President Poroshenko's allies.

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Ukraine's Millionaire Officials Come Out of Hiding

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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If you believe his mandatory income and property declaration, Serhiy Melnichuk, a Ukrainian legislator with a military past, should be one of the wealthiest people in the world. The document says he holds 1 trillion hryvnias ($39 billion) in cash. That's almost twice Ukraine's planned revenue for this year and enough to buy most of the country; the amount in dollars would fill a fleet of 390 midsize SUVs.

It's not an error but an intentional misstatement, Melnichuk said Monday. The legislator explained that he declared the nonexistent trillion to draw attention to a depressing outcome of a campaign intended to demonstrate Ukraine's commitment to eradicating corruption. Returns filed before the Sunday deadline show that many Ukrainian officials and legislators have taken the opportunity to legalize many years of unofficial income and create an official justification for their lavish lifestyles.

The European Union, which the Ukrainian wants to join, did its best to impress on officials in Kiev that it wanted them to declare their incomes and property in a publicly accessible electronic system. It was a condition of European financial assistance and one of the terms of the agreement allowing coveted visa-free travel to the EU. The Ukrainian parliament at first passed the necessary bill in a watered-down version, then had to vote again on a text approved by the EU. Finally, by early September, the system was ready and officials had 60 days to file their declarations. The resulting documents shocked Ukrainians, whose per capita gross domestic product, with purchasing power parity, is just $7,449 -- one-seventh of the U.S. level. The social networks were flooded with jokes about how the flow of aid from the International Monetary Fund could now be reversed.

The investment banker Andriy Gerus calculated that, excluding Melnichuk's trillion, members of parliament were in possession of 12.3 billion hryvnias, 7.4 percent of it in cash. That, he wrote on Facebook, is 31 percent of neighboring Moldova's budget. Prime Minister Volodymyr Groysman, who has been a government official for the last decade, declared 2.4 million hryvnias, $870,000 and 460,000 euros in cash; his wife declared another $372,000 and 1.6 million hryvnias.

If they have been truthful, it means Ukraine's second-highest official doesn't trust the country's banking system enough to protect his savings. That's understandable, though: The declaration of the central bank governor, Valeriya Gontareva, shows that she keeps most of her savings -- $1.8 million -- in U.S. dollars, though she does entrust it to a state-owned bank. That should be a signal to anyone holding Ukrainian currency to dump it.

The enormous amount of cash on the declarations should be an indictment of Gontareva's attempts to clean up the Ukrainian banking system. More likely it is an indication of the efforts to provide an advance explanation for any lavish future expenditures. The declarations don't force the officials to explain the money's provenance, though the country's graft fighters such as the National Anti-Corruption Bureau have the right to investigate. Strictly speaking, any of the legislators and bureaucrats could have been investigated regardless of the declaration, too; by listing their expensive real estate, paintings, cars, companies and hard-to-trace cash, they gain immunity from voters' demands that they explain where a new Mercedes or summer house comes from. 

"The declaration campaign answered society's question, 'How much,'" Mustafa Nayyem, a corruption-fighting legislator, wrote on Facebook. "Now, a public campaign must begin that will answer the question, 'Where does it come from?' Bureaucrats and politicians who worked for years in the public sector must explain the provenance of the declared property and cash. Otherwise it's just the legalization of what's been stolen."

Nayyem himself, however, recently showed how the declarations would be used. The legislator declared $17,000 in savings. He announced on Facebook that he'd bought a used Honda for $14,000. "The money is mine, from the amount of savings previously published in my declaration," he wrote. 

I doubt Nayyem, whom I knew as a fellow journalist in Kiev, could have explained the provenance of the funds without admitting he paid little or no taxes on his income. Under President Viktor Yanukovych, deposed in 2014, tax avoidance was rampant, and the media outlets for which we worked paid salaries in cash. But the corruption-busting agencies are unlikely to ask Nayyem any unpleasant questions: His savings are too small and he makes common cause with the investigators. The agencies don't have the staff to go after everyone at once, anyway.

There's another reason that Groysman and others probably won't be asked: They are too powerful and too close to President Petro Poroshenko. If anyone is investigated, it will only happen after they fall out of favor. At least, previous Ukrainian practice shows that officials and politicians only get into trouble once they lose the protection of the nation's high and mighty.

There is something to be said for a de-facto amnesty that makes legal whatever money bureaucrats and parliament members have made so far, regardless of how they did it. The huge cash element in the declarations, however, makes it possible for them to "lend" one another money for years, obscuring the true sources of funds. I doubt corruption can be effectively prevented by a declaration process: Cutting back the government's power to interfere with the economy would be far more effective, and that has been slow to happen in Ukraine.

As for Melnichuk, he has a week to amend his declaration. The National Agency for Corruption Prevention has warned him that "current legislation doesn't allow such jokes" and he might be fined. Officials who are not joking about their wealth have much less to worry about.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net