On appointments and the personnel selection process

- Ms Tymoshenko, on 4 February 2005 Viktor Yushchenko announced in the Supreme Rada that he was presenting his first Cabinet. He also made it clear that he would assess the ministers’ performances during their first hundred days in office. We think there were a lot of wrong appointments, particularly in the regional administrations. The first hundred days may become a milestone for the President, enabling him to show a different approach to personnel selection in the run up to the 2006 elections. Yet according to the Constitution, it is the Cabinet of Ministers who petition the President to dismiss a particular official. Do you have a list of officials whose replacement you would solicit from the President?

- There are scores of people who do not know what to do in the high offices to which they have been appointed, it is true. It does not mean, however, that we had an alternative in the first place; it is a challenge to replace dozens of thousands of officials throughout the country, especially given the lack of any consistent personnel policy in the previous administration. Now it is important for us to test the new cadre of public servants on the ground and, if there is a need for rotation, to bring in responsible professionals.

Another important thing is to develop eligibility criteria that would be in line with our electoral declarations and pledges on the Maidan, and to decide who sets these criteria.

The procedure of negotiating new appointments has been altered recently. The Secretariat of the President comes up with their proposals, which are later agreed upon with Poroshenko and submitted to the President for approval. At first I objected to it, as any normal Prime Minister would, because the government is held accountable for economic results or the absence thereof. It is critical for a head of government to be sure that his or her ministers are highly qualified professionals and decent, trustworthy people, and that they are good team workers. Later I realized there was no use trying to break the wave. Now I resort to a different tactic. I load the people appointed without my consent with tons of work and monitor their performance closely. If they deliver as expected, I will agree to their appointment by the President and accept them as my team members. If these people are unable to deliver, I will petition for their dismissal, and I will do it publicly.

- Are you going to take an active part in the personnel selection process in the future?

- I certainly am. I will not miss the second wave of appointments.

- As soon as the new administration came to power it promised to hold tenders to select CEOs for large state-owned enterprises and state monopolies. Yet the heads of NAFROGAS UKRAINY [Ukrainian Oil and Gas Company], UKRAVTODOR [Ukrainian Motor Roads] and UKRZALIZNYTSIA [Ukrainian Railways] were appointed without tenders. What is that supposed to mean?

- I think the only right way to select professional top managers for state-owned enterprises is through tenders. Tenders allow us to see a person’s qualifications, to study a proposed business plan for a respective enterprise, and to compare the bidders’ potential. The key indicator that one should seek to evaluate in the course of the tender is the enterprise’s profitability. Top managers should receive a certain part of the enterprise’s profit as remuneration for their work, rather than be paid a small salary, which encourages corruption. The Cabinet has passed a special resolution but, unfortunately, we had no chance to hold a single tender since, as you might know, the government was not involved in the selection of top managers for the state monopolies. Our proposal to spend several months on the tender process (as required by law) did not seem compatible with the need to fill those vacancies immediately. Nor did they seem to agree with some top officials’ visions of the process.

Yet I am positive we will come to that eventually. Like all people who were there in the Maidan, I want life to change for the better, and I am as impatient as they are for the changes to occur immediately in every sphere of life. We have already done a lot to make that happen, to improve the situation in the country. We have introduced new administrative methods and techniques. We have drafted enabling legislation and regulations to introduce even more of those new methods and arrangements. Some of our ideas are being implemented; others are nipped in the bud. Society knows that such appointments should be made publicly, with appropriate media coverage. Under the circumstances, all the candidates have to do is file a good bid and win fairly. We will come back to it.

- A month ago, on 14 March, the President promised at the NDSC meeting to sign a series of decrees that would, first, delineate individual ministries’ scope of work and responsibilities and, second, appoint all deputy ministers. Until now, however, the organizational structure of several ministries remains undefined, and some ministers, like Minister for Emergency Situations David Zhvania, Minister of the Environment Pavlo Ihnatenko, Minister of Fuel and Energy Ivan Plachkov and Minister of Economy Serhiy Teriokhin, either have no deputies at all or have only a couple of deputies appointed. As far as I know, such decrees were drafted long ago but are still not signed. Doesn’t it impede the government’s work?

- Yesterday the President promised to sign these two decrees within the next two days. I hope you understand that the President is not to blame for the delay. The fact of the matter is that every decree, subject to preliminary expert evaluation in the National Security and Defence Council, contains certain provisions allowing the NSDC Secretary to demonstrate his political clout. Every such provision is discussed at length. It is not a discussion of what the new administration should look like but, rather, of whose team a certain official should represent in that administration. I think the President was surprised to learn on 13 April that the decrees had not been signed. He said he would remedy the situation. The ministers who work without deputies are shouldering an unnecessary additional burden. They ask me about the decrees on their ministries’ structures at every Cabinet meeting. Amazingly, they manage to cope even as things are, and to show good results.

I appreciate [Finance Minister] Viktor Pinzenyk’s practical approach and sagacity. Hardly had I settled in my office when he came up with the list of candidates for deputy ministerial positions, vetted it with me, went to the President to have this list approved by a special decree, registered the signed decree with the relevant authorities and sent it to the official media outlets for publication. Frankly speaking, I followed suit to accelerate the approval of the Head of the Control and Auditing Department. Now I know the procedure for drafting and issuing decrees by the President’s Secretariat.

On a law on the Cabinet of Ministers

- The Supreme Rada’s passing a law on the Cabinet of Ministers could address many issues, including those with hiring and firing public servants and officials. The government is entitled to initiate legislation. Why don’t you commission Bezsmertny or Zvarych to submit a relevant bill to Parliament? To my knowledge, draft laws on the Cabinet of Ministers and on the central state power bodies are ready. They define the Cabinet’s and Prime Minister’s powers and their role in shaping personnel policies. Once the laws have been adopted, there will be no need to invent unusual procedures or ways of counteracting them. No decree can supersede or amend the law. Why don’t you use this opportunity?

- The law on the Cabinet of Ministers is being drafted by a working group under the guidance of Vice Prime Minister for Administrative and Territorial Reform Roman Bezsmetrny. It could really address many of the outstanding issues. Yet I expect difficulties with its adoption and implementation because, as matters stand, authority and competencies of various branches of power are too intricately interwoven. The President, government, National Security and Defence Council, State Secretariat - all have a vested interest in this law. I do not think it will be passed soon.

- Isn’t that a shame? Aren’t you aggravating the problem by trying to tuck it away?

- I am just trying to avoid raising issues likely to provoke a conflict. The government and Prime Minister have sufficient authority to implement the necessary reforms, not all of them, of course, but many. Therefore I will not upset the frail balance and aggravate the situation even further. We in the Cabinet should think of how to remove obstacles and show the good results of the new team’s operations to the people.

- Why do you think it better to contain conflicts? It is evident already that the process of the new administration’s evolving and maturing accounts only for some of the causes of conflict. Most of these causes are rooted in some of the new leaders’ incompatible goals and approaches. These “hot spots” exist even within the Cabinet. Look at Minister of Justice Zvarych. As far as I know, he does not even attend the Cabinet sessions, does he?

- So far he has attended only a few of over fifteen Cabinet sessions. Yet it is not the government’s problem; it is an individual minister’s problem. We have very proficient deputy ministers in the Ministry of Justice who have ensured its effective performance. In this case the minister’s absence goes unheeded.

The Cabinet is working. Some things are done today; others will be done, say, in three months. In six months we will hold tenders for CEO positions in the state monopolies. We will first see how the already appointed managers cope with their work. I do not think that sporadic intrigues could check our progress. We all need a result that the President and Cabinet can offer to the public. Only then will we be in a position to iron out all the wrinkles in our relations with other bodies of power and settle all hassles. It is not correct to engage in a battle from the start.

