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Following the last year, Ukraine started repayment of debts to the IMF. The repayment totaled $1.268 billion in 2017. Not a huge amount considering the gross debt to the IMF is only $12.1 billion according to the recent news. This amount ought to be repaid before 2021. Can Ukraine perform this liability? That is the question.

Can we settle it on our own?

Had Ukraine been on time with the performance of IMF requirements, settling debts would come much easier. All the changes that the IMF demands to adopt seek to surge Ukraine’s economic growth and increase the budget. Lower rates of corruption alone should add 2% to the GDP, and that’s a considerable boost.

However, reforms have been delayed for a number of reasons. In November, the IMF confined its 11 requirements to 4 key points:

  • increase gas prices;
  • implement a pension reform;
  • privatize state-owned enterprises;
  • create the Anti-Corruption Court.

No above requirement was met or implemented. The result is that there are no serious changes inside the country and the lack of lending.

Ukraine has lost two tranches by now. Odds are goods the third one goes out the window as well unless Ukraine meets at least half of the IMF requirements.

If so, our cooperation with the IMF can meet its end, thus, making the state of affairs even worse. Because those loans Ukraine obtains are used to repay debts. We take loans from international organizations and other countries to repay old debts. That said, new repayment dates get set as farther as possible to bide time and accumulate the hard currency.

Today, Ukraine’s external debt accounts for 80% of the GDP. What makes matters worse is that the external debt service is 32% higher than principal repayments on IMF loans, while the external debt service of 2018 will account for over 54% (₴35 billion) of the budget deficit. Repaying these debts through own efforts is impossible. At least without inflicting damage on our economy.

Where should we take the money then?

It goes without saying that in order to repay current loans we will have to obtain new loans from other lenders bypassing IMF. The National Bank of Ukraine should have resources too.

With the preferences provided by the IMF in 2015-2017, the National Bank had an opportunity to purchase enough hard currency on the interbank currency exchange to repay the external state loans and increase foreign exchange reserves.

According to the IMF, the increase is estimated to hit $30bn and more as soon as in 2018. Moreover, part of these funds will hardly be allocated to repay debts.

Ukraine has shown a foreign trade deficit for a long time. Last year, it declined even further down to $3.278 billion from January to August.

To compare, the trade deficit was $1.447 billion in the same period of 2016. This means that Ukraine will have to constantly allocate $3 to $6 billion from its foreign exchange reserves to support the foreign trade, thus, reducing its external debt solvency.

On the other hand, the deficit can be covered by personal transfers of foreign currency incoming to Ukraine from other countries. There is plenty of these transactions since many Ukrainians go abroad to work and send money to their families.

In 2016, these remittances went over $7 billion. 4 billion of that amount was converted to UAH. Then, the National Bank of Ukraine purchased $2.8 billion at the interbank exchange as reserves.

According to the NBU, 2017 marked a 30% increase in the cash inflow to Ukraine. If there are many remittances this year, they will allow increasing the reserves even more. Such outcome, however, means that the external debt problem will be solved at the taxpayers’ expense.

International investments can become another source of funds. They can become a solid support to repay debts, but the problem is that investments are few.

According to the IMF, Ukraine is estimated to receive $2.5 billion of investments in 2018, which is enough to repay only some of the debts.

How can repayments affect the economy?

The repayment period can create an additional pressure on the national currency. The more money Ukraine gives, the lower its national currency is expected to decline. There are two solutions to compensate the currency outflow: new tranches from IMF or a robust growth of Ukrainian exports.

On the other hand, if the forecasts turn out to be true and the foreign exchange reserves do increase, they can be used to support hryvna from shaking.

Conclusion

Money flow to the safest areas, and investments come where they are most secure. Ukraine needs transformations and reforms that can be used to retain the capital.

Therefore, it will be easier to repay the state debt, which will then result in more opportunities to replenish own reserves.

It is alright to have an external debt, but only if the economy is thriving. Alas, this is not the case for us at the moment. With no global reforms, there will be no global changes. And with no changes – Ukraine will forever remain a debtor to the EU, IMF, or some other organization.

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The current state of Ukrainian transfer pricing can be characterized as problematic due to uncertainties that taxpayers face as they try to substantiate the controlled transactions conducted. This problem centers around the statutory criteria used to compare controlled and uncontrolled transactions (a transaction that meets the market conditions).

When selecting comparable transactions, the Tax Code governs taxpayers to analyze the following elements of controlled and uncontrolled transactions to determine the arm’s length range:

  1. Description of goods (works, services) subject to a transaction;
  2. Parties’ performance of functions, assets involved and risks borne in the transaction;
  3. Relationship practice between counterparties and terms of agreements concluded;
  4. Operational conditions of parties to a transaction and their business strategies.

I think these parameters provide no certainty on how to create a methodological framework for comparison since all these criteria contribute to problems when it comes to selecting comparables due to the lack or insufficiency of the information required. Considering the generalized nature of these criteria, they increase the risk of additional tax charge since tax agencies may keep a personal bias on the search and selection of comparable transactions from open sources.

