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Cleaning Ukraine’s Augean Stables

A corps of reformers recruited from the business world takes on a Herculean task in Kyiv.

by Sergey Sydorenko 22 May 2014

KYIV | There’s a sign on the door to Denys Brodsky’s office at the headquarters of Ukraine’s civil service. It reads: “If you are not ready to show me the core of the problem and to propose a solution in three minutes, you are not ready to speak with me.”


If that sounds more like a businessman’s mantra than a bureaucrat’s, it should come as no surprise. Brodsky, 42, was appointed to lead the civil service in April – his first government post after 17 years managing human resources in private industry, most recently at Platinum Bank. Last year he was named one of the top 50 human resources managers in Ukraine by business newspaper Investgazeta.


Some of Brodsky’s ways – his bluntness and dislike of red tape, for instance – likely shock his subordinates, used to a creaky, Soviet-style government machine, but it’s too early to say if they will be effective. Brodsky acknowledges that he is just coming to grips with some nuances of how the civil service functions.


Left to right: Igor Bilous, Vitaly Naumenko, Denis Brodsky


“Here we have loads of procedures and regulations, authorizations and credentials. I have to learn all this stuff, how it works, how the process goes,” he told Investgazeta two weeks after his appointment.

Brodsky is one of a handful of people plucked from large companies to help the new government set Ukraine to rights – although in a country where business and politics have long been the same thing and the concept of conflict of interest virtually didn’t exist, it might seem logical to look outside the business world for a crop of reformers.


Since early March the Customs Service has been led by Vitaly Naumenko, who formerly worked in the Ukrainian office of accounting giant KPMG. The new director of the tax office is Igor Bilous, an investment banker late of UBS, Renaissance Capital, and Altius.


At a time when Ukraine desperately needs creative thinkers who can manage a crisis, the government says more such appointments are on the way.


Previous governments tried to institute reforms, but they wrecked on the shoals of the bureaucracy. In 2010, the government launched a civil service shakeup in which hundreds of bureaucrats lost their jobs. But the effort fizzled out in the next stage, which involved restructuring agencies and changing how public employees are chosen and paid.


Also in 2010, a commission was established to champion deregulation and help boost entrepreneurship. Its efforts were repeatedly thwarted by bureaucrats who resisted simplification and streamlining that would diminish their own fiefdoms.


For years, Ukraine has been stuck at the wrong end of Transparency International’s Corruption Perceptions Index; in the most recent edition it tied for 144th among 177 countries, alongside the likes of Cameroon, the Central African Republic, Nigeria, Iran, and Papua New Guinea. No other European country is in the neighborhood, with even Russia sitting 17 positions higher.


European practices have always been foreign to the Ukrainian administration. Prime Minister Arseniy Yatsenyuk is the first premier in the country’s 22 years of independence to speak English. During President Viktor Yanukovych’s reign from 2010 to 2014, no cabinet members except foreign ministers had worked or studied in the West.


The push to bring in multinational managers untainted by corruption came from Yatsenyuk and Pavlo Sheremeta, his 42-year-old economic development minister, who previously worked in Malaysia and Hungary and studied in the United States and the UK. Four of Yatsenyuk’s 21 cabinet members have worked or studied elsewhere in Europe. At least nine, including the prime minister, are fluent in English.


The recruiting proved to be a challenge, as most of the top managers the new government approached turned job offers. According to sources privy to the negotiations, corporate veterans were put off by comparatively low public-sector salaries, concerns for their and their families’ safety if they were to go after the engines of corruption, and possible damage to their reputations if they did not succeed.


Particularly difficult to fill was the spot of tax office director. No one from the Big Four accounting firms – KPMG, PriceWaterhouseCoopers, Deloitte, and Ernst & Young – would touch the job. Bilous, the eventual choice, is a second-tier manager without experience in taxes.


Bilous and Naumenko, the Customs Service head, announced there would be shakeups in their agencies. Bilous specifically put out a public call for people who have proven themselves “outside the tax system.” Naumenko said he has fired 20 of the 27 regional customs chiefs. Next will come the deputy heads, then the fate of every customs station chief will be decided, he said.


