k-market system, it is assumed that you are talking about an unambiguously criminal phenomenon. Here, the shadow game is played with such openness, and by so many, that few ever think about its criminal component, or even give it a second thought. It is just the way business is done – nothing more, nothing less.
Several years ago, the administration floated a so-called shadow economy amnesty, the goal being to decriminalize some of the huge illicit fortunes and bring them back into active participation in Ukraine’s economy. This proposal got absolutely nowhere, for a very simple reason. Those who had spirited huge sums out of Ukraine saw no reason to repatriate their capital, even if it could be done without criminal sanction.
Much of that capital has now returned to Ukraine in the form of investments made by what are euphemistically referred to here as “offshore companies.” When one hears mentioned, in parliament or in the media, that such a company is making an investment in Ukraine, it is to be understood that it is doing nothing more than returning capital to its original source, albeit under circumstances that ensure that no effort will be made to tax it, or in any other way impede its return to the Ukrainian economy.
Combined with the popular single-tax option and the growth of Ukraine’s exports to global markets, this whitewash is one of the most important causes of Ukraine’s economic renaissance.
The public tends to look negatively at the larger operators in the shadow economy but at the same time, most Ukrainians have their own small shadow niches in which they themselves operate. Working in the shadows has become such a part of the Ukrainian experience that it would be almost impossible to imagine it any other way.
However, those who think the shadow economy is a product of the independence era either have very short memories or else were not alive when the shadow economy really became a part of the lives of most Ukrainians.
The shadow economy truly began in the late 1960’s. In about the middle of the Brezhnev era, the Soviet economic model reached its logical limits, and deficits started to be compensated for with contraband goods and sweatshop production. The legendary Boris Berezovsky allegedly began his career long before the end of the Communist era, by dealing in semi-legal imports. Under Gorbachev, most of Soviet bureaucracy became to some extent corrupt, as it supplied a roof for mass illegal operations.
The break-up of the Soviet Union and the immediate deepening of the economic crisis left millions out of jobs. The real level of unemployment was concealed, and continues to be at least partially so even today. How many people still exist on low-paid make-work jobs that keep them only a few hryvna a month away from statistical unemployment?
And here it must be said in fairness that it was the shadow economy that reemployed most of the population in Ukraine and Russia, helping to avoid a regional humanitarian catastrophe.
In the late 1990s, shadow economy production and distribution began to supplant shadow economy imports. This made the shadow economy more complex, but it did little to cast light into the shadows, and it added yet another level of intricacy.
We may hope that the installation of a much lower fixed rate tax system may have some impact after it takes effect at the beginning of next year. But that remains to be seen. Russia claims that its fixed rate tax system is a great success. It was used as the basis for Ukraine’s similar system. However, the shadow economy system is so tightly interwoven with society that it may be hard to give it up and come into strict tax compliance.
Over a period of years, things have changed as the shadow economy has become more sophisticated. Vulgar pyramid schemes and cowboy-style shuttle-traders are now mainly a thing of the past. In part, that change has resulted from the existence of a stable national currency and the ready availability of enough U.S. dollars to support imports.
The shadow economy is still a very important part of the employment situation in Ukraine. A majority of Ukraine’s non-state employers now pay wages that are twice or three times higher than the wages of workers in similar, documented, jobs. The new flat tax may fundamentally change this situation or it may simply give rise to new and more sophisticated methods of avoiding taxation. The much lower tax may put an end to this situation, or it may not.
The value-added tax (VAT) is another enemy of the budget, and the shadow economy’s best friend. Ironically, it is the state budget’s largest revenue source. Viewed realistically, the VAT is an absurd taxing mechanism, since its imposition of a new tax at each stage of production inevitably leads to higher prices. That, of course, assumes that VAT is paid at each stage. Machinations on the part of some players in the economy seem to have effectively repealed the VAT’s full effects, at least so far as these players are concerned.
VAT has also become a major national problem because of the peculiar, and illegitimate, policy of insisting on collecting VAT taxes on exports. This situation has reached a point where it has become a major impediment to relations with international lenders. The IMF insists on repayment of the monies that the government has siphoned out of the economy by charging export VAT.
The current standoff has deprived exporters of Hr 6 billion, even while the government dawdles and says it cannot repay the large sums it collected. This was a simple case in which the government insisted on collecting a tax perhaps illegally, in order to solve its own short-term financial problems while ignoring the longer-term implications of its actions. The fact that collecting export VAT robbed businesses and industries of needed working capital seems to have been conveniently ignored by the government, for its own purposes.
What could effectively fight the shadow economy today? The fixed rate income tax is a great start. The best move of all would be a planned phase-out of the VAT, as well as the abolishment of many of the annoying small taxes that seem to exist at every level of our lives.
And although it would meet with resistance in some quarters, we have to face up to higher fees for education and health care if we are ever going to be able to upgrade wages for our teachers and health care workers, probably the most underpaid of all our public servants. More effective tax collections may help this situation, but in the end it is essential that the government stop providing services for which it receives, in return, only a pittance.
It was, in fact, the decision to keep natural gas flowing no matter what the cost, given consumers who could not or would not pay, that led us to one of the most difficult problems in our recent history, our huge gas debts to Russia. That problem has been partially solved, but at one time it had serious implications for our national independence. Though not technically a part of what we consider the shadow economy, our energy dependence upon Russia, Turkmenistan and other countries plays a role in the entire fantasy scheme that has passed for economic management during most of the independence period.
The solution to our shadow economy problem and other such issues requires openness and vision on the part of our government and the parliamentary majority. Three years ago the Yushchenko government had both, and the energy market became largely decriminalized.
As for the Yanukovych government, it is showing positive signs, and may yet prove to be more liberal and progressive than expected, if it lives up to its promise.
However, there remain extremely strong groups of players who will oppose the advances of justice, freedom and decency in our country. Their public statements can be very persuasive, but the underlying realities these players represent are worrisome.
We should realize that the shadow era has served the interests of many powerful players extremely well. It has made them as rich as any entrepreneurs in the world. We who consider ourselves in opposition to the shadow economy should not be guilty of hypocrisy, and should remember that our own shadow dealings often benefit underworld figures, men who hope to keep Ukrainians dependent on them forever.
Maksym Mykhaylenko is director of the Center for Intellectual Studies, Chernivtsi, and an assistant professor at Chernivtsi University.
