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