Tax dodging, UK and Ukraine style

Alexander Antonyuk exposes the UK-Ukraine tax rip-off and calls for coordinated action

Robust studies conducted by Ukrainian left wing activists find that profit shifting out of Ukraine through agricultural trade and iron ore exports supports the lavish lifestyles of Ukrainian oligarchs in London, and contributes to poverty and inequality in Ukraine and the UK.

The UK and Ukraine are located at the opposite ends of Europe and have different modern histories, but the social issues faced by the majority of their populations are quite similar. UK has the highest inequality in Western and Central Europe; Ukraine has arguably the highest in Europe. Both countries have suffered from the social and economic aftermath of deindustrialisation. Both states have embraced neoliberal economics, from the 1970s in the UK, and 1990s in Ukraine. One of the differences though is that while the poor from Ukraine often flee to the UK to be a bit less poor, the British poor have nowhere to flee to.

Both countries have very wealthy elites with a disproportionate, undemocratic influence on their economies and politics. The rich of both countries like to educate their children in UK’s top public schools and universities, as well as to buy luxury property there. British readers may know about their own British super-rich, but less about the Ukrainian ‘fat-cats’ who move in the same circles and own some of the most lavish real estate in London. The most expensive apartment in the world, located in Hyde Park Corner, for example, was bought by a Ukrainian oligarch.

These elites seem to have a strong geographical preference for living in the UK, drawn by its luxury properties and prestigious schools, whilst keeping financial assets in the Channel Islands. These luxurious lifestyles are underpinned by offshoring and tax avoidance. To illustrate the point, Ukraine is a large producer of vegetable oils, and more than £1 billion worth of oil was exported between 2015 and 2017 through companies registered in the UK, mainly in the Channel Islands. These companies are not real importers of the commodity, they are intermediaries or affiliates of the exporters, taking advantage of the favourable tax regimes. Only 2% of this oil was actually delivered to the UK. These tax dodging export operations are conducted by companies owned by very wealthy individuals. Agricultural business is the fastest growing source of oligarchic wealth in Ukraine.

We have conducted two detailed studies of profit shifting out of Ukraine through agricultural trade and iron ore exports – two of the top three Ukrainian exports (the third is steel).

Iron ore might seem like a defunct and unfashionable sector – but not so for Ukrainian oligarchs. Those who manage to grab a Soviet-built iron ore mine in Ukraine can make much more and much easier money than in other more cutting-edge industries. Out of seven Ukrainian US dollar billionaires, six own iron ore mines. These assets, exploiting cheap labour and using the country’s natural resources, generate for the owners all these prime properties in central London, luxury yachts, major media channels, and control of Ukrainian politics.

The ‘business model’ is simple. The capital expenditure was made in Soviet times so there are no investment debts to repay: the asset is ready to generate profits. All that is needed is to pay the miners, who risk their lives in tough conditions, the bare minimum in wages, on average £400 per month. In order to minimise and suppress public outrage at this clearly exploitative situation, it is helpful that Ukraine is totally dominated by right-wing ideology propagated by the major TV channels owned by oligarchs, as well as numerous right-wing think tanks.

Our iron ore study was initiated by trade unions in the industrial city of Kryvy Rih where the majority of mines are located. When 400 miners stayed underground in May 2017 demanding a pay rise the owners replied that profits were not sufficient to increase wages. The miners knew that the product is mainly exported and that the owners are billionaires. So the profits must be hidden in offshore financial centres. The trade unionists turned to us, and with the help of the progressive left in the European Parliament and international tax experts we managed to find where the profits were hiding.

Using the most detailed analysis of commodity exports ever conducted, as well as previous studies of other authors, we found that Ukraine is losing around $3 billion of profits every year. To put the number in context, fiscal losses from these shifted profits are similar in size to the whole of the EU’s macro-financial help Ukraine received since signing its EU association agreement in 2014. We presented the results in the European and Ukrainian parliaments.

Tax avoidance and offshores are among the most pressing socio-economic issues for both UK and Ukraine. Just taxation is the first item in Labour’s 2017 Manifesto. Murky profits pouring into the British economy are exacerbating the troubling levels of inequality in the UK and are further inflating already unaffordable property prices. In Ukraine, we demonstrated that the scale of avoidance is enormous and both the outgoing president Poroshenko and the new president Zelenskiy have been caught up in offshore scandals.

The UK and Ukraine, and many other countries are bound together by the negative effects of offshoring on tax revenue, inequality and politics. Progressive forces should fight this tax dodging from both ends: at the source of illegitimate profits, in Ukraine (and elsewhere), and where these profits are kept and spent, in the UK. Tax dodging elites have long been international in their approach – it is time for us to take a coordinated approach to fighting tax avoidance.

The studies referred to are by Ukrainian activists from NGO Social Movement, Platform Start and political party Respublika (Republic).

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