- Ms Tymoshenko, did you catch any of you subordinates red-handed, lobbying or indulging in corrupt activities?

- Most ministers work hard, selflessly and honestly. There are exceptions, of course, but I do not want to jump to hasty conclusions. Unless those few change their attitude, I will have to take public steps.

On resignations, relations with the President and non-crossing orbits

- Ms Tymoshenko, how often do you meet with the President? You had a hectic day on Wednesday, 13 April: you cancelled all appointments and your visit to Moscow, you did not preside at the Cabinet session and you spent long hours in the President’s office. What did you do there? Is it true you were ready to slam the door behind you?

- It is not true! I can assure you that nothing will ever make me slam the door behind me. It is not about ambition, pride or resentment. It is about responsibility. I feel responsible for everything the new administration is doing, for our living up to peoples’ expectations. I do not know what can stop me from meeting my commitments.

I will stand by the President as long as the country needs it. All our common strategies for the next elections depend on our successful cooperation. We have no ownership of our alliance; neither the President, nor myself. Our alliance, our unanimity sends a signal to the nation and the international community. We cannot destroy it.

I trust Viktor Yushchenko. I believe he is capable of achieving the declared goals, of leading the country in a professional, meaningful and beneficial manner. I know our alliance can yield good results.

As for how often I meet with the President, I do not think it effective to see him and consult in person every time a problem arises. I prefer to request a meeting with the President only when I have some pressing or major issues to address. On average, we meet once a week. I believe it is often enough for us to discuss what we need to discuss.

- Do you think Petro Poroshenko is likely to resign before the 2006 elections?

- I would not demonize Poroshenko. He is just the Secretary of the National Security and Defence Council headed by the President. I am a Council member, as are some ministers, the Supreme Rada Speaker, Supreme Court Chairman and other officials. A secretary is a secretary.

- How long will you be pretending there is no disagreement on principle between Poroshenko and yourself?

- I will not do anything that could be interpreted as the team’s weakness or lack of agreement. Our confrontation with Petro Poroshenko is a story from virtual reality. Our orbits do not cross over. I become aware that Poroshenko is part of this administration only when I have to reply to his official letters - about ten per month. We have different functions in the new team.

On Ukrainians’ wealth, inflation, tariffs and meat

- Last week, the State Statistics Committee reported optimistically that Ukrainians had become wealthier, by 42% on average. Can you feel it?

- I am so busy working in the Cabinet that I have no time left for feelings or emotions. I hope people have felt it. The government is now trying to make every Ukrainian solvent. People should be able to pay for the minimum comforts that they need in life. I think statistics just reflect the outcome of our effort. Adoption of the new budget and its first social disbursements must have contributed to this positive trend. Besides, we appealed, through the media and in our personal meetings, to private business and to directors of state-owned enterprises. The President and I asked them to pay more attention to their employees’ wellbeing, including salaries. As a result, the economic balance between pensions and salaries, which was captured in statistical indicators, has improved. It usually takes six months for statistics to start reacting to the results of economic change. Therefore, in what concerns microeconomic indicators, we are still reaping the “fruits” of the previous team’s activities. The GDP and inflation data characterizing the new team’s performance will appear in early September.

- Analysts are fairly skeptical about the State Statistics Committee’s data. Presumably, the Cabinet and President do not see the entirely true, or complete, statistical picture. Does the Committee try to please the clients?

- If there are certain gaps in their work or basically unprofessional things, they have existed under all governments and presidents. The Committee is a locomotive rushing along the rail at full speed. No one can make it turn wherever one desires. They have their methodology, software, techniques. As for the quality and timeliness of data, there is certainly room for improvement.

- Let us compare 2.2% inflation in Q1 2004 and 4.4% inflation in Q1 this year. Even if it is the previous government’s legacy, there is a problem for your Cabinet. Society is paying a high price for pre-election populist decisions. Don’t you think your government should have postponed the second pension raise in December-January?

- The Q1 inflation has three components to it. First is colossal social spending during the election campaign. Our team started making social payments in April. They could not have possibly spurred inflation in January or February.

The first inflation component is related to meat prices that account for 26% of the total inflation increase. It was a consequence of additional allowances to pensioners during the election campaign. The demand for meat grew and the market responded with a price rise. Strange as it may seem, potatoes accounted for another 14% of the inflation increase.

The second inflation component is the issue of paper money by the National Bank, which reached the six-month volume in one quarter. The NBU did that at their own discretion, according to their own calculations and understanding of the situation.

- The same was done a year ago…

- No, the figures are very grave.

- Can you estimate the total amount?

- 11.7% of the money supply. The third component was brought about by our clamping down on smuggling. Earlier many imported goods flowed into the country untaxed. They were sold cheaper on the market. We have put an end to massive smuggling, which affected domestic prices. We had an alternative: either to turn a blind eye to smuggling or to put up with this price rise that would position our country among the civilized economies of the world. Until recently we had no state borders: importers gave bribes to twelve different services to evade official taxation; customs duty collection was as low as 5-7%. That practice had to be eradicated, particularly given that the import duty, inter alia, makes up the budget revenue.

We hoped, however, to close the borders to smugglers and, concurrently, reduce customs duty. We were sure that the Supreme Rada would be with us on that. We believe that the President, government and Parliament are all one team, working for the common good. Yet the Rada did not amend the respective law in due time. So if goods were taxed at 5% but we introduce a 20% VAT plus 2-15% customs duty, the prices for those goods automatically jump up by 20-35%. For example, customs duty for all exotic fruit varied from 200% to 500%.

The situation with meat was also strange. It was imported through the so-called “free economic zones” and was exempt from tax. There were 3-4 major meat importers that later supplied meat to the market where everyone pays taxes. As a result a handful of companies reaped excess profits. As soon as we rooted out such schemes, the meat prices went up.

We tried to explain to the agrarian sector representatives that while they were expanding their meat production the importers did not pay any duty at all. Now we propose to tax them at 30% (20% VAT plus 10% customs duty). I am sure you know about the agrarian lobby’s negative reaction to the government proposals. They did get it their way, after all, keeping the customs duty at EUR 0.6 per kilogram, approximately 35-40% plus 20% VAT; 70% all in all. Mind you that the meat shortage on the Ukrainian market is about 50%. The lobby is happy. Are the consumers?

- Does it mean the government gave in?

- The government was forced to; we could not delay approval of new customs duties for 1000 other commodity groups because of meat alone. It was a political decision to agree to that duty. We understand that it is hurtful for customers who no longer can afford to buy meat. We also understand that, with the 50% shortage of meat and previously affordable prices on the domestic market, if we import the other 50% of meat taxed at 70%, the prices will grow. I have told you about it in such great detail to show how difficult it is to implement comprehensive, wide-range reforms. We have sorted out problems on the borders - and got a backwash in the form of a price rise.

- Inflation is likely to grow in Q2: rail fares, processing for oil and other power supplies has gone up. In some cities and towns public transport fares will increase. At the end of the day, the beneficial effect of high social expenditures may be neutralized.

- Our annual inflation estimate is 9.8%. We know for sure that there are 5-6 main inflation sources. In order to curb inflation we should act like all civilized economies do. By increasing the supply of normally priced goods through governmental interventions we will be able to send a positive signal to the market and stabilize the situation with a certain category of goods. Every government would do it from time to time in respect of up to 10 commodity groups. We have launched the process, and quite successfully. For instance, meat prices in some regions have stabilized, in others - even come down a bit.

