Ever wonder why most Ukrainians live so poorly although the nation is one of the world’s leading exporters of steel, chemicals, weapons and food? Experts blame ubiquitous corruption and insider dealing that cost the nation billions of dollars each year. Future generations will pay for today’s graft as the nation sinks more heavily into debt.
Ukraine’s reliance on foreign loans has raised its public debt to $54 billion, even as the government still hopes to tap up to $12.1 billion more in loans from the International Monetary Fund.
But does the nation really need to borrow so heavily?
No, say a growing number of economists and investment bankers. If Ukraine’s government would stop interfering heavy-handedly in the market, end subsidies and sweetheart deals for insiders and clamp down on financial fraud, there would be no need to rack up debt that future generations will have to pay off, some argue.
Corruption makes us poor. If we eliminate corruption even on the lowest levels – bribes to tax authoritties, police, etc., the sum would be much greater than the IMF loans.”– Oleksandr Paskhaver, president of the Center for Economic Development.
“Corruption makes us poor,” said Oleksandr Paskhaver, president of the Center for Economic Development. “If we eliminate corruption even on the lowest levels – bribes to tax authoritties, police, etc., the sum would be much greater than the IMF loans.”
Putting a price on Ukraine’s losses is difficult, but the sums are staggering.
The international financial watchdog Global Financial Integrity estimates that the financial system leaks $10.75 billion a year through the deliberate under-pricing of exports, overpricing of imports and the purchase of non-existent services – assisted 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.
Put another way, the government’s public debt of $54 billion is roughly 40 percent of the nation’s annual gross national product. It’s about $20 billion more than the government’s annual budget for its 46 million citizens.
In human terms, the lost money is a big reason why everything from universities to hospitals to roads are not as good as they could be, why pensions are meager and why – when faced with an uncompetitive economy – six million Ukrainians choose to live abroad, according to the World Bank.
Nearly nine million of the nation’s 14 million pensioners live on $120 a month, while as many as a third of Ukrainians are mired in abject poverty.All of this is happening in a nation that is one the world’s top exporters of steel, ore, grain, chemicals and arms.
The losses to the budget on non-transparent privatizations, grain export limitations, fictitious VAT [value-added tax] return and the like over the last several years amount to billions of hryvnia.”
– Oleksandr Zholud, senior analyst at the International Center for Policy Studies.
“The losses to the budget on non-transparent privatizations, grain export limitations, fictitious VAT [value-added tax] return and the like over the last several years amount to billions of hryvnia,” said Oleksandr Zholud, senior analyst at the International Center for Policy Studies.
Experts have identified the following areas as some of the biggest reasons why the national economy is in such sad shape for most Ukrainians as a cadre of billionaires grows even wealthier:
Shady privatization
Independent Ukraine has a long and horrible history of selling state-owned assets in non-competitive, non-transparent ways to insiders often at cut-rate prices. This practice effectively deprives the state treasury of a large amount of revenue, easily in the billions of dollars, had the enterprises been sold through competitive bids.
In fact, the only shining example of a clean, competitive privatization came in 2005. It was actually a re-privatization championed by then Prime Minister Yulia Tymoshenko. Mittal Steel (today ArcelorMittal) repurchased Kryvorizhstal, the nation’s largest steel mill, for $4.8 billion – six times the price paid the year before by a team representing government-connected Ukrainian billionaires Rinat Akhmetov and Viktor Pinchuk.
Viktor Yanukovych was prime minister during the earlier privatization derided as a sham. Now, as president, he appears to be returning the nation to the familiar path of opaque sales of state assets.
Ukrtelecom, the state telecoms monopoly and one of the few big government assets left, is close to being sold uncompetitively, Vasyl Yurchyshyn, director of economic programs at the Razumkov Center said. Ukrainian investment bankers say the deal appears to be greased for Epic, an Austrian investment house.
