Everybody is concerned over the global crisis, and nobody seems to know exactly what to do, since it is the severest economic disruption of the last few decades. The current financial crisis is likely to bring about a decline in production, recession and stagnation. Ukrainian customs is a sensor of the national economy and trade, one of the budget revenue sources. That is why we invited Valery Khoroshkovsky, Chief of the State Customs Service of Ukraine, ex-minister of economy and one of the richest people in the country, to this interview, hoping to hear the diagnosis and get a prescription for curing the disease…

— Mr. Khoroshkovsky, has the customs service noticed a decline in imports and what is your forecast for the further dynamics of import flows?

— Of course, we have noticed it. The first symptom is the decreased volume of imports. We took the hardest blow in early October. Now the situation has leveled out a little, first and foremost, due to the National Bank’s lifting the ban on prepayment for imported goods. When down payment was forbidden, all import activities practically came to a standstill. The situation was aggravated by turmoil around Prominvestbank: a lot of importers used its services. Thus, customs payments were delayed, and people just could not settle their accounts. In the first two weeks of October, the volume of import in tons fell by 50% compared to the respective period in 2007! At the end of the month, the decrease will be about 15%-20%. So things are getting a bit better.

Another worrying symptom is the absence of queues on the border. What once looked like a problem now feels like “air hunger”: when you see queues you expect a flow of goods. Yet now we witness a dramatic reduction in imports and exports. Moreover, we hoped for a “New Year derby,” for a usual seasonal growth in imports but the trend is the reverse at the moment.

— Does that mean that the volume of import-export transactions is dwindling even though the setback in production has not achieved its peak yet?

— Yes, it has started to decrease. In this country, however, there is another factor at play: the financial crisis has overlapped with the crisis in the foreign exchange rate. As a result, people panicked and rushed to withdraw money from bank deposits. They started buying durable goods, thus raising sales. It slowed down and deferred the effect of the crisis but it will catch up with us anyway.

— What volume of imports is critical for an economy?

— Up to 25%-30%.

— What is your forecast for the next year, may I ask? How much will the imports decrease?

— I have no answer because nothing can be forecasted today. People do not conclude contracts. The current situation is totally different from what it was, say, two weeks ago, and I do not know what it might look like two weeks from now. Why? There are too many subjective drivers. First of all, the government’s response is unclear. Saying “the government” I mean all branches of power. I understand what should be done but what will be done is a question.

— Do forex fluctuations and NBU policy in general affect budget revenues?

— I am not in the position to give advice but, in my opinion, the first emergency response should be to centralize the currency position. I realize it is a non-market measure but it is crucial under the circumstances. Banks should not be allowed to play with the exchange rate because such games enabled a few select commercial banks (known to the market) to profiteer from currency speculations.

— Why haven’t those banks been named and shamed?

— I am not naming them, either. It is about corporate ethics; everyone understands what is going on but naming the involved colleagues is pointless. Knowledge of the fact is not enough – proof is needed.

— To what extent do the customs and tax services fulfill their plans for collecting budget revenues?

— As of October 29, we have fulfilled 83% of our monthly plan; the tax authorities have fulfilled39% of theirs. These are not final figures, though, because collection usually increases in the very last days of every month.

— The tax collection plan is about UAH 6 billion and yours is about UAH 7.8 billion, right?

— That is right. In fact, our plan was increased by UAH 1.7 billion in the middle of the month. Unfortunately, it isn’t for the first time that the government has done this. However we are bound in honour to fulfill the plan this month, despite everything.

— At what expense?

— The shadow economy still accounts for a large part of generated incomes. If the government paid due attention to tax collection, I am sure the current plans could be fulfilled and over-fulfilled.

— What about the implementation of the “Stop Contraband” Programme?

— You know, there are different types of contraband. The situation with the so-called “black contraband” has changed remarkably. Of course, I cannot give you a 100% guarantee that an inspector somewhere would not let some goods go non-cleared through customs for a bribe, but such cases are rare. Smuggling practice has shifted into the “grey zone”: understating customs value, understating volumes of imports, changing codes of imported goods, etc. Customs services all over the world struggle to address this problem. Let us look back at what we had at the beginning (our previous interview was in March, as far as I can remember) and analyze what we have now. Collections have doubled. Yet what levers have we got since then? We asked for amended legislation – nothing has happened; we asked for special equipment – we have got none; we asked for salary increase – our requests have been ignored.

