October 2023 became a landmark year for Ukraine. For the second time since the beginning of the war, we did not receive additional funding from the United States (the first time was in August). But the whole month passed in the context of hints that it was time to learn how to collect taxes, eradicate the shadow and fight corruption, which actually “feeds” from the shadow economy. And in fact, the resonant article in the influential publication Time only became a loud public signal that Kyiv can no longer ignore.
Budget arithmetic
On October 19, the draft state budget for 2024 was adopted in the first reading, in which revenues were determined at UAH 1.746 trillion, expenses at UAH 3.308 trillion, and the difference (deficit) at UAH 1.593 trillion, which should again be covered primarily through international assistance.
This year, according to the Ministry of Finance, macro-financial assistance from the European Union amounted to $16.2 billion, grants from the United States - $10.9 billion, funds from the IMF - $3.6 billion, preferential financing from Canada - $1.8 billion.
Next year, as Lesya Zaburannaya, a deputy from the budget committee of the Verkhovna Rada, hopes, assistance from the United States will amount to about $14 billion. The Ministry of Finance says that they expect 12.5 billion euros from the EU (a quarter of the assistance package of 50 billion euros, designed for four years ).
But these are only hopes. The head of the IMF mission in Ukraine, Gavin Gray, and the deputy director of the IMF’s European Department, Uma Ramakrishnan, in an interview with NV, said that Ukraine needs to “develop its own internal resources for self-financing,” since “everyone understands: over time and gradually, international support will decrease.” That is, it is time to “focus on strengthening the ability to collect revenues – both tax and customs – on our own.” The hint is more than transparent.
In turn, the European Union, in the process of preparing a report on November 8 assessing Ukraine’s bid for EU membership, which will determine whether accession negotiations will begin, also hinted at additional conditions related to the fight against corruption.
Earlier, the European Commission's report on Ukraine's application contained a more specific remark that full membership in the EU would be impossible in the presence of dozens of tax evasion schemes.
The Americans decided to go straight. In early October, CNN published information about a US diplomatic note, which spoke of the need to strengthen the fight against corruption in order to continue receiving financial assistance. Almost simultaneously, Politico wrote that the Joe Biden administration is much more concerned about corruption in Ukraine than it admits publicly. Then there was the aforementioned story with the cover and article in Time...
On October 16, the US Special Representative for Economic Revival, former Secretary of Commerce Penny Pritzker, arrived in Ukraine, who, according to the media, will check the spending of American funds. Pritzker herself emphasizes that her task is much broader: to assess the state of the Ukrainian economy and promote “progress in various areas,” primarily in the fight against corruption, on which “bipartisan support for long-term assistance to Ukraine” depends.
And on October 27, the leaders of Slovakia and Hungary spoke out against a 50 billion euro aid package for Ukraine. Let us remind you that the government expects a quarter of this amount next year.
What's going on? It's very simple: corruption prevents us from taking money out of the shadows, so donors have to provide us with more funds than they could without our corruption. And given the escalation in the Middle East, the upcoming US elections and the European economic recession, enthusiasm for multibillion-dollar aid to Ukraine is waning.
Shadow as it is
During the war, the shadow economy did not decrease. According to various estimates, it amounted to 20 to 30% of GDP, and remained at this level.
As experts note, it was precisely because of the war and decreased control that the share of underground vodka, cigarettes, and fuel increased significantly. According to calculations by the Economic Expert Platform, in the first three quarters of 2023, from 6 to 12% of motor fuels were sold in the shadows, that is, without paying taxes and excise taxes (the average figure for three quarters was 10%), from 13 to 23% of tobacco products (on average - 18%) and from 30 to 47% of alcoholic beverages (on average - 38%).
According to the head of the financial committee of the Verkhovna Rada, Daniil Getmantsev, only non-payment of excise taxes and evasion of personal income tax through salaries in envelopes causes a hole in the budget, a shortfall of UAH 200 billion. The volume of manipulation with tax invoices is UAH 1.5 billion monthly. In 2022, 18 billion UAH were raised. “Spins” (fictitious tax credit) took at least UAH 16 billion from the budget last year. “Conversion centers” another 20 billion UAH. budget losses for the year.