- Chicken has become cheaper, but if you buy chicken cuts (like legs or wings, etc), the price is the same…

- Chicken is a different story. Our domestic farmers have doubled (some even tripled) their production, although the imported meat was not taxed properly. I hope in about eighteen months there will be no shortage of chicken in the domestic market.

Yet there is an unmet demand for beef and pork. Presently, we subsidize every kilogram of pork (for pigs heavier than 110 kg) and beef (for cows heavier than 300 kg). Thus we discourage slaughter of the young herd. Given that the cattle and pig breeding is a fairly dynamic type of production, we are expecting it to grow noticeably in the second quarter. I hope in a year or two we will have a sufficient supply of domestic meat and won’t have to import it.

On multiple personalities, the 2006 elections and the 2005 Cabinet

- Socialist Party leader Olexander Moroz organized the agrarians’ rally near the Supreme Rada and Cabinet of Ministers a couple of week ago. Socialist Party member Olexander Baranovsky is the Minister of Agrarian Policy. In your opinion, is Moroz’ party one of the political forces in power or does he still consider himself an opposition leader?

- When I see three Socialist ministers - Olexander Baranovsky, Yuriy Lutsenko and Stanislav Nikolayenko - at the Cabinet meetings, I understand that Moroz is a part of the new administration. When I see the agrarians’ rally, with all those hens, goats, pigs and calves, near the Cabinet building, I think he still feels he is in the opposition, Kind of multiple personalities… Olexander Moroz has got used to being in the opposition and no alliance can help him overcome this complex. His party has launched its parliamentary election campaign, and we can observe some political forces taking their traditional approach: the worse - the better.

- Are you going to form a coalition with Yushchenko’s “Our Ukraine” and Lytvyn’s Popular Party at the 2006 elections? The coalition list of candidates will, reportedly, be divided equally between Viktor Yushchenko, “Our Ukraine,” Lytvyn and you. Is that so? Are you happy with this agreement, if there is an agreement, of course? It is totally unlikely that your “Fatherland” Party would enter into an alliance with other political forces or carry out a campaign on its own?

- First of all, it is critical for me that my union with the President should stay inseparable, firm and lasting. The two of us should feel this responsibility. I mean it. As for the organizational arrangements conducive to the enhancement of this unity, we need to think them over very carefully. Our common goal is for our joint team to get as many seats in Parliament as possible. We have heard various proposals, including list quotas. There is an alternative plan to divide the list in five parts; there are some others. However, we should not make haste with forming coalitions and dividing lists. At this juncture, our main objective is to prove to our compatriots that we are worthy of their trust, that we can deliver on economic issues, first and foremost. Therefore I asked Viktor Yushchenko to put the discussion off till the autumn, to allow some time for teambuilding.

I also think we should limit the number of people authorized to negotiate for the coalition and its election list, to avoid contradictory approaches and statements. Of course, the President should be entitled to speak on behalf of the coalition.

- it so happens that the ministers you trust most - Serhiy Teriokhin, Viktor Pinzenyk, Mykola Tomenko - are all members of the “Our Ukraine” Party (former “Reforms and Order”), which seems reluctant to part with the brand and join the Popular Union “Our Ukraine.” The word in the street is that these and some other public figures could turn up in Yuliya Tymoshenko’s team on the eve of the elections. How can you comment on it?

- I can tell you that the government is gradually developing into a real team. As I mentioned before, there are a few exceptions, but I think those people will have difficulty working in the Cabinet in the future. In a couple of months, I hope, the Cabinet will be a true team of likeminded colleagues.

- All of its current members?

- Those who do not fit will leave sooner or later. I expect personnel policy to be on the top of the agenda for the coalition negotiations. At that time we will be ready to harmonize all branches of power, improve personnel qualifications and agree on effective rules of the team game.

On constitutional reform

- Ms Tymoshenko, as far as I know, Olexander Turchynov has a petition signed by sixty MPs locked in his office safe …

- …By sixty one.

- You see what I mean: a petition to the Constitutional Court signed by the MPs who challenge the legitimacy of voting for constitutional reform and, thus, demand that it be repealed. What are you going to do with the signed document?

- Recently I learned from analytical media publications that I would benefit from the constitutional reform. That is why, the authors concluded, the Prime Minister who used to be its staunch opponent would join the camp of the reform enthusiasts.

It is totally untrue. My official position in the administration does not determine my attitude to the structuring of state power in the country. A year ago I argued that the proposed reform would run counter to the principle of checks and balances between branches of power and would raise havoc with society. Today I still insist that reform, once it enters into force, will pose a huge problem for the country, irrespective of whether I will remain Prime Minister or not.

What we are witnessing now is a drastic change of the entire state machinery. We have replaced the old personnel without altering the model of public administration, and nevertheless the process has been extremely painful for society. Imagine the effects of constitutional reform accompanied by the implementation of Law #3207 on redistributing powers between central and local authorities. When the reform is complete, there will be no person responsible for the situation in the country. Parliament, local councils will be collective bodies of executive power. A parliamentary republic can take various organizational and administrative forms. The one envisioned by our constitutional reform is disastrous.

The state power will be concentrated not in Parliament even, but with the parliamentary majority. The latter will comprise at least 226 MPs, including 10 faction leaders. Those ten will be the actual rulers of the country, because other majority members will be hostages of the imperative mandate. In fact, the faction leaders will form the coalition government and elect its head. I can guarantee that big money will just buy the prime ministerial position, in this Parliament and in the next. Every minister in the coalition government that the majority will form will be accountable to at least three top officials: (1) the prime minister, unable though to dismiss him or her (the Supreme Rada will have an exclusive purview to appoint and discharge the Cabinet members); (2) the Supreme Rada speaker controlling the majority; and (3) the faction leader that nominated him on the faction’s quota. Trust me, the prime minister will be the least influential of the three. He or she will have no leverage with the ministers formally subordinated to him or her.

This same parliamentary majority will appoint the prosecutor general, Security Service chief and judges. And you would remember that the majority is, in fact, reduced to ten faction leaders. How will this country survive? Now extrapolate this model on local administrations. Power in an oblast will be focused with the oblast council dominated by ten political leaders or capitalists. It is not a parliamentary republic model but, rather, that of surrendering public administration to the capital.

My opinion of the proposed constitutional amendments has not changed. Nor am I going to change it in order to please the leftists. A political system transformation is the most important reform for any country. We should approach it with respect and responsibility. We should not tailor the public administration model to the taste of a couple of politicians. We should design a harmonious and efficient model.

- Who will file the petition to the Constitutional Court for repealing the constitutional reform?

- I think, those will be MPs, and many more than sixty one of them.

- When? After the sowing campaign?

- I think it will happen even later. Getting the petition signed or filing it is not a problem. The problem is to form the new Constitutional Court.

I want to underscore, though, that the President honours all his constitutional reform commitments to Olexander Moroz. It is important.

On parliamentary majority and on legal opposition

- You were speaking of a number of laws that are rather unlikely to be approved by the Verkhovna Rada. Do you feel the need in a pro-governmental majority in parliament?

- We have already had a majority in the Rada before the election. At that time probably all parliamentary bodies were not quite capable as the Speaker realized that decisions were made at the meetings of the majority without his involvement, the committees realized that they were only a decorations on decisions made without their participation. I believe that common deputies never read the bills since they knew that nothing depended on them. This situation was not normal.

As for the current situation, the President has defined his team for the long term. He made it clear at the congress of the Our Ukraine People’s Union that he sees the political force headed by Volodymyr Lytvyn and the political force headed by me as his strategic allies. Now it is only necessary to change the format of decision making in the Verkhovna Rada a little.