— I do not think the latter is realistic under the circumstances…

— I am not speaking about the next year. It should have been done this year, before the crisis hit the country. Thanks to active cooperation with international technical assistance programmes, we got 9 scanners and implemented a “Check-point Filter” project whereby special equipment was installed to register every stage of processing truck cargoes. I understand that no funds have been allocated for it from the 2008 state budget. Therefore our main tools in combating contraband were tough financial plans, customs value control, prevention of “black contraband” and firing of non-performing personnel. As you see, we have managed to deliver good results.

— Do you meet resistance?

— Yes. It saddens me to say that we meet resistance from the law enforcement bodies. Their involvement in covering up illegitimate export-import transactions is a big problem. And it is difficult to try to mop up the ocean with a handkerchief. Even when we do our work with utmost diligence and quality, we cannot carry it through. You will remember ZN reporting about a high-profile case when the latest collections of the world’s most expensive brands – Dolce&Gabbana, Prado and others – were imported under the guise of humanitarian aid. The case was called “Purses for Pilgrims.” Eventually, a court in Kyiv repealed the decision to institute criminal proceedings against the smugglers. Imagine all the hard work; our people declined lavish promises of rewards for “an amicable settlement,” spent two months documenting, counting, describing and valuating every item. It is a huge amount of work.

— The shipment was large…

— It was worth UAH 82 million. Now a district court has ruled to cancel the institution of criminal proceedings.

— On what grounds?

— On no grounds at all. They didn’t even call the other party. The judge made a ruling quietly; no one was duly notified of it. What should I say to the people who spent two months investigating the case, who believed they could combat corruption? How will I motivate them to do it again?

— Did you file an appeal?

— Not us, the prosecutor’s office.

— Mr. Khoroshkovsky, where does the money collected at customs check-points concentrate? Where is the top of the pyramid?

— As a matter of fact, the money does not concentrate anywhere.

— Do you mean to say the election funds are not financed from the “grey” contraband?

— I am positive they are not. It is much more primitive. If money is stolen at collection points, it is “pocketed” by an inspector or a shift supervisor.

— The 2009 draft budget provided for raising customs officers’ salaries. Now you can hardly count on this…

— You’ve raised a very important issue. The first reaction to crisis would be cutting costs. Yet the question is how to cut the costs of public administration. I do not think it should be a mechanical downsizing of the personnel. Instead it should envision the reduction of functions resulting in a release of redundant public servants. Any mechanic downsizing can lead to absurdity. Since 2000, the cadre of customs officers has remained unchanged while the number of check-points has increased, and we expect more than ten new ones to open before Euro-2012. Who can we dismiss? All potentially redundant administrative positions have been cut. Administrative personnel of regional customs offices have been moved to inspection divisions. For the same reason we are centralizing the accounting function. Yet optimization has its limits.

— You said you would fulfill the plan in October. What about November, December?

— Unless the plan is adjusted upwards, it will be fulfilled. In principle, we have already executed the annual budget.

— But what about monthly ones, for November and December?

— UAH 5.5-6 billion is an absolutely realistic amount.

— Three weeks ago, the government submitted a revised 2009 draft budget estimating the budget deficit at UAH 14 billion. As a former minister of economy, do you think it is an acceptable level of budget deficit?

— Not in the current economic situation, God forbid.

— What should the authorities do?

— They should make two understandable and natural steps. The first is to balance the budget and cut public expenses. Second is to pursue consistent exchange rate policy. The exchange rate of national currency should be stable.

— Who can be sacrificed in the process? You said: “Customs officers’ salaries should be raised, as low salaries instigate corruption.”

— In times of crisis, everyone should put their house in order before giving advice to others. We are prepared to do without beefing up personnel and raising salaries. We can do without expensive equipment and capital investment. We are prepared to do our part of the job, but we should understand for the sake of what we are doing it and for what time period.

— It might sound cynical but even if you stop paying salaries to customs officers, they will survive.

— That is what you think: customs officers are not all the same.

— You are right but any industrial worker…

— That is why I am ready to cut costs – to let the most vulnerable economy sectors survive.

— In the shadow economy?

— When every kiosk owner is on the waiting list for an airplane, it is an absurd situation. A list of Ukrainians waiting for an airplane was drawn for the next seven years.

— Waiting lists for an airplane? I do not think I understand, maybe because I do not own a kiosk…

— The waiting list for purchasing a private airplane was so long that one had to wait for seven years. People lived beyond their means, it is obvious. Now they are sobering up. Money has regained value, and it is a good sign. Any crisis gives us a chance for rejuvenation. It is an opportunity.

— How can we make sure it won’t take us two leaps to get across the abyss? How can we combine reforms with the “safety cushion” called operative response?

