Ukraine’s Hidden Economy

 
By Volodymyr Kish

One of the things I tried to do during my recent visit to Ukraine was to get a fix on the state of the Ukrainian economy.  This proved to be considerably more difficult than one might think. 

In a country like Canada, there are many credible and comprehensive sources of information that you can rely on that will paint a detailed picture of the country’s GDP, import/export numbers, unemployment statistics, rate of inflation, average earnings, debt loads, etc.  While one recognizes that there also exists an “underground” cash-based sector, by and large it is miniscule compared to the official, legal economy.

The same cannot be said for Ukraine.  Although the government does publish official economic statistics, nobody really takes them seriously.  As an example, since independence, the government has consistently published unemployment statistics that claim unemployment rates of under 10%.  Such numbers are patently ludicrous in the face of the collapse of the industrial and agricultural sectors in Ukraine that followed the disintegration of the Soviet Union and led eventually to the mass exodus of some five million or more Ukrainians to seek work in Europe and elsewhere.

The disconnect between official statistics and reality is clearly and visibly evident in the cities, where employees, whether in the government or private sectors, making an average of some $300 per month, are nonetheless able to afford to buy high-priced German cars, apartments worth hundreds of thousands of dollars, and pay world prices for gas and other imported commodities.

The truth is that most of the Ukrainian economy functions outside of official and documented, and hence, taxable scrutiny.  Knowledgeable experts I have talked to have estimated that some 60% to 70% of economic transactions in Ukraine are of the so-called “under the table” variety.  Goods and services are exchanged and paid for in cash, often in dollars or euros, with no paper trail.

A significant proportion of such activity results from the endemic corruption that pervades every aspect of Ukrainian life.  Most transactions or interactions with government officials invariably require lubrication in the form of envelopes stuffed with dollars.  Medical, educational and other professional services usually involve unofficial surcharges in cash.  Regulatory, legal and policing issues, whether legitimate or artificially created, are usually resolved by a timely exchange of currency.

Aside from the corruption aspect, most tradesmen and small businesses in Ukraine operate within the shadow economy where no records are kept and no taxes are paid.  It is no secret that the vast majority of Ukrainians have no faith in the integrity of their government and believe that most of their taxes go to support the rich lifestyles of government bureaucrats rather than toward the public good.  As a result, no one wants to pay taxes.  The result, inevitably, is a huge underground economy.

One other significant factor is the large number of young Ukrainians working abroad who regularly send remittances back to their families in Ukraine.  It is estimated that there are as many as five million Ukrainians working abroad, primarily in Europe.  On a regular basis, a good chunk of their earnings wind up back in Ukraine in the form of euros or dollars, where they play a significant factor in local economies.  Of course, most of this revenue is unreported, untaxed and does not enter into “official” economic statistics.

Yet another major aspect of the underground economy is the thriving volume of smuggling that takes place along the borders of Ukraine.  Ukraine’s Customs service is notorious for its shady practices, and the volume of goods that crosses Ukrainian frontiers without due process and appropriate duties and taxes being applied is staggering.  Instead the “unofficial” duties imposed go towards enriching the personal accounts of customs service personnel.

On a more individual level, a significant number of people who live along Ukraine’s borders make a good living smuggling cigarettes, liquor and other goods to neighbouring countries.  This is possible because of the large discrepancy in prices and taxes applied on such products in Ukraine.  For example, you can buy a pack of name-brand cigarettes in Ukraine for about a $1 to $1.50.  A bottle of vodka can be had for $3 to $4.  In neighbouring European countries, the prices would be many multiples of that, so you have the basis for a lucrative smuggling trade.

The sad fact is that in Ukraine, people do what they have to survive.  But in a country where there is so little respect for the integrity and fairness of the government and the law, most of the economy operates outside of normal and official structures and regulatory control.