KYIV – Natalie Jaresko has been at the epicenter of the Ukrainian government’s reform efforts since accepting her appointment to the Cabinet as finance minister on December 2 of last year and taking Ukrainian citizenship the same day.
Since then, Ms. Jaresko has earned international recognition for her successful execution of a $15 billion debt operation, in which Ukraine’s government and some of its biggest enterprises had to restructure their debt repayments that were made impossible due to the economic wreckage caused by the war in Donbas.
Her next biggest challenge is preparing the 2016 state budget, which will require a painful $2.5 billion in savings, most likely in the form of spending cuts, to meet the International Monetary Fund’s requirement that the deficit not exceed 3.7 percent of GDP.
“Ugh. I don’t know how you’d compare. They’re both enormous challenges,” Ms. Jaresko said when asked by The Ukrainian Weekly whether the debt operation or the budget was the bigger challenge.
She’s a busy woman, to put it mildly. Kyiv economists told The Weekly that she often schedules meetings with them, far more than her predecessors, yet she ends up canceling some of them because of other last-minute engagements that surface.
The Weekly managed to sneak in a few questions with Ms. Jaresko amid her busy schedule at Ukrainian Catholic University’s eighth annual Charitable Evening and Silent Auction held on December 5 at the Fairmont Grand Hotel in Kyiv. She popped in soon after at the start, gave some interviews, then had to leave for a Cabinet meeting.
She returned at the evening’s end and sat next to her longtime friend in Kyiv, former First Lady of Ukraine Kateryna Yushchenko. Their daughters sat at a separate table, where they fidgeted with their smartphones.
As for her impressions of working in Ukraine’s notorious bureaucracy, one of her business colleagues told The Weekly at the December 5 reception, “She called to tell us that she can’t wait to return.”
Indeed, the pravda.com.ua news site reported in a December 8 article that “according to the latest rumors, Jaresko is dissatisfied with the work in the Cabinet amid the conflicts surrounding tax reform and wants to leave her position altogether.”
Yet the same report said that Ms. Jaresko remains among the contenders for Ukraine’s prime ministership to replace Arseniy Yatsenyuk, in addition to former Georgian President Mikheil Saaskashvili, the current head of the Odesa Oblast State Administration.
She’s now in the midst of advocating her draft of the 2016 budget, as well as a tax reform plan that is currently being debated. An alternative, more radical plan has been presented by National Deputy Nina Yuzhanina of the Petro Poroshenko Bloc.
While the Cabinet plan calls for raising the enterprise profit tax to 20 percent from 18 percent, the Yuzhanina plan calls for cutting it to 15 percent. While the Cabinet plan calls for hiking the personal income tax to 20 percent from the current range of 15-20 percent, the Yuzhanina plan calls for cutting it to 10 percent.
While the Cabinet plan will cost the government 60 billion hrv in state collections, the Yuzhanina plan will cost 150 billion to 200 billion hrv, the Finance Ministry estimated. Many of the Yuzhanina plan’s losses will come from its proposal to cut the value-added tax to 15 percent from 20 percent – an idea that has been highly criticized by economists.
In her remarks to The Weekly, Ms. Jaresko cited two main faults with the Yuzhanina plan: its proposal to radically cut spending by 25 percent, and the elimination of a tax exemption of 1,000 hrv from salaries.
The 25 percent spending cut would affect what must be protected at all costs, which is military spending in the midst of war and the social safety net for those suffering from the economic hardship. [Ms. Jaresko referred to Ukraine as being in recession, but the Concorde Capital investment bank expects GDP to have fallen 10.4 percent this year, which is the definition of a depression.]
In addition, foreign debts have to continue to be repaid, though the minister pointed out the government has done everything it can to reduce them. (In referring to the repayments, Ms. Jaresko said “debt obsluhovuvannia” and struggled to find the word in English. “Uh, yak tse bude?” she said. “Debt repayments, yeah?” She has lived in Ukraine since 1992.)
Spending on the already-poorly funded sectors of education, health and culture will be cut by 7 to 10 percent in the Cabinet’s proposal, not by 25 percent proposed by the Yuzhanina plan, Ms. Jaresko said.
These savings will likely come in the form of layoffs, given that wages have become so meager they can’t be cut any further, said Dmytro Boyarchuk, the executive director of the CASE Ukraine Center for Social and Economic Research.
Ms. Jaresko said she also opposes Ms. Yuzhanina’s plan to drop a 1,000 hrv tax exemption on salaries in order to apply the 10 percent personal income tax starting with the first hryvnia. Meanwhile, wealthy citizens would get their personal income tax reduced to 10 percent from 20 percent.
The IMF supports the Cabinet plan and rejects the Yuzhanina plan for two reasons, Ms. Jaresko said, the first being that the Cabinet’s plan is balanced.
“We’ve gone through every single number with the IMF mission that was here a few weeks ago, both revenue and expenditure cuts. And they can see that it balances,” she said.
In addition, it’s building a better tax culture and broadening the tax base. “We can’t have people who are not participating in the tax base,” Ms. Jaresko said. “That’s the past, and that’s what we have to walk away from.”
What the minister likely meant by that is the elimination of the simplified payment system for business (classified as “yurydychni osoby,” or legal entities, under Ukrainian law), said Mr. Boyarchuk. They will pay more taxes when having to pay according to the standard system, he said.
