Will Ukraine's shadow economy assert its right to exist?
By Roman BOIKO, The Day
The discussion carried on in this newspaper about the "virtual" and shadow
economies has had one noticeable lacuna: those who assess the shadow economy
have no familiarity with it from the inside. To fill this gap I decided
to speak with those working day and night in illegal money-changing, money-laundering,
and evading taxes, in a word with those who live in the shadow economy.
What's new in the front line of the struggle of the state and the economy?
How do shadow structures want to answer the latest moves of state Robin
Hoods? One so-called "dealer" in a Kyiv money-laundering structure agreed
to tell about this and countless other interesting things. His organization
is half-jokingly called CashBANK.
Whoever has any contact with Ukrainian business knows that money-changing
is a must, based on the specifics of the Ukrainian economy, with its excessive
taxation and unpredictable business climate. Until recently the use of
dollars in the shadow business was reduced to capital allocation and partially
for consumption. The only foreign exchange item in any budget to be really
accounted for is bribes payable to bureaucrats at all levels. The hryvnia
remains the workhorse of business to secure capital turnover. A system
of cash exchange was devised to translate greenbacks into hryvnias and
has become a very profitable business. "We make Hr 4,000-6,000 every month.
I get about 50%, the rest stays with the main office. And there are many
others like me."
In the past several months the amount exchanged via these structures
has shown a dramatic decline, largely because most of their clients have
found themselves operating under worse conditions. The man I talked to
stressed on several occasions that none of his customers was into drug-trafficking,
arms, or excisable goods, saying that domestic producers, companies providing
goods and services, retail outlets, all those other legal entities and
advertising agencies are workhorses being actively used by the Ukrainian
and other economies, having to turn to the "shadow sector" not because
they want to appropriate embezzled public funds (this being "others' prerogative"
from among government-run entities), but because they simply want to stay
afloat.
The last year has been marked by a serious offense by law enforcement
on these structures, with the main emphasis on those who work for themselves
and refuse to share. About a year and a half ago such cash firms with support
at the very top. They remained out of the limelight for some time, but
not now, and there is every indication that unwelcome market operators
are being crowded out, quickly and most efficiently. Those remaining in
power want total control. "The domestic situation goes from bad to worse,
with most business people seeking refuge in the shadow sector. On the other
hand, those in power have developed all kinds of business ties; they do
not want to pay any taxes, so I think that crowding our rivals of one's
own business entity made sense, while providing most favorable conditions
for one's own reliable operators," says our shadow sector representative.
When I asked what the shadow economy was planning to do in response
to the mounting pressure by fiscal authorities, he told me several interesting
things which may have a crucial effect on all aspects of life in Ukraine.
He said that those at the top of the shadow sector have decided to change
things radically in Ukraine. The fiasco of the "stable" hryvnia on the
one hand and mounting fiscal pressure on the other have brought forth the
issue of final division of the two components of capital. The hryvnia will
from now on be used in all official books and records and greenbacks will
figure in all others kept secret from the tax authorities. Also, having
too much hard cash is an obsolete practice. Greenbacks on hand must be
secured reliable turnover channels. The solution? Very modern. Virtual
banking. This aspect is being negotiated with banks in countries with tax
concessions reserved for nonresidents. It is there that most of the shadow
dollars will be channeled via all these money-laundering networks. The
idea is that every such account-holder will be able to operate the account
from Ukraine using his office computer. If he needs cash he will use his
plastic credit card - VISA, for example - or one of the laundering channels.
And, of course, there will be interest on all such accounts. Most importantly,
all those nosy Ukrainian officials will be met with polite but firm resistance
from foreign bankers: of course, we will be happy to cooperate provided
you have sufficient evidence that the account at issue contains any such
illicitly acquired amount as you suggest. In fact, this approach proves
the old adage that the more things change the more they remain the same.
Big-time Ukrainian business has long been using offshore tax havens. By
spending $1,500-2,300 to open a firm in a privileged zone any Ukrainian
citizen can evade excessive domestic taxation absolutely legally. The most
interesting thing about this system operating deep underground is that
it greatly reduces expenses: instead of thousands of dollars it costs only
but tens a month and requires a minimum of paperwork. As a result, large
(millions of dollars a month) and medium/small amounts (thousands a month)
are attracted. The task is to use between 10 and 15 percent of the hard
cash turned over in Ukraine's shadow sector. In practice, this will mean
creating an "alternative" banking system geared to serve the shadow sector
only.