Bidding rules prevented some of the world’s leading telecoms from even attempting to buy the asset As a result, the sole bid came from Epic. An appraiser set the final price at roughly $10 million more than the $1.3 billion starting price. If the deal gets closed, Epic stands to buy Ukrtelecom at $500 million less than analysts say Ukraine could fetch in a competitive tender.
“Everything has been decided and the sale will proceed,” said Oleksander Valchyshen, an analyst at Investment Capital Ukraine. “But the fact that it is not taking place at an auction demonstrates that [Ukraine] is not welcoming real strategic investors.”
On average, whenever the government sells an asset to a single buyer, it losses one-third of the market price, but that depends on the specific sale.”
– Oleksandr Zholud, senior analyst at the International Center for Policy Studies.
In 2010, Ukraine sold only $137 million worth of state assets, 83 percent shy of targets. Two assets sold last year – locomotive maker Luhanskteplovoz and fertilizer producer Severodonetsk Azot – had single bidders.
Analysts believe Ukraine could have gotten more for them. For instance, Luhanskteplovoz sold for $7 million less than for what the same buyer paid three years earlier. Meanwhile, Severodonetsk Azot sold for 45 percent less than book value.
“On average, whenever the government sells an asset to a single buyer, it losses one-third of the market price, but that depends on the specific sale,” said analyst Zholud.
RosUkrEnergo
Swiss-based gas trader RosUkrEnergo says it is a legitimate business that performed a needed role as gas-trading intermediary between Russia, Ukraine and Central Asia.
Critics – including ex-Prime Minister Yulia Tymoshenko, Russian Prime Minister Vladimir Putin and the U.S. government – have raised questions about the company’s transparency, its beneficiaries and its purpose.
Many argue that RosUkrEnergo’s billions in profits came at the expense of the nation for the benefit of a few insiders.
Euro 2012
The government has embarked on a no-bid process for jobs and projects to overhaul the country’s outdated transportation and other infrastructure leading up to the Euro 2012 soccer championship. And it’s doing so mostly with borrowed public funds. As little as 20 percent of Euro 2012-related expenditures might come from private investors.
Two of Ukraine’s richest billionaires, Rinat Akhmetov (L) and Victor Pinchuk meet during an economic forum in Kyiv on May 18. Their attempt to acquire the nation’s largest steel mill for $800 million in 2004 fell apart the next year, when the Orange Revolution team of President Viktor Yushchenko and Prime Minister Yulia Tymoshenko took the steel plant back and resold it for $4 billion more in a rare open, competitve sale of state assets. (UNIAN)
Organizers had planned to use $5 billion of state government money but the current plan envisions $9 billion of government money.
The result? Runaway costs.
The cost of building the Lviv stadium has doubled from Hr 1.12 billion to Hr 2.3 billion, said AnatoliyVolovenko, the stadium’s construction manager., on Feb. 8. And reconstruction of Kyiv’s Olympic Stadium may double to $600 million, making it one of Europe’s most expensive stadiums.
One glaring, but relatively small, examples of oddly spent public money involves the purchase of 10 wooden benches for a Kharkiv metro station worth close to $8,000 apiece.
“There’s certain manipulation at work here. I don’t understand their current policy of holding non-competitive bids,” said Yuriy Pavlenko, the former minister of family, youth and sport. “Their approach is absolutely non-transparent.”
Borys Kolesnikov, the vice prime minister in charge of Euro 2012, has justified non-competitive bids because of time constraints. But Pavlenko and other experts say that the Yanukovych-controlled parliament could have easily streamlined public procurement laws – allowing Ukraine to get more bang for the public money spent.
Picking favorites
The government is also on the verge of shorting itself on billions of lost export income as a result of grain export quotas in place since last summer. Then it granted a disproportionate share of export quotas, more than half, to just three domestic companies.
The affair has been “unjustified, untransparent, and unfair,” according to the American Chamber of Commerce in Ukraine.
The 2010 harvest was the third largest in Ukrainian history. The chamber said a handful of preferred grain companies are suspiciously being granted the lion’s share of export quotas. The quotas are in place until June 30.