— We won’t go beyond theoretical discussion here: one understands how to do it; the problem is nothing is being done. We are lost in debate. I’ll give you an example from the customs service. Do you remember the hauliers’ strike some time ago, after which a decision was made to cut the number of authorities checking cargoes at the border, i.e. veterinary, sanitary, epidemiological and other services? We had a detailed list of goods subject to such checks – more than 1,500 items. I understand cutting as reducing the number, say, to 30, 50 or 100 items. Do you know what happened? After the decision was made, we received proposals from concerned ministries and agencies, and the number of items… increased by half.

It is a vivid illustration of an unbalanced system. Theoretical contemplations on what should be done are useless.

— How come at the most critical moment the state has found itself in dire need of intellectual and institutional capacity?

— I think the root of all evil is rampant, systemic corruption that has permeated all structures at all levels.

— In an on-line forum I came across a question: “When will the oligarchs finally return to the nation what they have stolen from it?” I have a supplementary question: when will all Ukrainians return to the country what they have stolen from it? I mean sewer manhole covers, elevators, cables, plates from canteens, unpaid taxes…

— You are right: it is a common problem. We are all to blame. One cannot say we have corruption at the top while the society at large is free from it.

— The difference is in the scale. So it is a matter of mentality, then: can’t we live without stealing?

— We can! Yet people should be afraid to steal, and they should have self-accepted moral principles against stealing. I meet and talk with a lot of people, and it pleases me to see that all of them, even those involved in corruption practices, realize that we have reached a critical line.

— Does that mean we will be the first to go into depression?

— I would not use such terms as “depression” because I believe Ukraine has more chances than any other country to survive this crisis with the least losses. Today business operates in spite of, rather than thanks to, the government’s policy and practices. Business is a living system, resilient and ingenuous. Most businesses will survive. It means that lots of people will preserve their jobs and the state will receive tax revenues, albeit diminished. Whether it will use them wisely is another matter. Yet given that we loosely integrated into global economic processes, the only imminent danger we should work to avert is recession in production, in the real economy sector. This is what we should discuss in a level-headed and constructive manner, and in specific terms. Believe me, every owner of a manufacturing enterprise knows what they can do in their company. The government should design its own plan, too.

— How many people could lose their jobs, do you think? Estimates range from 1.5 to 3 million.

— By the end of the year we could have 2 million unemployed. One should also bear in mind latent unemployment when people work two days a week and get 15% of their salaries or wages. Another challenge is the return of labour migrants.

— When do you think they will start coming back?

— They have already started. And that could cause a real problem because social expenses to cover unemployment benefits will make up a large part of budget expenditures.

— And yet we have come to you for prescriptions and ideas. Your first recommendation is a deficit-free budget.

— I would even strive for a budget surplus.

— What is next?

— Fundamental things should be done: a deficit-free or even surplus budget; radical reduction in public expenses through giving up some functions, first of all controlling ones that often duplicate one another. Numerous public offices are crowded with lots of employees who should be asked to do something useful for society. As I said before, an exchange rate policy is essential. These are two basic pillars and pivots, so to say. The next step would be addressing the challenges of the real economy sector. Those are going to be plenty. If the real sector withstands this crisis – we will all stand our ground. If it falls down – we will all lose.

I have got all weekly, monthly and annual statistics. We should analyze which of the imported goods cannot be produced locally, and focus on import-replacing technologies, infrastructure development, primarily on road construction, which engages numerous economy sectors and employs a lot of people.

— How can this be combined with the necessity to reduce the expenses of the budget?

— We are now proceeding to another issue. At the expense of what will it be possible to develop those sectors of economy? It will be possible to do that by creating a favorable investment climate in our country. The population of our country is about 50 million. Do you actually understand what this means? The consumer market is immense. GDP is growing by 7% per year. This is all the investor needs to develop the production industry. As a result, there will be new jobs and an increase in tax revenues, and foreign currency will remain in the domestic market. This is just another solution to the problem of balance of payments. However, this is a separate issue which begs to be developed further.

— Therefore, the parliament and the government should also pass an additional set of laws for the investors entitled “Investment climate creating.”

— In my opinion, this is not the way it should be treated. I remember my discussions with the Council of Investors when I occupied the post of the minister. When you tell them “We have passed a law and there is a resolution of the Cabinet of Ministers – the investment climate is favorable now,” they only smile and say: “You know we are not interested in this. We will ask the ordinary businessmen about their wellbeing, about bribery and other corrupt practices, about how long it takes to register a business and how often the tax inspection comes – this is what is more important than all your laws put together.”

— During the regional meeting of the World Economic Forum held several years ago in Kyiv, heads of three European leading communication companies came to Ukraine. One of them was eager to build here a European call-center. The other two planned to construct industrial facilities. All of them left Ukraine with nothing. As a result, a call-center has been opened in Hungary and a new industrial facility is almost ready to operate in Russia and so on… Therefore, we are not good at accepting investments.

