The liberalisation of the economy, an essential tenet of Ukraine’s transformation from command to free market management, brought with it new opportunities for accumulation by the capitalist class. The lifting of barriers to trade was intended to harness Ukraine’s export potential and facilitate its integration in global markets, a policy pushed for by western creditors and international institutions like the IMF as a condition for extending credit to the country. Large agribusinesses specialising in the export of grains, oilseeds, fats and oils have been one of the main beneficiaries of this opening up.
Liberalisation, however, also served as the precondition for the exodus of domestic capital as it opened up access to tax havens, offshore accounts and financial services abroad. Compounded by existing loopholes in the state’s tax regime, a ‘shadow market’ in grain production and trade emerged, leading to billions of dollars in yearly losses to the national budget. The shadow market includes such practices as the setting up of offshore companies to avoid taxation, the understatement of production and trade volumes to lower the taxable base, and the illegal transfer of state-owned land into private hands. Estimates suggest that Ukraine’s shadow market constitutes between 40 to 45 per cent of its GDP in 2015, and up to 40 per cent of its grain market.4 Offshoring, in particular, is responsible for about 100 to 150 billion UAH in lost revenues a year, making it the primary scheme through which significant contributions to the state coffers are lost.
Offshoring occurs when a firm sets up or registers as an as offshore entity in countries with a lower tax base and more permissive regulatory environment than their home countries. While technically legal, it permits companies “to do things they can’t do otherwise” onshore. In Ukraine, offshore jurisdictions have been widely used by the largest corporations to siphon off earnings and profits. According to the figures of the State Fiscal Service of Ukraine, about two thirds of export operations in Ukraine are processed through offshore entities. All agroholding companies operate as offshore legal entities.
Looking at the example of corn, which accounts for the largest share in Ukrainian crop exports, helps illustrate the extent of financial outflow from offshoring. The export of corn is concentrated in five countries—Spain, Italy, the Netherlands, Egypt and Iran—which together make up 50 per cent of total corn exports (see Figure 4). Direct exports from Ukraine to these countries only stand at 1 to 2 per cent, whereas 98 to 99 per cent come from companies ‘residing’ (i.e. registered) in other countries, like Switzerland, Cyprus, Virgin Islands, Great Britain, Panama and UAE—some of the world’s major tax havens (see Figure 5). Almost the entire trade in corn is routed through ‘transit’ countries on paper, even as the physical goods are directly delivered to the destination countries, where the goods are consumed. The only exception is the Netherlands, which imported 18 per cent of corn directly, although this is heavily influenced by the country’s status as a tax haven.
Note on methodology
The Ukrainian customs databases and open sources such as YouControl have been used to establish actual contract chains and destination countries in the export of grains, and for information on supply chains, importers, amounts and prices. The analysis was carried out using the example of corn exports which accounts for the largest share in Ukrainian crop exports.
Figure 4. Destination of corn exports from Ukraine, 2012 to 2017, in thousand tonnes
Source: Own calculations
Figure 5. Corn supply channels to the main importers, 2012-2017.
Source: Own calculations
Explanation of figure: Using the example of the first column. The total Ukrainian exports of corn to Spain amounted to 2,799 million USD (or 2.8 billion USD) between 2012 – 2017. However, according to customs data, Spain received only 5,2 million worth of corn from Ukraine directly, just 0,2% of the total value. Most of the actual supply was carried out off-shore, through various transit countries e.g. 59% of the total corn exports from Ukraine to Spain transited through Switzerland (amounting to 1.660 million USD), 6,5% via Cyprus (amounting to 0,181 million USD) etc.
The purpose of trading through transit countries is to avoid or minimise taxes on income, in this case accomplished by understating corn export prices. On average, 1 ton of corn allowed each exporter to ‘offshore’ between 10 to 20 US dollars. Taking into account the export volumes from 2012 to 2017 (inclusive), the overall amount of funds transferred from Ukraine reaches 1.2 billion US dollars (26 billion UAH) in corn exports alone. Thus, a considerable amount of income remains in the accounts of companies related to exporters in these countries. Companies registered in Switzerland are the absolute leaders within this offshore transit trade, having shipped 53 per cent of the grain.
The example of corn is not an isolated case, but rather reflects the broader trend in grain exports. As one study also revealed, as much as 43 per cent of Ukrainian export of goods in 2014 was trans-shipped through eight countries including the Virgin Islands, Cyprus, Panama and Switzerland, whereas only 2.41 per cent of goods were consumed in these countries. Considering that the 2012-2017 exports of wheat, corn, soybeans, rapeseeds and sunflower oil are worth 65 billion USD, the approximate amount of funds moved from Ukraine stands at about 4.5 billion USD – a huge sum that a debtor country like Ukraine could have used to pay off its debts or to re-invest in the domestic economy.