Back in Black – (Ukraine’s shadowy economy that is)

Over the years this blog has been running, it has touched upon the size of the “black economy” several times and puzzled over just how large it is.

There have been previous guesstimates from various political figures over the years ranging between 60% and 80%.  A truly outrageous percentage and one suspected somewhat embellished for political reasons, whether to show the scale of the problem and lost tax revenue as an excuse for not delivering necessary infrastructure or to show the ineffectiveness of the government of the day when raising the issue.

Like all such quotes and guesstimates, not only do you have to wonder at how such figures are arrived at, but it is then necessary to get behind those numbers to discover who and what qualifies as being included in the “black economy”.

The latest politician to have produce “figures” about the scale of the black economy is Prime Minister Azarov.  According to him more than 6,000,000 people in Ukraine are actively working in the black economy.

That is an incredible figure if we agree that there are only 20.5 million Ukrainians of working age from a total population of just under 46 million.  To cut to the core of the issue, it means only 14 million Ukrainians are paying any form of tax or pension contribution whilst 32 million Ukrainians do not.

Less than 1 in 3 are contributing to the development of Ukraine via direct taxation.  In fact the situation is worse given the aging population of Ukraine as they will be drawing pensions in excess of the pension pot.  A $2.5 billion shortfall to be exact in 2011.

Granted in the global scheme of things, even in the Ukrainian scheme of things, that is not a massive amount of money.  Indeed the Ukrainian budget deficit is declining which ultimately can only be good news if the economy can survive the massive amount of foreign loans due in H1 of 2012.

However, the issue of 6 million Ukrainians working and employers engaging that many people, both of whom are avoiding direct taxation by way of employee and employers contributions notwithstanding pension contributions is simply unsustainable in the long term regardless of which colour any sitting government may be.

Prima facie, the new Tax Code would theoretically force many of those currently “in the black” to certainly reach the grey if not the white economy.  However when Ukrainian psyche and innovation is taken into account, as well as a massive distrust of government (of any party) when it comes to spending tax revenue on Ukraine rather than pocketing it, the new Tax Code will probably force as many into the black economy as it will force out of the black economy unless it is effectively implemented and enforced.  Effective implementation is an area where Ukraine always fails.

Coming from a nation that has spent an awful lot of money to inform me I owed Sterling 1.18 ($2) from the beginning of the millennium, (now duly paid I will add) and thus spending far, far more money chasing my (unbeknown to me until recently) tax debt from the UK to Russia and then Ukraine over the course of a decade,  it does seem rather incredulous that 6 million Ukrainians cannot be made to pay by Ukraine in Ukraine.

Anybody who can offer up answers, please send it to: Prime Minister Azarov, Ukraine RADA, Kyiv, Ukraine.   Quite obviously those in power are seriously struggling with those in and those going back in black.

All the above said, it really doesn’t help when leading politicians here submit tax returns that are truly unbelievable and the law makers pay their researchers with cash in an envelope (as happened with one researcher I know when working on the new Tax Code by his RADA boss.)

Hmmm!

Simplified business procedures or a discombobulated mess as ususal?

Well, the good news?  The RADA is to consider and probably pass two new laws making it easier to set up business entities in Ukraine free of charge.

Hurrah and huzzah!

The bad news?  Well I refer you to my post from a few days ago.  Has anybody told the State Registrar?  If they have, does the State Registrar know what to do?  Has anybody told the Pensions, Tax and Statistics agencies?

Will there be sound instruction and quality communication between the brain and the vital organs involved or will everything be discombobulated as usual when any changes occur to any administrative procedures in Ukraine?

(I still think ”discombobulated” is such a brilliant sounding word. – It should be used far more often!)

You really have to hedge your bets on the side of discombobulation (used it again – wonderful!)

Another small matter is that is has never actually been that difficult to open a business in Ukraine……but try closing one!

Further to this, a seemingly good step in the right direction is this announcement that the government will no longer charge for copies of certain legal licenses when they are required and even better, regional administrations will be able to issue them rather than everything going through the bottle neck that is Kyiv.

Indeed – discombobulation comes to mind yet again not to mention the ability for regional fiefdoms to engage in nefarious and corrupt acts with once solely centrally issued and coordinated licensing.

Once again you have the very real fear of an effective and good policy suffering from in effective implementation with counterproductive results at least in the immediate term.  That poses the question, what period of time must pass for a policy to be seen as effective, ineffective or counterproductive?  What starts off as one may end with another and may not always follow a smooth of linear track.

