Cost of cor­rup­tion: Ukraine loses $8.6 bil­lion an­nu­ally to poor man­age­ment, graft, study finds

Kyiv Post - - National - BY VERONIKA MELKOZEROVA [email protected]

Ukraine pays dearly for cor­rup­tion, its shadow econ­omy, in­ef­fec­tive rule of law, and in­ef­fi­cient state man­age­ment.

In fact, ac­cord­ing to a new study pre­sented by Cen­ter for Eco­nomic Strat­egy think tank on Dec. 4, the cost of those woes could to­tal a whop­ping $8.6 bil­lion in lost in­vest­ment, tax pay­ments, and other rev­enue-rais­ing op­por­tu­ni­ties — that’s 7.6 per­cent of last year’s GDP of $112.13 bil­lion.

Add to that the hold-ups in the pri­va­ti­za­tion of state prop­erty, which cost the bud­get some $26.6 bil­lion a year, the $12.5 bil­lion lost due to the mora­to­rium on sales of farm­land (plus $52 mil­lion a year of lost land tax rev­enues), and an­other $25 bil­lion lost from prob­lem loans, Ukraine could have thrown away around $70 bil­lion over the last five years — enough to pay off the bulk of Ukraine’s $76 bil­lion state debt.

That’s eco­nomic mad­ness, ac­cord- ing to Hlib Vysh­lin­sky, the Cen­ter for Eco­nomic Strat­egy’s manag­ing di­rec­tor.

“It is un­ac­cept­able to lose such a tremen­dous sum in times when the coun­try de­pends on ex­ter­nal loans,” Vysh­lin­sky, wrote in the Ukrain­ska Pravda news web­site’s blog on Nov. 30.

Ukraine is in­deed de­pen­dent on the In­ter­na­tional Mone­tary Fund. The coun­try has bor­rowed some $8.5 bil­lion from the IMF since 2014, with most of the money be­ing used to build up cur­rency re­serves in an ef­fort to sta­bi­lize the econ­omy. Ukraine got the lat­est $1 bil­lion tranche of the IMF loan in April 2017.

But Ukraine’s slow progress in meet­ing its com­mit­ments on ruleof-law, the cor­rup­tion fight and tran­si­tion­ing to a mar­ket econ­omy have caused the IMF to sus­pend its lend­ing.

Rais­ing gas prices to mar­kets level was one of the lender’s key de­mands.

Af­ter more than a year of ne­go­ti­a­tions, Ukraine’s gov­ern­ment fi­nally agreed to raise gas prices for the pub­lic by 23.5 per­cent start­ing Nov. 1.

Re­act­ing to crit­i­cism from op­po­si­tion politi­cians, Prime Min­is­ter Volodymyr Groys­man said the move was nec­es­sary be­cause Ukraine faced de­fault on its $76 bil­lion in gov­ern­ment debt if it couldn’t get the IMF’s money.

For the study, ex­perts toted up the sums for cer­tain goods, land, cus­toms du­ties and also the uni­fied so­cial taxes the Ukrainian gov­ern­ment could have got if it had fought cor­rup­tion and man­aged the state more ef­fi­ciently.

Ukraine came 77th out of 113 coun­tries in the 2018 World Jus­tice Project In­dex, which mea­sures the rule of law world­wide based on eight fac­tors: con­straints of gov­ern­ment pow­ers, the ab­sence of cor­rup­tion, the open­ness of gov­ern­ment, fun­da­men­tal hu­man rights, or­der and se­cu­rity, civil and crim­i­nal jus­tice, and reg­u­la­tory en­force­ment.

“We’re well be­hind in such (fac­tors) as cor­rup­tion and crim­i­nal jus­tice,” Vysh­lin­sky said.

Cor­rup­tion, im­punity and a lack of trust in the ju­di­cial sys­tem re­main the main ob­sta­cles to new in­vest­ment in Ukraine for the third year in a row, ac­cord­ing to a poll con­ducted by Cen­ter for Eco­nomic Strat­egy, Dragon Cap­i­tal In­vest­ment Fund, and the Euro­pean Busi­ness As­so­ci­a­tion in Au­gust-Septem­ber 2018.

Land mar­ket

Af­ter the 1996 land re­form in Ukraine, the gov­ern­ment al­lowed some seven mil­lion for­mer Soviet col­lec­tive farm work­ers to pri­va­tize the land plots of the col­lec­tive farms they used to work in.

How­ever, they were not al­lowed to sell their land, but only rent it out af­ter the gov­ern­ment in 2002 im­posed a tem­po­rary mora­to­rium on agri­cul­tural land sales. Since then, the “tem­po­rary” mora­to­rium has been pro­longed ev­ery year by the Ukrainian par­lia­ment.

The IMF is de­mand­ing that Ukraine fi­nally lift the mora­to­rium, which mostly ben­e­fits Ukrainian

agrar­ian ty­coons like Yuriy Kosyuk, a close ally of Ukrainian Pres­i­dent Petro Poroshenko.

Agrar­ian oli­garchs pay peanuts to rent the land plots that bring them mil­lions of dol­lars in prof­its per year: rent­ing agri­cul­tural land costs about $300 in Ukraine for a hectare per year, while in neigh­bor­ing Poland rent starts from $3,000 per hectare.

More­over, in May the Euro­pean Court of Hu­man Rights ruled that the agri­cul­tural land sales mora­to­rium vi­o­lates ba­sic hu­man rights in Ukraine. The court called on the Ukrainian gov­ern­ment to can­cel the mora­to­rium, which par­lia­ment pro­longed last year un­til Jan­uary 2019.

