"Shadow economy not separate from real economy" Interview with MTI co-owner Serhiy Bashlakov

Photo: Persha Spalta

Photo: Persha Spalta

MTI Vice President Serhiy Bashlakov

When people in Ukraine talk about big business, they will definitely remember the MTI group of companies. This is a diversified business that belongs to two of Ukraine’s most wealthy people — Volodymyr Tsoi and Serhiy Bashlakov. 

Both men are alumni of the Kyiv Institute of Civil Aviation Engineering, where they studied radio electronic equipment. This allowed them during the early 1990s to create a company that today is engaged in various types of business: design, implementation and maintenance of IT systems, electronics retail and logistics. In addition, the group is one of the largest retailers of footwear, clothing and jewelry in the country. Their most famous business in Ukraine is considered the Intertop network of shoe stores. In total, the group has 200 stores in Ukraine and about 50 in Kazakhstan.

MTI Vice President Serhiy Bashlakov rarely gives interviews. He agreed to talk about the changes that are coming at customs in connection with the appointment of Maksym Nefyodov, whom he knows personally, as State Customs Service Chief. Bashlakov also explained why it is profitable today to work with Ukrainian manufacturers.

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- Your business is closely related to customs. Now we have a new head of the State Customs Service. He has already made several statements about his plans. What do you think he should do to make business easier to work?

- We have a very large share of imports, and of course, customs policy issues are very important to us. I personally know Maksym Nefyodov, I want to wish him all the best in his new position.

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- You are not being facetious? Or are you just being polite? 

- I mean it sincerely. I am convinced that he took the job to change customs. Now many are talking about smuggling. But I would look at the problem more broadly. Smuggling is not what everyone is talking about right now.

- What does smuggling mean? Is the definition ‘importing goods without paying duties and fees’ passe? 

- According to the Ukraine’s Criminal Code, smuggling is either the transportation of goods outside customs inspection points, or at the customs inspection point with an attempt to conceal it, or the transportation of items that are not allowed to be transferred across the border.

- What is the name of something imported for a bribe?

- I would call it not a smuggled item, but a shadow import. Goods are presented for customs clearance, pass the border where they should pass, but there are changes in the accompanying documents. The most common reason is for understating customs value.

There are still legal opportunities for shadow imports, for example, the so-called ‘jacket schemes.’ This is when the residents of the border areas cross the border several times a day and transport small consignments of goods within the allowed amount.

- Yes, these are some trifles!

- On the one hand, little things. But when the ‘jackets’ number in the hundreds, it becomes a serious problem. You can see this for yourself. 

- What do you mean? 

- Let's count. In my opinion, now through airports, without duty, you can carry goods worth about EUR 1,000. And through the car or pedestrian crossings — about 100 euros. One hundred people at a hundred euros this is EUR 10,000. If they make five drops a day, that’s already EUR 50,000. For some goods, it may already be half a truck worth. Often they move in small ‘minivans,’ driven back and forth in cars. 

- It still seems to me most smuggling activities involves crossing the border in an organized way, and not by some small groups.

- Yes, this is true. And the goods are undervalued. Take, for example, postal shipments. It’s free to send parcels worth up to EUR 100 euros. But regulations do not take into account who receives these parcels. I can receive 100 packages a day, and no one will suspect me of receiving shadow imports. 

- The new head of Ukraine’s State Customs Service recently commented on this. Did what he say give you the impression that he will help fight smuggling? 

- What he proposes offers minimization of human participation in the process of customs clearance. At the same time, it will be technically difficult to make any kind of criminal manipulations. But since shadow imports are an integral part of the shadow economy, it will be difficult to completely overcome smuggling. If you do not remove the factors that make it possible for the shadow economy to exist, then you can chase the wagons as much as you like, toughen control and punishment, but this will lead to nothing.

- What exactly do you think should be changed? 

- By itself, the shadow economy does not operate independently from the public one. According to various estimates, Ukraine’s shadow economy accounts of plus or minus 50% of the entire economy. Shadow goods need to be somehow legalized. And today it can be done only with the help of one scheme — through individual entrepreneurs. Since they are not required to submit documents on the origin of goods. Individual entrepreneurs can buy goods anywhere, for cash, and sell it, also anywhere.

- Should individual entrepreneurs disappear when we get rid of shadow economy schemes? 

