Corruption lies at the core of Ukraine’s poverty, lack of transparency, and dormant economic potential. Ukrainian state budget annually loses over $37 billion due to this curse of inefficiency. Although the numbers are shocking, the actual damage done is significantly greater in scope.
Tackling corruption is challenging not only because of the lack of political will, but primarily because it is deeply rooted across many fields.
Identifying the policy areas that can be reformed and targeting them in a smart way by cutting the red tape is the first step towards making every substantial change a success.
Here are some of the key fields that generate most losses:
State-Owned Enterprises: $6 billion lost
According to the State Property Fund, in 2019, the losses from state-owned enterprises amounted to more than 170 billion hryvnias, which is about 6 billion dollars at current exchange rates.
The head of the Foundation, Dmitry Sennichenko, brought this up at a meeting of the National Council of Reforms, where privatization reform was presented, and also a slightly bigger figure was confirmed by the report done by the State Secret Service of Ukraine.
There are many inefficient enterprises in Ukraine, and in each case, there is some kind of corruption interest behind.
For the funds that the state fails to receive due to corruption in this field alone, it would be possible to build 1,700 new schools, 4,500 new kindergartens or 170 hospitals. This could be built in just one year of no corruption.
Salaries in envelopes: $6 billion lost
According to the Centre for Economic Studies, about 23% of Ukrainians receive a salary unofficially while another 30% receive a “gray” salary: partly in envelopes and partly “white”. A major reason why we ended up in this situation is because Ukraine’s labour legislation is over regulated, as well as it is crippling with exorbitant taxes. Reducing the tax burden leads to business growth and, consequently, to the de-shadowing of the economy. We need reform now.
Offshores: $6 billion lost
According to a study by CASE Ukraine and ICET, the total outflow of capital is about 10% of GDP (in 2019 it is 397.5 billion UAH or 15.3 billion US dollars). Given that exports account for about half of official GDP, and some outflows are also related to imports, the figure seems quite realistic.
According to a study conducted at the request of the European Parliament, the offshore income abroad costs Ukraine about three billion euros. Thus, the shortfall of taxes in the budget of Ukraine annually reaches 750 million euros.
According to the cryptocurrency market rating, compiled by the American company Chainalysis, Ukraine ranks as the first in the volume of operations with cryptocurrencies. That is direct evidence of the over-regulation again, and there is an urgent need to cut the red tape. If we do not do this now, the offshore market will only continue to expand.
Subsoil use: $5 billion lost
The Ministry of Economic Development has concluded that 48% of subsoil production is “gray”. This industry costs $9 billion in GDP, which means that the losses can be estimated at $4,5 billion. In addition, Ukraine is one of the world leaders in the extraction of amber, sand and other minerals. The failure to uphold comprehensive economic liberalization costs another $0.5–1 billion.
Corruption in public procurement: $3 billion lost
In total, public procurement in Ukraine is about $19 billion. According to Transparency International, about 20% of procurement in developing countries have a corruption component. With investigations in this field, we see bribery from 7 to 30%.
Customs: $3 billion lost
We have studied in detail the comprehensive research by the Ukrainian Institute of the Future that confirms that the budget loss from customs exceeds $3 billion. If those schemes were eliminated, Ukraine would not need to borrow money from the International Monetary Fund.
VAT fraud: $6 billion lost
According to the head of the State Tax Service, over UAH 40 billion in value-added tax is lost every year. The losses from VAT are actually twice higher because the VAT losses from the fraud reflect the amount of illegally circulated smuggled goods, i. e. $15 billion in value, of which $3 billion is internal VAT losses. An additional $3 billion are lost from not accounting for other taxes because of this fraud, i. e. CIT, PIT, natural resource taxation. Thus, overall losses from VAT fraud are $6 billion annually.
Excisable goods: $1 billion lost
The chairman of the Accounting Chamber personally stated that due to the “shadow market” of gasoline and diesel fuel, the state budget did not receive excise tax in the amount of Hr 25 billion which is approximately $890 million. In addition, the illicit trade in cigarettes is booming. According to the SBU, the volume of the illegal tobacco market is about 7 percent of the total. As a result, in 2019 the state budget received about UAH 5 billion due to unpaid taxes, not counting losses from alcohol.
Shadow lease of land: $500 million lost
According to the explanatory note to draft bill #3131 the losses of budgets at all levels from taxes and other payments not paid in this field range from 6 to 22 billion UAH. On average, we are talking about $500 million.
Sleeping licenses: $500 million lost
30% of all special permits issued for the use of oil and gas subsoil are so-called “sleeping” licenses, otherwise not utilized, according to the data provided to us by the State Service of Geology and Mineral Resources of Ukraine.
Due to the inactivity, and as a consequence of paying taxes in this practice, there is a parallel practice of underestimating the price of deposits.
These are only some of the few examples of areas where corruption schemes have been poisoning the whole economic system in Ukraine. The longer we continue to ignore these dark holes, the farther we get from economic prosperity. Corruption should end.
The Office of Simple Solutions & Results has put together very specific concept reforms and draft laws for each of these problem areas. I hope that President Volodymyr Zelensky will show the great political will to tackle the said problems in the same way he has done in other fields in the past. From my side, I will do my best to help and push.
Mikheil Saakashvili has been the chair of the executive committee of the National Reforms Council since May 7, 2020. He served as governor of Odesa Oblast from May 30, 2015, to Nov. 9, 2016. He was president of Georgia from Jan. 25, 2004, to Nov. 17, 2013.
