President Viktor Yanukovych
Ukraine is in the midst of a financial as well as a political crisis, one that is essentially caused by embezzlement from the Ukrainian state by its rulers to the tune of $8 billion to $10 billion a year. The European Union and others dealing with Ukraine should demand that the government be audited, the culprits forced to pay back, and those found guilty be ousted and prosecuted.
So far, the Euro Maidan or Euro Revolution has largely been about politics and foreign policy, but it must not be forgotten that this government has run the Ukrainian public finances into the ground through top-level corruption. The time has come to think creatively about how to sort out the rampant Ukrainian financial crisis.
Ukraine’s well-known problems of corruption lie behind Ukraine’s last-minute demand for payment in return for association with the European Union. A headline in Yevropeiskaya Pravda on December 7 said it all: “[First Deputy Prime Minister Serhiy] Arbuzov: Ukraine needs 10 billion [US dollars], but Europe Proposed only 610 million [euro].” This is of course better than President Viktor Yanukovych’s absurd demand of €160 billion from the European Union in grants until 2017, but Arbuzov’s insistence was logical if fantastic. His government needs such a large amount because of its financial mismanagement.
The Ukrainian government’s budget deficit of 6 percent of GDP or $11 billion is driven by what is commonly called the “Yanukovych family” siphoning big money from the state budget. Because everyone knows about this corruption, the International Monetary Fund (IMF) and the European Union have refused to aid the Ukrainian government.
Billions of dollars have disappeared from the Ukrainian government each year, equivalent to an amount sufficient to cover the $30 billion budget deficit run up during President Yanukovych’s term in office. Ukraine’s independent media has reported how the money has been embezzled and who has benefited, but the exact details are important, and I abstain from naming names. Among the devices of corruption identified by the media are the following:
1. Billions of dollars are extracted each year out of the State Tax Administration and the State Customs Committee. Some appears to be sheer embezzlement, some is in the form of bribes passed on to the top, and some comes from commissions demanded from value-added tax refunds for exporters. A reasonable assessment of this embezzlement would be $3 billion to $5 billion a year.
2. Competitive bidding of large infrastructure projects, notably connected with the Euro 2012 Soccer Cup, has ceased. The government overpays for these projects by paying twice as much as it should. Reasonably, half of the money should be returned by those who will be revealed to have benefited. This source should generate at least $2 billion a year.
3. The state oil and gas company Naftogaz buys 18 billion cubic meters of domestically produced natural gas each year at the ridiculously low price of $53 per 1000 cubic meters. The alleged purpose is to sell cheaply to consumers, which is done but only to a limited extent. There is a leakage of perhaps half this volume, permitting someone to make a fortune from reselling the gas to industrial customers for a price related to the Russian gas price of $410 per 1000 cubic meter. The potential for privileged arbitrage here is enormous: $350 per 1000 cubic meters times 9 billion cubic meters equals $3.15 billion. This is probably the main reason why Yanukovych so adamantly opposes increased gas prices.
These three sources of embezzlement and corruption alone have probably generated $8 billion to $10 billion a year to the “Yanukovych family” during the last three years. Rather than allowing Yanukovych to try to get the best bargain he can from the IMF, Europe, Russia, and China, with the aim of feeding these embezzlement schemes, the appropriate legal authorities need to audit the Ukrainian state finances in the three areas mentioned above, going back to Yanukovych’s election in February 2010. Given the pervasive corruption of government state agencies and mutual political distrust in Ukraine, it might be a good idea to invite independent European auditors to sort out the mess.
Once the beneficiaries of embezzlement have been established, they should be forced to pay back to the Ukrainian state. If this were done fast, the current problems with Ukraine’s state finances would disappear.
These and other methods of corruption probably explain why Yanukovych refused to go along with the new EU-designed law on prosecution in Ukraine. Any independent investigation or prosecution directed by the West could end up with Yanukovych and members of his government in court, with the possibility of prison. Russia’s President Vladimir Putin, on the other hand, embraces and endorses corrupt practices.
Ukraine harbors many other sources of corrupt revenues, such as privileged privatization and extortions at all levels, but given the critical state finances, there is merit in focusing on the direct extraction of cash from the government that can be returned.
Five natural conclusions flow from these observations. If carried out forcefully and effectively, they would help resolve Ukraine’s current financial and political crises:
1. The Ukrainian opposition, the European Union, and the IMF need to demand a full audit of these key features of the central Ukrainian government finances during the Yanukovych presidency. The only plausible audit would be international. International donors have a stake in restitution of theft by those in power.
2. Once investigated and understood, the European Union and the IMF should demand that these corrupt practices be outlawed, putting state finances on a sustainable basis.
3. All top officials responsible for gross larceny should be ousted from government.
4. The beneficiaries of larceny should be forced to pay back what they have extracted unlawfully from the Ukrainian government. In return for reasonable repayment, they should be permitted to buy their freedom from jail.
5. Inevitably, this process will take some time and it will have to be accompanied with major political changes. If this cleansing process is on a sufficiently secure basis, the European Union and the IMF will no doubt provide the necessary crisis financing. That is the very function of the IMF, and the European Union has often cofinanced sound IMF programs.
Anders Åslund is a senior fellow at the Peterson Institute for International Economics and author of How Ukraine Became a Market Economy and Democracy. The article is published with the author's permission and can be found here.