One should not underestimate the role of customs in the Ukrainian economy. In 2020, its contribution to the budget amounted to 360 billion UAH, constituting 33% of the budget’s total revenues. According to the latest data, in January-June 2021, the State Customs Service contributed 207.5 billion UAH to the Ukrainian budget, thus exceeding the revenue plan by 108%. However, these figures fall short of the potential that customs could bring to Ukraine’s economy. To improve its efficiency, the State Customs Service began work in the format of a single legal entity starting from July 1, 2021. However, it remains to be seen whether the changes will solve systemic problems of the customs.
Following the present-day needs and the memorandum concluded with the International Monetary Fund, the customs was reformatted into a single legal entity – the State Customs Service subordinate to Ukraine’s Ministry of Finance. However, the new format may fail to change the substance.
As per the ICPS’ recent study on the independence of state institutions, the State Customs Service and the State Tax Service of Ukraine proved to be the least legally protected from interference and external influence, having a plethora of legislative loopholes and shortcomings. In the study, they were negatively underscored in the areas of the appointment and dismissal of senior management, sovereignty, the transparency of the appointed management’s income, as well as the transparency of the competition for the position to head these institutions. The lack of changes in the legislative field regarding the State Customs Service only confirms the fears that the change of form may not lead to the change of its content. This, in turn, is just a part of the problem.
Overall, according to various data, losses from gaps in legislation, the "inefficiency" of customs and smuggling reach over 4-5 billion USD per year. These figures were named by Ukraine’s Minister of Internal Affairs Arsen Avakov, former head of the State Customs Service Maksym Nefyodov, and Minister of Finance Serhiy Marchenko. The numbers are rather impressive, as these funds could be used to address key economic and social issues of the Ukrainian economy. The money could also diminish the need to attract loans from the IMF, the EU, and the World Bank, which now serve as a burden to the Ukrainian budget.
With this, it’s quite easy to evaluate the extent of the institution’s "inefficiency". It’s enough to compare official data on exports and imports from Ukraine with the corresponding statistics on Ukraine coming from the state’s trading partners. For example, in 2020, according to Ukraine, the country’s exports to the EU amounted to $18.66 billion. As per the EU data, the figure was $19.57 billion. Similarly, as per Ukrainian statistics, imports amounted to $23.74 billion, while European statistics showed $27.43 billion. Surely, akin discrepancies could arise for various reasons; however, smuggling is one of the key problems accounting for the said differences.
According to the State Border Guard Service of Ukraine, cars, tobacco and alcohol predominate among the smuggled goods. It’s worth noting that the scale of smuggling and the scale of the shadow economy are interrelated. At the same time, the volume of the latter ranges from 30% to 50%. This, in turn, may be a "normal phenomenon" during the economic recession (creating a "safety cushion" and smoothing the "sharp corners" of public policy, but it’s a highly negative occurrence during economic growth. It hinders the prospects for development and creates asymmetries.
At the same time, no systemic solutions to combat the shadow economy and "gray" imports have been proposed. Reformatting, hiring new staff, dismissing chairmen and employees has not led to the desired effect. Moreover, the Economic Security Bureau was invented to deal with smuggling. There is also Bill № 5420 on establishing criminal liability for smuggling and inaccurate declaration of goods. Nevertheless, the bill is rather ambiguous, as it provides for higher fines on goods worth 50-100 thousand UAH. This, in turn, may affect regular citizens of Ukraine.
Unfortunately, all the measures described above target "small fish": they deal with symptoms rather than causes of the problem.
With this, it’s worth highlighting the recent decision of the National Security and Defense Council to impose sanctions on top smugglers, even though its results will not be felt immediately. Moreover, it remains unclear whether high-ranking officials involved in smuggling would be affected by the decision.
As a result, smuggling shall remain one of the main causes of Ukraine’s budget loss for quite a while. The problem is rather multifaceted: on one hand, there are efforts of small businesses to survive and compete; on the other hand, big businesses strive to minimize the costs. Customs officers and officials, in turn, desire to make money in the face of weak institutions and relative impunity.
The solution is simple – minimizing the human factor. Additionally, some of the recommendations are:
Surely, the list is not exclusive. In general, the attempts to solve current problems (such as combatting cross-border small-scale trading and the restrictions imposed on individual entrepreneurs) fall under the Pareto principle, though not in the best way. According to the principle, roughly 80% of consequences come from 20% of the causes. In the case of Ukraine, 80% of work – requiring significant effort and time – may lead to merely 20% of the results. Clearly, 20% of work should be targeting “big fish”. However, there is not enough political will to do that. Large-scale smuggling cannot exist without political protection. While the Security Service and the Ministry of Internal Affairs divide the spheres of influence in regards to customs, Ukrainians shall face another peak of debt payments in the fall. Having customs as a single legal entity – or not – will not solve the major problem.