The national regulations include OECD developments on the usage of information sources to substantiate the controlled transaction to be used in search of comparables. These comparables may be taxpayer’s internal uncontrolled transactions and/or related party uncontrolled transactions, as well as external transactions available from public information sources.

The internal comparables can cover most of the needs for comparables specified in the Tax Code.

It is safe to say that financial transactions (lending transactions) are arguably the most exposed today because low comparability is the main reason for tax inspections and additional charges of corporate tax.

At this moment, Thomson Reuters, Bloomberg and the National Bank of Ukraine databases are the most common external sources to substantiate that controlled transactions are arm’s length. As a rule, most taxpayers, who prepare documents for these transactions on their own, use only the databases of the National Bank of Ukraine. These databases do not fully meet the comparability elements. Therefore, the substantiation should be based on the key criteria of lending transactions that affect interest rates in accordance with the loan principal.

As contractual terms are being created to regulate the financial terms of transactions, one can treat the following criteria as the main ones:

  • loan disbursement period. The interest will increase if the disbursement period extends;
  • subordination (debt repayment priority). Higher subordination means a better interest;
  • loan uses. The intended use of borrowed funds aligned with the borrower’s business profile affects the interest;
  • security and collateral. These allow to decrease the interest rate when borrowing funds;
  • financial statements. Borrower’s financials fail to comply with those specified in the contract, thus, resulting in higher interest rates;
  • loan amount. When interest rates are being set, It constitutes a separate determiner causing the interest rate both to decrease and increase;
  • acceleration of debt. Agreeing on this option can decrease or increase the interest rate;
  • loan type. The type of loan can also decrease or increase the interest rate. For example, clients with a strong credit history will most likely decrease the interest;
  • credit rating. A credit rating reflects the borrower’s solvency. This parameter is an inverse of the interest rate set.

That said, I believe that when analyzing this type of financial transactions, the key conditions to study are: duration of loan, borrower’s credit rating, type of credit and subordination. They are to be identical in the analyzed transaction. Resultant differences, if any, are subject to adjustments.

Taking these criteria into account will create a better transparency in legal relations between tax agencies and taxpayers, thus, increasing the investment appeal of Ukraine and enhance the economy.

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The problem of “grey” export of Ukranian grain has been there for years. According to a number of experts and business associations, we have 30% to 40% of grain exported unofficially. For all intents and purposes, these shortages are too huge both for the budget and legal agribusiness. Our legal experts, contributing to the strong audit and consulting record of Kreston GCG, explained why this is happening and what can be done to solve the problem.

What exactly casts this “shadow”?

There are many factors that can drive up the numbers of illegal transactions with grain in Ukraine. All such transactions have the same origin, i.e. lack of an effective state regulation of the grain market.

More specifically, currency regulations and VAT refunds seem to be that very weak spot of the Ukrainian grain exporters. VAT refunds, even with the automatic system, still cannot entirely rule out the human factor and, thus, the corruption risks.

When it comes to a currency regulation in Ukraine, one should bear in mind that revenues that Ukrainian companies receive in foreign currencies are subject to enter their foreign currency accounts at authorized banks when debts under the contracts are due, but not later than in 180 calendar days following the clearance of such products (export customs declaration) in pursuance of Article 1 of the Law No. 185 “On the Procedure for Payments in Foreign Currencies” with due regard for paragraph 1 of the Resolution No. 410 “On Regulation of the Situation in the Monetary-Credit and Currency Markets of Ukraine”). Breaching these timelines will result in 0.3% fees for each day the foreign currency earnings are lost as translated in UAH at the exchange rate of the National Bank of Ukraine at the date such debt occurs. That said, banks have no right to lift the currency controls on export transactions with documents that discharge liabilities by setting off homogeneous counterclaims.

Moreover, the National Bank of Ukraine has extended the surrender requirements to sell 50% of Ukraine’s foreign currency proceeds obtained by non-resident legal entities (Resolution “On the Imposition of Surrender Requirements” No. 129 dated 13 December 2017″).

There are more problems for a domestic exporter such as the process of obtaining a certificate of origin and passing the grain ecological control. Registration of such documents takes time and delays the export of grain. Therefore, exporters often obtain certificates in hinterlands, which makes the export cheaper.

Apart from the tax system and currency control, Ukraine also has transportation issues. Since logistics routes are still failing to meet modern standards on the export of agriproducts, the costs to transport grain from line silos to the Black Sea ports is approximately 40% higher than those of France or Germany and 30% higher than of USA. The end result is that the price of grain does not allow Ukrainian manufacturers and exporters to become viable competitors on the world market.

All these circumstances make agrarians run their business off the radar. Because illegal schemes allow both for more savings and time. It is hardly the matter of tax avoidance alone – farmers bypass the currency control, sell the grain for dollar cash at the juicier market exchange rates than those of the National Bank of Ukraine. Moreover, there is no need to translate the currency to UAH. As an option, a farmer can store foreign proceeds in cash to spend and reinvest these funds when needed.

