financial (Hanfa).
An exchange of technical knowledge
The visit of the two commissioners, Maksym Libanov and Yurii Boik, is a continuation of the technical cooperation started in 2019, and the first topics on the table were UCITS and alternative investment funds. As part of the visit, a technical cooperation agreement between the two regulators was signed.
“We have been in contact with Hanfa for three years now, and since Ukraine received its status as an EU candidate state, we decided to deepen cooperation with European regulators,” said Maksym Libanov, whose area of expertise covers corporate management, securities, depositary, investments and pension funds, explained. With special permits to leave the country, they arrived in the city of Zagreb. “We were guided by the logic that the Croatian experience, as the youngest EU member state, is very important for us. At the moment, our discussions are focused on the technical exchange of knowledge and experiences in the process,” said Libanov, adding that they also met with representatives from ZB Invest and Maverick Wealth Management.
Ukraine has been in a state of emergency since the Russian invasion began in late February, and UNHCR estimates that nearly seven million people have fled the country. Economic activity is virtually devastated, listing on the Ukrainian stock exchange was halted on February 24 (it was only relaunched for a month with restrictions), and funding depends on injections from the West. Before the war broke out, Ukraine’s economy was based on metallurgy, mining and ore processing in the east and south-east, the territory now under Russian occupation, hence the devastating images of Mariupol, the Azovstal steel plant being turned into a shelter for civilians and the area of the last stronghold of the Ukrainian army horrified the world.
About a third of Ukraine’s GDP was created by agriculture, which makes Ukraine often referred to as the breadbasket of the world. In 2021, says Libanov, around 95 million tonnes of cereals, such as wheat and sunflower, were produced in Ukraine, two-thirds of which were destined for export markets. According to the Food and Agriculture Organization of the United Nations, 16% of the world’s corn production and more than 40% of sunflower oil come directly from Ukraine. Moldova alone, for example, gets more than 90% of its wheat from neighboring Ukrainian fields. Russia’s invasion, in addition to terrorizing Ukrainian citizens and seeking to destroy Ukrainian nationality, has also disrupted global grain supply chains and caused food prices to skyrocket.
Despite long-standing political tensions with Russia, the occupation of Crimea in 2014 and the invasion of Ukraine in February, Ukraine is grappling with accumulated economic and social problems. The gray economy, an extremely disordered market, a lot of corruption, the generally low standard of living of workers which was even worse for retirees – this series of events is well known to other countries in transition.
From approximately 42 to 44 million inhabitants, and this is an estimate because the last census dates from 2001, 20 million Ukrainians are of working age. Among them, only 13 million pay pension contributions, the others are in the gray echelons of economic activity or outside the labor market, while there are also around 11 million pensioners. With these ratios of employees and dependents, the Ukrainian pension system and the labor market have always been hot topics. This has been especially the case since the imagined pension system that would have had three pillars never materialized. The first pillar of generational solidarity is the only functional one, and the second should have been put into operation in 2023 if there had been no invasion or war.
The third pillar, based on voluntary payments, had around 50 funds before the war broke out, but total assets were only around 150 billion euros, they say. “
This Ukrainian pension system is young and still developing. The average pension is about 2,800 hryvnias, or about 100 euros. The problem is that the average pension is very close to the minimum because many people don’t have documentation of their work before 2004, and there is no central register,” Libanov explained. The situation of his parents reflects these disparities; the father’s pension is about 3500 hryvnias, while the mother’s is five times higher thanks to her professional life spent at the Ukrainian Academy of Sciences. However, they add that this problem has been present for 30 years now and a lot has been done thanks to digitalisation, but the consensus is that the reform of the pension system is an absolute necessity. The Croatian experience, as the last state member of the EU and a country that was at war just 30 years ago, is invaluable in this respect.
According to a survey of business leaders, up to 39% have completely stopped doing business since the start of the Russian invasion, and only 11% have continued to do business as before or increased their activities, said Yurii Boiko, Commissioner for Investments, Communications and Project Management. He pointed out that, judging by this survey, we should praise the way companies deal with war, illustrating that around two-thirds of people are willingly involved in fighting in one way or another. .
“There is no doubt that the war affected Ukrainian businesses and the functioning of the economy. There was a wave of layoffs and 1.28 million people lost their jobs in small and medium-sized enterprises,” says Boiko.
With a surprising number of parallels that can be drawn between Croatia and Ukraine, we must consider which reforms are most desperately needed. The two Ukrainians said judicial reforms are needed now. They explained that a number of measures must be taken in the long term for the country to be competitive, attract capital and investors, build infrastructure, but everything is secondary to the functioning rule of law. We know very well how true this is in Croatia, which still today suffers from enormous problems in this sense.
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