In addition to trimming deadwood, the tax and customs offices will need to throw a spotlight on the country’s shadow economy - which a 2012 estimate valued at one-third of gross domestic product – and help fatten Ukraine’s coffers. In 2013 the country had a budget deficit worth 4.4 percent of GDP, and this year it could be higher.


Two months in, Bilous and Naumenko have little to show for their work, although most experts and market analysts interviewed for this story support the idea of bringing figures from private industry into the government.


"Statistics don’t bear out a real change in tax and Customs Service work,” said Dmytro Boyarchuk, executive director of the CASE Ukraine think tank. “The government says there’s widespread tax evasion, that everyone is in the shadows. Well, why don't you block the most obvious schemes of tax and customs abuse? You'd get instant budget income growth.”


Boyarchuk said there is a precedent: in 2008 the government launched the "Stop Contraband!" program and saw customs revenue double.


Other observers offer mixed reviews, saying it will take at least another month for the fruits of Bilous’ and Naumenko’s work to register in the statistics but bemoaning a lack of concrete action on ingrained dodgy practices.


Businesses have long complained, for example, about arbitrary and opaque dealings at customs stations. They say inspectors often use inflated, government-set guide prices to assess higher tariffs on shipments than are warranted by their actual value and that there is no clear rationale for choosing which shipments get a thorough going-over and which are waved through.


In taxation, businesses complain about frequent audits and irregular and opaque VAT refunds, among other things.


“With more than two months having passed since the country’s tax and customs chiefs reshuffle, tangible progress and notable changes are yet to be seen. Businesses are waiting for rhetoric to transform into actions,” Anna Derevyanko, executive director of the European Business Association, wrote in an email. The Kyiv-based trade group represents more than 800 companies.


“However, I must admit with today’s situation in the country being unstable, acute, and complicated, the process of structural reforms in the tax and customs realms has become more difficult than ever. Changes won’t happen instantly,” Derevyanko said.


It’s likely that some of the new reformers underestimated how difficult it would be to clean house in Ukraine. For instance, most department heads in the Customs Service were born or have worked in one region of Ukraine – Donetsk Oblast.


That's not because the towns of that region are so rich in talented customs officers. Rather, it’s because Yanukovych was born and lived most of his life in Donetsk. In his four years as president he and his inner circle built a unique state management system, based not only on the rigid hierarchy typical of authoritarian governments but also on regional privilege.


Almost all top positions, from ministers to local government heads, were filled by people from the Donetsk region who have not yet been replaced. Many of them owe their loyalties to the deposed president.


Adding to the challenge are low government salaries and a budget deficit that leaves little room for raises.


“In two months we have made 409 rotations – there have been dismissals, demotions, transfers to other positions,” Naumenko said. He would not say when he expects the process to be finished.


Nor does the customs chief argue with the criticism from business leaders.


“I completely agree, and the critics are fair: we still don't have a clear, visible improvement in the way customs functions. The reason is that we have not made enough changes in our mid-level staff and among grassroots customs inspectors. The whole system is rotten right through,” he said.


Sifting through the service’s roughly 15,000 employees will take time. In searching for new hires, “we’re pinning our hopes on young people,” Naumenko said. “We're looking for new and ambitious employees.” He said the agency will set up a mentoring program to get those people up to speed as quickly as possible.


Derevyanko, of the business association, noted that Georgia, aiming to lure the best people into government after the Rose Revolution, used international aid and domestic contributions (notably from billionaire Bidzina Ivanishvili, who would later become prime minister) to boost salaries for civil servants. So far, no such arrangement is in the offing for Ukraine.


But Brodsky, the civil service head, said money for raises could be found by instituting some key reforms, including restructuring some agencies, selling some government-owned assets, and outsourcing some government functions.


Beyond reshaping the government, Brodsky said, the new managers will have to deal with another challenge, just as daunting.


“Look at what ordinary people think” about civil servants, he said. “They figure, ‘We taxpayers know full well that the state doesn’t pay you enough to make a living, so it’s normal that you would steal and take bribes sometimes.’ That's an attitude we need to change.”

Sergey Sydorenko is a freelance journalist in Kyiv.

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