To mitigate taxes, Ukrainian exporters of grain use different schemes. More specifically, they build chains of multiple companies interrelated by local and international contracts that would often operate from low-tax jurisdictions. This scheme can reduce taxes for exporters at the pricing stage: Ukrainian companies sell goods to an ultimate buyer using a chain of non-resident companies, including low-tax jurisdictions, where the bulk of exporters’ profits are kept.

Form of contract matters

Alas, these are all but a few challenges Ukrainian exporters encounter. Many of them, for instance, often face a problem of supply contracts being drafted improperly. There are standard contract templates drafted by GAFTA (Grain and Feed Trade Association) and FOSFA (Federation of Oils, Seeds and Fats Associations). The standards they offer often allow to reflect the contractual terms of transactions such as the price, quantity, quality and specifications. It is noteworthy that all standard contracts of GAFTA and FOSFA specify the England law in their governing law and jurisdiction clauses, thus, allowing to use agile and sensible rules known worldwide as business-oriented and perfectly tailored to trade raw commodities. Moreover, the conditions of these standard contracts are carefully planned and balanced, respect the interests of sellers and purchasers, contain trader-friendly procedures and terminology. Any company can use these documents regardless of whether it is a GAFTA or FOSFA member.

In Ukraine, these standards are often overlooked. Meanwhile, SMEs may not even know those actually exist. As a result, they conclude poor contracts that are either incomplete or carry little benefit for farmers. The end result is unforeseen events caused by failures to perform payments, supplies, non-compliance with the deadlines or grain storage conditions, theft.

Other complications for Ukrainian grain exporters, especially for small enterprises, are associated with the lack of reliable partners abroad. The government could support Ukrainian grain exporters by engaging industrial ministries, committees, branches, the Chambers of Industry and Commerce, including the trade missions and representative offices in many countries. Unfortunately, these opportunities are not being implemented yet.

Another pressing issue is the lack of funding or lending opportunities for Ukrainian grain producers. That applies both to large and small exporters. Ukrainian government also does a poor job supporting and aiding the agro-processing industry, especially when it comes to the grain.

What is the government thinking?

Saying that the government idles by and avoids problems with the grain export would be unfair. There are many attempts to invigorate the business climate made on a constant basis. Most significant changes were adopted in 2014-2015 when the EU autonomous trade preferences took their effect for Ukraine and the government started deregulation of other industries.

For instance, those years marked the lifting of an obligatory quality certification for grain and its products and certification of storage conformity. In 2015, the Ministry of Agrarian Policy and Products of Ukraine developed the Single and Comprehensive Strategy for Agriculture and Rural Development in Ukraine for 2015-2020. Agricultural reform boils down to the following principles: euro integration, deregulation, decentralization and management efficiency of state-owned assets. Alas, many ideas specified in the document have not been implemented yet.

Apart from that, the government extended its list of entities entitled to a VAT refund. This measure drove the grain market out of balance. Given that grain traders had no right to a VAT refund from export transactions, the state support for domestic producers boiled down to a support of grain trading companies.

The VAT refund was abolished on 1 January 2015, while all grain export transactions were VAT-exempt before the end of 2017. After that, quarantine certificates were abolished. These certificates allow one to move grain inside the country and were often used in corrupt practices. In that same period, the government reduced the time required to obtain a phytosanitary certificate from 5 days to 24 hours. Compare it with the EU countries, where this procedure takes 2 hours.  That said, this new measure reduced the detention time for vehicles and allowed cutting the costs of ship chartering.

Attempts are being made to reach an agreement with international representatives to provide better terms for Ukrainian exporters, increased sales quotas and more trade preferences. Today, however, they fail to provide the result needed. According to our international partners, this failure owes to poorly designed Ukrainian laws (as far as the commodities export is concerned), strong bureaucracy and corruption.

Ukrainian statespersons are also engaged to resolve this “grey export” issue at the state level and through tax policies by adopting quotas, limitations and bans, increasing tax rates and using local industrial regulations. From time to time, we can see news on how tax authorities reveal some schemes that allow for a “grey export” of grain and tax avoidance in Ukraine.

Such evidence can only prove that the government has set sail to solve problems with the “grey export”. Alas, not all the measures adopted were successful. Some new solutions give preferences to specific players on the grain market and infringe the rights of others.

The most striking example came in 2015 — an arrest of grain shipments (just before their dispatch) belonging to three largest international traders in Ukraine: Bunge, Glencore, Louis Dreyfus. It was later revealed that agents working for these companies used off-shore schemes to purchase grain. Therefore, “grey export” inflicted damage on large and respectable companies.

More importantly, the government’s measures are rather local. They solve only part of problems, while the entire market remains unchanged.

In pursuance of Article 25 part 2 of the Economic Code of Ukraine, the government bodies and local authorities regulating the economic activity are forbidden to adopt acts and perform activities that would result in privileges for business entities (regardless of incorporation), or that can put business entities at a disadvantage, or otherwise breach the rules of competition. Failure to meet this requirement will allow anti-monopoly/anti-competition agencies and business entities to challenge such acts as governed by the law.

