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'People Are Walking With a Noose Around Their Necks': Inside Ukraine's Huge Shadow Economy

A black market money dealer in Kiev wouldn't give his full name to VICE News, not for fear of being arrested, but because he did not want to be robbed.
Photo by Roman Pilipey/EPA

Leonid is not exactly what you would expect from a black market money dealer.

He is young, well-built, handsome, and well-dressed. The upmarket café he chose to meet in is the kind that serves its meals on slates and offers menus in English as well as Ukrainian.

Leonid orders tea and adds honey before he begins to speak quietly, barely audible across the table. "The black market in Ukraine, it is not so black. It is just how things are here," he said.


"We're used to giving a 'present' to the doctor when we go. Right now the present is 200 hriyvna ($9)," he added. This could also be a week's shopping in some of Kiev's cheaper supermarkets.

Up until four years ago, Leonid worked in various banks before being laid off because of Ukraine's rapidly declining economy. He started off waiting next to currency exchange windows, trying to tempt customers with a better rate than those offered by the banks. Then he moved up to doing deals in his car.

Now he deals with any amount up to around $100,000 — often taking deliveries of currency in gym bags.

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"If it is more than about $100,000 it becomes dangerous and difficult to count, and it is a big bag of money. You have to understand even $300,000 can be as big as this table," he said, gesturing to the table for four where we sat.

"If it's less than $50,000 then consider it done. For really large amounts I try to do the transactions in different places so I am not as visible… Sometimes if it is two days in a row, people who share the office space start asking questions.

"They are nervous because they are doing things that they shouldn't be… I don't want to know what they are doing and they don't want to know about me."

Leonid would not give his full name to VICE News, not for fear of being arrested, but because he did not want to be robbed. He also said he did not want to come to the attentions of the secret service, describing some instances when he had a bad feeling about a transaction being set up.


'Everybody is used to these shady transactions in life'

"There is something about the way they are talking on the phone, if they won't tell you exactly when they will arrive. Sometimes I have just thrown away my phone and walked away from a deal. You trust your instincts. I just don't want to be visible."

Ukraine's economy is in trouble, according to the World Bank, the country's Gross Domestic Product (GDP) is expected to shrink by 12 percent by the end of 2015. In addition to this, Russia is demanding payment of a $3bn debt, leant by the Kremlin when Viktor Yanukovich was still president of Ukraine.

"People are walking with a noose around their necks," said Leonid. "Life is getting more expensive, but the salaries don't increase, and so they have to do something about it."

Ukraine's shadow economy is one of the largest in the world, reaching 47 percent of GDP by the first quarter of 2015. "The loss of economic entities' trust in the improvement of the economic and political situation in the near future forced them to actively use schemes for concealing income, including such as expansion of losses and non-payments," said a government report published in August.

Leonid explained: "Everybody is used to these shady transactions in life. They are trying to crack down on shady things, but it is going to take a long time for them to do it."

According to Igor Vinnychuk, an economics expert at Chernivtsi National University, a lot of Ukraine's shadow economy activities walk the grey area between illegal and legal.


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"In Ukraine, we should clearly highlight several areas of shadow economy, which have varying degrees of legality. For example, there may be the illegal production or sale of legal goods."

Vinnychuk said that the most profitable businesses in the shadow economy were the illegal production of alcohol — which makes up about 40 percent of the country's total alcohol production and is worth about $1.1 billion — illegal manufacturing of oil products, and amber mining.

Illegal oil production makes up about 30 percent of the industry in Ukraine with an estimated value of $550 million and about 99 percent of amber mining is actually being done illegally in Ukraine and is worth about $330m a year.

Vinnychuk added that one of the most common shadow activities is smuggling. "The amount of smuggled cigarettes is estimated at being worth between $360- $450m. Smuggling in Ukraine exists principally because of participation in the process by the people very people that should be combatting it. One of the biggest challenges in Ukraine is a huge level of corruption."

Vinnychuk added that the excessive amount of paperwork and documents needed by business in Ukraine often meant they worked in the shadow sector rather than face mountains of bureaucracy.

"Achieving this level of shadow economy in Ukraine is owed largely to ineffective and ill-conceived policies in the areas of taxation and regulation of economic activity," he said.


'Corruption threatens the very existence of the state'

He added that there is a "neutral or apathetic attitude towards the phenomenon" which was largely formed during Ukraine's time in the former USSR.

With conflict in the east leaving much of the country's mining and industrial areas destroyed or inaccessible to the west of the country, yet more pressure has been put on the ailing economy.

According to the National Bank of Ukraine, the country lost 15 percent of GDP and almost 20 percent of its total economic potential by losing control of territory in the east.

"Prior to the conflict in eastern Ukraine, the share of exports of goods from the old industrial regions of Ukraine was about 45 percent of the national total," Vinnychuk said.

The war has also had an indirect effect on the growth of the shadow economy. Some people returning from the front find that they either cannot pay taxes, or do not want to because of a growing resentment towards what they see as the failings of the government to the Ukrainian people.

Lawyer Mihail Gulak said he had been a battlefield medic on the frontlines in the east before returning to Kiev last year. "Before I left, everything was good. Business was good and I had the money I needed, then I went to fight in the east and everything changed. I got back here and there was no help, no recognition for what I had done."

Related: Two Years After Ukraine's Euromaidan, Protesters Say 'Nothing Has Changed'


Gulak's office is in a single story building, with a long, narrow run of rooms that feels similar to a strip mall. On the back of one chair is his army uniform, washed and ironed since the war. As he speaks, he gesticulates with a hand decked out with a gold ring inlaid with a large red stone.

"This government does not value people who are doing things for this country and this is why I am not willing to pay taxes," he said. "Until the country has a good and honest ruler there won't be any changes."

The government has said it is attempting to tackle corruption and clamp down on shadow economy activities by introducing and anti-corruption offices.

"The anti-corruption bureau cannot do anything about this," Gulak said, referring to the wide-scale corruption in the country. "They took not very good people as investigators. Basically they hired amoral idiots who do not know what they are doing."

Vinnychuk agrees that corruption is the key to Ukraine's growing shadow economy: "Corruption was and remains one of the biggest obstacles on the way to reform of Ukraine's economy."

"Corruption threatens the very existence of the state; it is the main obstacle to improving living standards, economic development, civil society and combating organized crime."

Follow Philippa Stewart on Twitter: @Flip_Stewart