In its study De-shadowing Ukraine’s Economy, the Ukrainian Institute for the Future analyses the causes of the shadow economy, assesses the authorities’ actions in recent years, and proposes an alternative model of de-shadowing built on trust rather than fines.
The scale of the problem
According to the Ministry of Economy of Ukraine, the shadow economy amounts to between 20 and 50% of GDP. For comparison: the figure is 8–11% in Germany, 10–12% in France, 15–18% in Poland, 25–28% in Romania, and 28–32% in Bulgaria. Even the upper bound for Ukraine’s neighbours comes nowhere near the Ukrainian level.
In May 2026, the state and the IMF announced a campaign against the shadow economy, putting its level at 45%. The Ukrainian Institute for the Future draws attention to a critical divergence in official estimates. If the Ministry of Economy is right that the shadow economy costs around 30% of budget revenues, and the tax burden on the economy in 2025 stood at 36% of GDP according to the Ministry of Finance and the IMF, then full de-shadowing would push that figure to 47% of GDP — a level the Institute calls catastrophic for the business climate.
Four components of the shadow sector: labour, schemes, smuggling, corruption
The Institute identifies four components of the shadow economy:
- undeclared labour — between 15 and 25% of the employed population works fully or partially without official registration (wages “in envelopes”, unofficial seasonal employment, unregistered self-employment);
- tax optimisation and evasion — VAT schemes, profit-tax minimisation, undeclared production;
- smuggling and illegal imports — the highest-risk categories are tobacco products, electronics, textiles, motor vehicles, and fuel;
- the corruption economy — kickbacks, bribes, manipulation of public procurement, and the embezzlement of budget funds.
The last segment generates the greatest public resonance, though in volume it may be smaller than informal employment.
Twenty causes of the shadow economy: from the Soviet state apparatus to mobilisation pressure
The Institute has compiled a list of 20 causes of the shadow economy across four levels. The highest impact score — 10 out of 10 — went to an unreformed state apparatus; corruption as the mechanism binding the post-Soviet model of governance to a market economy; low trust in the state; and mobilisation legislation. The last is classed as a current wartime factor, because the official registration of male employees exposes an enterprise to the risk of action by territorial recruitment centres (TRCs).
At the level of the business environment, two causes stand out as critical: the shortage of bank lending — the NBU has made it more profitable for banks to buy domestic government bonds than to lend to the real sector — and the absence of personal accountability for officials who harm business.
How informal incomes support the budget and the birth rate
The Institute advances several arguments rarely voiced in the public debate on de-shadowing.
Fiscal benefit in a crisis. During the pandemic, the US and the EU spent USD 3 trillion and EUR 3 trillion on social payments — 14–17% of GDP. Ukraine, with its high level of shadow economy, came through this period with far smaller fiscal stimulus: informal household income acted as private insurance, sparing the state from having to compensate for lost earnings. In February–March 2022, the economy fell by 40–45% in a single month; without the informal sector, the social explosion, or the outflow of population, could have been far greater.
The link to the birth rate. Ukraine is going through one of the deepest demographic crises in Europe. Around 630,000 children were born in 1991, only 273,000 in 2021, and roughly 170,000–180,000 a year in 2024–2025. The total fertility rate has fallen to 0.9–1.1 children per woman, against a replacement level of 2.1. The Institute compares Ukraine with Israel for 2021: the average net salary there was USD 2,990 against USD 414 in Ukraine, and income distributed across non-working family members was USD 1,423 against USD 133. Informal incomes, in the Institute’s view, partly offset this gap and give families a tangible “free balance” — the margin that often decides whether a second or third child is affordable.
The crisis of trust in the pension system. As of 2025–2026, Ukraine has 10–10.5 million pensioners and only 10–11 million officially employed contributors to the single social contribution. The ratio has approached 1:1, whereas a solidarity-based system needs at least two to three contributors per pensioner to stay stable. In such conditions, the Institute argues, keeping money informal and investing it in real estate or children’s education is a rational strategy rather than a breach of the law.
