Ukraine: Corruption Festers

Kiev, Ukraine -- One year into his presidential term, has Ukraine’s Viktor Yanukovich started to deliver on his pledges to cut corruption, reduce red tape and improve the country’s miserable investment climate?

The honest answer is “not really”, although the generous might be inclined to say “not yet”. With the International Monetary Fund supervising the economy under the terms of a $15.5bn rescue loan, the administration should be working over-time to clean up business life. It is not.

Yanukovich won last year’s presidential election exactly 12 months ago, partly by promising to clean up and painting his opponent, the glamorous Yulia Tymoshenko, as corrupt.

However, well-connected business tycoons have been allowed to cash in on lucrative deals at the nation’s expense and appear to be flourishing under his oligarch-backed administration.

Martin Raiser, head of the World Bank’s office in Ukraine, said: “Ukraine still has an awful lot of work to do to improve its investment climate.” In the corruption perception index compiled by Transparency International late last year, Ukraine ranked at 134 among the nations – that is a bit better than 146 (as in 2009) but the same as 2008 (also 134).

Speaking on condition of anonymity, investors say that shakedowns by officials and non-transparent dealings are growing to unprecedented levels.

A case in point is the plight of international grain traders such as Cargill, Toepfer International and Bunge. For more than a decade, foreign agribusinesses have invested in developing Ukraine’s promising agriculture sector.

But last year the Yanukovich administration delivered a double whammy. In a bid to keep domestic food prices low, Kiev restricted grain exports last summer. Then it granted a disproportionate share of export quotas, more than half, to just three domestic companies.

The entire affair has been “unjustified, untransparent, and unfair,” says the American Chamber of Commerce in Ukraine, which represents foreign businesses.

The 2010 harvest, while lower than that in three previous years, is the third largest in Ukrainian history. The American chamber says preferred grain exporters will profit greatly amid record global grain prices.

But the quotas – still in place – will cause up to $2.6 billion damage to Ukraine’s agricultural sector in terms of lost export income, the Chamber estimates.

In fuel supplies too, foreign-owned companies headed by Royal Dutch Shell and TNK-BP, the Russian-British-owned group, have also experienced what foreign business people and the American chamber says is unfair competition.

A little-known company was last year permitted to import more than 1m tonnes of oil and motor fuels tax and duty-free via what the chamber calls a loophole.

These imports amounted to around 60 percent of all oil imports and cost the state coffers millions of dollars in lost revenue. They stopped after protests from the Chamber.

The Chamber said in a recent letter to Ukraine’s authorities:

At a time when the government takes difficult and unpopular decisions [cutting public spending], the [duty and tax free import privileges exploited by some companies] not only allows certain companies to evade paying taxes, but also distorts free competition on the Ukrainian fuel market, threatening investment in this sector.

European companies largely take the same view. British Ambassador Leigh Turner this month criticised a lack of transparency in how Ukraine refunds Value Added Tax to exporters, saying:

Some companies receive it quickly, some receive it slowly, and some companies do not receive them at all. Unfortunately, there is an opinion, that how quickly you receive the VAT refund may be influenced either by political connections or corruption. Clearly, this is a catastrophic situation for business climate.

Ukraine officials insist the complaints are taken seriously. Vitaly Lukyanenko, a Ukrainian government spokesperson said: “The government does not only recognize the big corruption problem, but is taking steps to combat it across the board.”

Referring specifically to the allegations that grain export quotas are distributed unfairly, Lukyanenko said: “We have appealed to grain market players, asking for concrete examples of corruption at play, but we have not received proof from the business community.”

He added: “We will combat them. But we have not received any concrete examples from the side of the business community.”

Lukyanenko also commented on claims that a few domestic companies had received special rights to import oil products duty-free. He said it was “unfortunate” that the privileges enjoyed by one particular company had been upheld by a Ukrainian court.

He added: “The government is working hard to end such unfair status in setting up market conditions that would set a fair playing field for all.”

If the IMF is serious about improving the Ukrainian economy, a delegation visiting Kiev this month should take a close look at these issues. Otherwise the country’s macro-economic performance, especially its fiscal management, will be seriously undermined. And Yanukovich’s record in fighting corruption will be no better than his predecessors.

Source: Financial Times