- Why immediately draw such conclusions? Changes need to be made [in legislation] which make it illegal for private entrepreneurs to legalize grey imports. The activities of private entrepreneurs require regulation. 

- Control over them should be increased? 

- Private entrepreneurs who receive imports must provide documentation of the origin of the goods. It is also necessary that they use a cash register.

- Now they can be replaced with a smartphone or tablet.

- In fact, this is not yet possible with us. But this system has worked in many countries of the world for a long time. For example, I arrived by plane from the United States not so long ago. I bought an iPad for my daughter's birthday there. In the store, the seller designed everything for me using the same iPad. He just sent a check to me in the mail.

- Let's talk about the iPad. You say we don’t need any gray schemes. And you buy the iPad in the United States. Why not in Ukraine? Is it cheaper there?

- This is just a coincidence. My daughter was at a language summer camp at Georgetown University. It was her birthday, so I bought her a present. I would buy it here.

- For you it does not matter, and for many in Ukraine, it is important. Why does this whole circuit with private entrepreneur work? Because it allows you to sell products cheaper. Our people have little money. This is an economic factor.

- Absolutely. I have already started talking about the legalization of shadow imports. Tax reform is needed here. The level of tax burden that we have today in our country is a very serious incentive for the shadow economy.

What is the result? On the one hand, our population is not very solvent. On the other hand, our state machinery cannot provide for the collection of these taxes in the required amount.

There is still such a moment. I can not say that we now have a higher tax burden than in neighboring European countries. It’s around the same. But we are the poorest country in Europe. And in poor countries, collecting taxes is more difficult — because people have little to lose.

There is another aspect. The Finance Ministry considers tax collection solely as a fiscal history. But you can, with the help of taxes, stimulate the development of the economy and attract investment in the country. And this is a completely different approach to tax policy.

- I agree. If the benefit from non-payment of tax is less than the possible loss from the fine, then they will pay more.

- What is our main problem now? This is why we are an unattractive economy for investment. The main indicator of this is the mass exodus of Ukrainians abroad. We are slowly turning into a nation of foreign workers.

- They pay more abroad. 

- If people leave a country, so does capital. It’s inevitable. And vice versa: as soon as money starts coming into the country, the number of jobs immediately increases, the cost of labor increases, wages start to rise and people begin returning to the country.

- Your main business is to deliver goods necessary for Ukrainians. Where are you investing?

- I wouldn’t say our main business is delivering goods. It turns out that we are logisticians who deliver and distribute goods.

- There’s nothing wrong with that. 

- We have such a business. We have a logistics center, Denka Logistics, in which we invested about $20 million. Today, our logistics operator, although it has been operating for 10 years, continues to be one of the most innovative in this market.

But our main business is retail. And there is not much difference between imports or Ukrainian product. I will even say more: after 2014, our company INTERTOP made a strategic decision to increase the share of footwear produced in Ukraine. And we have already managed to bring it up to 30%.

- Is it in pairs or in money?

- In pairs.

- It is probably cheaper.

- Cheaper, but not ten times cheaper. But what are we facing? We began to look for Ukrainian manufacturers, and it turned out that most of them work "in the shadow." Not even through the registered private entrepreneurs. Many work without any documents. 

- Unlicensed manufacturers? 

- Yes, just like in Soviet times. We had to perform the function of legalizing business. Because those who wanted to work with us and wanted to receive stable large orders had to move into the so-called ‘white segment.’

- Is this a patriotic decision or is there a business advantage in it?

- This is a business decision. Patriotic business decisions are a hoax. I like the statement that if someone speaks too loudly and talks a lot about patriotism, it means that something has already been stolen.

- And what is the benefit of working with a Ukrainian manufacturer?

- First, you reduce the risk of exchange rate fluctuations. If the currency ‘jumps,’ and we sell in the hryvnia and the incomes of our customers are also in the hryvnia, we become hostages of these fluctuations. Secondly, there is a certain period from placing an order to getting goods on the shelf. For example, if you place orders in China, Vietnam or India. Of course there is a huge choice, but the goods need to be ordered almost a year in advance. Flexibility disappears. If I did not take into account something, then it is almost impossible to correct the error. I cannot consider customer feedback. If I work with local manufacturers, then the logistics arm is small. I can order small batches. It is much more efficient.

- And what is the demand for Ukrainian shoes? It seems to me that if there is no money, you buy Chinese shoes, and if you have money, then Italian shoes. Who buys Ukrainian shoes?

