A number of "prophecies" made by the world's leading analysts spelled doom for the Ukrainian economy, and today, indeed, it is teetering on the edge. While the IMF, the international donors, and investors alike recognize the risk of putting money in Ukraine, I wanted to highlight an opportunity. Not just market access and a chance to create shareholder value, but an opportunity to act responsibly in a world, where the system of international law that has delivered unprecedented prosperity, is now being threatened.
Without a doubt, the burden is first and foremost on the politicians in Kyiv to deliver, at last, on the promise of truly fundamental reforms. Having been elected into the new Parliament, I appreciate this awesome responsibility and recognize how little time we have to prove to the Ukrainian People, as well as the world, that we are equal to the task. Parliamentary elections concluded, coalition agreement is signed, and the cabinet has just been formed. After long deliberations, the cabinet appointments symbolize Ukraine's commitment to economic reforms, considering how many people were attracted from the private sector to serve in the government. It is now time to act, and I promise that we will - there is no alternative.
While my legislative experience and personal interest is in promoting better business climate and fostering innovation in the IT sector, the number one economic priority today for the Parliament and the new Cabinet should be the energy reform. One of the most prominent Ukraine experts, Anders Aslund, in his recent policy brief termed our energy sector "Ukraine's of corruption" and he warned "energy subsidies amounted to no less than 7.6 percent of GDP in 2012 and are likely to rise to 10 percent of GDP in 2014." This isn't just unsound and unsustainable economics, this is systemically and symbolically the key issue for us. Ukraine must define energy independence as a matter of national security. We must set an ambitious target, together with our partners in the West, to achieve independence, at least from the Russian gas, within 3-5 years. I am convinced that with the right policies in place: reverse flow from Europe, increased domestic production, and serious investment into the energy efficiency, this is possible.
We have no illusions as to the challenges of the coming months, as we try to tackle the most sensitive energy question of all - household tariffs. Historically, those have been heavily subsidized, of course for political rather than economic reasons, giving Ukrainian electorate an illusion of a caring state. The real consequence of these misguided policies was a disincentive for energy conservation and ever-growing dependence on the Russian gas. The scale of subsidies has no economic justification, but there are social and political promises, which are hard to break. To end the market distortions, we have to set up a system that offers means-tested assistance to the low income families and phase out the general subsidy - a field ripe for corruption. Prime Minister Yatsenyuk has mentioned the energy reform in his acceptance speech last Thursday. To deliver on this agenda, the cabinet will have to find a formula supported by investments. Correcting consumer behavior and realigning incentives is our guiding principle, but without private sector involvement, major increase in FDI (foreign direct investment), and growth in domestic energy production, carrying this reform agenda forward would be met with popular discontent.
We have a lot to learn from counties like the US where the 2008 financial crisis were converted into an opportunity for energy independence. A big part of the economic stimulus funded a variety of energy-related projects: from building weatherization to renewables, and from smart grid to mass transit. The scale and the scope is what made the difference. Investing about $100 billion and leveraging a comparable amount from the private sector was a way to set a trend and make transformative changes.
To replicate such success in Ukraine, we could use more than just sharing of experience. An Energy Plan for Ukraine, conditional on the ongoing commitment to reform, is what we need. As we take the steps towards price parity for domestic gas production and push towards transparency in the energy trade, we would like to count on the investors to bring back the energy projects that we've been discussing for many years. We will need a multi-billion dollar program to help municipalities and households upgrade their heating equipment to a current standard of efficiency. To end our dependence on Russian gas, which I would equate with protecting our sovereignty, we need a comprehensive approach at a right scale. Incremental steps that have been taken so far will not get us there.
Ukrainian politicians, myself included, have no right to let Ukrainian economy collapse. Neither does the rest of the world. Whether in defense of its values or out of enlightened self-interest, the U.S. and the EU must allocate ample state resources and create conditions for investors to come back to Ukraine and help revive our economy for all of our sakes. The much-anticipated donor conference has to be successful and result in real and substantial financial assistance. Clear signals from the Western leaders and macro stability in Ukraine will also help reassure private investors. Economic success of Ukraine is our shared responsibility, and, as we do our part - pushing through painful reforms, we count on the support of our partners in pursuit of a win-win solution for Ukraine and for the World.