OREANDA-NEWS. July 19, 2010. Speech of the Prime Minister of Ukraine Mykola Azarov at the meeting with foreign business community and diplomatic corps with the assistance of the American Chamber of Commerce in Ukraine and the European Business Association.

Azarov M.: First of all, I want to welcome all of you, this is not the first time when we meet, I can remember about five times, that's for sure. Being the head of the Tax Service I held several meetings with investors and diplomats, and then I held meetings working in the Government. So we have a good tradition, which allows us the exchange of views, and we will support it.

I'll meet with you and the ministers, heads of ministries and departments that you are interested in. We agreed with the leaders of business associations that maybe once a month such meetings can take place if there are questions.

But today, in this room, I see, for example, the head of the Customs Service is present, the head of the Tax Service is present, the Minister of Economy, other government leaders, so you can immediately ask a question, and perhaps even at a glance receive a solution.

A few words about the general situation and the policy of the Government of Ukraine. First of all, what with have we began our work? March 11, we formed the Government and what have we faced?

For us it was not news, but nonetheless unpleasant impression gave the entirely empty treasury. When I left the government in late 2007, I left for Mrs. Tymoshenko 24 billion UAH on the Treasury balances. It makes 3 months of quiet life. We also got some debts. From the outset we have faced with the fact that we had to find as early as March 5 billion UAH to pay for the obligations inherited from the previous government. This is a very large sum of money for us.

Until July, we were paying about 5 billion UAH on our domestic obligations. Monthly. It was only in July, when we have a "relief" - about 2.5 billion debt payments. These are unprecedented payments for Ukraine, It had never happened, I know very well the budgets of Ukraine for the all those years. To pay for domestic obligations 2 billion in a year was a big load for us. And now - 5 billion per month!

Unfortunately, the analysis of the external situation, the behavior of markets, quite frankly, does not inspire much optimism. Since April, the beginning of the recession in the financial markets. Greek crisis, Portuguese crisis, Spanish crisis, strange behavior of Euro, strange behavior of currency speculators.

The Big Twenty decided to sharply limit the costs of State budgets, etc. A number of other factors, among which the main factor for us was the metal demand reduction, metal, fertilizer, chemical industry products went down. There has been an unprecedented price fall for Ukrainian exports.

Now, let us say, all of our chemical companies are producing and cannot sell their production because the price is lower than the cost of this product. Especially the high price for Russian gas depressed us in March, according to the formula inherited from the previous government, according to January agreement 2009. The price is determined very simply: 450 USD per thousand cubic meters multiplied by coefficient which components: the cost of gas oil, fuel oil, etc. The formula gave us in the first quarter approximately 330, in the second - around 358, in the third quarter - 370 and in the fourth - 390, near 400 dollars per thousand cubic meters.

It is clear that if we agree with these prices, and did not negotiate it with Russia, then we would have to stop our chemistry. What actually happened, when, in January, February, March 2009, we received the first time these gas agreement, it is easy to see that in the first quarter of 2009 our chemists were idle.

So for us it was extremely important to negotiate with Russia to reduce the gas prices. We had a considerable amount of meetings - the President and the Prime Minister and the Government. We finally agreed. Therefore, we have managed to achieve that we have been criticized for, but what I think was extremely required – was to bring the minimum wage and minimum pension in line with social standards, which were approved by the Verkhovna Rada.

Why were we criticized for that? Who was criticizing us? First of all, the IMF, with which we immediately began the negotiations. In March, we resumed relations with the Fund and of course tried to negotiate. They told us: "All of Europe reduces costs, some countries even reduce wages, and you increase them.

We explained to them that we were not increasing, but paying extra to the level of subsistence minimum established by law. 2 years minimum the wage has been frozen in the country. We could not go for it. Why? Not only because we knew that one cannot do so, social policy is not to be like that. We have also seen that we have a falling purchasing power of our people. It has begun to fall in 2009 and the beginning of 2010 was marked by the fall of domestic turnover in quarter. In order to strengthen the domestic market, we had to raise a certain amount of demand. We have done so. In May first time we had the turnover increased, it has been fixed in June, and now we have, not at the level of statistical error, but quite correct data that our internal trade began to increase.

We have made significant breakthrough in our balance of payments: according to 6 months evaluation we have plus 2.5 billion USD and foreign exchange reserves had grown up to 30 billion USD. 5 billion, we added only in the last 3 months.

That means the measures to restore basic order, stability, power vertical strengthening, performance discipline improving yielded positive.

What to do next? And next, it is absolutely obvious, you need to go to the systemic transformation in the country, to systemic reform in all areas. The health care system, because we cannot maintain that underdeveloped level of health care, in the social security system, pension system, the judicial system. Administrative-territorial reform is the pressing issue etc.

That is why the President has proposed a major package of reform - reform program for Ukraine.
It is clear that this program required resources. Therefore, we have intensified our negotiations with the IMF. They were very difficult these negotiations, we have defended our vision, our understanding of what measures we should take. We didn’t disagree with the fact, that we need to cut the budget deficit. If last year it was 16%, this year we have budgeted for deficit 5% and we were unanimous in understanding that we can no longer live in debt, we must find the strength to live within our means. Next year, we have budgeted 3.5% for the deficit, and I think it is quite real. We put things in order in Naftogaz: instead of the deficit of about 45 billion UAH. This year we will have a deficit of about 10 billion UAH. The next year Naftogaz will be deficit-free. We have made those commitments to the IMF, which the previous government signed, but were not going to perform. For example, about gas tariffs aligning. And, accordingly, we during yesterday's session of the Government have implemented a comprehensive system of social protection measures so that our poor people were given appropriate compensation.

