Ukraine has historically been eastern Europe’s great borderland, and today it continues to play a crucial role on the trade routes linking the continent to Asia and the Middle East. With the EU and Ukraine currently locked in talks over a new free trade zone agreement and WTO membership secured, the longstanding corruption of the country’s border customs services has become a priority concern for the new administration, and initial signs are that it is making discernable progress.
“Within a month or two, not so much as a bird will be able to fly across the Ukrainian border without customs clearance,” pledged Prime Minister Yulia Tymoshenko of the progress made in the first three months of her hobby-horse project Contraband-STOP! Industry insiders would seem to agree and have called it the most successful aspect of her first 100 days in office.
During January-March 2008, customs revenues contributed UAH 21.1 billion to the state budget, exceeding planned revenue by more than UAH 5 billion and demonstrating a 32.7% growth rate compared to Q12007. Related VAT revenues meanwhile registered a 76% increase. “Imagine how much money has been taken out of the shadows,” commented Mrs. Tymoshenko, celebrating her first public victory over the extensive smuggling industry, which, alongside the highly corrupt tax and customs services, have long been a cornerstone of Ukraine’s notorious black economy.
Prince of the porous borders
In her first months in office the Prime Minister crowned her protege Valeriy Khoroshkovskiy chief of Ukraine’s State Customs Service, calling him “the right person in the right place.” The appointment of 39-year old Valeriy Khoroshkovskiy, who is thought to be worth a cool USD 1.1 billion and remains a metallurgy and media magnate with a taste for expensive machinery - he drives a Maybach during the working week and a sports Bentley over the weekends - as customs head has provoked a heated debate for a number of reasons. Firstly, it seemed to directly counter Mrs. Tymoshenko’s advocated principle of separating business from government. Second, it facilitated the amalgamation of politics with the largest national media holding, which includes TV’s Inter Channel and is part-owned by Mr. Khoroshkovskiy. Also, many have doubted his competency and experience in public administration, while others worry over the consequences his appointment could have on the re-distribution of contraband flows.
Mr. Khoroshkovskiy has attempted to calm such concerns, saying he has far-reaching plans for replacing the old, defective system with a new and effective one. He has also handed over his commercial interests to trustees, partly so that he can concentrate on the task at hand and partly to assuage fears over yet more business magnates wielding political clout despite repeated calls for more separation between commerce and state administration. Assessing his few first months on the job, Mr. Khoroshkovskiy compared the State Customs Service to a sieve, with contraband flowing through the thousands of tiny perforations. “We have only managed to plug a few holes yet we have still produced impressive results,” he reflected, pledging that the entire smuggling industry could be tackled effectively by the end of the year if the necessary measures can be enforced.
Raiding the shadow smugglers
In the course of the Contraband – Stop! campaign, customs officials have unveiled the country’s two most criminalised borders: the southern customs area incorporating the Odesa and Illichevsk ports and the western customs zone bordering the EU, where shadow businesses have long been successfully competing with the legal activities of their import-export rivals. Dozens of high-ranking officials have been fired for corruption as a result of the recent crackdown on shadowy practices.
Anti-corruption raids conducted by the State Security Service against law enforcement bodies and state authorities, including customs offices, unveiled a series of cases of smuggler sheltering, which has led to numerous resignations. The raids are still in progress and security officers have opened a telephone hotline for businessmen to report extortion and other corrupt practices.
Critics say however that the bribes demanded by corrupt officials have merely increased recently because of the higher risks they face connected with the fierce anti-smuggling campaign. Various press reports have alleged that unofficial bribes paid to facilitate customs clearance now amount to USD 7,000 for one container instead of the former price of USD 5,000. “That USD 5,000 was distributed between all law enforcement officials. Everybody was involved and the scheme worked. Now, nobody receives any bribes. If this is not the case I will eat my boots,” countered Mr. Khoroshkovskiy, although he did concede that one or two containers may still be passing through the border via the old methods. He denied that a culture of mass bribery remained in place.
An entire industry under threat
Part of the problem facing Mr. Khoroshkovskiy has been with the sheer scale of customs corruption. “Large swathes of the population have been making good money from smuggling – in the state executive, in parliament and the customs service. Law enforcement officials didn’t generally put customs officials in prison – they blackmailed them instead, making them slaves and forcing them to allow more and more contraband goods into the country. I struggled to resist this pressure when taking the first steps towards reforming the system. After people realised that I don’t plan to re-distribute the cash flows, it became easier,” Mr. Khoroshkovskiy said in an interview with the weekly newspaper Dzerkalo Tyzhnya.
