Black holes

17 March 2017, 15:47

In the disputes that have swirled in the last month around the question of a blockade of ORDiLO, the occupied counties (rayon) of Donetsk and Luhansk Oblasts, those who support the blockade call it a moral and ethical issue, whereas those who oppose it say it’s an economic one. The former insist that trading with the aggressor is immoral and dirty; the latter apparently don’t disagree, but they note that therein lie Ukraine’s national interests. In their minds, this trading offers only benefits to the domestic economy.

According to SBU data, companies that operated in ORDiLO but were registered in Ukraine paid UAH 31.7 billion in taxes, which was about 5% of all budget revenues for the year. This number clearly does not match statements by "LNR" and "DNR" militants, or by some Ukrainian politicians, who predicted that the country would die and its economy go into collapse if it lost Donetsk and Luhansk Oblasts. But as this makes clear, the share of the occupied territories of the total Ukrainian pie is extremely small and the economic benefit from relations with them not that obvious.

The 5% they represent in the budget can easily be compensated by revenues from other sources, but precisely over this income a battle unfolded for some reason that has divided Ukrainian society. What’s more, Ukraine easily loses similar amounts in other oblasts. How many debates have there been over the illegal extraction of amber in Volyn, for instance! Yet, the government for some reason watches equanimously as public resources are stolen in enormous quantities and does nothing to stop it. For nearly two years now, it keeps promising that it will bring order to an industry that is almost entirely in the shadows. In actuality, though, every attempt to legalize extraction is sabotaged.

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Nor does anyone seem particularly worried that Ukraine loses billions of hryvnias ever year because its resources in Zhytomyr and Rivne Oblasts are being robbed. So why is it that, in one case, economic gain and profits are so important for elected officials that they are prepared to close their eyes to the ethical aspects of trading with Russia’s proxies, while in other cases, they couldn’t care less about economic losses? What makes money from ORDiLO so important for the budget but money from Volyn irrelevant? Are hryvnias in western Ukraine somehow less valuable?

And when it comes down to it, relations with the occupied territories don’t necessarily assure Ukraine profits of some kind. Often they also cause losses, but people who know this don’t like to talk about the size of these losses. Officials are happy to talk about how many money came to the budget, but no one is willing to talk about the overall economic costs of a black hole like ORDiLO on its borders. No official will admit that occupied Donbas has in fact turned into a kind of offshore zone through which Donbas oligarchs can evade taxes.

The losses from trading with ORDiLO are a known fact. How this happens can be shown in the schemes being used for several years now by two national deputies from the Opposition Bloc, Natalia Korolevska and her husband Yuriy Solod. Their family owns a plant near occupied Antratsyt, that specializes in products made of iron and steel alloys.

After the city was captured by Russian-sponsored groups, TOV Ukrspetsmet, the company controlled by the couple, continued to operate as normal until at least the start of the ORDiLO blockade. Throughout all of 2016, trainloads of scrap metal were being shipped to Korolevska’s plant in Antratsyt through Kyiv by a company called Resursinvest-1. Invoices show that the freight was indeed being delivered to Korolevska’s plant. The freight would arrive at the Karkhash station in Antratsyt or in occupied Luhansk, which can be seen in Ukrzaliznytsia manifests. What happens to the scrap beyond this point is anyone’s guess. Whether it’s processed at Ukrspetsmet or simply shipped on to Russia, no one can give a clear answer, because the areas captured by the militants are not under Ukraine’s control. They have no fiscal agencies, no way to confirm the activities of businesses, and not even any journalists who might undertake their own investigations.

It normally costs 15% duty to export ferrous scrap out of Ukraine, but no freight being shipped to ORDiLO is dutiable under Ukrainian law. It turns out, then, that Korolevska ships scrap to Antratsyt while not paying a penny to the Ukrainian budget. Beyond that, Kyiv does not control the border, so no one will be stopped while shipping the scrap on, across the open border, to sell it in Russia for a higher price without having paid any duty.

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While Ukraine is suffering from a shortage of scrap, Korolevska quietly got a permit from the SBU to ship it to the occupied territories. Beyond that, it’s a black hole. Who knows for whom Korolevska’s plant in "LNR" makes its products? Whom does she pay for the right to operate freely, and how much? Only the owners themselves know the answers to these questions. Obviously, if they weren’t paying “taxes” to "LNR", which Ukrainian law considers financing terrorism, the plant would not be operating.

What’s also not clear at all is wherein do Ukraine’s interests lie in such a scheme, the ones that fans of trading with ORDiLO claim to be defending. Why ship ferrous scrap to "LNR", leading to a shortage in Ukraine, when it can easily be processed on Ukrainian territory, offering jobs and wages here and not under occupation? In Ukraine, numerous companies process this kind of metal and they are in need of raw material. Why take work away from them and give it to Korolevska’s minions in "LNR"? How does the Ukrainian budget benefit from any of this? Where’s the logic?

It’s understood that both the Opposition Bloc and Natalia Korolevska will insist on trading with the devil himself. And in order to continue to make money, they will come up with all kinds of ridiculous stories about how “our people” are suffering in the occupied territories and how Ukraine will fade away without taxes from ORDiLO. How does this fit in with the interests of the Ukrainian people and their state?

The thing is, how many companies like Ukrspetsmet are located on the occupied territories today? Hundreds, without doubt. It’s just the majority of us don’t know who is hiding behind various TOVs. Which one is a real plant, and which merely a shell company set up to launder money? Only the big companies that know everything are privy to this. Not long ago, they found themselves on a list of “squeezed” companies whom Plotnytskiy and Zakharchenko decided to take under “temporary administration.” Still, there are far more small companies that rent facilities in long-dead soviet companies in ORDiLO, but they, for some reason, have not been subject to “nationalization.” Most likely, because no one really knows about their existence and it’s easier for the owners to just cut a deal with the militants about “cooperating.”

How much does Ukraine lose because of such companies? In a slew of cases, it’s probably hundreds of million of hryvnias. No one has a complete picture, most likely, other than possibly some qualified government agencies.

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Complaints were first filed against Korolevska’s companies and those of another notorious Luhansk ex-Regional Oleksandr Yefremov, who is currently in jail, back in 2014. Over 2014-2016, a whole series of MPs from different factions filed queries and suits with various government agencies in which they outlined the corrupt schemes being use by Korolevska and Yefremov. But the state never responded to these complaints. Indeed Korolevska and Solod apparently have no problems at all with the law and continue to function as lawmakers in the Verkhovna Rada. Up until the start of the blockade, Korolevska continued to ship scrap to ORDiLO.

The latest events show that the government has, finally, found the political will to issue a trade embargo at the state level. This means that the corrupt schemes that were costing the budget enormous losses will stop, at least for a time. Clearly, this happened because of pressure from that part of Ukrainian society that was against trading with the enemy. Still, it’s already understood that victory is still far off. To this day, relations between Ukraine and the occupied territories of Donetsk and Luhansk Oblasts have not been regulated legally in any way. This kind of legal limbo offers the ideal conditions for all kinds of corruption to take place.

For ORDiLO to stop being a black hole, Ukraine needs to clearly establish the legal status of these territories and a proper procedure in relations with them. Until this is done, officials will continue to be able to interpret any events connected to the occupation of Donbas as they wish and to abuse their positions of power.

Translated by Lidia Wolanskyj

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