How­ever, sev­eral law­mak­ers in De­cem­ber reg­is­tered a law that pro­poses to pro­long the mora­to­rium for not one, but an­other five years.

Some 50 per­cent of 40 mil­lion hectares of Ukraine’s fer­tile soils are owned by the state.

“Ac­cord­ing to our sur­vey, some 8 per­cent of landown­ers, the so-called payshchiki, would con­sider sell­ing their land if the gov­ern­ment can­celed the mora­to­rium,” Dmytro Yablonovskiy, the deputy manag­ing di­rec­tor of Cen­ter for Eco­nomic Strat­egy said dur­ing a press con­fer­ence in Kyiv on Dec.4 to present the think tank’s re­port.

Some 100,000 landown­ers die ev­ery year, most of whom are el­derly, the ex­pert added.

Their lands are then taken over by the state or lo­cal au­thor­i­ties, which then of­ten pass them on to state com­pa­nies and pri­vate in­di­vid­u­als via a range of cor­rupt schemes, Yablonovskiy said.

If Ukrainian gov­ern­ment can­celed the mora­to­rium and sold 50 per­cent of the land it owns, that could bring in some $12.5 bil­lion at once and some $52 mil­lion in taxes to the state bud­get ev­ery next year, the study reads.

Shadow salaries

As of Septem­ber, only some 16.5 mil­lion Ukraini­ans were of­fi­cially reg­is­tered as be­ing em­ployed in Ukraine, an­other 3 mil­lion work abroad, and 1.5 mil­lion Ukraini­ans be­tween 15 and 70 years old are of­fi­cially reg­is­tered as job­less, ac­cord­ing to State Sta­tis­tics Ser­vice data.

But some 30 per­cent of the of­fi­cially em­ployed peo­ple get their salaries or part of their salaries in cash — the so-called “salaries in an en­ve­lope,” Maria Repko, the deputy manag­ing di­rec­tor of the Cen­ter for Eco­nomic Strat­egy, said at the Dec.4 press con­fer­ence.

Some 6 mil­lion more Ukraini­ans work un­of­fi­cially, the ex­pert added.

“As the re­sult, the state does not raise enough sin­gle and uni­fied so­cial taxes — the money it needs to pay pen­sions. In turn, the pen­sion fund has a deficit (of some $700 mil­lion),” Repko said.

In June and July the Pen­sion Fund was un­able to pay pen­sions to hun­dreds of re­tired Ukraini­ans as many em­ployed Ukraini­ans didn’t pay their uni­fied so­cial taxes in time, reads a mes­sage pub­lished on the Pen­sion Fund’s of­fi­cial web­site on July 25.

Stricter checks on en­ter­prises could help to im­prove the sit­u­a­tion, but won’t solve the prob­lem en­tirely, Repko added.

Rather, the gov­ern­ment has to re­gain the trust of the pub­lic, and show them how their taxes are spent.

“(That means) bet­ter in­fra­struc­ture, re­paired roads, new schools, and hos­pi­tals, and so on,” Repko said.

Un­of­fi­cial em­ploy­ment and pay­ing salaries in cash have al­ready cost the bud­get some $6 bil­lion in lost taxes this year, the study reads.

Bad loans

An­other gap in state fi­nances arises from bad loans — some Hr 700 bil­lion or $25 bil­lion in loans in Ukraine are cur­rently not be­ing paid back, the study reads.

Loans mainly go bad be­cause banks grant them to the con­nected com­pa­nies or in­di­vid­u­als.

A prime ex­am­ple is Pri­vatBank, which lent some $1.9 bil­lion to 46 com­pa­nies af­fil­i­ated with its then owner Pri­vat Group, co-owned by the oli­garchs Gen­nady Bo­golyubov and Ihor Kolo­moyskiy in 2016.

The gov­ern­ment na­tion­al­ized Pri­vatBank in De­cem­ber 2016 af­ter the weight of all those bad loans threat­ened to bring down the bank, Ukraine’s big­gest — and the en­tire bank­ing sec­tor with it.

The prob­lem also stems from a lack of bor­rower dis­ci­pline as well.

“(Some) clients think that only a cow­ard re­turns the money he bor­rowed to the bank,” Repko said.

Ukraine’s in­ef­fec­tive le­gal sys­tem means most of the money lost in bad loans stays lost: the banks man­age to re­turn only about 8 per­cent of prob­lem loans in the courts. In coun­tries with bet­ter state man­age­ment the rate of re­demp­tion of prob­lem loans is more like 40 per­cent, the study reads.

“Even un­der the best sce­nario, the gov­ern­ment will man­age to re­turn only about $2 bil­lion of all the bad loans,” Repko said.

If Ukraine’s state man­age­ment and jus­tice sys­tem worked as well as they do in other coun­tries, the state bud­get would man­age to get back around $10 bil­lion, she said.

Rad­i­cal Party leader Oleh Lyashko ar­gues with Ukrainian Par­lia­ment Speaker An­driy Paru­biy dur­ing an emer­gency meet­ing of par­lia­ment on Nov. 26, 2018. The same day, af­ter hours of ar­gu­ment, par­lia­ment sup­ported im­po­si­tion of mar­tial law in 10 border oblasts of Ukraine. (Volodymyr Petrov)

A man drives a trac­tor cut­ting dried grass on Oct. 23, 2017. A new re­port says Ukraine could raise $12.5 bil­lion at once if it can­celled its ban on farm­land sales. (Oleg Pe­tra­siuk)

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