Anyway, good policy should not be thrown out because the best policy is not attainable straight away and as far as these policies go and the intention behind them are concerned, they are good policies.  Thereafter when it comes to implementation and actual results, we shall have to wait and see.

A step, in theory and principle, in the right direction at least.  However a far better policy where practical, given the excessive and out-dated Ukrainian statue book, is a new law in, two old ones out (or at least one out and another brought into the post-Soviet era).

Too much to ask?

Death of an EU white elephant a risk to Ukraine – Nabucco

Well the death of the Nabucco pipeline seems to have finally arrived as I (and many others) have predicted years ago.  It was, of course, doomed to failure from the outset, not because of the idea or reasoning behind it both of which are sound, but because of the parties involved and the geopolitics.

Unsurprisingly, the Nordstream gas pipeline is now open and supplying gas directly from Russia to Germany removing at least some German/EU and Russian dependence on Ukraine as a transit route.

So why has Nabucco died?  Well for a start Azerbaijan and Turkey have eventually signed an agreement on any transit line through Turkish waters which you would think would be a step in the right direction rather than its death, but you would be wrong.

The death of Nabucco relates to putting enough gas into the pipeline at the Azerbaijani end of the pipe. Nobody was ever quite sure where the 30 billion cubic meters of gas to be pumped through Nabucco was going to come from.  The existing Shah Deniz field doesn’t produce that much gas in a year, there were and are additional risks by asking Turkmenistan to make up the difference by pumping into the same pipeline, and the latest Azerbaijani discovery, the Absheron field is some way from being developed.

None of this took into account the shares holders in the existing and highlighted Shah Deniz field which is not solely run by the government in Baku.  As in most cases there such ventures are joint ventures and the Shah Deniz field has several major stakeholders.  Stakeholders begin to worry about risk when other suppliers are needed to connect to the artery they push their product through as it allows external influences and actions that were never in the risk assessment model.

It is of course typical EU grandiose thinking to decide on a 30 billion cubic meter per year pipeline (not to mention 20 billion Euro price tag) ahead of knowing exactly where all that gas will come from.  It shows the awareness and risk analysis similar to creating a common currency without any common fiscal directives to run along side it, and we are all aware how that has turned out.

Anyway, BP, a major stakeholder in the Shah Deniz field has effectively pulled out of Nabacco and offered up its own, smaller 10 billion cubic meter per year alternative.  Thus, Nabucco is no more as there is no supplier of gas.

Good news for Ukraine you would think.  There is now only Nordstream and Ukraine as routes for Russian gas to the EU and no route from the Caspian Sea at all.

Alas, whilst Nabucco remained a pipe dream, Ukraine remained fairly secure as a gas transit route.  Nabucco was never going to work, everybody new it except those in ivory towers, but so long as the Nabucco pipe dream continued no other Caspian alternatives would be considered before this EU flagship pipe line.

The simple fact that Nabucco was as ill-fated from the onset as the Mary Rose, a similarly grand flag ship that barely made out of Portsmouth harbour, is all rather irrelevant to the planners within the EU.

Now however, whilst the Russian/EU South Stream pipeline plans may be on the back burner, to the point EU institutions are making promises of funds to upgrade the Ukrainian gas transport system with Russia and Ukraine, the Caspian Sea issue becomes a very real threat as far as Ukraine is concerned.

With Azerbaijan and Turkey in agreement over undersea routes, BP whilst pulling the plug on Nabucco has submitted a plan called the South East Europe Pipeline (SEEP).  Also submitted some time ago, but largely ignored was the Trans Adriatic Pipeline (TAP) amongst others.

All these smaller proposals envisage 10 billion cubic meters per annum delivery from Azerbaijan.  All these smaller proposals have quietly continued to jump through the geopolitical and sub-sea survey hoops.  Statoil and partners E.On, Ruhrgas and EGL would seem to have stolen a march with the TAP pipeline when it comes to the bureaucratic requirements and are probably ahead of other smaller project submissions in this regard.

BP and SEEP are some way behind.

It is also worth mentioning that Statoil and BP are equal partners in the Azerbaijani Shah Deniz field which could make things quite interesting as far as that partnership goes.

Regardless, the demise of Nabucco is not a blessing for Ukraine as it was a threat that was never likely to happen.  The alternatives, however, are very real threats with the undoubted finances behind them to make it a reality now that Turkey and Azerbaijan have signed their transit agreements.

The Azerbaijani government in Baku now has to decide which project to go with and the threat becomes a reality.

The saving grace, if there is one, is that neither the Russian/Germanic Nordstream or any 10 billion cubic meter pipeline from the Caspian Sea combined, will completely remove the need for gas transited across Ukraine.  Yet.