Indeed, in the first half this year, about 42 percent of the Ukrainian economy remained off the books, or underground, according to a study released on December 3 by the Economic Development and Trade Ministry of Ukraine.
Among the two plans’ many common points of agreement are improved tax administration, a reduction in the single payroll tax to 20 percent from the 37-41 percent range and elimination of the payroll tax on individuals.
In addition, the National Reforms Council, led by President Petro Poroshenko, on December 8 recommended a compromise proposal between the two plans. Nonetheless, the Concorde Capital investment company in Kyiv predicts a heated debate in the Verkhovna Rada that will require the president’s personal intervention and coaxing.
The Weekly asked Minister Jaresko whether the 2016 budget is the biggest challenge in her career, which she could not deny. “Every day gets bigger and bigger. It never gets smaller,” she said with a smile.
Nonetheless, she’s demonstrated herself to be a team player, never directly criticizing any of her colleagues. To those disappointed with her government’s performance, Ms. Jaresko said “they’re not focusing on what we’ve actually done.”
Among the most successful spheres has been energy, in which Ukraine has gradually diversified away from Russian natural gas supplies.
Russia now supplies only 30 percent of Ukraine’s gas needs compared to 92 percent in 2013, before the Euro-Maidan, estimated Alexander Paraschiy, the head of research at Concorde Capital. The EU’s share of Ukraine’s gas imports has increased to 70 percent now as compared to 8 percent in 2013.
All of the EU gas is from Russia, Mr. Paraschiy acknowledged, but Ukraine not only gets a lower price from EU sources but also gets fees for transiting the gas from Russia to the EU and then back into Ukraine.
In addition, Ukraine has signed a series of credit agreements that will open up access to a billion dollars in a revolving loan to purchase gas when the price is lowest, maximizing the use of reverse flow, Ms. Jaresko pointed out.
The government has started to pass the cost of gas onto consumers by eliminating subsidies and bringing them to market prices, “but simultaneously providing a (new) subsidy so that no person without means pays more than 10 percent of their income,” she said. “And this subsidy is well-funded in the budget.”
As a result of the market prices, which are significantly higher, gas use has fallen by a quarter, Ms. Jaresko said. “And this was a very energy-inefficient country.”
The government has also eliminated the decade-long deficits that have plagued Naftohaz Ukrayiny, the state-owned natural gas production, distribution and transit company. Two years ago, Naftohaz’s deficit was the equivalent of $10 billion – larger than even the state deficit. Next year, it will be zero, she said.
Ukraine has also adopted a series of gas market laws as of October 1 that brings the country to European standards in accordance with the Third European Energy Charter.
“In the fiscal area, I’m extraordinarily proud,” Ms. Jaresko said. “We’ve reduced expenditures, we’ve broadened the tax base somewhat, we’ve cut out some of the ways the oligarchs were cheating on taxes in the past. And on top of that, I think we’ve done a great bit to start to move away from a burdensome State Fiscal Service, or IRS. We’ve decreased the size of it by 30 percent this year. That’s 17,000 people that are being let go from the State Fiscal Service alone.”
A new electronic value-added tax payment system eliminates fraud, saving a billion dollars a year, she said. A new e-procurement system has eliminated corruption from state purchases, she said. Open databases on the Treasury system and government officials’ property have been opened up, she noted.
In April 2014, Ukraine secured a $17.5 billion loan program with the IMF, $6.7 billion of which has been received so far and has enabled Ukraine’s international reserves to recover to $13.2 billion in November after they were depleted entirely following Viktor Yanukovych’s flight from Ukraine.
At the same time, Ukraine’s foreign debt has swelled to more than $70 billion.
“The outside support is important not because if someone should like the IMF or not, but it finances our deficit at a time when I can’t have access to commercial markets,” she said. “And it finances it at very low interest rates for a very long period of time.”
“I’m proud of what the government has done so far. Do I want more? Absolutely,” she underscored.
Wrapping up her defense of the Cabinet’s performance, Ms. Jaresko flexed her political muscle in targeting the Presidential Administration for criticism, reflecting the ongoing, behind-the-scenes rivalry between Messrs. Yatsenyuk and Poroshenko.
“I think the one critical area that Ukrainians have a right to be disappointed is in rule of law, in justice and anti-corruption,” she said. “The courts, the prosecutor general, putting people in jail that deserve to be in jail is something that’s not up to the Cabinet of Ministers, and it’s something that still remains to be strengthened and improved to the max.”
Natalie Ann Jaresko
Born: Elmhurst, Ill., on April 24, 1965, to Ivan Jaresko and Maria Budziak
Education: B.S. in accounting, DePaul University, 1987; master’s in public policy, Harvard University, 1989
Career: U.S. State Department, 1989-1992; chief of the economic section of the U.S. Embassy, 1992-1995; president and CEO of Western NIS Enterprise Fund, 1995-2014; founding partner and CEO of Horizon Capital, 2006-2014; finance minister of Ukraine, December 2014
Awards: Order of Princess Olha, 2003; Prime Minister’s Medal of Honor, 2009; Order of St. Nicholas the Miracle Worker of the Ukrainian Orthodox Church, Kyiv Patriarchate, 2011