Redistribution of the shadow economy

The Ukrainian informal economy is undergoing a market reshuffle. According to Forbes, there are currently 10 banks operating in the financial market whose primary activities are currency conversion and cash withdrawals. At the beginning of the second quarter, the number of such institutions stood at 15. The NBU is thus waging a campaign to combat elements of the informal economy in the banking system. However, the informal component itself will likely either migrate to other banks or to other industries.
Ten converter banks, up from 15 at the end of spring—that's the result of the NBU's "crusade." Some were placed under temporary administration (for example, market participants hint that Yuzhkombank was engaged in similar operations), while others simply abandoned some of their shadow operations in the face of losing their business. How effective is this victory?
Part of the reason for the decline in participation is the state of the economy itself. Due to the military conflict and economic crisis, business activity has declined across all economic sectors: white, gray, and black. Consequently, demand for services from service providers has declined.
"Converter banks were fulfilling orders from the shadow economy. As service providers, they, for example, issued cash, which allowed salaries to be paid in envelopes and avoid paying income tax and the unified social security contribution. But the cost of cashing out and converting hasn't changed since the spring," notes Alexander Zholud, an analyst at the International Center for Advanced Studies. "This means that accessing the service hasn't become more difficult. Therefore, even if a fight is being waged, it's not having a noticeable effect on the shadow economy, affecting conversion costs." If this is the case, a reasonable question arises: what's really going on?
National Bank Governor Stepan Kubiv was the first to report banks' active involvement in money laundering in the spring. At the time, the NBU counted as many as 12 banks engaged in underground currency conversion. The volume of these shadow transactions was estimated at 142 billion hryvnias. Oleksandr Sugonyako, President of the Association of Ukrainian Banks, points out that everyone knows about these transactions and their participants: "The NBU knows. The Cabinet of Ministers knows. The Prime Minister and the President know. Financial Monitoring knows. If our shadow economy accounts for approximately 50% of GDP, then its functioning requires monetary circulation. Given the exchange rate instability, this currency must be the dollar."
Shadow dollars enter the economy through several channels. On the one hand, exporting companies sell some of their products as shadow exports—for foreign currency. "Some revenue from legal exports also ends up in the shadow economy. I'd like to point out that gold and foreign exchange reserves could even be a source of dollarization in the shadow economy," Sugonyako emphasizes.
It's also worth noting that the real demand for dollars from the shadow economy is undermining the stability of the national currency. But no government agency is taking effective measures to stop this process. Many bankers interviewed by Forbes flatly refused to comment on the issue—and even called it undesirable. Even so, everyone knows the extent to which the financial system is integrated into the shadow economy. The situation is almost comical—the political elite and the entire business community know which companies are cashing out and under what conditions.
One reason is the potential redistribution of schemes. Such a shift in flows is natural with every change of power. For example, the system of shadow operations was previously centralized. "The regional authorities were able to centralize all shadow flows," explains Sugonyako. "After March 1, there was an attempt to stop the shadow economy because these schemes served the previous government. But today, officials have come to their senses and remembered that serving the shadow economy is good business."
Moreover, when competition in the "envelope market" is intense, the cost of cashing out increases. This hasn't happened yet. "Previously, there have been numerous situations in Ukraine where some participants in schemes were replaced by others. The flow simply 'switched,'" recalls Alexander Zholud.
Another reason for the crackdown on converter banks is the FATF's heightened interest in Ukraine. Since the country was fighting terrorism, the FATF's direct responsibility was to monitor financial flows. All banks employ financial monitoring officers. In theory, they observe all shady transactions—and even approve the false reports used to conceal these shady transactions.
However, if terrorism exists in the country, the government is obliged to demonstrate its fight against the shadow economy. Which, in fact, is what it's doing. The Security Service of Ukraine (SBU) has already stated that some Russian banks have financed terrorism. "In a dark room, all cats are gray," jokes Yaroslav Lomakin, owner of Honest & Brigh Ltd. "Saying who's a lamb and who's a scoundrel is impossible in today's conditions. But if such participants exist, then who's stopping Finmonitoring from taking action right now? It seems that either the market is being re-divided, or the authorities are trying to create the impression of combating these schemes by pressuring certain entities."

Margarita Ormotsadze, Forbes

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