We are. What are we doing today? We’re striving to establish a regional study center for customs inspectors. It will be one of the seven centers that currently exist in the world. We will account for practically half of the Eastern Europe. The center will be established at our Academy. We also make an emphasis on express transportation services. The quality of these services determines freedom of business conduct in the entire country. We have already developed a model of the market participants’ joint actions and created a separate specialized customs office. I sincerely believe that we will attain positive results.

— During the discussion of the anti crisis action plan in the Verkhovna Rada, there was a proposal to add anti corruption measures to the set of anti-crisis laws to protect the funds earmarked to us from misuse, which is theoretically possible. For instance, there was an idea to abrogate the Economic Code of Ukraine.

— This idea has been around for a while. The differences between the Civil Code of Ukraine and the Economic Code of Ukraine enable conflicting decisions to be made and give the judges additional loopholes. My opinion is that this is one of the measures, but not the most extraordinary measure, which might help.

— Today is the 90^th anniversary of the Komsomol [Young Communist League], which no longer exists. Incidentally, no new ideological or propagandistic organizations have been instituted to replace it in our country. Our country doesn’t have any ideological base today. We talk about the problems of the new generation, but, at the same time, we raise it according to some “wild growing” principals.

— I absolutely agree with you. However, this requires one basic condition – stability. First, it is necessary to put an end to the constant contradictions and conflicts in our country. And then, we can dilate upon ideology, youth organizations, principles and tasks. However, under the current situation when there is no system, it doesn’t seem possible.

— One of the key steps determined by the anti-crisis action plan is limiting imports. You have got a serious instrument to do this – a so called customs value. Have you managed to unify the methods used by the state customs service in this regard?

— By 80%.

— Then you will be able to raise customs value in order to limit imports at the level necessary for the state.

— The customs service does not regulate customs value. It is prohibited by the Customs Code of Ukraine and by international agreements. The tariffs are established by the state. We are only carrying out a fiscal function in this regard. Speaking of customs value, it is actually claimed by the entity which submits its customs declaration.

— Nevertheless, you are able to control it more or less strictly, aren’t you?

— No, we are only able to employ a so called “6^th method” - method of comparison. First of all, I would like to specify that I can’t set customs value higher than it actually is. It would be nonsense. Second, it is necessary to limit imports not by tariff regulation, but rather by the development of import substituting industries and creation of a normal investment climate. It is usually more comfortable for the investor to construct a production facility in the country rather than supply its products to this very country. Why don’t they do this in Ukraine? Because it is cheaper for the investor to produce products even by expensive labor, for example in Switzerland, than have business with our numerous officials and work under unpredictable circumstances.

— However, at the beginning of our conversation, you said “we had been raising customs value and then at some point, I understood that it was necessary to stop this process.”

— Because customs value was very low. The market should be adaptive. Dramatic changes are unacceptable since they might lead to the appearance of illegal schemes and decrease in sales. Changes should be conducted carefully. We cooperate with associations of importers. We receive information on customs value from them and define the steps necessary to attain that level under the condition that all participants of the market follow suit.

— Your service is keeping record of exports statistics. Is the situation today actually so critical?

— The situation is very critical. The situation with exports is even more difficult than with imports.

— Except the metallurgical industry, what sectors are experiencing difficulties?

— All sectors are. The cellulose industry is. The glass and ceramic industries. The situation is really bad.

— The decline in exports to which region –western countries or Russia – is the most sufficient?

— The volume of export operations between Ukraine and western countries is decreasing more sufficiently than between Ukraine and Russia.

— What percent of total budget revenues is your service accountable for?

— Previously, the State Customs Service accounted for 40%. Today it accounts for around 60%.

— Will you be able to execute instructions for the next year?

— 117 billion? Yes, even in a situation similar to this month’s.

— And if the situation worsens?

— We have already discussed this. It is now not possible to plan or forecast anything. The loan allotted by the International Monetary Fund will be the most sufficient precondition for stabilization. First of all, it will be psychological stimulus. Second, a possibility to support the exchange rate. Third, a possibility to stabilize the banking system, including transferring it into state ownership as an extreme necessity.

— Do you like this idea?

— I perceive it absolutely calmly. The only thing is that I don’t believe that the state can be an effective manager. However, the example of Ukreksimbank shows that everything is not that bad. The bank is developing quite steadily. It is a normal commercial bank. By the way, I would amend the principle of its supervisory board’s formation since it consists of too many politicians whereas real professionals are needed at those posts. Their authority should comply with their responsibilities. At least this is the principle I always follow.