During his recent visit to Kyiv, U.S. Secretary of State Antony Blinken has said that corruption is the main enemy of the Ukrainian economy. He mentioned corruption among the main internal enemy forces threatening the economy at least a dozen times, far more than anything else.
We at SCM attest to that. Corruption is the main economic enemy of Ukraine, a black hole that consumes the future value and the entire economy, along with its key assets. Corruption erodes all the government institutions, people’s lives, fairness, and the state itself. According to the independent analytics, Ukraine loses Hr 500 billion to Hr 950 billon to corruption every year.
Corruption, a flawed judicial system, and poorly performing officials are the three main enemies of any legitimate business in Ukraine, both national and international.
This is evidenced by the 2020 outflow of foreign direct investments from Ukraine, which amounted to a record $868 million never seen over the last 20 years.
The national and international investors are left exposed to attacks that come from dishonest competitors, corrupt officials, and even the government that is constantly moving the goalposts. Neither the scale, nor the investment track record, nor the place of registration can protect an investor from the attacks. This makes Ukraine an extremely risky place to do business.
We at SCM have been investing in Ukraine for 20 years.
Throughout all those years, we have worked to improve our Ukrainian investments and built transparent processes as per the best global practices. For 20 years, we have been enhancing our corporate governance and taking every effort to integrate the Ukrainian economy into the global one. We are guided by uniform principles, and the basic one is to ensure that our way of doing business is beneficial for both Ukraine and the Ukrainians. This is the principle that we follow now and are going to stand by in the future. It is our contribution to the making of an independent Ukraine.
Today, SCM is one of the biggest investors in the national economy. In 2014, SCM businesses accounted for 3.9% of Ukraine’s GDP and generated 5% of the country’s tax revenues. Our CAPEX exceeded 10%. Based on our internal assessment, those numbers are true for 2021 as well.
What does it mean?
We pay more taxes than the others. We invest far more than the others. We develop the country and its economy by acting rather than talking. In 2019 alone, we paid around Hr 60 billion in taxes to the Ukrainian budgets.
Our CAPEX in Ukraine made Hr 42 billion, and Hr 10 billion were allocated to social projects. This does not include the charitable programs of the Rinat Akhmetov Foundation. We are yet to finalize the 2020 performance numbers, but even during the COVID pandemic we have been doing everything possible to work efficiently, maintain jobs, and decent official salary for nearly 200,000 of our employees nationwide. No special terms, no support from the government.
This gives us every reason to consider SCM one of the biggest and the most important elements of the Ukrainian economy. The one that exists and works by the country’s laws and to its benefit, that pays legal salaries and all the required taxes in full and in due time.
Thus, we may rightfully expect the authorities to take measures that will stimulate economic development. We may insist on the anti-corruption reforms that can drastically improve the country’s investment climate.
Corruption does not only hinder economic development but also charges a hidden corruption tax, which should not add to the businesses’ tax burden. Any tax increase taken without eliminating corruption at the government bodies first becomes a toll of sorts that is pocketed by officials.
This is our vision of priorities in a systemic, true fight against corruption, which we insist on.
1. Rule of law and fair trial
Neither people nor business trust the Ukrainian court. The biggest Ukrainian entrepreneurs tend to seek resolution in the High Court of Justice in London or other European jurisdictions, but not in Ukraine. The rule of law is an important signal for global investment flows. Without effective courts that will ensure fair protection of any business, corruption will never be defeated in Ukraine.
2. Effective fight against corruption in government
According to the publicly available information, the corruption schemes used by tax and customs officials alone deprive the national budget of Hr 120 billion every year. We pay all taxes in full and stand firm that the revenues we earn for the country should be spent on society (education, health care, and security), instead of enriching the corrupt officials and MPs.