What do I mean? Parliament has its head. Most likely it is necessary to create a parliamentary majority rather than a pro-presidential or pro-governmental one. This majority will include different political forces and it will not be concentrated around any specific person. The decision-making will be based on inner discussions within the majority. At the same time the Speaker should perform the functions of the head of the entire parliament. This is what I would like, that there be a parliamentary majority and I make every effort for that. I believe that it can include both the right and the left forces. I don’t see any problem with that. On the contrary, it is good when different forces unite, because in this way commonly shared interests are born.

- Does this mean that parliamentary majority as a structure is, nevertheless, necessary?

- It is certainly necessary, but I also keep on dreaming about institutional parliamentary opposition. I mean the opposition, which has the appropriate status. I am sure that sooner or later we will do it. Parliamentary opposition will be clearly defined in number and membership; it will influence the appointments to controlling bodies. The Auditing Chamber is the most illustrative example. We should empower the opposition to appoint the head of the Auditing Chamber independently, without the participation of the majority. The Auditing Chamber must be given more authority since whatever government comes to power, it will never work honestly if there is no control over it. Whereas only the opposition can exercise motivated control and it must be given a tool for that.

- It has been reported recently that a shadow cabinet has been created in Mariinsky Park [official residence of the president]. What do you think of such a form of control?

- I would prefer that a normal shadow cabinet be created not in Mariinsky Park but in parliament. It must become a regular institution. We must radically differentiate between the legislative and executive powers. Executive power cannot exercise effective control over itself.

- It is well know that your negotiation with Akhmetov [Ukraine’s richest oligarch] has produced certain results. Akhmentov also met with Poroshenko [secretary of the National Security and Defense Council] and they supposedly came to certain agreements. And Kolesnikov is in prison now.

- I assure you that Cabinet did not make this decision. It did not for the following two reasons: first, it is not the job of the Cabinet. Second, even if we decided to gather secretly to discuss this issue we would not have time for that since we face much more important tasks right now.

Now, if Kolesnikov is arrested, one has to determine whether he is guilty or not. Only then it will be possible to say whether it was selective pressure on the Donetsk group or Kolesnikov indeed violated the law. But if the law was actually violated, then Kolesnikov alone must not be imprisoned and nor he should become the first.

- Yulia Volodymirovna, some of the ministers have returned their mandates of people’s deputies. Others, including some of the governors, failed to do this. Why don’t you as a prime minister react to such violation of the Constitution?

- Of course, the mandates must be returned. But why do the representatives of the executive power act like that? They worry about the instability of their positions. After all, the situation when a governor is dismissed only a week after his appointment and the deputy to the department head in two weeks, dictates such behavior.

This is the first reason. The second reason is the fear of upsetting the balance of power in parliament. Most appointments were made from that part of the Verkhovna Rada that used to be in opposition and that maintained a certain balance during voting. Practically all of those who were elected to parliament according to the party lists have returned their mandates, while the votes of those who were elected in majority constituencies and kept their mandates are very important. That is why they delayed the retuning of the mandates.

Although I do not approve of the approach of compliance with the law depending on the circumstances, I stand for clear differentiation between executive, legislative and judicial power.

On the idea of privatization

- Which [state-owned] enterprises do you plan to sell to meet the budget target of seven billion hryvnias revenue from privatization?

- There was no special policy in Ukraine that would determine which enterprises should be privatized and which should remain in state ownership. Privatization was carried on, as a rule, when someone in the presidential circle wanted to have this or that enterprise. Now, we began with a clear definition of those enterprises that must remain in state property.

First. These are the enterprises which are essential for the country’s viability or national security. There are not so many. The examples are Ukrzaliznytsia [Ukrainian railway] and the gas transportation system.

As for [the telecommunications giant] Ukrtelecom, it must be significantly upgraded so that it will have more value for privatization. We must avoid the situation when first, an enterprise is destroyed and its price is reduced and only then it is sold. If we deicide to sell an enterprise, we must bring it to a condition where it starts producing quality products or service and its price reaches its maximum.

Second. We should not privatize the enterprises that provide for the network, which I talked about before. They must fulfill their functions for the country’s interest.

Third. We should not privatize those major enterprises where effective management is possible and which will bring much profit to the state.

- Kryvorizhstal?

- As an example. Chiefly, if an enterprise brings profit to the country, it is not really necessary to sell it into private ownership.

All the rest of the enterprises that do not fit into these categories must be privatized. The other question is whether a state should have a share in them or not. It is my deep conviction that it must, not to control them but to earn money. If an efficient private proprietor, who made investments and introduced quality management, owns as much as 90% of the stock in it, such enterprise should be profitable. Moreover, if we adopt a proper law on the payment of dividends to small shareholders, the state will be a minority shareholder and receive money for the budget without doing anything.

This is my conception that I would like to see implemented in real life.

- Is the communication sphere taken from the charge of the Transport Minister?

- This is the issue of the political will of the President. I have submitted a draft decree on the division of the Ministry into two- Transport Ministry and Ministry of Communication and Information. It was endorsed and submitted to the President for his signature. In my view such division is essential, since these two functions have very little in common. People who make the “nation’s intellect” should be appointed to head the Communication and Information Ministry. They should be the people who realize that information is the # 1 product in the modern world.

The incumbent Minister of Transport and Communication does not agree with this decree. That is why the final decision must be made by the President.

On privatization: extra charge or bankruptcy

- Currently there is much debate over the need to re-establish justice in privatization carried through in the past. Benefits that the state and the budget will gain from this are debated even more. But in actual fact the scheme of redistribution of property is taking its shape. Business sharks, untouched by the state, are going to redistribute the property of those whom the state “bit” a little. However, businessmen from the new government will not be able to afford to buy many businesses and enterprises currently owned by Pinchuk, Akhmetov and Surkis. They can make money, first by creating favorable conditions in the courts and the Prosecutor General’s office for other Ukrainian businessmen and second by performing the same functions for the sake of Russian businessmen. If this scheme works, the state budget will receive only a symbolic sum from re-establishment of justice in previous privatization sell-offs. Do you see this scheme?

- I really don’t want this to become true. First, I am against shedding the blood of specific entrepreneurs. I am for a totally different approach to enterprises. Clearly, many of them were privatized without objective competition and without true assessment of their cost. They brought in much profit. Their proprietors could make significant capital out of them. In addition they have established good relations with international banks.

My conception is very simple. Guys, have you used free property? Have you earned money? Have you established good contacts? It’s time to buy these enterprises at their actual price. And they don’t necessarily have to pay with their own capital. There is an opportunity to use the world’s banking system and raise money.

The idea is as follows: We must adopt a law on the calculation of after-evaluation of enterprises and establish strict criteria for selection of the enterprises that are to undergo this procedure. A first criterion is the overall output of the enterprise. Second is whether it was privatized through competition or not. The year of privatization is proposed for the third criterion, however I am not quite sure of it. Does it make any difference if the enterprise was stolen in 1995 or 2000? The fourth criterion can be the fulfillment of investment commitments. But it is not a secret that nobody ever made those investments as stipulated by privatization agreements. There is such a clause in the draft law.

In addition, the law must provide for a forbearing and transparent procedure. Thus, an enterprise is put for expert tender. The tender is held similarly to the privatization tender. There are no restrictions for participants with experience in this field and for the attraction of costs from the world’s banking system. Its only difference from an open tender is that the current proprietor has the prior right to pay the price that was set up as a result of the auction, no matter whether he won it or not. He has the right to pay in installments and other privileges. If he pays, he is give a state certificate of amnesty. After that no one will ever bring up this issue. This will be written in law. The whole privatization issue can be revised according to this law and the country will never raise it again.

