Tymoshenko's big gamble

I liked this 'broader view of the economy' article on the Ukrainian/Russian 'Unian' site, so I've paraphrased and translated some bits of it below:

The policies of Tymoshenko's government directed toward radical increases in wages, pensions, other social benefits, and the reinbursement of depreciated personal bank balances of former Soviet bank account holders, are commendable. But there is one but. The threat of inflation returning on the scale of the '90's is real unless state revenues can be increased substantially soon. So where is the money to come from?

According to the Ukrainian Ministry of Finance, revenues to the state budget grew in 2005 [the time when Tymoshenko was last in government] by 63% (from 51,8 billion hryven in 2004 to 84,4 billion hryven in 2005.). Reciepts of the state customs service increased by 73%; VAT receipts grew by 100%; and tax receipts on profits grew by 45%. The corresponding indices in 2004 were considerably lower, even though the rates of growth of GDP in 2005 was much higher (in 2004 increase in GDP was 12,1%, and into 2005 - 2,6%).

The increase in state revenue in 2005 was primarily from taxes applied to the profits of enterprises, particlarly those who exported a large portion of their production and had understated their profits, and, correspondingly, underpaid taxes to the state coffers. Many of these enterprises are in the mining and metallurgical complex (HMK) of Ukraine which provides about 40% of entire commodity export and about one third of the entire GDP.

In 2005, tax audits revealed massive illegal VAT reimbursements for fictitious exports, of about 5 billion hryven. Smaller businesses 'came out of the shadows' at that time following the orange revolution, and were more positively disposed to paying taxes. But after the 'round tables' with Yushchenko and Yanukovych and the coming to power of Yanukovych's government, small businessmen became disenchanted again, and returned to their old habits, as did the large industrial enterprises.

In the first quarter of 2006 large problems began appear again in the state budget, with large enterprises using offshore schemes to supress incomes. E.g. the portion of production that went through offshore schemes were: for Mariupol metkombinat 13%, Industrial Union of Donbas 63%, Alchevsk metkombinat 63%, Dniprovsk metkombinat 70%, Donetskstal 61%, Dnipropetrovsk metzavod im. Petrovskoho 74%, Zaporizhzha aluminium plant 82% etc.etc. [see source article for full list]

According to the ministry of finances' estimates, loss to the state budget from the off-shore schemes as a result of understatement of the true value of exports comprised, in the first quarter of 2006, 2,5 billion hryven.

'Mittal Steel - Kryviy Rih' decreased payment of tax on profits by half in comparison with 2005, the Interpipe corporation by half, Nikopol' ferro alloys - a ninefold reduction, Mariupol metkombinat - tenfold reduction. [Incidentally, many of the owners of these large enterprises are frequently seen 'brown-nosing' with the president and his followers at various charity bashes, Elton John concerts etc. So can you blame smaller businessmen and entrepreneurs for not paying taxes? ..LEvko]

After the appointment of prime minister Viktor Yanukovych, similar information was not published and one can only guess what has taken place in the last year and a half as regards non payment of taxes by major enterprises in Ukraine. At the same time there has been a massive inflow of capital into Ukraine, cynically laundered via offshore companies, under the guise of direct foreign investments. According to government data, in the second half-year of 2006, and in 2007 more that $2 billion of 'investments' have entered the country from Cyprus alone...

So specific reserves for filling the treasury''s coffers in 2008 exist, but this will not be as easy as in 2005. There will be resistance from large businesses; and smaller businesses will be less ready to co-operate this time, having been let down before. The new Ukrainian government will have to work especially hard to gain the trust of the people. Unless they see corruption tackled in the courts, tax administrations, police and customs service, the growth in tax revenues seen in 2005 will not be achieved. And if the authorities have not borne this in mind as they increase wages, pensions, allowances and benefits, then difficult times await the Ukrainian economy - either these will not be paid, or they will be clawed back, or the government will have to resort to the printing presses. All of these alternatives are obviously extremely negative.

The only thing that could help would be wide-scale privatizations (or reprivatisations), or large external loans.

It is obvious that Tymoshenko has taken a large risk - either she will succeed..or she will perish..Matters will become more clear by the Spring.

p.s . EDM have today posted a concise roundup of what Tymoshenko has done so far as PM