Against All Odds: Has Zelensky Failed Ukraine?

In 2019, comedic actor Volodomyr Zelensky defeated incumbent Petro Poroshenko to become president of Ukraine. He won in a landslide. His victory was part of a global movement of political outsiders and populists winning elections. He even outdid the Italian comic Beppe Grillo, who led his Five Stars Movement to an electoral victories in 2013 and 2018.

Everyone had high hopes for Zelensky – young, cool, and not a saber rattler. Unfortunately, real life in Kyiv was not like his scripted hit comedy-drama Servant of the People, even though many Ukrainian politicians switched and became members of the Zelensky political party named after his show.

What happened?

Ukraine was recently pushed to the edge of the cliff with Russia. This stress is fairly consistent even as the war drums are no longer beating as loudly as they were a week ago.

More importantly: the economy is going nowhere. War of any kind is the last thing the Ukrainians need, Zelensky warned recently.

Ukraine needs as much as $5 billion to stabilize the economy, Bloomberg reported on January 28. The currency dropped by around 11% against the dollar at its worst last month, worse than the Russian ruble. One Hryvnia (UAH) will now get you $0.035.

Net divestment (capital flight) in Ukraine in 2020 was nearly $900 million, according to data UNCTAD’s World Investment Report. It’s been this way for two years already. It’s getting worse.

Zelensky estimated that UAH12.5 billion ($446 million) in investments have already flown the coop this year because of war fears, the Kyiv Independent reported on January 28.  The paper was created by former journalists of the English language Kyiv Post.

The Ukrainian government had to dip into its foreign currency reserves to stabilize the Ukrainian currency recently.

No foreign investor other than distressed asset bond lords looking for yield is considering Ukraine today. Zelensky needs this to change.

Why Investors Have Given Up

Corporate investors are giving up on Ukraine. War rumors aside, Zelensky has other things to focus on, too. He must build constructive relations with states that are ready to support him; and countries that want to back Ukraine. Most of all, he needs to develop and approve pro-growth economic policies.

The exact opposite is happening.

While this is not as “romantic” as soldiers moving into battle, Ukraine’s current tax policy and pressure on businesses are considered the reason for weak investment and falling support for Zelensky among the top business leaders and the middle class. No investment plus no jobs equals no support.

Frustration mounts even more because there is a perception in Ukraine that tax increases don’t apply to everyone. Zelensky’s biggest critics will point out that one of his top backers, billionaire Igor Kolomoisky, under U.S. sanctions, has enjoyed support from Parliament to avoid higher taxes on his mining operations.

The State Department has alleged that Kolomoisky, long believed to be a key supporter to Zelensky’s campaign in 2019, laundered money from a Ukrainian bank into dollar accounts here and elsewhere, The Washington Post reported in March.

Zelensky’s relationship with Kolomoisky media company 1+1 was the subject of the Panama Papers investigations of the offshore accounts of the rich and powerful.

In addition to the tax hikes, Ukraine’s Tax Service has gone after international companies. Zelensky deeply distrusts the Ukrainian establishment and may have his reasons for going after them. But whatever the reasons are, political or business malfeasance, it is impossible to separate these actions from weak business and investor sentiment. They go hand in hand.

The list of Zelensky’s targets is long. It includes multinational Swedish medical laboratory firm Synevo; it has been targeted by Ukraine’s IRS equivalent for allegedly failing to provide documents confirming the company’s expenses.

Global steel giant ArcelorMittal had its bank accounts in Ukraine frozen over tax evasion claims this January. They called the investigation “political pressure.”

“The company considers these charges baseless and a clear example of political pressure on a major foreign investor. There is no current tax related civil proceeding against ArcelorMittal and no legal grounds to freeze the company’s accounts,” the steel manufacturer said last month.

Arcelor is the largest foreign investor in Ukraine. The company bought a steel mill for $4.8 billion after it was put up for privatization in 2005, becoming the country’s most expensive privatized asset to date.

Ukraine’s largest steelmaker, Metinvest, said law enforcement agencies were conducting searches on some of their businesses as part of an investigation into supposed tax violations.

Major corporations can handle the tax load. They also have legal avenues to avoid taxation. Small business owners in Ukraine do not.

A group of them protested at Ukraine’s parliament recently, calling for a more simplified tax code.  Some protests turned violent, Radio Free Europe reported.

The Ukrainian parliament passed amendments to the Tax Code in November. There was strong opposition to this document. The updated tax code meant higher taxes for almost all sectors of the economy.

A parliamentary group called “For Future” voted for the government’s bills after the resignation of Speaker Dmitry Razumkov and the creation of a separate deputy group of 21 members of parliament. The tax plan included an increase in royalty fees for the extraction of manganese ore, but these Rada (Parliament) members rejected this increase. Those who are angered by Zelensky’s policies have complained that the parliamentarians threw Kolomoisky a meaty bone while taking it away from most everybody else. Kolomoisky is a big stakeholder in Ukrainian ore mining plants.

This move would be like the U.S. Congress raising C-corp taxes but exempting Facebook from the increase.

The uncertainty and the lack of a level playing field has led to disinvestment in Ukraine for years.

Meanwhile, Ukrainian authorities continue to sabotage the work of anti-corruption agencies, making the country look like an old-boys network, something Zelensky was elected to upend.

Even without Russia, political risk remains high for business investors, foreign and domestic. This is as much a headwind for Zelensky as geopolitics.

Foreign policy intrigue is not fully in his control. A local poll suggests a majority of Ukrainians (55%) doubt Zelenksy even has control of the situation with Russian, nor is he seen by the majority of being capable of confronting a full-scale war as commander-in-chief, CNN reported this month.

The Ukrainian economy is, on the other hand, where Zelensky can lead. He has more control over that than what the Russians do on the Ukrainian border.

No one wants war with Russia. Constant war-footing is exhausting Ukraine.

Everyone wants jobs, attracting foreign investment, and an improved standard of living.

That will depend on the Zelensky administration implementing pro-growth measures to support the economy. And it means a transparent, equitable and easy-to-understand tax policy for businesses small and large, foreign and domestic, looking to build, and benefit from, a post-crisis Ukraine.