- And if in five years this law will be abolished…

-A new government will not come in five years. It will not come even in ten years. There will be consistency.

This law will make it possible to grasp the rules of the game. Currently one major problem is that nobody understands the rules. Now, a government representative comes to an enterprise and proposes that its proprietor sell it at 5% of its price, “to avoid problems…”

- Is this a real fact?

- There are many real facts like that. Tomorrow, another one comes and says that “if the proprietor does not collect his luggage and does not leave for abroad, having left his property for free, he will be in prison.” Then comes the third and says: “Tomorrow I will be your “krysha” [I will protect you], but you must pay me. Now.”

I would like business to have clear rules. Then there will be no problems. After-evaluation is merely a payment for what the country gave them for free some time ago.

- Not everyone will agree to this approach. Thus, an enterprise could be privatized in 1998, when a concentrate cost 19 dollars. Now it costs 70 dollars. And the enterprise now costs 600 million dollars instead of the 50-60 million that were paid for it. In addition many proprietors have invested significantly in their enterprises.

- It should be written in the law that in the case of a real investment in an enterprise, this amount is to be deducted from the price of an expert tender.

In addition, the proprietors may not want (or be able) to keep all the major enterprises that they have now. They may want to keep, say only five out of thirty, and this will be enough for them. The remaining 25 enterprises will be sold at a regular auction.

Let me tell you what will happen if we leave everything as it is now. There will be war not between the state and unscrupulous proprietors but between the corporations set up in the past and in the present. Guess who will win this war in the court? He who is well connected with the government. In this case the old proprietors will lose their property for free. The government is now trying to protect them. They can keep their property on condition that society will be compensated for what it once had.

Where will this money go? This is a very important question, since after-evaluation of strategic enterprises means legalization of a huge amount of money. There are three areas.

The first area is a real estate state fund. It will finance construction and long-term loans (up to twenty - thirty years) for individuals to purchase apartments or agricultural loans. In short, this money can be used to set up a powerful state real estate institution.

A certain part of this money must be allocated for compensation of lost savings. And the third area is interest-free loans to small and medium businesses.

I think that soon I will meet with each of the major proprietors and we will agree that they will vote for the law on after-evaluation in parliament.

We may also have a public discussion of this issue.

- Will the law on after-evaluation be discussed during this parliamentary session or the next one?

- We are screwing up our courage. After the sowing season.

The law is ready. It was reviewed by many serious international experts reviewed and supported as an element of stabilization and establishment of the rules. We must also have discussions with the proprietors of the enterprises to see what alternatives they can propose and to ensure that they all agree to it.

On VAT and simplified taxation

- Yulia Volodymirivna, having imposed Value-Added Tax on the industries exempt from it and on the industries that were released from it by the previous government, you in fact hit at the middle class, which supported you during the election…

- For example?

- For example, individual entrepreneurs who make more than 300 thousand hryvnias a year must pay VAT.

- Indeed, I am sure that the Value-Added Tax is totally inadmissible for states, which must rapidly develop their industry and entrepreneurship. Many countries are critical of VAT.

Moreover, a week after my coming to the government, I charged the previous leadership of the Tax Administration with calculating budget revenues without VAT but with 10% sales tax and with only 13% tax on individual incomes, excise and import duties.

The calculation proved to be excellent! If we adopted this taxation system, budget revenues would increase by almost 30% and shadow schemes would be liquidated. However two obstacles prevent us from doing this. First, we are moving towards Europe, where VAT, profit tax and others are in full effect. If we want to get access to the European Union, our taxation system must correspond to theirs. The second obstacle is the lack of political will. We need public support, support of all branches of power and of the President.

That is why we fall into a trap. On the one hand, it is obvious that taxes must be radically reduced. But on the other hand, if we start reducing taxes under the current taxation system, we will lose budget revenues and will not be able to make up for this loss.

- Yet increasing pressure on the incomes of, say, entrepreneurs will not eradicate tax evasion schemes, but will only force people to hide their incomes in the shadows. The state budget will not receive the money due to it.

- Let me tell you the following: If we keep VAT, it must be effective at all stages, from the very beginning till the end of the chain. If there is a “gap,” it is clear that VAT accumulated earlier will be lost. That is why the Finance Minister is fixing this chain step-by-step. Only then will it be possible to reimburse VAT, while acting systems of simplified taxation break this chain.

VAT poses a very serious problem. It is very complicated and unharmonious; one can’t like such a tax. But it exists; it was imposed long before the coming of this government and we have to put up with it.

Still I hope that we will manage to introduce a sensible taxation system, which might possibly be different from the EU model, as a temporary measure to bring our economy out of the shadows and to see what our country is like in economic terms. After all we know nothing about our economy. What are our exports and imports? We do not know the actual amount of the salary fund and actual GDP, because a major part of our economy works according to tax evasion schemes.

I think that after five years of this experiment, the EU would like to change its taxation laws but not Ukraine.

- Yulia Volodymirivna, you personally took part in the development of the Budget Code and you now the rule: no tax law adopted later than August 15 of the year preceding the budget year, can be enforced since January 1 It can only be enforced one year later. Strict adherence to Ukrainian laws was on top of Viktor Yushchenko’s election agenda. Now, numerous tax innovations and amendments to the budget are adopted in March.

All entrepreneurs are shocked. A director from Kharkiv oblast called us and said that they were planning to set up a joint venture and expected equipment from abroad in April. Due to the amendments they will have to pay VAT on the imported equipment. It is now questionable whether this joint venture will be actually set up. The director asks, why then were you stating your intention to set up millions of new workplaces in Ukraine?

VAT is imposed on imported goods in almost any country in the world. Later it is included in the price of the end product and is reimbursed almost instantaneously. If the product goes for export VAT is paid from the state budget. We are currently working on the improvement of this procedure. Enterprises with a long production cycle should be allowed to pay VAT not with the money but with avalated bill of exchange. That is why the issue of entrepreneurs who did not pay VAT earlier and who must pay it now is the issue of a valid bill of exchange, which is accepted for payment upon the completion of the production cycle.

It is very important that all entrepreneurs work in equal conditions. Why did a dozen entrepreneurs not pay taxes, whereas all the rest did? Everyone should compete under equal conditions.

And of course I don’t like the saying that this budget is “a budget of spending on food” (this is a quote from a well-known politician). It is nonsense! This is the budget of giving due to people who work in the social sphere and who are paid from the budget. That is why, let us agree, taxes are part and parcel of an entrepreneur’s life, because they provide for the extremely important social sphere.

The only thing that I would like to think about is the increase in the turnover of individual entrepreneurs that is not eligible for VAT. We might raise it from 300 thousand hryvnias up to a million.

- In our view the increase of this threshold is not significant, since the 300 thousand hryvnias turnover is usually that of an enterprise. However small entrepreneurs had to close their businesses since March 31, which is a serious problem. Now they may work with a legal entity no longer than one month, after which they will have to pay other taxes in addition to their simplified tax. What do they do? Go into the shadows? As legal workers they are now unprofitable for enterprises.

- We must investigate this issue. Even the previous year’s budget provided tax on a salary fund for small entrepreneurs. We abolished it, but the timeframe, which you were talking about remained.

- But Yulia Volodymirivna, in current amendments to the budget a new definition, “self-employed person,” is introduced. They will have to pay the same taxes as hired workers if they are working with the same enterprise longer than one month. However simplified, the single tax was not abolished for them. The Verkhovna Rada finance committee was against this rule as it saw double taxation in this scheme. In vain, as we see…

- I promise you, that we will schedule for Monday a meeting with a large number of small entrepreneurs. We, together with Pinzenyk and Terekhin, will go through virtually every clause that worries them. I think we will be able to improve many things.

