To answer these questions, let’s take a look at the big picture.
Ukraine is one of the poorest nations in Europe. Today, the national per capita gross domestic product is barely $3,000. In contrast, Ukraine’s immediate neighbor, Slovakia, has a gross domestic product 5.3 times higher.
According to the United Nations, 78 percent of Ukraine’s population lives in relative poverty while 12.5 million live on less than $3.50 per day. Ukraine is close to or at the bottom of just about every international performance indicator. Apart from raw commodities, the country now produces very little at all.
The small-and-medium enterprise sector contributes less to the national economy than the European average; most of the economy is dependent on commodity production of an elite few.
Yet this country used to contribute more than 17.5 percent of industrial and 22 percent of agricultural production of the former Soviet Union. It was the breadbasket of Europe. It was the center of Soviet space and high technology, aviation, electronics, ship building, armaments and engineering industries. It was a real powerhouse. What has gone so wrong?
Some might blame the failure on the West for not providing sufficient support. Some might blame politicians for wasting time on national pride and ignoring priorities. Some might blame the people for preserving post-Soviet values.
But we believe that the real culprit is home-grown corruption.
Corruption is now endemic. It enables the elite to rape the nation of billions. At the bottom it is, in many cases, the only means of survival. For the last 350 years, Ukrainians have been fighting one oppressor or another. The fact that culture exists at all is a tribute to Ukrainian tenacity and survival skills. Yet these skills may well be their downfall.
Under the czarist empire, the communists and the Nazis, making the system work for you was a means of staying alive. Today that tradition has continued to the point where fiddling with the system is considered normal. The problem is that the only people these modern-day patriots are stealing from is themselves.
The scale of corruption in Ukraine today is truly mind-boggling.
The international financial watchdog Global Financial Integrity estimates that the Ukrainian financial system has been leaking $10.75 billion a year through the deliberate under-pricing of exports, overpricing of imports and the purchase of non-existent services – much of which is facilitated through offshore tax havens in Cyprus, the Seychelles and the Cayman Islands. All are designed to ensure that profits are held offshore and out of reach of the Ukrainian tax system.
The fraud within the value-added tax refund system has practically bankrupted successive governments and resulted in legitimate exporters being repaid in five-year redeemable government bonds. So indebted is the value-added tax system that many international investors have simply given up, sold out and moved on.
The fraud is brilliant. Nonexistent cargoes get loaded onto nonexistent ships, but paperwork says that the goods have been exported. All the customs and tax office stamps are perfectly genuine and the value-added tax is reclaimed in the normal way. It has been going on for years and has cost the nation a fortune.
If you want to meet a minister, bribe the secretary. If you want to win a court case, bribe the judge. If you want a university degree, bribe the tutor or the rector. If you want quality medical attention, bribe the doctors and nurses. If you want to avoid paying speeding fines, bribe a traffic cop.
Combine all of this with endemic overpricing and the scale of the problem should be ringing alarm bells, particularly at the IMF.
The problem is that Ukrainian corruption is not simply restricted to home waters. Some Ukrainians are masters of manipulating the international financial and legal systems. Either with the connivance of the Western banking and legal systems or through their ignorance, they have built up truly impressive financial laundering networks.
Cypriot companies are Ukraine’s largest foreign investors. Cypriot lawyers regularly plough the path to Kyiv in order to set up offshore financial instruments that use the double taxation agreement – often to aid and abet questionable practices.
The IMF is planning to lend Ukraine a further $1.47 billion without insisting that the government takes real steps to combat and shut down these systems which continue to bleed budget coffers dry as fresh foreign loans pour into the other pocket. This is not to accuse the government of theft. But this money will find its way out of Ukraine, one way or another, leaving the people of this poor country to pick up the bill.
Perhaps it is time for the well-meaning bankers in Washington to open their eyes and take a fresh look at the scale and reality of Ukrainian corruption before they exacerbate the problem by handing over yet more cash.
Victor Tkachuk is chief executive officer of the Kyiv-based People First Foundation (www.peoplefirst.org.ua), a former deputy secretary of the National Security and Defense Council of Ukraine, adviser to three Ukrainian presidents and a former parliament member, Tkachuk can be reached via [email protected].