However things change.

On the up side for Ukraine, is that the exploration of the Black Sea shelf and tapping its own hydrocarbon reserves looks ever more likely with China, RD Shell, BP and Petrobas all signing or in the process of signing on dotted lines with Ukraine.  Ukraine could well end up being a net exporter in the decades ahead.  What is not sent to China or used internally could very well head towards the EU if the existing GTS system is saved from falling into further disrepair.

Unfortunately for Ukraine, given its complete inefficiency and bureaucratic nature, there is more chance of the Caspian TAP, SEEP and others being in existence before Ukraine gets its act together with its partners.

Tax of the Ukrainian kind

Just a very quick post today.  Hopefully tomorrow normal service will resume with something more worthy of your attention.

Suffice to say, having engaged and emerged victorious with HMRC, the UK tax man last month as you dear readers are awware, I now go into battle with the Ukrainian tax man today.

They say these things come in 3′s, so I suppose I will have a letter from the Russian Federation’s tax man next.

That said, the Ukrainian issue is not a major issue and related to tax due on selling assets here.  As the law is actually quite accommodating in this particular case, if I can delay the completion date of an asset sale until 1 January 2012 or thereafter (so 3 January seems like a reasonable completion date) I should avoid an unneccessary $7000 in tax…….assuming I understand the law correctly.

Today I will see if I do……..or not!

Meanwhile Ukraine has announced direct flights to Sri Lanka and Cuba, two of my favourite holiday locations, so if I am right that $7000 will quickly be spent in either Gala or Havannah by the good woman undoubtedly.

Ease of doing business in Ukraine – Latest WB report

Well, the latest World Bank “Ease of doing business” report is out and Ukraine dropped 3 places.  Whether that is because Ukraine got worse or others got better faster and simply overtook Ukraine is not really clear from a brief look although I am sure amongst you dear readers will sit numerous statisticians and economists who have nothing better to do than work that out.

More interestingly, half way down the page in the above link are numerous block boxes upon which you are free to click and subsequently are presented with a breakdown of the + and – of any particular category relating to Ukraine’s rankings.

Quite obviously, looking at the summary sheet you are taken to immediately in the link I provide, if Ukraine can sort out the tax situation it will dramatically climb in the global rankings.  We will see where Ukraine sits next year when the new Tax Code has come into effect in a few months time.

I’ve not heard anything further about the sovereign nation Ukraine was negotiating with relating to civil service realignment and tax collection assistance overhaul since May.  If a deal has been made, I am yet to hear about it from reliable sources and I am not about to repeat rumour from unreliable ones.

Regardless, the Von Bismark-esque style of governance Ukraine seemingly now runs under (OK not exactly in the style of  Otto Von Bismark but there are several prima facie parallels) has yet to make any radical improvements within the parameters of the WB score sheet.

Let’s see where we are next year.

New criminal case against Tymoshenko – Right weapon and right ammunition this time?

Well, a few days into her 7 year stretch and the SBU has opened another case against Tymoshenko yesterday:

One assumes this is the $405 million that United Energy Systems still owes Russia from when she ran it and is entangled within the case of money laundering that got Lazerenko jailed in the US.  You will recall I blogged stating this would come and haunt her back in August.

In this instance it is a little more difficult to imply using the law to compensate for bad judgment over the gas deal with Russia. This time at least it is an out and out criminal investigation to which recently she did say money was owed publicly, but not to that figure as claimed by Russia.

Whereas the gas agreement with Russia is very easy to depict as a “political crime” as was the intent behind the Soviet law when written she was prosecuted under and thus not very European, fraud and theft are much harder frame as persecution, particularly when the case seems to be entwined with somebody found guilty of money laundering in a US court and jailed there.

In effect, politically, the trail at which she has recently been found guilty was the right gun with the wrong ammunition, this current investigation is the same gun and ammunition currently being used in France against an ex-President making it quite European and also contemporary.

So, possibly we will see her current conviction politically annulled by decriminalising the law she was found guilty under, allowed to run in the elections, whilst under investigation for a “crime crime” rather than a “political crime”, possibly get into the RADA to then have her immunity revoked by majority and jailed once again on more criticism-proof crimes.

Alternatively Ukrainian leadership may have decided “enough of the EU”, the Eurasian Union with Russia and others is probably better given EU membership is decades away anyway, if ever.  Personally I don’t think the current authorities have decided to do a U turn on the EU yet, but anything is possible.

Maybe the EU and Ukraine will pursue only the DCFTA and consign the AA to the shelf or even rubbish bin.