Governors, Public Control, and Local Budgets

What are the most serious successes and failures in your regional staff policy?

It’s too early yet to talk about failures or victories. I expect results after this crop sowing campaign. In about six months we will know which governor has managed to increase revenues to his local budget - that’s a very serious indicator! Each governor has four or five orders to fulfill, and we will keep an eye on their fulfillment. I think in half a year we will see who is able and who is unable to work for the country. Besides, all governors and local administrators are under scrupulous public control. I have a feeling that the public is watching us through a huge telescope and giving us signals. Governors and local administrators don’t even imagine how closely the public is watching them - as never before. Now the people know that they have some influence. Unlike the previous government, this one is aware of its tremendous obligations to the people. We can’t ignore public opinion. This is a colossal achievement. Today no one can turn a deaf ear to signals from the public and no one can get off lightly. The President and the Prime Minister will exercise only partial control, and 80 percent of control will be exercised by the public. It is very important.

More than 80 percent of revenues to local budgets go to pay wages. So we may end up with frozen capital construction and no funds for new equipment…

The budget can not afford the necessary volume of capital construction. It is silly to think that budget funds can cover the construction of houses or infrastructural facilities in the countryside. In fact, the budget can only pay salaries to budget-funded employees and fund some social programs. But credits, construction, and development programs can only be covered by extra-budgetary sources. In this year’s national budget we earmarked expenses for reducing interest rates on agricultural, housing construction, and investment credits. This gives people a hundred times more opportunities to get credits. Actually, we changed the very concept of the budget.

As far as local budgets are concerned, let’s be frank: they can’t expect manna from the central government. First of all it’s necessary to put things in good order within local communities. Here’s a simple example: construction companies build residential blocks on land plots that they take on lease or buy for a song. Why not sell such land plots for a real price? - That money could go directly to replenish local budgets. You want to build a cottage? - Okay, but why do you have to knock on the back door and pay bribes to people’s deputies or clerks in every office to get your documents signed? Why not sell such land plots through auctions? - That could be a six-fold increase for local budgets. But then someone would have to forget about pocketing money.

Our plans to replenish local budgets are a priority. Step number one is to sell land at real prices. And even that step would be enough.

There is one more feasible source: state-owned enterprises. Everybody regards their profits as their managers’ personal profits. Why not involve local authorities in drawing up their financial plans and reserve at least a quarter of net profits for bonuses to hired employees? - As a result, we could increase revenues from individual income taxes.

We have thousands of state-run enterprises. We have only just begun to work. Only two months have passed, but it seems like a lifetime. We mean to step up our work at the regional level in order to make local budgets deficit-free. We have increased the revenue section of the central budget by 57 percent in comparison with last year. And this serious result was achieved by stopping shadow turnovers alone.

Russia and the SES

The official explanation of the postponement of your visit to Moscow was the crop sowing campaign. Can we expect negative consequences for Russia?

I do want Russia to have Ukraine as a friend and partner. I don’t want any tensions or confrontations. Our government will do everything possible to make this transition period painless for the Russian political elite. I understand that it’s difficult for the Russians to put up so quickly with the new type of relationships - honest, just, and free from any confrontation, that they have yet to learn to respect another country. They have to learn to heed the other side and look for compromise solutions instead of forcing it to sign documents. I want everything to be different in our relations.

Did you get guarantees that your criminal case in Russia would be closed?

I don’t negotiate this issue. I just want everyone to realize that the period of political competition is over and all political techniques must remain in the past. Both Ukraine and Russia must understand today that they are entering an entirely new stage of their relations. Of course, we have to adapt to it, and it’s not always easy and painless. But I want this adaptation period to be as smooth as possible. As the head of the Ukrainian government, I am certainly Russia’s partner. I want our relations to be nice and mutually beneficial. But that takes a mutual will.

Will you visit Russia when things get nice, or a little sooner?

As soon as the sowing campaign is completed.

But then there will be the harvesting campaign…

I hope we can find some time before the harvesting campaign.

As far as we know, in Moscow you were supposed to discuss the SES project and Ukraine’s involvement in it. Your and your ministers’ comments suggested that the only stumbling block for Ukraine was the idea of a supranational body, which is proposed by the three other would-be members of the SES [Russia, Belarus, and Kazakhstan]. But even Kuchma regarded it in a rather distant perspective. Don’t you see any other dangers in the SES project? By luring us with the free trade area (a format that suits Ukraine), Moscow simply tries to impose a customs union on us. That would ruin our European integration plans. You must have seen the documents signed by Kuchma: what was passed off as a free trade area was nothing else but a customs union. So what is Ukraine’s position with regard to the Single Economic Space?

It is good that Ukraine has become the main decision-maker in the SES project, because today it is up to Ukraine to determine the form and format of this organization and decide how to make it effective for each member. Today it is up to us to make decisions and suggest options.

The SES has two component aspects. One is political - a demonstration of commitment to friendship. The other is economic and it should be built on the basis of the present level of cooperation. We have recently held many talks on cooperation in space rocketry. We can cooperate in aircraft-building, oil, gas, and other industries. It is a positive factor for both Ukraine and Russia. It might take several decades to build normal economic relations. Now we are like Siamese twins: no way to cut us apart and no way to live together. We just have to get through this period, and the SES is a good way out for now. I am all for both political and economic components, because we are determining priorities in our foreign policy and we need to receive some signals of readiness for discussions from all our partners. It is very important for us to know that we are not confronting, but negotiating parties. The economic component in a mutually harmless format is also very important.

That is why I planned to offer Moscow a feasible and transparent concept of the SES project. Now let Moscow wait till the next visit.

Prices for Gasoline and Mechanisms to Regulate Them

The situation on the national petroleum market demands resolute steps from your government. But the steps taken so far have been administrative rather than “market” ones.

The problem is that prices on the oil market fluctuate, causing fluctuations in export duty rates. Our market is very sensitive: once early signs of an upward trend appear, retail traders respond immediately and very inadequately. For example, when prices for crude oil on the global market go up a few points, retail prices for oil products in Ukraine go up by 35 percent.

All countries have their own mechanisms of protection from such price fluctuations. And every country should have a reserve of oil products and an “intervention network”: I mean a certain stabilization reserve, which could be sold through state-run stations at a stable price during crisis periods.

This retail network may be small - say, five percent of the total. But when the market gets a signal from this five percent of traders, oil refineries can easily weather price fluctuations, because Ukraine has a very wide profitability margin.

As a rule, gas filling stations belong to those who export, supply, or refine oil. Their profitability rate enables them to keep stable prices regardless of any fluctuations on international markets. Actually, such fluctuations are a political instrument during certain periods, so every country has its protective means.

We don’t have such protective means. When my government started working two months ago, Ukraine had no intervention network. But it’s very easy to create it. All it takes is a legislative act that would allow shareholders to adopt decisions at meetings with a 50-percent-plus-one quorum. The draft bill has been shelved in the Parliament for seven weeks. You know the story of Ukrnafta [Ukraine’s Oil and Gas]. You know that this company has a huge network of filling stations - 20 percent of the total number in the country. It runs its own extraction facilities and retail network, and the majority stocks in it belong to the state. Formally, the government controls the company, but can not even appoint its managers.

It takes political will and political decisions. On Tuesday I am going to make my 275th attempt to include this draft bill in the Parliament’s agenda.