More taxes instead of liberalisation: how the state shadowises its own economy
Instead of easing the burden on the payroll fund, the authorities raised the military levy to 5% for most types of income in December 2024, and in April 2026 the Verkhovna Rada voted to extend it for at least three more years after the war ends. For individual entrepreneurs in Groups 1, 2, and 4, a mandatory military levy of 10% of the minimum wage — 865 UAH a month, against a 2026 minimum wage of 8,647 UAH — has applied since December 2024.
The failed capital amnesty. The one-off declaration campaign of 2021–2023 was meant to legalise USD 20 billion in assets and bring the budget USD 1 billion. The actual result was only 8.8 billion UAH in declared assets and 547.5 million UAH in fees. The Institute attributes the failure to the state breaking the basic principle of any amnesty: stable rules and trust first, legalisation second.
Digital control without liberalisation. Ukraine has made real progress in exchanging financial information. Automatic exchange under the Common Reporting Standard (CRS) began in September 2024 with more than 50 countries, and in June 2026 the Verkhovna Rada passed a law on digital platforms implementing the EU’s DAC7 directive. At the same time, 7 million Ukrainians abroad have fallen into a dual-residence trap — and the CRS, in the Institute’s assessment, effectively pushes them to sever ties with Ukraine formally rather than pay tax at home.
The lending collapse. Over the past 12 years, lending to the economy has fallen from 80% to 15% of GDP, while housing and car loans to households stand at around 1% of GDP — one to two orders of magnitude below Western levels. The scarcity of cheap money pushes business to plug the capital gap with informal funds.
What the Ukrainian Institute for the Future proposes
Instead of a “punish” model, the Institute proposes one of “simplify and encourage”, built around ten priorities. Among them:
- making the number of official private-sector jobs, rather than the sum of penalty collections, the main KPI of de-shadowing;
- reducing the tax burden from the 39% of GDP targeted in the IMF memorandum to 30–32% of GDP — the level of Israel, a country that has lived through decades of war while maintaining high economic activity;
- replacing income-based social payments with tax benefits for those in official employment;
- liquidating the Bureau of Economic Security (BES), which, the Institute concludes, inherited the methods of the tax police instead of becoming an analytical body.
Specific mechanisms include merging Groups 2, 3, and 4 of individual entrepreneurs into one, with a fixed rate of 3% of turnover for trade and production and 8% for services; introducing a “wolf ticket” — a lifetime ban from posts in controlling bodies for officials whose decisions the courts twice rule unlawful; and shifting from licensing to compulsory professional liability insurance for business.
A separate block addresses two amnesties needed after the war: a mobilisation amnesty for the 5 million men who did not register in Reserve+ and ended up in internal or external emigration, and a tax amnesty modelled on a “Liquidity Amnesty with a Security Limit”. Under it, sums up to USD 50,000 are legalised at a 0% rate with no check on the origin of funds, while sums above that threshold are legalised at 5% with standard financial monitoring that meets FATF requirements.
Another proposal is budget crowdfunding: the right of a citizen to direct up to 5% of the taxes they have paid to a specific local project, instead of to vague budget lines such as “landscaping”.
The Ukrainian Institute for the Future stresses that the liberal path to de-shadowing delivers long-term, stable results, whereas the coercive path produces only a short-term effect, with the risk that business retreats even deeper into the shadows. The full study, with all calculations, tables, and the list of legislative changes, is available on the website of the Ukrainian Institute for the Future.
This material was produced by the NGO “Ukrainian Institute for the Future” with the support of the Askold and Dir Fund, administered by ISAR Ednannia as part of the “Strong Civil Society of Ukraine – a Driver towards Reforms and Democracy” project, funded by Norway and Sweden. The contents of this publication are the sole responsibility of the NGO “Ukrainian Institute for the Future” and can in no way be taken to reflect the views of the Government of Norway, the Government of Sweden, or ISAR Ednannia.
