How Ukrainian farmers are using the cover of war to escape taxes

“Black grain” infuriates exporters playing by the rules
On the lookout for “ordnance”photograph: getty images

Since russia began its invasion in 2022, Ukraine’s economy has shrunk by a quarter. But the ravages of war are not the only reason for the government’s reduced tax take. Businesses are also making use of the chaos to dodge paying their fair share. This is particularly true in agriculture, which before the war was responsible for 40% or so of Ukraine’s exports by income. The sector has been transformed by a scramble to find export routes safe from Russian attack. As Taras Kachka, Ukraine’s deputy minister for agriculture, notes, this disturbance has provided plenty of opportunity for farmers to “optimise taxes”.
Around 6.5m Ukrainians—or 15% of the country’s pre-war population—have escaped the country, shrinking the domestic food market. At the same time, Russia is targeting transport infrastructure, grain silos and other agricultural equipment, which has driven up costs. Many workers have been recruited by the armed forces, and are at the front. “If you can drive a tractor, you can drive a tank,” notes Mr Kachka. Farmers therefore not only have new opportunities to evade taxes, they are also increasingly desperate. The result is that two of every five tonnes of grain harvests now avoid contributing to state coffers, according to Mr Kachka’s estimates.

Some of the “black grain” wrongdoing happens on a small scale. Perhaps a tenth of dubious trades are conducted via barter and cash payments, for instance, which make it straightforward to hide transactions from the taxman. Another tactic takes advantage of the landmines and unexploded ordnance that are now scattered across parts of the Ukrainian countryside. Since land contaminated by explosives cannot be worked, farmers with safe fields have discovered they can stop reporting harvests without raising suspicions. Dmytro Kokhan of the Ukrainian Agri Council, a farming association, says that such tricks are limited to a fraction of farms in areas directly affected by fighting.

A bigger problem concerns the use of grain exports to escape capital controls. After Russia’s invasion, these were made much stricter in order to prevent money fleeing the country, with the central bank setting a fixed exchange rate of 29 hryvnia to the dollar, which undervalued the currency by about a quarter. Farmers are able to falsify documents to pretend that the grain they are selling is of a legitimate, tax-paying variety or to understate revenues when selling abroad, before keeping the proceeds in a foreign bank. Sometimes they also sell grain at a low price to a foreign organisation that is in cahoots with them, or secretly under their control, and often based in Turkey or Romania. Proceeds from such sales are returned to Ukraine, but cash from a subsequent, higher-price sale to another firm is not.
Crooked financiers, serving as middlemen, handle the logistics for a cut—often around 2% of profits. Companies established to hold profits are then shut down before deadlines for currency repatriation arrive. Some are registered to a “homeless guy who doesn’t even know that he was director of a company”, says Yurii Gaidai of the Centre for Economic Strategy, a think-tank. Although such manoeuvres are not entirely new, use of them has soared. Maryan Zablotskyy, a parliamentarian who has investigated the matter, reckons that in the past two years more than $3bn has escaped the country via black grain, with other estimates suggesting the figure may be even higher. Over the previous eight years, the total figure was probably $4bn.
One official at the Economic Security Bureau of Ukraine, an investigative body, says its efforts to “de-shadow the economy” include analysing data to find suspect shipments and improving information-sharing between its detectives and customs authorities. All told, the esbu has investigated more than 1,300 agricultural firms in the past two years. Meanwhile, the government is easing capital controls, including by improving the exchange rate on offer, in order to limit the attractiveness of parking earnings abroad. These measures are popular both with the wider Ukrainian population, which sees tax-dodging as a betrayal of a cash-strapped motherland, and farmers playing by the rules, who complain that black grain pushes down prices. They also help Ukraine’s case when it goes to allies asking for more financial support. Tax receipts have begun to creep up as the changes take effect—but there is a long way to go before the crackdown can be judged a success.

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