By increasing fiscal pressure on business and not improving the overall business climate in Ukraine, the government is digging itself a financial hole, says a KW article.

Ukrainian authorities are hurriedly building a “dam” to shut off the outflow of hard currency from the country. The withdrawal of foreign capital prior to the parliamentary elections estimated at around US $4-5 bn, business schemes organized as channels for the withdrawal of hard currency from the county and the panic of citizens buying up greenbacks on the eve of devaluation left a serious hole in the government’s hard currency earnings.

Ukraine’s balance of payments deficit amounted to US $1.102 bn in September 2012, while there was still a US $615 mn surplus in August. In October the NBU reserves this year dropped by a record high US $2.45 bn having fallen to a 3-year minimum of US $26.8 bn. The last time such a low level of reserves was registered was in December 2009 at US $26.5 bn.

“The NBU basically was granted unlimited power over the regulation of the terms of currency return and its mandatory sale. The six-month limitation is in no way a restraining factor. After the six-month period ends, say in two days, another six-month term can be introduced. In addition, if necessary, the NBU can set any size of mandatory sale of currency, including the demand of 100% sale of earnings,” says Ihor Reutov, a lawyer at Hramatskiy & Partners law firm.

However, “businesses with sufficient turnover to support affiliated companies will direct to the exporting country only a part of the earnings that it deems necessary. The lion’s share of the profits will end up on the accounts of foreign companies and the profitability of Ukrainian export will be maintained at the minimum possible level. In such a scheme, a foreign company will essentially play the role of a settlement center, a certain intermediary between an exporter and a real buyer,” says managing partner of the PRIME law firm Tetiana Kuzmych.

The article looks into other schemes that that resident companies devise to outmaneuver the government’s fiscal efforts, but overall, according to expert assessments, Ukraine could fall short of US $20-25 bn due to such financial export-import operations this year.