Reform-minded Natalie Jaresko has had a tough baptism in her role as Ukraine's finance minister. However, she is determined to demonstrate the safety of the country's banking sector and show that Ukraine is still an attractive investment destination, as she tells Stefanie Linhardt.

It is not an easy time to be Ukraine's finance minister. The country – which has been locked in conflict with Russia in its eastern regions since March 2014 – has a significant gap in its finances and is suffering from economic difficulties. Indeed, stability in Ukraine is reliant on the Minsk II agreement being honoured, which was signed in Belarus in February 2015 and agrees a ceasefire in the Ukrainian conflict zones.

Faced with these struggles, US-born Natalie Jaresko was asked to join Ukrainian president Petro Poroshenko's government as finance minister in November 2014. Ms Jaresko, who is ethnically Ukrainian and has lived in the country since the collapse of the Soviet Union, was sworn in as finance minister in December 2014, as one of three foreign-born ministers, alongside Lithuanian-born economic development and trade minister Aivaras Abromavicius and Georgian-born health minister Aleksandre Kvitashvili – all of whom received Ukrainian passports as a result.

Answering the call

"I’m a Ukrainian-American and have always been committed to trying to accomplish something, trying to be a part of this transition," says Ms Jaresko.

In November 2014, some recruiters visited Ms Jaresko’s office – she was then CEO of Ukraine-focused private equity fund Horizon Capital – to ask if she could recommend any Ukrainian professionals who might be able to serve in different government positions. During the course of the conversation, the recruiters also asked  Ms Jaresko if she would consider joining the government.

“I didn’t think that Ukrainians were willing or conceptually thought about bringing people with foreign passports into government,” she says. Indeed, Ms Jaresko thought that the prospect “was going to go away”, but the president’s administration called her back the next day to ask if she was willing to serve.

“Ukraine was in such a difficult situation – this was in late November of last year – the crisis was so complex and the question really was ‘if [I do] not [join] now, then when?’,” she says. “I had already invested my professional life into this country and into this transition, so it was an offer that, frankly speaking, I couldn’t refuse. I thought I would never forgive myself if I didn’t make every effort now to try and get Ukraine through a very difficult moment.” 

Trouble shooting

Ms Jaresko’s first act after joining the government on December 2 was to form a budget that the country could function with and show Ukrainians and the international community alike that the coalition in parliament was working effectively.

“We already knew at that time that we had this financing gap [of $40bn over the next four years] and that we needed to raise support from our international partners,” says Ms Jaresko. “Unfortunately, credibility was something Ukrainian governments in the past 23 years have not been able to build with their partners.”

It was therefore important for Ms Jaresko to improve confidence in the administration, which included negotiating an international support package, which includes a four-year extended fund facility from the International Monetary Fund (IMF), of $17.5bn alongside some wide-ranging reforms.

“The economy was in freefall,” she says. “We needed to shore up the reserves of the central bank to be able to shore up confidence in our banking system to be able to stem the withdrawals of deposits. All of that was having a 'vicious circle' effect on the exchange rate – in which there was enormous volatility – which has an immediate effect on the population, on business; it has an inflationary effect – all of this taken together made our efforts in achieving an IMF agreement critical.”

The IMF agreement led to a second support package: a $7.5bn programme from the G7 countries (France, Germany, Italy, the UK, Japan, the US and Canada), as well as from multilateral organisations. The next step, however, an international debt restructuring, is the biggest cause for debate.

“The debt restructuring must give us $15.3bn of savings over four years to balance payments targets and that is a key goal for us at this time, without which we cannot succeed in this macroeconomic stabilisation,” says Ms Jaresko. “Aside from that, simultaneously, the government is working on trying to improve the business climate because stabilisation is the first step to returning to real economic growth, but real economic growth requires investment.” 

Economic difficulties

The Ukrainian economy is in need of an upturn in fortune. In the first quarter of 2015 the country’s gross domestic product (GDP) fell 15% year on year, a figure that can largely be explained by the fact that the data for the first three months of 2014 does not take into account the annexation of Crimea and unrest in eastern Ukraine. And while the government expects to see a slower GDP decline in the second, third and fourth quarters, it has revised the GDP forecast for full-year 2015 downwards from -5.5% to -7.5%. The European Bank for Reconstruction and Development followed suit with its latest forecast for Ukraine in May, which was revised from -5% for 2015 to -7.5%.

“Critical for our ability to move back to what we are hoping will be 2% growth next year is taking control of inflation, which is unfortunately very high right now, and the full implementation of the Minsk agreements, because that is the one thing that [we cannot] control,” says Ms Jaresko. “Any escalation of violence will cause havoc to the forecast. The goal is 1% to 2% growth next year, to turn the corner and stop the recession.”

In the National Bank of Ukraine’s March inflation report, the GDP deflator reached 36% in the first quarter of 2015, with forecasts for the entire year of 32.5%. Inflation is then expected to fall throughout the course of 2016 to 11.3%, while GDP will see a 3% increase, driven by investments and consumption.

The key areas where Ukraine is seeking investment are infrastructure, agriculture, energy and energy efficiency, as these are areas where Ukraine continues to be very competitive, says Ms Jaresko. 

Structural change

These investments will only come, however, if the new Ukrainian administration succeeds in convincing investors that it is bringing real structural change. The government is working on a much-needed reform package with a focus on deregulation, state and enterprise reform, tax policy reform, tax administration reform, as well a broad range of anti-corruption measures.

“We are trying to wipe out corruption from top to bottom, using a carrot and stick approach, meaning our new prosecutor general has probably charged more people in the two months that he has been in office, than [we have seen prosecuted] in the past 23 years,” she says. “The stick is ‘you should be afraid of going to jail’. On the carrot side, we’re also working on creating the right policies to discourage corruption in the future.”

Another area Ms Jaresko has inevitably been preoccupied with is the reform of Ukraine’s banking sector. With more than 50 banks taken out of the system for financial weakness, the clean-up of the system is showing banking customers that the remaining financial institutions are safe, says Ms Jaresko. But there have also been new laws instituted to spot and stop the black sheep.

“Part of the bank failures were indeed financial but part of it is also the abuse by owners and related parties of owners, through fraud, criminal activity and abusing the depositors’ trust,” she says. “We have adopted legislation that makes this enforceable in terms of criminality and we will be going after those bankers, those related owners or related parties that have abused the system.”

After improving the transparency at the National Bank of Ukraine and strengthening its powers and efficiency in terms of being a bank regulator and supervisor, Ms Jaresko believes that the final part is to strengthen the protection of the country's banking consumers.

“We need to strengthen our deposit guarantee fund for our citizens to make sure we can bring back confidence into the banking system and bring back the deposits that have been withdrawn over the past year,” she says.

“I want the message to investors to be: this government is different,” says Ms Jaresko. “We are not just talking about reforms or legislating reforms, we are actually implementing reforms. It’s about Ukrainian ownership of the reforms and civil society’s demand that reform is going to continue – whether it is me or somebody else, the reforms will continue.”

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