3. Predictable tax policy and regulatory framework
Ukrainian officials and lawmakers tend to change business rules and taxes as often as they think fit. This means manual tax regulation, which is bad for any investor. It is particularly bad amid dysfunctional courts and other institutions. And a huge shadow economy makes it even worse. Now some politicians and officials are crazy about raising taxes endlessly for those who already pay taxes honestly, turning a blind eye to those who are in the shadow. Even the fact that the government’s commitments are enshrined by law does not guarantee the investors that they will be met. For example, Ukraine has called for investing in renewable energy for many years, promising investors a special feed-in tariff (so-called green tariff). But when opponents of clean energy took senior roles in the energy sector, investors were simply denied further payments for the generated electricity. Even the calls of the ambassadors of a number of Ukraine’s leading partner countries could not help.
4. Prudent macroeconomic policy
The government must ensure low inflation, control over the public debt, and the independence of the National Bank. Monetary stability is necessary groundwork for long-term economic projects. Ukrainian exports need government incentives, a credit guarantee institution.
5. A drastic reform of corporate governance in state-owned companies
State property has always been a nidus of corruption schemes, with rare exceptions. Numerous executives have cared about private interests rather than production and financial performance. The coal mining industry can be taken as an example. Since Ukraine’s independence, government-owned mines have received about $30 billion in subsidies. However, they did not perform any better: production was steadily declining. It was coal industry insiders who were growing fabulously rich. DTEK has not received any subsidies for its private mines but rather raised bank loans for their modernization. In the end, it was them who could boost production and become the backbone of the country’s energy security. Therefore, the government should apply the best corporate governance practices in the public sector and continue transparent competitive privatization. This will help bring new investors to Ukraine.
6. Absolute guarantees of the freedom of speech and media
Any authoritarian and corrupt government system always seeks to control the media, fearing that certain shady business may come to light. A civilized and democratic government must secure the right to know the truth. Business should help civil society and democratic media that work in the interests of Ukraine, avoiding interfering with editorial policy.
7. E-government
Digitalization of public services should cover tax and customs services as well. Yes, it is a vital tool for combating corruption. However, we believe that digital transformations have far greater potential for creating transparent and understandable relations between the government and business, keeping the influence of officials at all stages to a minimum.
8. Demonopolization of the economy through integration into European markets and promotion of competition
Ukraine needs market competition, primarily in the energy market. Synchronization of the Ukrainian and European energy grids will help overcome the historical over-concentration in the energy market. The government should do everything it can to foster new strong and competitive players in every market segment. This is precisely the way to demonopolization, to a higher quality of services and goods, and to growing investments.
9. Clear and transparent level playing field
The economy needs as little manual regulation as possible, as manual regulation kills the investment climate. The competitive market, not a corrupt official, should be the main regulator. The government must put an end to selective approaches for good. To discuss the rules and protect their interests, businesses must have transparent legal mechanisms, from strong business associations to a civilized law on lobbying.
10. Investing in education
Knowledge is a key resource of a new economy. We do believe that there will be no economic growth in Ukraine without good schools, higher, and vocational education. However, education without fighting corruption leads to the brain drain: the smartest and most competitive specialists leave the country.
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Political populists may call private business opponents of reforms, but this is absolutely not the case. Such statements are made only by those who are trying to lead society along the wrong path in an attempt to keep their corrupt paychecks.
Over the past five years, the number of companies associated with government officials has grown by 3,000, from 16,117 to 19,118. As a big business, we have the right to insist on the transparency of the government and politicians. We do not engage in politics and believe that government officials should not engage in business. This is the only way to break the vicious circle made by the oligarchs, who raise their capital due to political corruption in the government. The separation of business and government is the only viable recipe for deoligarchization.
Politicians must pursue a common goal with business – a successful Ukraine. Fair business wins in a corruption-free Ukraine, and SCM – most definitely. The less corruption there is in Ukraine and the stronger its institutions, the larger the Ukrainian economy, the higher the capitalization of Ukrainian companies, the more real a bright future for the Ukrainian economy. In this case, Ukraine will become stronger.
