KYIV, Nov. 7 – A top Ukrainian reformer was forced to flee the country following mounting pressure from the SBU security service seen by Western policy experts as an attempt to reverse liberalization and deregulation.
Serhiy Verlanov, a former head of the State Tax Service and an architect of the country’s tax reform, is facing ‘terrorism’ charges for allegedly trying to ease tax burden on a major foreign investor.
The development sends a warning to those investors who have contemplated entering Ukraine encouraged by President Volodymyr Zelenskiy’s plea to invest and create jobs in the country. It also discourages other reformers from joining the government and launching reforms needed for Ukraine to weather a looming financial crisis.
“All this was set up just to make the fake accusations,” Verlanov said. “The system makes a vaccine against the reforms. If you want to change anything you will be punished.”
Verlanov, a successful corporate litigation attorney, joined the government in May 2019 to help Zelenskiy carry out ambitious reforms and boost the country’s economic growth.
After defeating incumbent President Petro Poroshenko in a landslide victory in April 2019 on a message of modernizing Ukraine, Zelenskiy formed a Cabinet that had quickly delivered on the message. A high pace of deregulation and reforms stunned Western experts and helped unblock lending from the International Monetary Fund and other donors.
But after six months of fast transformations, Zelenskiy has suddenly decided to reshuffle the Cabinet replacing young pro-Western reformers with little known bureaucrats that have alleged ties to wealthy and powerful businessmen.
“A lot of them are old school bureaucrats who are not pushing the reform forward,” said Verlanov, who was dismissed in May.
What followed later surprised even those Western observers that had watched Ukraine for years.
“We’ve seen a disturbing tendency to go after reformers by the prosecutor general’s office and by other law enforcement of Ukraine,” Amb. John Herbst, director of the Eurasia Center at the Atlantic Council, a Washington-based think tank in the field of international affairs.
At the heart of the SBU’s investigation is Verlanov’s decision in December 2019 to re-audit about 4 billion hryvnias ($150 million) in tax assessments imposed by previous administration against ArcelorMittal Kryvy Rih, the largest steel company in Ukraine.
From his corporate litigation attorney career, Verlanov knew the tax assessments have often been unreasonable, creating unnecessary tax burden. Well-connected domestic businessmen usually fend off these tax assessments via friendly local courts, but foreign investors often face challenges unable to compete with their domestic counterparts.
“If you want to attract foreign direct investment and nourish business climate you need to change,” Verlanov said. “We need to get rid of these nonsensical and unlawful practices.”
For the SBU to legally delve into the corporate tax dispute, it had to classify the investigation as a “terrorism financing” probe after independent anti-corruption bodies had showed zero interest in the case.
But punishing reformers with criminal investigation may appear to be a double-edged sword for Ukraine as it discourages other reformers from joining the government in the future.
“If I were the Zelenskiy administration, maybe I would have a good think before I put more criminal charges against these people who’ve done a lot of really good things,” Melinda Harring, deputy director of the Eurasia Center, said.
“You’re not going to be able to attract top talent,” she said. “Who in the right mind would want a job like this?” (nr/ez)