Conclusion

The reasons behind a “grey export” of grain lay in the ineffective governmental control of the grain market, i.e. a complicated and poorly designed taxation system. On part of the government, there is no efficient support of law-abiding Ukrainian exporters, including the small- and medium-sized ones. The latter struggle to find reliable international partners and are often subject to fraud.

On the bright side, the Ukrainian agrarian community already has the solution. Entrepreneurs have long called the government for collaboration to solve a great many of problems and create an efficient grain export market. The January sessions held by the American Commercial Chamber in Ukraine can attest to that.

On our part, Kreston GCG is ready to support Ukrainian producers and exporters of grain by providing the professional legal and forensic consultations, tax and transfer pricing consulting. Moreover, we are ready to provide legal services and help you with the tax planning, execution of contracts and support the transactions of Ukrainian exporters on the agricultural market and settle any disputes.

Find our vast array of services on the Kreston GCG website or contact us by phone or social networks.

This article is brought by the legal department of KRESTON GCG.

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A high-profile security service, spontaneous inspections, removing cash from turnover are only part of the methods not to overlook.

– You see a fraudster?

– No, why?

– Because no doubt your company has one.

As a rule, this is the type of dialogue we have with owners of the largest Ukrainian companies.

Most of them deny the facts of fraudulent activities performed by managers inside the company.

Here are the most common answers to such questions:

“Out of the question. Being an owner, I am engaged in the operations management of my company and I control the matters directly”.

“My management team and I work alongside for ten years. We have built the company from scratch together and it is extremely loyal to me. Fraud is out of the question”.

“My management has a salary above average, it values the company and would never decide to commit fraud. Doing is against the logic”.

“My relatives take key positions at the company, thus, making the fraud impossible”.

“My company is subject to systemic financial audit procedures conducted by a representative of the global auditing network — out of question”.

“The management knows my authoritarian attitude and would not strain my confidence”.

I call all these words and formulations — “out of question”, “impossible”, “would not strain”, “illogical” — a forensic catch. They lead to an incomprehension of problems behind the regular fraud in the company.

As global practices show, companies incur 5-10% losses of the annual turnover every year as a result of fraud.

Ukrainian practice shows that 25% of annual earnings get misappropriated as revealed through financial investigations conducted by Kreston GCG in 2017.

These are horrifying numbers, aren’t they? This is the price of denial that owners pay for to managers’ benefit every year.

Most common ways and areas for fraud

Procurement department — procurement from related and unrelated parties at overstated price bypassing tender procedures.

Financial and accounting departments — intentional misrepresentation and distortion of financial statements, understatement or overstatement of financial performance. Chaotic accounting of fixed assets — risk of intentional misappropriation of assets.

Production — overstatement of products cost.

Marketing department — ineffective, uncontrolled spending of marketing budgets.

Inventory accounting and storage — plain misappropriation of products and inventories caused by poor organization processes or a lack of physical security and inventory accounting systems.

Sales department — sales through related and unrelated parties at an uncontrolled selling price, poor management of non-performing receivables. Large receivables are indicators of problems in your company.

Legal department — ineffective litigations against counterparties can also be indicative of problems at your company. A defaulted customer can outbid your in-house lawyer.

Security and IT departments — risk of information leakage.

All these moments constitute main risk points for your company.

Fraud cannot be examined, but it can be reduced to a minimum. Internal corporate fraud can be countered by specific measures.

Systematic spontaneous inspections of your management without warnings.

Well-considered financial and non-financial motivation system. Once your manager gets a percentage of business earnings, he/she will become extremely loyal to you and the company performance will directly depend on his/her own results.

Create a security department that would be accountable only to you.

Implement a whistleblowing system. Intracompany statistics show that one out of two cases gets identified through whistleblowing.

Avoid large numbers of duties and responsibilities being assigned to a single manager.

Aim for the process automation.

Follow the functional utility principle and implement a KPI system.

And above all, avoid cash as managers always find it quite sticky to their hands.

What is the key conclusion? There are no ideal methods to minimize losses caused by fraud inside business structures, but there are proven methods not to be scorned as many of them worth millions of dollars.

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Banks have long ruled the show on the financial market. So long that it seems as if it’s always been the case. Well, all of a sudden we have the fintech startups ready and raring to go. It took some ten years for these small projects to become large companies and grow in some investment and clients. They even managed to attain the impossible and move banks from their lofty perch.

Some already say that banks will disappear leaving the way for progressive solutions. Well, perhaps it is going to happen in some very distant future but definitely not tomorrow morning. Or even afternoon.

Unsuccessful attempts at ignoring

2007-2008 brought a serious mortgage crisis to the USA. It gradually grew into the financial and economic one covering the entire world. The crisis hurt banks a lot causing their mass bankruptcy.

Of course, they could not give loans in such conditions not even mentioning any types of deposit accounts. The same banks remaining afloat had to abandon the lending services being under the pressure from regulators.

Unlike the online lending services (P2P), which hardly depended on anyone. Anticipating its advent, the very first of them had appeared in the U.S. a year or two before the crisis kicked in. Take Prosper and Lending Club for example.