For many years the notoriously corrupt Ukrainian court system had played into the hands of shadow businesses engaged in cross-border smuggling, with many anti-contraband verdicts thought to have been tainted. Last month, President Viktor Yushchenko ordered the State Security Service and Prosecutor General’s Office to check immediately if any criminal cases involving smuggling launched in 2005-2007 were concluded lawfully. He also signed an order on organised measures to combat smuggling during 2008-9, giving particular attention to providing the customs bureau with modern electronic equipment. “Ukraine will not be able to enjoy the advantages of a free trade zone with the EU if our customs people continue working as before. The implementation of a fully electronic customs service is a key task facing our customs bodies,” he stressed.
Bureaucratic banditry
The ongoing investigation into current practice at Ukraine’s borders has uncovered widespread systematic abuse. Import prices have been declared at values far below the actual price in 99% of invoices. In one example, a container of boots valued at USD 0.30 per pair on the invoice was sold later at USD 1,000 per pair. This has been a relatively common practice, while “inaccuracies” over measurements have also been common. If a customs declaration read that there were 30 tonnes of cargo on a ship, it was commonplace for the actual weight to be as much as 400 tonnes, according to Mr. Khoroshkovskiy, who claims to have clamped down on such practices.
The lack of modern equipment at the borders has also helped smugglers circum-vent the law. Mr. Khoroshkovskiy said that poor equipment at Odesa’s port, for example, badly hampers the customs service. In March, 50 kilogrammes of cocaine was uncovered in tinned pineapples at Odesa on en route from Costa Rica to Moldova, but this haul was the exception rather than the rule, raising the question of how big a part in the international drugs trade Ukraine really plays.
“Facilities at Odesa’s port for examining cargo are non-existent, Mr. Khoroshkovskiy complained. There are only two scales, one of which does not work, he said, and to reach the working scale goods have to pass through a labyrinth of passages. “Not a single van can go there, so there is no weighing done at all, the scanner system does not work and there is a lack of space for vans – while one is being unloaded, others waste time. The entire system is built in such a way that the customs officers can’t properly examine the huge flow of cargo going through the port.”
Reform drive causing delays
Smugglers and corrupt officials have not been the only figures to suffer as a result of the recent push to clean up Ukraine’s border services. Legitimate businesses have also been upset by the cancellation of 30-day promisory notes that were used to delay VAT payments when importing goods into Ukraine. The Ukrainian Union of Entrepreneurs and Industrialists, headed by erstwhile Orange coalition backer turned Party of Regions fringe figure Anatoliy Kinakh, claimed that the move has had a negative impact on importing companies and damages Ukraine’s investment attractiveness.
Serhiy Prokhorov, First Vice-President of the Union, claimed that the VAT paid on the border cannot now be returned to the entrepreneur any earlier than after at least six months. “In some enterprises where exports exceed 80%-90% of a company’s output, all working capital will be wiped away, and the enterprises will fail to settle accounts with suppliers, the state budget, social funds, and pay salaries. As a result, companies can face bankruptcy,” he warned. “The investment climate is a pretty sensitive issue and that’s why the cancellation of tax bills at the border is a negative signal for those who want to work in Ukraine.”
Mhykola Kruglov of the opposition Party of Regions labelled the move as “great stupidity” and expressed confidence that tax bills would soon make a reappearance. One of Ukraine’s leading economists, Oleksandr Kirsh, echoed these concerns, stating that the cancellation of tax bills threatens domestic manufacturers and could lead to decreasing productivity growth and much-needed state revenue.
President Yushchenko, in more conciliatory manner, commented that the cancellation of tax bills was in principle a good idea, but noted that the companies’ working capital “should not be taken away due to untimely VAT compensation.”
Mr. Khoroshkovskiy dismissed allegations that they new VAT policy would hurt investment or threaten local export-based industry. “We proved that the tax bill scheme is a deferred tax payment. It is an evasion of VAT payments on the border, as the tax bill is issued for just 30 days. There is little economic logic to the tax bill. Had it been issued for, say, three, six or twelve months, the company would have had time to invest this money. Yet the only purpose for the company’s tax bills was to have VAT refunded, reduce the debt of the state and make its own bills payable. A lot of ‘black’ companies took advantage of this scheme to get non-existent VAT payments refunded. By our estimates, they caused the state budget losses amounting to UAH 9 billion. This is money the Ukrainian people have never received in pensions, salaries, or social benefits. Who can criticise us for this initiative? The law prohibits deferrals, so all types of deferrals should be outlawed, full stop,” he concluded.