- Honestly, I was even surprised at your question. We constantly hold focus groups, and that's what we found. It turns out that for many of our consumers, the brand itself is not very important. The main thing is to make shoes quality and comfortable.

Secondly, we are not a backward country, we are not Africa. In terms of official GDP, yes, we are Africa, but go outside and see what kind of cars we drive. This again shows that our share of the shadow economy is very significant. We have enough skilled labor. Ukrainians are hard-working, disciplined people. When they travel outside Ukraine, for example to Poland, they are welcomed because they don’t need to be retrained. The shoes we produce in Ukraine are not defective in any way. 

- Well, yes, many imported imported materials. We copy designs.

- Have you heard about the so-called give-and-take scheme? 

- The classic scheme. ...

- Ukrainian light industry, especially in crisis years, largely survived due to the fact that it worked using raw materials supplied by the customer. Such a business brought a penny. But some entrepreneurs used the tolling scheme in order to master new technologies, to purchase the necessary equipment. We are in contact with several manufacturers, who, by working on a give-and-take basis, were able to create their product and their shoe lines.

- Are there factories which can compete with Chinese manufacturers?

- I think it's all just around the corner.

- Online trading. I think this is a serious competitor for you. How do you fight with her?

- We are not fighting with her. Why do we have to fight this?

- They take customers from you.

- E-commerce is the future. We are seriously developing this area. I do not consider online trading something harmful. I am opposed to those who are engaged in shadow imports, who break up consignments of goods into small parts and deliver them duty-free to Ukraine under the guise of parcels, and then sell them on the Internet.

- Well, you understand that the buyer doesn’t care who sells them cheaper — the shadow business or you?

- All sellers want to sell for more, any buyers wants to pay less. There are no moral issues here. 'm good, you're bad. What’s important here are scemes which can be used and those which cannot. Why did I talk about poor and rich countries? The richer the country, the richer the person, the more law-abiding he is. Not because he is more moral. It's very simple — he has something to lose. The richer you are, the greater your risk becomes if you break something.

- You do not engage in gray schemes, because you have something to lose. I understood. 

"My risks will immediately grow. When we went to the ‘white field,’ then two years were at a loss. Somewhere only in the third year came to zero.

- So you moved from optimization to the ‘white business’ only three years ago?

- In Ukraine, before the Revolution of Dignity, up to 90% of the economy worked according to optimization schemes. Under ex-President Viktor Yanukovych, Oleksandr Klymenko was in charge of taxes and fees. He created a parallel system of taxation. There were sites on which everyone was driven, through which everyone worked. By and large, our whole business worked like that.

- And after 2014, you started to work by other rules. Do you regret it? 

- The prize that you acquire when you go to the white field is a kind of freedom that you receive, including from the state, from regulatory agencies.

- Several years have passed. Someone moved to the "white field", but someone — no. Here you sit and think: why do I need all this? My competitor earns, and I, so white and fluffy, in zeros.

- I told you my motivation. This motivation is enough for me. I still think we did the right thing.

- Let's talk about your plans. What is your company going to do in the next year, three, five?

- The first and main direction is e-commerce, which we talked about. We are not originally an Internet company, such as Rozetka. We have a leading position in the retail market of ‘brick’ stores. There is electronic and there is a ‘brick’ trade. And we are now trying to build a model that would use to the maximum those advantages that we have — this is an extensive network of offline stores. And also the opportunity for each of our customers to receive goods both directly on the Internet and using these offline stores.

- Will you build a separate brand for e-commerce?

"Our task is to see the same INTERTOP brand not only as an offline trade, but also as a leader in omnichannel trade.

- And what share should be taken by electronic, and which — offline commerce?

- Once they said that little by little the Internet would force out everything. Now we can say for sure what will oust, but not all. According to my forecasts, e-commerce in the segment of footwear and clothing will occupy from 30% to 40% percent. As experience of developed countries shows, e-commerce grows in spurts: when it was a new phenomenon, intensive growth was observed, and then stabilization occurred.

- Will the share of Ukrainian products grow in your stores?

- It will depend on what conditions will be created for the functioning of the economy, what the legislative field will be for the public economy. But our focus groups show that the attitude towards Ukrainian products as something backward, soviet and inappropriate has long been gone. Remember, earlier Ukrainian manufacturers took foreign names for themselves? In order not to show that this is a domestic manufacturer. Now there is no such thing.

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