After studying the situation in Ukraine and abroad (including Russia),
then discussing certain issues with experts, among them top officials of
the National Bank of Ukraine, I arrived at several conclusions:
First, setting up this "alternative" banking system is not only
possible in theory, but there is evidence that it actually exists; there
are Ukrainian citizens who can operate foreign bank accounts using their
PCs. Moreover, the "mass electronic bank transfer system" being developed
by the NBU amounts to the same thing. Using Smart Cards, legal and natural
persons will be able to manage their money the way one talks on a public
phone. There is one tangible distinction. The NBU system will be governed
by eternally greedy top bureaucrats, while that contrived by the shadow
experts will be protected by international law, which is a different story
altogether.
Secondly, the Ukrainian government is not prepared or equipped
to meet the challenge. The experts I spoke to were expressly skeptical
about the Ukrainian regime being able to understand the legal, technical,
and institutional intricacies involved. The authorities might crusade against
the shadow economy, but is always tripped up by the basic incompetence
shown at all legislative and executive levels whenever it comes to settling
any more or less sophisticated legal conflicts.
Third, looking at this whole pattern, one has to admit that it
will have a stronger impact than Ukraine's accession to the CIS Interparliamentary
Assembly. All those Ukrainian nationalist lawmakers pouncing on their Red
colleagues whenever given the chance - be it a red banner or a portrait
of Lenin or Stalin - seem unable (unwilling?) to realize that the main
threat facing the Ukrainian polity is its own economy. National sovereignty
is impossible without economic sovereignty, and the latter implies a stable,
effective, and sovereign banking system and currency. Until recently foreign
exchange transactions were limited by the absence of civilized turnover
channels. Now the possibility of such a fully fledged illicit system (with
the National Bank being actually unable to do anything about it) constitutes
a most formidable challenge to Ukraine's national interests.
Fourthly, any official attempts to root out the shadow economy,
along with all those awkward efforts to legalize it (like President Kuchma's
proposal to "regularize capital") are about as effective as all those Kremlin
endeavors to combat Soviet alcoholism, drugs, and prostitution, considering
that most of the populace still lives in utter misery. The shadow economy,
like addiction or prostitution, is a social problem. An ailing society
is bound to operate a sick economy. We watch and hear sanior bureaucrats
point a threatening finger at all those who "shamelessly embezzle public
funds" and refuse to heed all those "national interests." Either they do
not know or just cynically ignore (and this author tends to agree with
the latter, considering his many years of professional experience) that
most people operating in that shadow sector just want to survive and keep
their near and dear ones fed and clothed. Getting Hr 200-300 a month is
peanuts; no family can live on such a budget. People do not want to live
in misery. They want to live, here and now. After all, there are internationally
recognized human rights and average living standards. If the state cannot
- or does not want - to secure them, one has the right to take care of
oneself in one's own way.
For as long as we have perfect dishonest mediocrities going through
the motions of running Ukraine and no one to establish a healthy legitimate
economy to crowd out the shadow one, the latter will exist and prosper.
COMMENTARY
Viktor LYSYTSKY,
NBU Governor's Consultant
I am sure and statistics prove my point that two-thirds, maybe even
three quarters of the money outside the official banking system is clean
- I mean this money is not smeared by murder, drugs, or commandos raiding
some village in Colombia. Back in 1989, in the twilight of the Soviet command
economy, Pavel Bunin, a noted Russian economist, said: "Excessive restrictions
and excessive incentives do not work in any economy." Capital is seeking
refuge in the shadows. This is a healthy response by our economy to its
unhealthy administration. So they are developing new shadow economy techniques,
so what? I say God bless them; this money will work anyway, being used
by a variety of entities. I mean that Verkhovna Rada should be concerned
primarily about all those resolutions it has passed, which just cannot
be implemented under today's Ukrainian economic conditions, but which may
trigger off total exodus of our capital to the shadows.







