Ukrainian Prime Minister Arseniy Yatsenyuk declared the nation to be at war against corruption. It sounds promising, but can they deliver? Ukraine is currently in the midst of a very challenging time: it is enduring the loss of its territorial integrity, military activities in some parts of the country, and economic instability in the entire country. To solve these problems, and to secure financial support from the West, the administration of Ukrainian President Petro Poroshenko is implementing a wide range of reforms, including several anti-corruption initiatives.
Our 2013 representative study of 625 Ukrainian enterprises showed that corruption seemed not to be a significant problem for most business operations regardless of region, industry, or firm size. Corruption had simply become a part of the system, and businesspeople have learned how to deal with it (Denisova-Schmidt and Huber 20141). Our new representative study of 120 Ukrainian companies, conducted in early 2015 in the western part of Ukraine, shows the new tendency: corruption has become an obstacle for the majority of the companies that participated in the survey. Has the situation changed significantly since 2013, or are CEOs becoming more open in their discussions of the business environment?
Corrupt versus Informal Practices
In both surveys, we coded the negatively connoted word “corruption” into the more neutral “informal practices,” to refer to the practical norms CEOs and managers often use to get things done (Shekshnia, Ledeneva and Denisova-Schmidt 20142). In our questionnaires, we asked about the informal practices used within the company, such as whether companies tend to pay salaries to their staff in cash, or if managers receive any benefits from job candidates, or if they use company funds or employees for their personal needs. We also asked about any informal practices that occur in dealing with suppliers and buyers. We talked with companies about their interactions with local and state authorities, with different control agencies, and with tax inspection and the courts. All of these actions are informal practices on the part of the practitioners, but according to Transparency International, they are all forms of corruption (Table 1).
Table 1: Informal Practices vs. Corruption
The 2015 results show a considerable increase of about one standard deviation in the usage of two informal practices:
- Paying salaries and bonuses to staff in cash without paying taxes or social fees—the average response increased from 2.23 to 3.4 on a scale from 1 to 5; and
- Selecting vendors, contractors or the winners of open tenders on the basis of informal relationships and agreements—the average response increased from 2.3 to 3.3 on a scale from 1 to 5.
The open questions about the reasons for using such informal practices shed some light on these issues.
Paying Salaries and Bonuses to Staff in Cash without Paying Taxes or Social Fees
Small and medium-sized companies would not be able to survive without paying salaries and bonuses to staff in cash and tax-free. In Ukraine, taxes and social fees are very high for a small or medium-sized company. Even many large businesses try to evade high taxes by employing people as independent contractors, which reduces the tax burden considerably.4 Our respondents indicate that, if they were to pay all the required taxes and fees, about half of their employees’ salaries would be taken away as a result. That demotivates employees and reduces their productivity and morale, so employers try to increase salaries by paying social benefits directly to their staff. Also, having no formal relations with employees reduces the time needed for managing taxes. Hence, tax evasion is seen as a factor in increasing productivity and a socially accepted way of increasing the benefits of employees.
Selecting Vendors, Contractors or the Winners of Open Tenders on the Basis of Informal Relationships and Agreements
Our respondents indicate that the practice of using informal relations to select tender winners reduces the time and resources necessary for formal tender arrangements. Several respondents referred to business as a zero-sum game, mentioning that if one does not use informal connections, then one’s competitors would do that to win. Such a view correlates with the view of Neutze and Karatnycky (2007)5 on the problem of business corruption in Ukraine. They indicate a mixed picture of corruption practices in the private sector. While corruption remains a major mechanism by which companies evade taxes, resolve complicated bureaucratic procedures and obtain market access under favorable or even monopolistic conditions, many big companies strive for transparency in order to get access to the international capital market. At the same time, small and medium-sized enterprises strive for a decrease in negative, blat-related6 relationships in order to have equal access to corruption mechanisms on the market.
The survey yielded some very interesting results. On the one hand, businesses are still using or even increasing their usage of certain corrupt practices; on the other hand, they indicate a significantly more negative attitude to corruption as the usual way of doing business in Ukraine. The number of businesses that view corruption as an obstacle for their development has almost doubled since 2013, from 23% to 43%. This brings hope that continuing systemic changes in Ukraine, the reformation of the Ukrainian economy and constant anti-corruption measures will push the Ukrainian business community from their current “bad” long-term equilibrium of rent-seeking behavior to a “good,” corruption-free equilibrium of a win-win business game.
2. Stanislav Shekshnia, Alena Ledeneva, and Elena Denisova-Schmidt, “How to Mitigate Corruption in Emerging Markets: The Case of Russia,” Edmond J. Safra Research Lab Working Papers, No. 36, February 6, 2014, http://ssrn.com/abstract=2391950.
5. Jan Neutze and Adrian Karatnycky, “Corruption, Democracy, and Investment in Ukraine,” Atlantic Council Transatlantic Relations Policy Papers, October 2007, http://www.atlanticcouncil.org/publications/reports/corruption-democracy-and-investment-in-ukraine.