Report

Ukraine Fights Second Enemy: Corruption

Kiev moves ahead with tax reforms even as war rages in the east.

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While Ukrainian troops are fighting off a renewed offensive by separatists in the east, Kiev is launching a new battle against corruption in the ranks of its own bureaucracy.

Cracking down on tax fraud is one of the first priorities. On Monday, Feb. 2, Ukraine started a new electronic system for corporate tax filing to try to eliminate about $1 billion a year in tax fraud, said Finance Minister Natalie Jaresko. Streamlining tax filing is meant to make the system more transparent and less susceptible to abuse by corrupt companies and officials.

“War is not a reason or an excuse to not reform. It has spurred us toward reform,” Jaresko said Tuesday during on a call for reporters hosted by the Washington-based Atlantic Council think tank.

In the past, Ukrainian officials used the bureaucratic tax system to extract bribes. The government would require a huge upfront tax payment and then withhold the refund companies were legally due. A 2013 U.S. government report found that refunds were more likely to go to “companies connected to the government or those that pay bribes.”

Agribusiness giant Archer Daniels Midland paid a $54 million fine in the United States in 2014 for allegedly giving corrupt Ukrainian officials $22 million over six years. The bribes weren’t for special treatment; instead American authorities said the company was just trying to get its refund back.

Jaresko has been campaigning for public and private support to fill a $15 billion budget gap. The Ukrainian government is still negotiating with the IMF, which started warning last fall that the $17 billion bailout it promised last March wasn’t going to be enough if war continued in the east. In a Jan. 23 interview in Davos, Switzerland, the new finance minister said she hoped to wrap up talks with the IMF and have new funding in place by the end of February.

Fighting has intensified in eastern Ukraine over the past two weeks, undermining a fragile cease-fire both sides agreed to in September. Ukrainian forces have suffered major setbacks as separatists took control of the Donetsk airport and set their sights on a strategic rail junction in Debaltseve. The United Nations said Tuesday that 224 civilians had been killed in the three weeks leading up to Feb. 1.

“Bus stops and public transport, marketplaces, schools and kindergartens, hospitals and residential areas have become battlegrounds in the Donetsk and Luhansk regions of Ukraine — in clear breach of international humanitarian law which governs the conduct of armed conflicts,” the U.N. high commissioner for human rights, Zeid Ra’ad Al Hussein, said in a statement Tuesday. He urged countries with influence to help end the conflict.

Meanwhile, Jaresko is working to reassure Ukraine’s allies that the reforms required by the IMF can continue, despite the war. A new IMF deal could unlock smaller amounts of funding from other countries, including up to $3 billion in loan guarantees from the United States. Barack Obama’s administration is also reportedly considering supplying Ukraine with weaponry and ammunition to help it fight the Russian-backed separatists steadily gaining ground in eastern Ukraine, even though German Chancellor Angela Merkel opposes arming Kiev and wants to rely solely on sanctions. Last year, the United States sent $340 million in nonlethal aid and backed a $1 billion loan.

To get support from the United States and the IMF, the Ukrainian government has to cut government spending, reform the economy, and crack down on corruption. In addition to changing the tax code, Jaresko said, the government is creating an all-new traffic-police force, reforming the judicial system, and setting up an independent business ombudsman for companies to report problems to.

Jaresko’s work is not only being watched by its big lenders, but also by current and potential investors. U.S.-Ukraine Business Council President Morgan Williams said foreign companies in Ukraine are “hunkered down” right now and Kiev has only made about 5 percent of the necessary changes.

“For investments to really flow under these conditions they’re going to have to really move faster and do a lot more,” Williams said in an interview. He said Kiev is fighting two wars, one against Russian President Vladimir Putin and one against the old guard of corrupt bureaucrats who benefited from the previous system.

“Ukraine’s fighting against the last 80 years of corruption and illegality,” Williams said.

Photo credit: DOMINIQUE FAGET/AFP/Getty Images

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