Ukraine-UK Profit Shifting: How Labour can Beat the Oligarchs

By Ukranian activists from NGO Social Movement, Platform Start, Political party Respublika (Republic)

The grand buildings of Trafalgar square might seem worlds away from somewhat depressing sights of industrial heartland of Ukraine in the south east of the country, but a ground breaking research project organised by Ukrainian left wing NGOs added new light to the connection between the two. The earlier evidence from Panama papers showed that Ukrainian oligarchs shift prime London properties between themselves, but the new study demonstrated that the wealth going into the properties is based on tax avoidance.   This has been an issue which Labour’s Shadow Chancellor John McDonnell has sought to address, it also of joint interest to the labour movement in both the UK and Ukraine.

In May 2017 a series of industrial actions shook the city of Kryvy Rih, a centre of iron ore and steel production. It started with 440 miners in Suha Balka mine staying underground after the shift, then other mines followed suit. The workers were appalled by the contrast between their low salaries (around £300 a month on average) and enormous wealth of the oligarchs who own the mines.

However, when the trade unions approached the owners with demands to increase wages and improve health and safety conditions, the response was there was “no money”. The workers knew that most of the production was for export and that world prices for iron ore were relatively high. Faced with the refusal of the mines’ administration they turned to us, left wing NGOs for analytical help, to get solid evidence that there was money for pay rises.

We in turn sought support from the European left and tax justice activists. We managed to put together an international team of experts from UK universities and the European parliament, acquired necessary market and customs data. We also aimed to get as reliable results as possible, so our analysis was “best practice” in a sense of calculating shifted profits for every individual export transaction.

The results of the study proved that the miners were right – there was more than enough money to increase wages. We found that on average export prices at the Ukrainian border were lower than market prices by 20%, which allowed iron ore exporters to shift annually around £500 million of profits out of Ukraine. Common locations of intermediaries acting as buyers were Switzerland and Cyprus.

This amount of profit is several times higher than the total labour cost of all the iron ore mines in Ukraine, so had the Ukrainian government had enough resolve to retain the profits in Ukraine, the wages could easily be increased and the state budget would not lose around £100 million a year.

So why do these tax avoidance practices continue, shifting profits from the poorest country in Europe to some of the richest countries in the world such as Switzerland, to the pockets of some of the richest individuals in Europe? The issues is that the owners of the assets have very cozy relationships with the government, sit in the parliament, work as advisors to the president. A significant political shift to the left is required in Ukraine in order to solve these issues of conflict of interest and oligarchic capture of the state.

Given the international nature of the issues we are facing, the labour movement in Ukraine and the UK should coordinate their efforts in this fight for social justice.  Already there has been some success on individual disputes where Labour has assisted the Confederation of Free Trade Unions of Ukraine in struggles with oligarchs run companies in Ukraine. John McDonnell, Clive Lewis, John Cryer and Lloyd Russell-Moyle and Jeremy Corbyn have all stood in solidarity in with union campaigns in Ukraine.

A starting point for cooperation in addressing the issue of profit shifting and tax evasion is to build upon the policies proposed by Shadow Chancellor John McDonnell to introduce an “Oligarch Levy” to hit oligarch linked corrupt finance networks.  

Labour’s six-point plan to take on the oligarchs:

  • “Oligarch Levy” to tax secret offshore purchases of UK residential property
  • “Magnitsky Clause” to apply sanctions against human rights abusers
  • Tighten “Politically Exposed Person” regime
  • Extend the beneficial ownership register for Crown Dependencies and Overseas Territories and end anonymous trusts
  • Implement Unexplained Wealth Orders to confiscate illegally-obtained wealth
  • Resource Companies House to properly investigate dubious company registrations.

(https://labour.org.uk/press/mcdonnell-demands-hammond-introduce-almost-1bn-oligarch-levy-hit-russian-tax-dodgers/).

The 3rd measure in McDonnell’s proposals is tightening the PEPs regime (politically exposed persons and their close associates). This measure would certainly help with preventing profit shifting and tax avoidance in Ukraine, as illustrated by the case of a prime property in London linked to one of the companies we investigated.

It was reported in Panama papers that a London court dispute between Ukrainian oligarchs over an iron ore mine in Ukraine resulted in an out of court settlement. The agreement included shifting ownership from one oligarch to another of a property in Trafalgar square, worth hundreds of millions of pounds in the analysis in our profit shifting study.

And two of the involved oligarchs are PEPs. Viktor Pinchuk has been an MP, is related to the ex-president of Ukraine Leonid Kuchma, and has donated heavily to political foundations. Igor Kolomoyskiy was governor of one of the most important regions in Ukraine in 2014-2015 and has a number of “representatives” in the parliament (see for example a report by BBC Ukraine 

Cases such as the Trafalgar square property and the iron ore mine in Ukraine, from which profits are shifted, can also be prevented by the 1st and 4th measures proposed in the “Oligarch Levy”: the tax on secret offshore purchases of UK property, and to extend the beneficial ownership register to Crown Dependencies. The same leak from Panama papers also showed that the Trafalgar settlement would be secured by bank accounts set up in the Isle of Man and backed by a number of Cyprus companies, the former being a Crown Dependency and the latter an “offshore” (or a low taxation jurisdiction).

Transparency International have found £4.4bn of suspicious wealth owned in the UK, of which around 20% is held by Russians and 12% by Ukrainians. This is only a small portion of the wealth that can be redistributed to aid in projects such as rebuilding public services in the UK, tackling the oligarchs however will require a coordinated effort both in Ukraine and the UK. This will greatly assist working people of both countries to reverse the years of austerity.