At the start, they were treated with caution at first just like anything new. Yet after the crisis, borrowers flooded those two. So, we can see the history behind the finest hour of P2P platforms and financial technologies as a whole.

Banks have ignored this potential competitor for a long time considering it too small of a fish for their stock. And they had every right to do so. After all, the value of largest fintech startups ranges from $500 million to $5 billion now, while the value of Wells Fargo exceeds $250 billion. The difference if self-evident.

Still, financial technologies showed an incredible growth almost immediately. Even now it offers a great many of progressive solutions. For instance, applications for money transfer, insurance registration, services for designing investment portfolios.

There are digital banks allowing to solve a wide range of financial issues. Working with them is easier and faster than with a conventional bank since you do not need to stand in a queue, fill some application forms, etc. You don’t even need to go anywhere, just run your application.

However, the fintechs went even further and started developing complex B2B solutions. There are already algorithms for countering the money laundering for example.

Investments in the fintech grew 10 times between 2010 and 2015. At the same time, the industry caught the attention of regulators. Contrary to the banks expectations, not only did they not impose any restrictions but contributed to its growth. For instance, the European PSD2 (Payment Service Directive) has granted access via API to the data on account balances in any bank allowing them to make payments and transfers to third-party companies. In Europe and USA, regulators create the so-called “sandboxes” – special areas free from regulatory pressure to test the fintech products.

All this in itself is a red flag for banks. And, perhaps, the last decisive factor for them was the outflow of young clients.

Young people do not like the conservatism of traditional financial institutions, which is expressed both in the service and in the digital products they offer. They are much more compelled with the ease-of-use and availability of fintech solutions.

As the Facebook IQ and MasterCard surveys taken in 2016 show that 93% of young people do not trust banks in the USA. Another 45% reported their readiness to abandon their services and enjoy only the fintech solutions. That is a big blow for conventional financial organisations since it is largely the millennials that constitute the largest consumer group. In these circumstances, banks needed to change something. Which they did.

In recent years, we can see potential competitors becoming partners and uniting to develop joint projects. Many banks even buy the successful fintech developments. For example, a popular digital bank Simple was bought by the BBVA.

It is fair to say that involving the youth is not the only reason for cooperation. Both parties receive other benefits in this case as well.

United we stand, divided we fall

The cybersecurity issue is one of the core issues when it comes to innovation. Alas, fintech solutions cannot guarantee the entire security for users.

That is why many still do not trust these technologies using them only for solving short-term tasks (such as getting a loan or money transfer). Users mostly avoid more serious projects, namely from the B2B segment, preferring to work with banks that have long proven themselves in this business. As a result, fintech companies lose a significant portion of income.

Banks, in turn, can expand their client base using financial technologies and enhance the service quality. Notably, with the access to accounts via API they can be servicing both their own and other clients using their interfaces.

Thus, the need for two parties cooperating is obvious and rather a matter of time. Slowly, this time comes.

Now, over a half of the largest world banks use fintech solutions one way or another. Generally, they use the works in cloud technologies and big data analytics.

For instance, HSBC uses the best practices of the fintech Tradeshift, which is based on the Ribble protocol allowing to conduct various types of financial transactions remotely.

The Canadian Imperial Bank of Commerce has entered into an agreement with the Borrowell allowing clients to obtain instant credits. Scotiabank followed in this example along with the startup Kabbage. These examples are many and there will be more in the future.

That means that the ice broke up. The snowball is rolling, the process is irreversible. Still, we are yet to find out the way it ends. Perhaps banks will be entirely taken over by fintechs or, perhaps, fintechs become some sort of financial IT giants. For now, all we can do is wait and monitor the situation further.

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No matter how people try to be modern, progressive, independent from the weather and seasons, the natural cycles affect us same as our ancestors. Celebrating the New Year is the tradition we can easily take as an evidence. Ancient pagans put a start to it originally and the holiday served as a symbol for ending one cycle and starting a new one.

These beliefs have not disappeared even now. We are still building new plans for the new year, evaluate results of the previous one, and try to realise the things we have actually accomplished or left out for another year. For this reason, we can see the increasing number of workshops, training sessions, and lectures on planning for the next year. Each is going to tell that annual objectives should align with the life priorities and facilitate implementation of the long-term goals (yes, these should be set as well). Moreover, they are going to explain why analysing the current situation and summing up the year results is so important.

Annual Report as the essence of long- and short-term planning

In business planning, the methods shaping your objectives, the ways of accomplishing those will have a various format and different frameworks, while the general principle will remain the same: analysing the current situation, defining the state you want to arrive at in the future, and determining specific steps to implement the plans. The only difference is that business planning is more dependent on the calendar year, which is driven by the need for submitting annual financial reports. An Annual Report is an efficient tool for summarising the results, formalising the strategy, and setting objectives for the future according to the strategy selected.

An Annual Report is a multifunctional document allowing to solve plenty of problems: describing long-term targets, business development prospects, management plans; substantiating the current business model and legal structure of the business; explaining the performance results with the context taken into account; providing unaudited indicators; describing investment programmes and their potential effect; presenting a team of managers, as well as the management approaches; describing the company policy and accomplishments in socially important matters, etc. Let us take a closer look at the Annual Report role in planning from the stakeholders’ standpoint.