I suspect that the lawmakers won’t agree to change the procedure of shareholders’ meetings, because every second MP is an entrepreneur: receiving dividends from their two or three percent of shares, they want to keep the situation under control. But if the Parliament supports our proposal to cut the quorum of shareholders’ meetings down to 50 percent plus one vote, this country will have a real intervention network that will insure us against any price fluctuations on the global oil market.

You say it is necessary to manage Ukrnafta, and at the same time your government rejects the idea of a vertically integrated oil company. This looks very much like lobbying for the interests of individual companies like Galychyna or Ukrtatnafta. Aren’t you afraid of new lawsuits and a new round of wrangling for Ukrnafta?

We don’t make a fuss about Ukrnafta. All’s quiet, and all profits go to Privatbank’s coffers. All’s quiet, like at a cemetery.

You have just mentioned a new rule of holding shareholders’ meetings. Is the government aware of an impending wave of lawsuits, since the state enjoys the same legal rights as other shareholders? And there is one more problem: the list of enterprises not subject to privatization won’t be published before this fall. It looks like you keep this list up your sleeve in your game against oligarchs, who know about your business experience and your capabilities. Isn’t this what they call manual control?

We need manual control only for a changeover from system A to system B. That is, for a very short period of time. When I was Vice Prime Minister in charge of the fuel and energy sector, I was criticized for manual control. But I managed to build a model of the energy market, in which 97 percent of settlements were monetary.

Today my government is building a system out of chaos. The state is a proprietor like anyone else. What do proprietors do? - Number one, they create an effective management; number two, they don’t let anyone steal their property; number three; they use their net profits at their discretion; and number four; they set prices. And it is wrong to think that private companies are managed by their private owners and state-run companies hire managers. That’s the main mistake.

The state has Ukrnafta and a very good network of filling stations, which the company bought from Privatbank for a triple price. I respect Privatbank, but everything that was acquired unfairly must be returned. So once the Parliament passes this bill, the state will become a real proprietor and will work for the people. Then we won’t have price hikes, because we will have such a powerful stabilizer.

And as to wars, I am not going to wage them. The government tries to set general rules for all. And if we see that some rules don’t work, we are always ready to correct them. We won’t use manual control for ages.

The new system is very simple: selection of highly qualified managers on a competition basis; competitive salaries for them, proportional to net profits so that they don’t steal; absolutely transparent tenders for all necessary purchases of equipment and raw materials.

And last but not least, we need to have cash flow plans instead of regular balance sheets. We need to see how much we may lose and earn, how much to invest and how much the state would get in net profit. No wars - just one general system for all. Of course, it’s going to take some time. We have drafted all necessary normative documents. Hopefully, the Parliament will adopt them soon. One of them is a draft bill on tenders, meant to rule out thefts. At open tenders nobody will set prices. Prices will be set by the market, and they might even be lowered. We have adopted a resolution on tenders and auctions, a resolution on the standard procedure of drawing up and adopting cash flow plans. If all this starts working, state-run enterprises will start working normally and efficiently.

Oil and Gas Pipelines

Does Kyiv have enough time before your visit to Moscow to consider Gazprom’s proposal to make all settlements for natural gas supplies and transit exclusively monetary?

Today it is better for Ukraine to receive natural gas as payment for its transit, because the country has a guaranteed source of gas supplies. Here’s a good example. Ukraine charges a low price for piping Russian natural gas through its territory, but we do this on purpose, because this way we keep low prices for our consumers. It’s a political decision. If we gave up this practice today and said: pay for gas supplies and gas transit separately, we might receive five times more money for transit, but the price for our consumers would be five times higher. We couldn’t afford to subsidize all households and enterprises.

Besides, we know that Russia itself has shortages of natural gas, because its operational gas fields are not large enough. So it’s better for us to be paid “in kind.” But it is also better for us to pay for the transit of natural gas through Uzbekistan, Kazakhstan, and Russia in cash (at any price they set). And it would be good to receive natural gas from Turkmenistan. This problem is very critical for Ukraine, because there is a certain confrontation: Russia plans to turn over the full volume of Turkmen natural gas in order to a) keep up its own balance; b) retain its monopoly on export, which is very important for Russia. Ukraine has a different plan: we want to diversify gas supplies for our domestic needs and our own export, which is absolutely normal and logical. So Russia and Ukraine have to find a center line of their interests. Moscow wants Ukraine to buy Turkmen natural gas from Russia. Kyiv wants to level its consumer balance with the help of Turkmen natural gas and cooperate with Russia in exporting all the rest.

Don’t you have fears about the agreements between TNK [Russia’s Tyumen Oil Company] and Shell on constructing a new oil pipeline or the Russian-German plans to build a gas pipeline under the Baltic Sea, bypassing Ukraine?

Ukraine has to reckon with all international plans to build oil and gas transportation corridors, because Ukraine is a player in this field and we need to peg our share in this global market. Our share is the Turkmenistan-Ukraine and Iran-Ukraine pipelines. This is our target. And if we want to succeed, we need to find a number of political solutions in our relations with those countries. I am working on this. We need to negotiate with more countries - not only where such pipelines may be built, but also countries that have an external influence on decision-making. With regard to the Turkmenistan-Ukraine gas pipeline project, my forecasts are very optimistic. As to the Iran-Ukraine pipeline, our chances for this project are not so fair. In order to make it work we have to join powerful corporations of the countries that provide a political cover for such projects. But I think we’ll make it.

But still, what do you think of the agreement between Putin and Schroeder on the construction of a new gas pipeline? Many European experts call it “traitorous” in relation to other EU countries. They believe that Germany deceived its partners in pursuit of its interests. And Ukrainian experts warn that this pipeline may be detrimental to Ukraine, because it will bypass our territory and oust our gas transporters from competition.

As long as Ukraine is an onlooker and not a participant in such processes, it will always have such problems. Other countries will always build oil and gas pipelines, and it’s impossible to stop such negotiations. If a pipeline is profitable, they will lay it even on the Moon, regardless of whoever may object. So instead of trying to stop or hamper international projects, we must build our own policy, and it must be strong in action, not counteraction. Our policy today consists in looking for partners in building two major international gas arteries. And that’s a definite strategy for Ukraine.

But while Ukraine was pondering the Odessa-Brody oil pipeline, Russia struck a deal to build an alternative pipeline from Burgas, Bulgaria to Alexandropoulos, Greece. How much longer are we going to ruminate? When will the Odessa-Brody pipeline be completed at last?

A pipeline is a great thing. It can pump oil either way - it’s only a matter of profit and energy security. In my view, it would be very profitable for Ukraine to receive crude oil as payment for transit, because in today’s world energy resources are more valuable than money. And it doesn’t matter much in which direction oil is pumped. Of course, decisions in this area have a weighty political component, like the need to diversify sources of supplies. Now our Odessa-Brody segment is just an idle pipeline without stable inlet and outlet resources and necessary infrastructural facilities. Thank God, we can pump at least something through it. To make it efficient, we need to have stable supplies of Caspian oil and to know exactly who will buy it at the other end of our pipeline. We have to decide whether to extend it through Poland to Gdansk or build a powerful refinery in Brody and sell our finished products to domestic and foreign consumers. So we have two options. We need to have enough information and guarantees about Caspian resources to make a final decision: to build an extension to Poland (which is a better option) or build our own refinery. The latter option is not much worse, because it could give us new jobs, cheap oil products, and resources for export.

Deutsche Bank has promised a € 2 billion credit to Naftogaz Ukrainy. How will this credit be used? And isn’t the 8% interest too high?