But things could get much worse soon: the state could end up monopolizing the grain market altogether, running counter to the nation’s international trade commitments.
According to Volodymyr Klymenko, the head of the Ukrainian Grain Association, a proposed law may force grain traders to buy from a state company instead of directly from farmers.
Klymenko summed up the losses this way: “What is clear is that Ukraine could have raised $4.2 billion exporting grain from last season’s crop. Instead, Ukraine exported only $1.4 billion worth of grain due to export restrictions. At the end of the day, Ukraine missed out on $3 billion due to the destructive state policy in the agriculture sector.”
At a time when the government takes difficult and unpopular decisions [such as cutting public spending], the [duty and tax-free import privileges exploited by some companies] not only allows certain companies to evade paying taxes, but also distorts free competition on the Ukrainian fuel market, threatening investment in this sector.”
– Chamber of Commerce letter to government authorities.
Duty-free oil
Experts say hundreds of millions of dollars in tax revenue were lost last year because an obscure firm was permitted to import, duty-free, massive volumes of oil and related products. The firm, Livella, would have owed the state more than $375 million worth of import duties, according to Ukraine’s anti-monopoly committee, had the taxes been charged.
The company stopped importing oil after protests from competitors and business lobbyists.
“At a time when the government takes difficult and unpopular decisions [such as cutting public spending], the [duty and tax-free import privileges exploited by some companies] not only allows certain companies to evade paying taxes, but also distorts free competition on the Ukrainian fuel market, threatening investment in this sector,” read a recent Chamber of Commerce letter to government authorities.
Value-added tax
By far one of the biggest boondoggles has been the government’s value-added tax refund program. It is designed to make Ukrainian exports more competitive by rebating the VAT to exporters. However, the government’s chronic unwillingness or inability to pay exporters what they are owed has fueled suspicions of corruption involving fictitious companies. Some firms get VAT refunds, others don’t – and the government decides.
The issue is an impediment to investment. Vice Premier Serhiy Tigipko said the government owed $1.2 billion to exporters as of December 2010 on top of more than $2 billion in VAT bonds it issued in September 2010 to companies it owed.
Ukraine’s largest steel mill, ArcelorMittal Kryviy Rih, alone was owed $288 million in value-added tax refunds as of Dec. 31
British Ambassador Leigh Turner this month criticized the whole process.
“Some companies receive it quickly, some receive it slowly, and some companies do not receive them at all. Unfortunately, there is an opinion, that how quickly you receive the VAT refund may be influenced either by political connections or corruption. Clearly, this is a catastrophic situation for the business climate,” Turner said.
Government is correcting the problem, according to Iryna Akimova, the president’s top economic adviser.
“We improved the VAT refund system and introduced fines that the state has to pay in case of delays. There is also an automatic VAT refund system for exporters that meet certain criteria,” Akimova said.
But government has a dismal track record in delivering on its promises.
It is correct to say that had the Ukrainian government been more efficient in generating income from privatization, lifting grain quotas and the like, IMF money would probably not be needed.”
– Vasyl Yurchyshyn, director of economic programs at the Razumkov Center.
A case in point is ArcelorMittal, the steel giant. Its general director, Rinat Starkov, summed up 2010 this way: “We’re ready to invest in the modernization and further development of production. Unfortunately, the automatic VAT refund system hasn’t been put in place and VAT arrears remain a serious obstacle not only to development but also for the normal functioning of the enterprise.”
Exactly how many billions of dollars that Ukraine loses through corruption, insider dealing or simply bad governance is difficult – if not impossible – to calculate.
But it seems clear to many experts that borrowing from the IMF would be unnecessary if government would simply clean up its act.
“I doubt Ukraine needs IMF loans now,” Razumkov Center’s Yurchyshyn said.
“It is correct to say that had the Ukrainian government been more efficient in generating income from privatization, lifting grain quotas and the like, IMF money would probably not be needed.”
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Kyiv Post staff writers Yuriy Onyshkiv and Mark Rachkevych can be reached at [email protected] and [email protected].