Foundation for trustful partnership with investors

An Annual Report, namely, its financial and strategic elements show investor how appropriate his/her funds are allocated. It also serves as a portfolio for attracting new investors. An Annual Report shows the company’s commitment to its strategy and principles, provides an analysis of the company’s accomplishments over the previous year focusing on both its strengths and weaknesses and the plan to mitigate the risks.

Investors expect proofs that the company is governed reasonably, as well as the proofs of its highly competitive and promising nature. Sections describing the management team allow evaluating its professionalism, understanding how effectively these people can manage investments. For an investor, it is just as important as the company indicators since no one would be eager to trust their money to strangers.

To protect their own investments, investors also want to be confident that the company is working on a prospective market. An Annual Report contains relevant sections that give an idea of the product development plans, studies, company developments, and its future potential.

Opportunities for mutually beneficial cooperation with partners

A successfully prepared Annual Report, first of all, can help your company stand out among competitors and, thus, reinforce your market standing, increase the brand loyalty. This, in turn, will serve as a signal to partners that they can build long-term beneficial relations with your company rather than entering small deals to obtain short-term benefits. For your company, this would mean discounts, more favourable terms of supply, participation in new joint projects.

Quality assurance for products/services

Information that b2b clients mostly expect from an Annual Report and in the trust-demanding areas such as banking and insurance. Clients want to ensure the reliability and quality of the products and services needed for their own businesses, as well as to get an assurance of your company’s reliability and viability. Information on the strategy, studies, and developments helps clients integrating their own business with the policy of your company and thus, establishing the further cooperation. Moreover, clients want to make sure investments are made in the quality and manufacture and that your company guarantees them a number of benefits.

Enhancing staff involvement

An Annual Report displays the results of staff performance, informs on the strategy, shows each officer’s contribution to achieving certain strategic aims, as well as the company development. In taking its further steps, a company shapes the image of progressive business, which can offer other employees a safe future, development prospects, professional growth. Annual Report can assist in generating a positive vision of your company among the would-be experts, who are yet to find their professional self.

Analysing the company activity and evaluating the strategy relevance by the management.

In preparing an Annual Report, the management will detect current problems in the company, activities with a low return rate, its strengths and weaknesses, existing and potential synergies. A solid Annual Report will serve as a basis for further strategic solutions.

Obligation of implementing the published plans

The plans that no one is aware of except for some officers inside the company and the plans written on paper and then pronounced openly are poles apart. The publicity of plans will encourage their execution. And should actual results deviate from the projected ones, it is better to analyse the reasons such deviations occurred and provide an unbiased substantiation of the inconsistencies between the anticipated and actual internal or external environment, other than to avoid publicity at all. The management able to reflect on its errors reinforces the stakeholder’s trust and his/her estimate of the management professionalism.

If personal planning aims at summing up and finishing the planning before New Year’s Eve, business planning generally starts the production of the Annual Report immediately after the New Year holidays.

Let all your dreams come true this year but do not forget about the SMART principle since it helps to transform the chaotically generated ideas into attainable goals!

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President Petro Poroshenko has recently stated that the minimum salary In Ukraine can make ₴4,100 as soon as in 2018. Even though it sounds tempting, Ukrainian reality prevents us from branding it a step into the bright future. This issue is a double-edged sword.

What can we see now

In 2016, the Verkhovna Rada adopted a bill on increasing the minimum salary doubling it from ₴1,600 to ₴3,200. This led to peculiar consequences:

— The first disappointment from innovations came when people realised that 3,200 is the amount they get without the income tax deduction. After taxes, the employee would get much less – ₴2576. Against the backdrop of utility costs and product prices increasing, such increase in salary no longer seems significant.

— Increasing the minimum salary created problems for budget organisations. Their budgets were not increased, while the organisations were demanded to raise minimum salary. To replenish the budget, chief officers had to take various measures. Such as redeploying their manpower with minimum salary so it continues to work part-time. Other enterprises (private ones as well) had to cut their staff so as to pay the remaining officers the minimum salary required.

— The business, in turn, had to pay more taxes. It is the unified social tax (UST) we speak of that an employer pays for each salary paid. Now, with the minimum salary of ₴3,200 it accounts for ₴704.

— Doubling the minimum salary also added around 2-2.5 percentage points to inflation in 2017. These figures were presented by the National Bank of Ukraine. However, they clarified that in reality, employers were not expected to raise the real income of workers and it was rather the matter of dragging them from the shadow sector.

— Tax deductions from salaries increased, which is logical. According to the State Fiscal Service of Ukraine, the personal income tax (PIT) collected increased by 40% more and the unified social tax — by 20%.

— In turn, the Ministry of Economic Development and Trade reports a downturn in the shadow economy. It is that very trend that the President of Ukraine had referred to when he suggested increasing the minimum salary up to ₴4,100 in 2018.

Then we have an abnormal pattern as a result. In fact, the real improvement in living standards has not brought the increase in minimum salary, albeit resulted in some positive trends.

