With a potential cease fire in the works, Ukraine will soon face a new phase of its development — reconstruction.
While this is a lengthy and complicated process, it's also an opportunity for Ukraine to not only rebuild what was lost during the war, but emerge as an improved, modernized state.
To achieve that, economic policy and uncorrupt finance management will become paramount.
Looking at recent history, it's clear that developing countries, such as those emerging from the Soviet Union, suffered from a shadow economy.
Ukraine is no exception with the size of the country’s informal economy estimated at 43.4% of GDP, which severely hinders the country’s ability to collect revenue and hence needs to be addressed at early stages of reconstruction.
The correlation between the size of the informal economy and a country's ability to develop is widely known.
Most countries encountered the issue of shadow economy at some stage of their statehood, and some developed countries are still faced with this problem today.
At the same time, the existence of a shadow economy presents an opportunity for transformation and bringing the country into new stages of its development.
One of the means to fight the informal sector is by digitalization, and several countries have shown the success of such methods.
In the post-Soviet context, Estonia presents the most relevant model for Ukraine to follow.
Right after achieving independence, the Baltic country engaged in full digitalization of government services, allowing businesses and individuals to interact with the government online.
Such an approach, labeled as e-formalization, significantly reduced the amount of informal transactions that were difficult to trace and helped formalize many small businesses.
Given Ukrainian context and the vast diaspora abroad, digitizing government services would ease transition to peacetime and allow facilitating important national processes, such as election voting. Together with economic development, free and fair elections will be essential for Ukraine’s future.
In addition, Estonia’s digital, real-time tax reporting system made it easier to track and collect taxes. The e-taxation system helped combat tax evasion and encouraged businesses to report income more accurately. In the early days of independence, the Estonian government also simplified the tax code, reducing bureaucratic barriers and incentivizing businesses to formalize.
As Ukraine is entering a new phase of its development, implementing digital taxation would present an important step in fighting the vast problem of shadow economy.
In addition to Estonia, a more recent digital development story is presented in Turkey. In the country that is often seen as a moderator between Russia and the West, the informal economy accounts for 31.4% of GDP, presenting a severe challenge.
A significant portion of this informal sector is attributed to unregistered fuel sales and fuel theft, which not only result in considerable tax revenue losses but also undermine fair market competition.
To fight this, Turkish Minister of Treasury and Finance Mehmet Şimşek unveiled the National Vehicle Identification System (NVIS) on Oct. 5, 2023, aimed at digitally tracking fuel consumption across eight million commercial vehicles beginning in 2025.
This cutting-edge technology initiative, designed to eliminate tax fraud at gas stations, presents a milestone of Turkey’s fiscal strategy, digitally transforming fuel purchases across millions of vehicles to establish a transparent, secure, and traceable taxation system.
According to Turkey’s Ministry of Treasury and Finance, the implementation of the NVIS is expected to drive total tax revenues — combining both direct and indirect streams — up by more than 5% in 2025 compared to 2024.
Combined with lowering interest rates and inflation rate that is showing a faster-than-expected pace of cooling, the initiative will help to grow Turkey’s economy.
This example shows how targeted modern technology solutions can have a significant effect on a country’s economic health.
Hence, on its path to reconstruction, Ukraine should empower its domestic technology firms to work with best-placed international counterparts to develop tailor-made solutions to fight the informal sector.
As Ukraine enters a post-war stage, and aims to ensure its future security, guaranteeing domestic effectiveness and growth will help the country to gain stronger footing and international support, including that of the U.S.
While trying to rebuild from horrendous consequences of Russia’s war, Ukraine has a chance to come out of it stronger.
To do so, Kyiv needs to strengthen its economy, which in turn will help to stabilize its institutions. Following the best digitalization practices will allow fighting the shadow economy and encouraging further business development.
Colonel Wes Martin, is a retired U.S. Army colonel, has served in law enforcement positions around the world and holds a MBA in International Politics and Business.
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