There are three questions. Question number one: what should we spend this money for? If all this money is going to be spent to reconstruct the operational gas transportation system, I’m against it. Our gas transportation system is working normally. There hasn’t been a single accident in 14 years of its operation, so there are no grounds to doubt its reliability. So it would be more expedient to use this money for increasing Ukraine’s transit capacities: that is building new oil and gas pipelines. It is strategically important for Ukraine to retain control over its main pipelines and never cede it under any circumstances.

Question number two: who should we invite to cooperate in our construction projects and will this money suffice to fund them? I can say definitely that this money is not enough. We would have to look for partners and other banks to raise more funds.

And the third, very pragmatic question is the real costs. If the Japanese government offers us very serious credits at an annual interest rate of one and a half percent, we certainly should give preference to the cheaper way. The logic is obvious: you don’t have to be an expert in business or finance to see the difference between 1.5% and 8%. But 8% is not the final figure, and it’s possible to negotiate a more acceptable interest rate.

Railroads and Tariffs

On April 1 tariffs for cargo carriage by rail were doubled. Okay, the budget gets additional revenues. But there are other ways. Ukrainian railroads buy materials and products for their needs at excessive prices and through an enormous chain of intermediaries. Wouldn’t it be better to lower purchasing prices and deal directly with producers of rails, ties, and other things instead of raising the tariffs?

Prices charged for railroad services are market prices, too. Prices for railroad services are determined not only by the national market, but the neighboring markets as well. Today prices in Ukraine are almost three times lower than in Russia and almost two times lower than in Belarus. 60 percent of cargoes transported by Ukrainian railroads are “metallurgical” - from iron ore to pipes, rolled steel, and other finished products. So it is clear that for many years our railroads have been used as a supportive segment of the metallurgical industry, which belongs to five families. It’s not right. It’s abnormal. So we made this “mild” step. We didn’t raise the tariffs up to Russia’s. We raised them by 50 percent.

Now we can see all manner of political speculations. The metallurgists are calling congresses and rallies to show the government its nook. But that’s not the right way. It’s better to talk things over. The government raised the tariffs by 50 percent, and not more. So the metallurgists should appreciate this care.

How did it happen? At first the railroads proposed 17.6%, then 100%, and finally 50%, as a gesture of goodwill.

The railroads initially proposed raising the tariffs up to Russia’s. Of course, the reaction was very negative. Then they proposed 100 percent. But then we invited Volodymyr Boiko (Illich Metallurgical Works) and owners of several other big metallurgical companies to a Cabinet meeting. We negotiated and found a compromise solution: 50 percent.

It was a political decision. If it had been economic, we would have adjusted our tariff system to Russia’s. This agreement demonstrated our mutual understanding. After the meeting Boiko and I held a press conference. He said that the companies would abide by our agreements.

But as soon as we raised the tariffs, Pinchuk’s team went into hysterics, because tariffs for carriage of ferroalloys grew by 200 percent. Why so much? - When we looked into the matter, we found that the general system of preferential pricing had included a special privilege for Kuchma’s son-in-law: the tariff coefficient for carriage of ferroalloys nearly equaled zero. And when the price went up from zero, it made 200 percent. One should take all this hysterical lamentation calmly and professionally.

Culture

Nothing has changed in the management of the culture sector: there is still the same practice of conferring titles, the same system of funding from the budget, the same subordination to the Ministry of Culture and Arts. Does the government lack time or professional ability to carry out reforms in this field?

This field is supervised personally by Yushchenko. I think we are really short of professionals who could reorganize this system. We are working by the emergency principle: we receive an SOS from, say, a choir and give it a chocolate to calm it down. Of course, it’s wrong. I think we should invite people who know what to do and how. At present I am dealing with poultry, pork, and crop sowing, and it’s going to take a while. But I promise that early next month we will gather a compact working group of professionals, who know how to form a new qualitative basis for the culture sector in this country, how to develop it and make it self-sufficient, how to promote it in the world. I hope together we can work out a realistic action program.

We try to apportion the meager funds allocated for culture among all branches, although some of them may just as well make their own living. Is it because top government officials don’t know the real situation and needs in this area, or do they want to keep each segment under control?

I can say honestly that we don’t have a clearly formulated concept. But I assure you that no one in our government is after control over human souls by means of controlling this or that segment of culture. Our problem is that we still act in response to situations rather than strategically. I do want the government to start acting strategically as soon as possible. In my opinion, culture must develop freely. The government must only create a fertile field, in which culture can flourish.

Health Care Reform and Medicines

Health care is a special branch: it concerns each and every one. But there is no sign of reforms in it. Does your government plan to radically reform it?

Health care and education are the branches that are the most difficult to reform. We don’t have solvent demand for these services - neither the budget nor individual consumers can afford them. That’s why our prime concern today is to increase people’s solvency by raising wages and through dividends from minority shares. We must give our people opportunities to earn money. They could buy minority shares in profitable companies and have guaranteed dividends in any financial weather instead of the 10% interest on a bank deposit. We are also developing a new concept, which classifies hired employees and capital as equal sources of profit. So those who work 12 hours a day but have no entrepreneurial status must get adequate remuneration and subsequently be able to afford services - medical or educational.

Problem number two is that the budget is insolvent and that this money is practically uncontrollable. Annual budget allocations for education total UAH 6 billion [$ 1.14 b.]. Wouldn’t it be better to individualize these appropriations so that a student could get a grant or a credit? We want the health care and educational systems to have their solvent customers, just like in any other business. But so far there is no progress in these areas. The shortage of budget financing is compensated by money pumped out of patients and students. And this practice is uncontrollable and unpredictable.

There is no use visiting hospitals and lamenting about their awful condition before TV cameras. It is necessary to find out where this money goes and work out a model of transformations that could breathe life into our health care and educational systems. I think in a month or two we will present such a model.

It has been proposed for a long time that the government determine a list of medical services to be rendered by all medical institutions - state-run or private. Expenses for these medical services must be covered by the central budget. Patients must know which services are free and which they have to pay for. When can we expect this list?

We don’t have it yet, because we can’t calculate real tariffs. Before we decide whether to base the health care system on medical insurance or on budget financing, we need to know how much it all would cost. All other CIS countries have made such calculations, and we actually have to start from scratch. The only thing the previous governments managed to do was let the people pay for themselves. And there is also the problem of medicines.

You promised to lower prices for medicines by 15% - 40% by the end of this year. At whose expense do you mean to lower them?

We certainly will lower them. Let me tell you how. Presently, the central and local budgets allocate a total of UAH 1.3 billion [$ 250M] annually to purchase colossal amounts of medicines. If we purchased them for real prices (not overpaying 40% - 50%) we would give a very strong signal to the market. Other traders would see that they couldn’t sell higher. We have annulled the tenders at which medicines were purchased at overstated prices. We are announcing new auctions.

The pharmaceutical sector has three problems. Problem number one is counterfeit medical drugs. We have no labs to test them for quality. The national market is flooded with dummy pills and other hollow medicines. We have no bio-authenticity labs to test the contents of pills.

Problem number two is the collusion among traders: one sets a higher price for medicines, and all others immediately follow suit. We could counter this practice by interventions in the market for medicines, at least the most essential ones. Such interventions would prevent excessive surcharges in the retail network. We are working on a program for the provision of cheap and quality medicines to the population. We have the state-run company Liky Ukrainy [Ukraine’s Medicines] and a retail chain of communal drug stores that haven’t been privatized yet. We will engage them in this model and let the rest work as before.

And problem number three is the quality of domestic pharmaceutical products. It’s not too difficult to produce medicines. All it takes is good investors, up-to-date technologies, and just a wish to work honestly.