What can the ₴4,100 minimum salary change?

Given the positive trends in unshadowing and increasing tax deductions, the government decided to continue raising the minimum pay. Hence is the Poroshenko’s assumption about the minimum pay of ₴4,100 possible as soon as in 2018 rather than in 2019 as was planned originally.

One could hardly argue with that: Ukraine actually has the resources needed for such an increase in salaries. That becomes obvious if we look at the balance dynamics on the Treasury Single Account – the balance there has not gone below ₴40 bn. over the last three months.

In other words, the country has something to spend.

Unfortunately, there are no guarantees that this experiment will end up well:

— Firstly, increasing the minimum pay to 4,100 will inevitably cause the inflation to grow, which is going to exceed the projected indicators in 2017 (12.2%-13.7% by the year-end 2017 with the projected 9-11%). The inflation, in turn, will drive the further hryvna depreciation. Since the only instruments for combating inflation and devaluation the National Bank has is the discount rate, its increase will make it impossible to lower the interest rates on loans.

— Secondly, the tax burden on business will increase and that means more reasons for businesses to enjoy the benefits of shadow economy. Employers will be more eager to risk with off-the-books employment introducing an hourly pay, redeploying their manpower to work part-time, cutting the staff, and using other saving schemes. In the long run, all this can eventually result in unemployment and a new boost for shadow economy.

— Increasing the minimum salary should be aligned with the gain in production. If there is no gain in production, then companies cannot pay new salaries. They will simply have nothing to pay them with. Which, once again, will result in the business shadowing or its liquidation. The latter largely applies to small-sized enterprises.

— Finally, I would like to note that the IMF does not endorse the minimum pay increase. The previous double increase was criticised there as well while awarding Ukraine with another loan tranche nevertheless. This time, however, it may not be the case given that our government has not met a number of other requirements set by the Fund.

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Soviet times did not favour private landowners and so there were none of them. Farmlands were owned by peasant communes — kolkhozes. In independent Ukraine, private farming was allowed, albeit people were not permitted to sell the land plots they owned. In both cases, the result remained the same: the economy was stalled, the budget was losing profits, people were unable effectively manage their land resource.

Shadow land market does exist

It may be sad to admit it but it’s true. In 2016, nearly 65,000 ha of land was leased on the emphyteusis terms. Almost the same amount was leased long-term for 50 years. From the legal standpoint, such transactions constitute a sale de-facto.

It gets worse since their number grows exponentially. According to the Ukrainian Club of Agrarian Business (UCAB), there were around 14,000 transactions entered in 2016 and 2,800 transactions — in 2015. It means that the shadow turnover of agricultural land grew by 80%. By the end of 2017, UCAB experts expect the shadow schemes in land sales to hit 40,000.

If such tendencies continue, it will take 5 years before the land plots change their owners even with the land moratorium in place.

How to fix this situation?

Comprehensive measures are the answer here. It goes without saying that the first step to take is settling the land moratorium issue. Obviously, it has to be lifted and a land market must be created. It is what time, logic, and common sense demand to do. Yet how exactly should this market look like is the million-dollar question. This situation has many problem points. One of them is that lifting the moratorium would result in large investors buying all land at rock-bottom prices.

Ukrainian agricultural holdings already increase their land banks. The growth in M&A transactions in the agricultural complex can serve as an evidence to that. There were 16 in 2017 and 11 in 2016, which is many times more than in any other industry. This way, companies try to accumulate as many agricultural assets as possible before their prices grow once the land reform is adopted.

Let us not forget about foreign investors as well. They are also interested in Ukrainian chernozems (a black-coloured highly fertile soil — translator’s note) and unlike the local enterprises, they have much more money. And unlike local enterprises, foreign investors give Ukraine only the raw-export role due to the unstable political situation in the country. Most of their money is aimed solely at developing the storage capacity (grain elevators, loading terminals, etc.) rather than the production base. Almost all foreign companies investing in Ukraine work in the following principle: Risoil S.A (constructed a grain terminal), Cofco Corporation (constructed a grain terminal), Bunge Ltd (constructed a loading terminal), etc. They benefit much more exporting cheap raw materials from Ukraine, manufacturing a product in their country and selling it at an overcharged price. If the land market starts working now with no account of the situation above, it will only benefit foreign companies. Thus, Ukraine will lose a significant share of profits. To avoid this, we need thought-out reforms.

And the transparency as well. After all, even if buying land using the shady schemes is possible with the moratorium in place they will not disappear once the moratorium is lifted. Unless efficient control means are introduced. These particularly may include:

— adopting the law on the turnover of agricultural land containing all the rights and obligations of land market players, while striking a balance between the interests of business and society;

— implementing an e-auction system to show the data on all processes in the purchase/sale of land and data on the parties involved;

— creating an electronic database with the newest land prices will help landowners be well-informed on the prices and reduce the risk of selling their land dirt-cheap.