The volume of contraband can be calculated using a simple mathematical problem. Ukraine's external trade turnover for January-September was $73.7 billion. They imported goods worth $46.6 billion, and exported goods worth $27.1 billion. At the same time, for 9 months, receipts of export and import duties amounted to only 22.4 billion UAH ($612) million). The ratio of tax payments to turnover is 0.8%. We have clear evidence of evasion of legal customs clearance in extremely large volumes. According to various estimates, budget losses from “gray” imports and smuggling are about UAH 100 billion per year.
Game outside the rules
In addition to the economic, there is also a moral aspect. This is the problem of the gap between those who pay and those who do not pay. Experts say that in the fuel market alone this figure reaches five to six times.
An illustration of this dissonance is the situation in the gambling business. Legal now produces record amounts of taxes paid. In September, UAH 1 billion was paid, which is UAH 300 million more than for the entire 2022 and five times more than for the entire 2021. In August 2023, the gambling business paid UAH 2.28 billion in taxes. For nine months – UAH 6.65 billion in taxes. This is 9.5 times more than for the entire 2022.
At the same time, illegal offline and online casinos, as well as gambling halls that operate without a license, do not pay anything at all except corrupt “fees.” The Commission for the Regulation of Gambling and Lotteries (CRAIL) cannot clearly calculate the volume of the shadow gambling market. It is estimated that this is 12 billion UAH per month and at least 2 billion UAH of unpaid taxes per month. But perhaps significantly more, since this is BEB's estimate based on an analysis of bank transactions in December last year. At the same time, calls continue to be made to tighten the tax screws on legal businesses even more. It is possible that the effect will be exactly the opposite of what the initiators expect.
“If, for example, the gambling business for nine months of this year, this is official statistics, paid 9.5 times more taxes than for the entire last year, but at the same time there are calls: let’s increase taxation even more. Despite the fact that 70% is in the shade. It is obvious that, most likely, those who are not in the shadows will begin to enter the shadows. Therefore, the question is this: if the government follows this path, then this is a path to nowhere,” economist Boris Kushniruk noted in an interview with Direct.
Who should fight the shadow? Competence: relevant law enforcement agencies. They do this from time to time. For example, the latest news: BEB exposed a group of people who organized a system of mirror sites and offered players underground gambling games with cards and roulette in real time, dated October 24. Attackers face up to 680 thousand UAH fine.
Previous news – from June – that a network of illegal gambling establishments was exposed in Bila Tserkva. And before that, in March, an underground VIP casino was “busted” in one of the capital’s restaurants, where four roulette tables, 10 poker tables, computer equipment, more than 10 sets of chips, and playing cards were seized.
There may have been other stories that didn't make it to the press. But it seems that there is no clear instruction at the state level to devote all efforts to a systemic fight against shadow gambling. Instead, there are calls to increase the fiscal burden on the legal sector, which is already paying. It seems to be happening in other areas of the economy as well.
“It is necessary to take steps that would reduce shadowing and reduce abuses in various areas. When importing products, the main problem is that many products were imported as volunteer assistance, but, in fact, were simply hidden commercial imports, on which taxes are not paid. We have a problem with VAT refunds. There were and still are abuses there,” notes Kushniruk.
Everyone understands that the fight against shadow, illegal businesses and various schemes is the only correct way to sharply increase budget revenues. It is also clear that further pressure on legal businesses is a direct and short path to the complete collapse of the economy.
A few final questions
Why were our partners silent last year and now they are speaking up? Most likely, due to the active phase of hostilities, the need for Ukrainian troops and the focus on the military and humanitarian aspects of support. But the war is dragging on, the need for external financing remains, so the likelihood that international assistance will correspond to our successes in overcoming the shadow economy and corruption is high.
What could be the scenario if the authorities do not respond to transparent hints? It may happen that we will continue to receive military assistance in full, and we will have to largely find sources of financing for budgetary expenditures on our own.
The worst scenario is when, instead of shadowing, fiscal pressure on legal businesses will increase. Although no demands for tax increases have been heard either from strategic partners or from the IMF. The latter only recalled in the above-mentioned interview the obligations of the Ukrainian authorities to adhere to a balanced fiscal policy. A logical remark, from which there can be only one conclusion - budget revenues must be sought from “shadow workers” and “scheme makers”.