After all, there is a large number of UK citizens who would happily consign the EU to the rubbish bin and just agree on matters of trade and bilateral agreements, without a non-elected supra-structure interfering in the UK legal system and other organs of the State.

Would that be so bad?

More executive prosecutions at Odessa City Hall

Only a few days ago I mentioned the arrest of Deputy Mayor Mykola Ilchenko for what I assumed at the time would be accepting bribes.

This would seem to be the case as he was arrested under Section 3 of Article 368 of the Criminal Code which to cut a long story short is used for those taking large scale bribes.

As stated the Odessa Mayor who was in Kyiv at the time, either by coincidence or by design (and whether his design or that of the police we will probably never know), subsequently made a statement supporting his subordinate claiming there was some mistake or misunderstanding.

Unfortunately for the Odessa Mayor, Deputy Mayors Chernenko and Orlov can now be added to that mistake or misunderstanding as they too will be arrested under the same section of the same Article when they can be found.

Orlov is apparently in Spain on holiday and Chernenko’s whereabouts are unknown.  So who is running Odessa with three Deputy Mayors absent?  Good question as according to Anna Osypchuk, media spokeswoman for Odessa City Hall, the Odessa Mayor is in Kyiv.

At a time of an obvious political crisis in Odessa City Hall, why is the Odessa Mayor in Kyiv?

When three of your Deputy Mayors are under investigation by the PGO (and you have to ask how many Deputy Mayors you need), is it possible that one should consider their position?  Should one stand by his colleagues and maintain faith in them whilst investigations get under way?  Should one sacrifice his subordinates, maneuver oneself into a position of driving force against corruption within the Odessa political elite in order to take some of the political plaudits for cleaning up City Hall?

It seems any answers you may have should be sent to the Odessa Mayor in……Kyiv.

Overhaul of the Ukrainian Criminal Code by Christmas?

As many of you dear readers will be aware, successive Ukrainian governments since independence have done very little by way of updating historical Soviet laws that weren’t in their interest at the time to do so.  (Namely if such laws did not stand in their way to achieve X or Y, then they have remained unchanged.  If they did, they were changed.)

Thus we are still in a situation where the Soviet 1974 Labour Laws are technically providing the boundaries to the work place, Ms Tymoshenko is being tried on a 1968 Soviet “misuse of office” article obscurity undoubtedly in the Criminal Code to react to “party members” overstepping the mark back in the deepest, darkest days of the USSR.

Great swathes of Ukrainian life in the 21st Century are still technically marshaled by 20th century Soviet laws which are quite obviously either technically still in existence but completely ignored and never implemented (like large sections of the Labour Code) or employed if you manage to annoy somebody of importance (as is possibly the case of Ms Tymoshenko).

You will note that the existing and pending allegations against her are under the obscure “misuse of office” Soviet “control system” and she is not charged with corruption under more recent laws.  (To use the corruption law would open up a can of worms and leave the RADA bereft of MPs as you simply don’t get into the RADA unless a beneficiary of the patronage system that runs throughout Ukrainian life.)

Anyway, the Speaker of the RADA, Mr Lytvyn, has confidently stated that the new Criminal Code, as submitted to PACE/Council of Europe in August, will be passed by the year end.  If there is ever a way to put an end to the politicalisation of the Tymoshenko trial it will be to repeal the Article she is being tried under during this process (or repeal it before).

Now a new Criminal Code is all very well, especially if the CoE/PACE decide it meets European norms (if there is such a thing as European norms.  After all, law runs to the very heart of sovereignty and in many EU Member States what is legal in one nation is illegal in another.)  The question is the repealing or canceling of the existing Criminal Code in part or in full.  Will it be done or will it be allowed to lay dormant as so much outdated and superseded statute does on so many nation’s books?

What laws have been changed, repealed or updated in the new Criminal Code or is the new Criminal Code a reform of processes rather than existing laws?  Is it both?  As with many things in Ukraine, whilst there is a need to have the laws of the land, the implementation of them, even very good and reasoned laws, does not necessarily happen consistently, fairly or “blindly” as justice would necessitate.

When will CoE/PACE give their opinion on the new Criminal Code?  Surely having only received it in August, they have not given an opinion (or any recommendations) in a matter of weeks.  This is a European collective institution and by its very nature, speed is not one of its defining traits, especially over something so fundamental as providing opinion (and/or recommendation) to a nations criminal code.  Such things need consideration, exploration, rumination and comparison in order to provide a fair and reasoned response.

We will see how this develops with interest, particularly as this is a busy session in the RADA already.