In the process of reform we have adopted a very serious law on public procurement. Only lazy does not talk about high level of corruption. However, no one during 5 years was not capable to adopt normal law on public procurement. We have adopted it. This is the law, which we have worked out with the World Bank, and which is absolutely consistent with European standards.

It is clear, and 5 years before us it was talked about, that there must be decentralization of budgetary resources, and that it is necessary to adopt the Budget Code. They talked, but we have adopted that. The Budget Code, which provides for three times reduction, for example, of local taxes. At the local level we have just 5 taxes and duties, and for local budgets 5% tax on profits will be allocated. This is the very significant part. That means that one fifth of the income tax will remain at the disposal of local budgets. For the first 20 years of independence of Ukraine, local budgets will become real revenue-generating resource.

All 19 years of independence, the need for a stable tax system, adoption of the Tax Code were spoken about. It was spoken, but nothing was done.

We submitted the Tax Code to the Parliament, and it was adopted in the first reading. What was the storm of indignation, criticism! At the same time, serious innovation, which the Government has undertaken, were ignored. And the very serious risks undertaken by the Government. As example - reducing the value added tax from 20 to 17%, reducing the income tax from 20 to 15% - I mean the part that remains in the hands of the State. The introduction of accelerated depreciation, for example, various investment and innovation incentives for those who plan to modernize its industrial base, the incentives related to energy saving.

All this was put out of sight by our critics. All this was not seen, they do not talk about it in front of people or businesses. Take our Tax Code and compare with the U.S. Tax Law. I have been many times in IRS. I know very well the current tax system of the USA. Will you sing a different tune when you compare?

So, I ask myself: if the government lowers taxes - significantly reduces the tax burden on businesses, and creates incentives for energy efficiency, innovation, investment - what about the budgetary implications? Will the income be enough for it? That means we are to lay down rules, which will allow us to collect taxes. Or what? Or we are to place only the gingerbread in the Tax Code? Who then will collect the budgetary revenues?

That’s why I was surprised by that totally unbalanced, totally biased criticism, which appeared, as by an order, in all the media.

What the Government was counting on? First of all, we had hoped to create in the Tax Code simple and understandable rules. They cannot be good for everyone, that is impossible.

However, government bodies and businesses must follow these rules equally. There should be a street with oncoming traffic, with the understanding: what the government wants, and what business want. We are interested in the business working. Therefore, we have decided to allow Parliament to consider all the provisions of the Tax Code and to take into account all the objective comments as much as possible in the second reading. We will do it.

What 5 thousand amendments to the document do mean? This is an attempt to torpedo the Tax Code. It is clear that the 5 thousand amendments to a document will change its appearance and make its adoption impossible. We discussed, no matter how hard it was, all the 5 thousand amendments. And we selected 300 of the amendments, which will be taken into account. And in the next few days, this option, which is considered, by the way, by the Committee on Tax Policy of the Verkhovna Rada, will be posted, and in a month we expect proposals from business to this option. Then we will meet again and see. And we will try to find a balance. The balance between the need to create incentives for business investment and the need to collect taxes.

Internal Revenue Service may not be the persuasion service. Yes, it should be a partner for business, but for honest business. Unfortunately, in the country where we have approximately 50% of the shadow economy, where the payment of wages in envelopes is spread, where the converting centres are in big number, where the officials are bought and sold, to rely on the fact that we suddenly will invent super liberal code and that it will solve all our problems means to be naive and to not correspond to the challenges in front of us.

If we have already made the decisions coming out of our agreement with the IMF, in contrast to the previous government, we will execute all our agreements. And not only with the IMF.

I want to assure you that the Government of Ukraine will perform all agreements, which it signs and undertakes. Up to the last comma. No matter how difficult it may be, but we must restore confidence in our government. That is why we are now negotiating with a number of companies with which the previous government terminated the agreements without explanation, having thrown them from the market without clear grounds. This will not happen anymore. Everyone should know: this is an axiom for us that if we do something agreed with the business, we will adhere to these conditions, holly, whatever it may cost us.

With that assurance I finish my speech and will be pleased to answer all the questions you have.
However, a priori I know that, of course, the VAT will be the issue. We’ll got many issues, but the problem for us is one of the main.

We first of all, definitely put things in order in terms of this tax, and we are no longer growing at the debt rate. So-called debt of 34 billion UAH suddenly appeared out of nowhere. Out of these, approximately 17-18 billion, I can safely say is the real debt. But all the rest is created by so called converters, minimizers, who made their business on VAT.

The part that has already been checked is about 16.6 billion - it is already framed in a general register, and from  August 1, I think we will issue state obligation to repay our debt and to place the bonds. We will make them perfect to monetize absolutely convertible. I think we will close this issue definitively.

Our task is to move from January 1 next year to the repayment of VAT in the automatic mode. We have the task set, the problem is how to cut off the “butterflies”, fake VAT refund out of the actual compensation. I think that we will find a solution and the problem of VAT in Ukraine will be solved, so that it does not arise at each meeting with foreign delegations.