In the long run, it would be great to have an agency able to control the sales and purchase of land and prevent agricultural lands from real estate development or other inappropriate needs. Finally, it is necessary to create a compelling image of the country in the eyes of foreign investors and convince them that things are not as bad to invest in certain areas of the agroindustrial complex only. To achieve this, it is essential to solve the corruption issue, adopt a reasonable land law and develop an effective presentation of the country, namely, by using the thought-out financial and non-financial reporting prepared by qualified auditors.

Bottom line

Given these premises, it is self-evident that solving the land issue is entirely in the hands of authorities. It depends on the decisions they take, regulations they see adequate enough to adopt, and the way they secure transparency and efficiency of the land market. Since the adoption of the land reform and land market has already been delayed for 15 years, immediate results are unlikely.

It is worth mentioning, however, that the land issue itself is a critical and hot topic not only in Ukraine. Even in Germany, there are regions (GDR area), where issues regarding the sales and purchase of farmland are not entirely solved and remain problematic for at least 20 years.

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According to UN estimates, the total population will grow up to 9.1 billion by 2020. To feed everyone, the food production must increase at least by 70%,

Only new technologies can secure a boost that big. Fortunately, the world has already gotten the innovative solutions for agrarians and some of them originated in Ukraine.

Innovations against pests

There is only one pest control instrument – pesticides. They are efficient but harmful to both the parasites and the environment.

That said, calculating the exact amount of poison substance to be sprayed on a certain field is almost impossible since no one knows the exact number of pests in such field. Thus, there is an unreasonably great number of pesticides getting into the soil with all the negative factors it entails.

Yet the newest IoT technologies (Internet of things) allow solving this problem.

For instance, the American Semios manufactures so-called “smart traps” to protect grain from pests. They represent a network of containers equipped with sensors and each of them is situated in certain areas at the field.

Traps calculate the number of pests in their area separating the harmless insects from crop eaters.

As soon as the latter grow in number to a critical point, the system notifies the user through a mobile application.

With this data, calculating the amount of poison substance required is not so difficult anymore.

It is worth noting that Semios traps are also equipped with sensors tracking the soil temperature, humidity, and the health of plants. This, first and foremost, allows identifying the signs of plant disease beforehand and secondly, tracking the soil humidity and thus, build irrigation schedules more efficiently.

Spensa and Ericsson also manufacture such systems. The first is designed for monitoring apple trees and the second one — for vineyards.

All three developments are already used in practice, mainly in the USA and Western European countries.

Smart irrigation systems

Spanish scientists have developed an intelligent irrigation system called Waterbee. It is a network of sensors placed over the entire site.

These devices check the soil conditions occasionally, its humidity, friability, saturation with various substances, etc.

Areas with lowest indicators get irrigated automatically.

According to developers, implementing the WaterBee system reduces the water consumption by 40%.

Chilean scientists have also created something similar. Their system, however, is designed for irrigation of blueberries, which is the leading export product in Chile.

The technology is based on wireless sensors. They analyse the status of plants and soil, compare them, and start the irrigation system. According to the published statistics, these technologies managed to save 70% of water.

New Generation Livestock

Innovative solutions are also getting developed for the companies involved in animal husbandry.

Some of them allow to monitor the cattle movement, others monitor the animal’s health down to their genetic characteristics.

Such a system – BovControl – is used in Brazil, for instance.

Autonomous tractors

It is worth mentioning: these technologies are still in the “near future” category. Still, various companies test their first prototypes as we speak.

One of the most interesting among them is an autonomous tractor Spirit by Autonomous Tractor Cooperation (ATC). It is able to drive autonomously and go around obstacles.

Most recently, Cognitive Technologies, a Russian company, started such development.

But the manned tractors also get smarter: Blue River Technology models, for example, are able to detect weeds among healthy plants and spray them with herbicides.

Drones are getting popular in agriculture as well. They are used for remote monitoring over the lands, as well as for spraying fertilizers or any substances that can scare pests off.

What good news does Ukraine bring?

Our country has a great number of startups able to offer IT solutions for agricultural business. eFarmer is among the largest. This developer created an application “Record Keeping”.

It allows you to monitor your field boundaries using GPS and study the state of cultivated lands remotely. Moreover, eFarmer has a solution allowing to turn a conventional tractor into a smart one by means of a special mobile device and a portable GPS antenna.

The startup AgryEye has created a multifunctional sensor for analysing the soil. It can identify a soil composition and vegetation condition.

AgTech Forum has also shown some interesting developments this year in Kyiv.

These are: Kray Technologies (world’s first industrial drone for chemical spraying for the field crops), Water Cloud (a machine for producing water from air), BioSens (sensor that scans foodstuffs for toxins), etc.

Future prospects

Maximum labour automation is a trend for the next several years in all professional areas not limited to the agriculture only.

Technologies aimed at the long-term storage and transportation of dairy products will also be relevant.

Even now, we can see smart grain and vegetable storehouses able to adjust the climate control system as they independently track the temperature of the harvest.

Vertical farms are a very much promising technology as well. They are basically greenhouses able to recreate all the conditions for plants to grow.

As a rule, plants are placed in special pallets located vertically one over another, which enhances the yields manyfold.

The American startup Plenty is the first to attempt implementing this idea.

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