Ukraine’s geopolitical location between the EU and the Russian Federation bordering on the Black Sea and the Caspian region and its richness in energy resources, especially in natural gas reserves as well as a large potential for hydro and biomass energy, make it an attractive partner for Europe.
Current developments on the front of the Ukrainian government’s fight against corruption have drawn attention to one of the country’s biggest obstacles to become a functioning democratic state. A lingering problem of Ukrainian politics is the sway a number of oligarchs, who dominate the energy sector, hold over decision-making processes and public opinion through their media empires.
President Volodymyr Zelensky started in February of this year a new sanctions regime against Taras Kozak, an opposition politician of the Moscow-leaning Opposition Platform – For Life party (Опозиційна платформа — За життя), the second largest in parliament (Prince, 2021). Kozak owns several media companies including three recently banned television stations accused of spreading pro-Russian propaganda (112 Ukraine, NewsOne, ZIK). He also entertains links to Viktor Medvechuk, a key player in the Ukrainian gas and energy sector and intimately connected to Russian President Vladimir Putin (Peleschuk, 2021). Medvechuk also used to be one of the principal brokers in peace talks and prisoner exchanges between Ukraine and Russia despite having been sanctioned by the US because of stirring separatism in the Donbas region (Prince, 2021).
The Prosecutor General of Ukraine, Iryna Venediktova, put Medvechuk under house arrest with charges of treason and attempted plundering of national resources; he allegedly channeled money to separatists in the Donbas from his Russia-based refineries (Prince, 2021). Surprisingly, another key actor, Ihor Kolomoisky who sponsored Zelensky’s presidential campaign, has been spared further legal actions.
– any high-profile criminal proceeding against an oligarch must be considered within the framework of the oligarchic, factional structure of UA’s political establishment; oligarchic interests based on rent-seeking opportunities and their preservation by circumventing rule of law
– Zelensky’s motives for legal actions against Medvechuk [fall in approval ratings and polls; “Zelensky realizing he’s on verge of losing political power” (Olearchyk, 2021), competition from Poroshenko’s and Medvechuk’s parties (junior coalition partner), signaling to new US administration of willingness to act; role of Kolomoisky, Zelensky’s main sponsor prior to the latter’s election, considering his business interests and rivalry with Medvechuk for gas sector and media landscape]
Oligarchs’ hold on political system in Ukraine
For the comprehension of Ukraine’s political system one needs to know about the informal networks between political and economic elites as well as the political landscape which differs markedly from Western standards.
Three key features of Ukrainian oligarchs can be specified. Firstly, they tend to monopolize in every field of operation wielding an “intrinsically negative influence” (Kuzio, 2016). As a result from close ties with political elites, “(t)he politically-connected firms reap the benefits from preferential treatment when interacting with the state and limiting market competition” (Balabushko et al., 2018). Secondly, they distinguish themselves through their “political flexibility” (Konończuk, Cenusa & Kakachia, 2017) from other actors. In other words, oligarchs change their political affiliations depending on which political actor can provide them with the most benefits (Puglisi, 2003; Åslund, 2015; Kuzio, 2016; Konończuk, Cenusa & Kakachia, 2017). Indeed, elites tend to defect or disobey orders if they sense their patron’s weakness and the rival’s growing organizational strength (Åslund, 2014). Thirdly, they employ a range of tools to influence the political decision-making processes. A handful of oligarchs own almost 80% of the television market (Konończuk, 2016). Control over television channels plays a major role in Ukraine since television reaches 90% of the population in contrast to Internet, with only a 43% share of regular users (Langley, 2014).
Close ties between political and economic spheres led to “an economy-driven elite that is dominated by particularistic interests” (Puglisi, 2003; Jaitner et al., 2018). Under Yanukovych’s rule, oligarchs have been successful in averting reforms in sectors of high importance to them, instead steering the government to proceed in areas unrelated to their business interests (Matuszak, 2012).
Another result of these informal networks is a network of appointed state bureaucrats and the heads of about 1,800 state-owned companies loyal to different oligarchs who in turn sponsor different politicians (Wilson, 2016). Crucially, these state-owned companies concentrate in key sectors of Ukraine’s economy, so whoever controls them predominates the economic and – consequently – political decision-making.
The political party system differs in various aspects from Western standards. Ukrainian parties in general are non-ideological and lack genuine programmatic agendas (Bader, 2012). Due to a lack of structure, many parties are dependent on the reputation of their lead candidate as well as on clientelism (Bader, 2012; Kuzio, 2016). Other parties exist solely to gain as many seats in parliament to sell them to the highest bidder (Bader, 2012; Åslund, 2014). This favors oligarchs who can place their own men (or sometimes themselves) there. Thus, factionalism of Ukrainian oligarchs plays an important role in building and supporting of political parties and party coalitions as the former strategically co-opt opposition parties or put forward “fake candidates” (Kuzio, 2016).
Importantly, party and campaign financing is not public and thus, political elites depend on large amounts of donations from oligarchs (Matuszak, 2012; Åslund, 2014; Kuzio, 2016). The mutual dependence of political elites on oligarchs’ money, and vice versa for access to decision-making processes, has facilitated a system of corruption-based deals, public tenders or fixed privatizations. Authorities’ participation in such illegal schemes sharing profits with oligarchs negatively impacts the state budget (D’Anieri, 2007; Kuzio, 2016; Konończuk, Cenusa & Kakachia, 2017). Operating with their enormous wealth and media resources, oligarchs were able to hold control over parliament and presidency even in the backwash of revolutions, with the result that no administration in independent Ukraine has ever imprisoned any major oligarch (Matuszak, 2012; Kuzio, 2016). Evidence suggests that many key oligarchs usually outperformed main regime leaders with regard to maintaining political influence behind the scenes (Kostiuchenko, 2011; Matuszak, 2012; Åslund, 2015).
Another characteristic is the regionally limited electoral support of parties. Regional political support coincides with regional oligarchic centers of power (Pleines, 2016). Therefore, political elites sustain “only peripheral links to the electorate” preferring the more lucrative and efficacious connections to oligarchs (Jaitner et. al, 2018). Yanukovych gathered many oligarchs in his party, besides moving towards authoritarian rule over Ukraine by gaining control of key state infrastructure (BTI report, 2014).
Although business links to EU countries had been growing, in 2013 exports to the EU were on a same scale as those to Russia. Only since 2016 had the EU become Ukraine’s largest export destination while trade with Russia declined in the same period (Havlik, 2018; Tyushka, 2018). Yanukovych’s fraudulent financial policies had deterred long-term investors leaving Ukraine vulnerable to an economic and currency crisis. Also, public finances deteriorated even more in early 2014 and the national currency depreciated further due to an unclear provision of much-needed financial aid (Deuber & Schwabe, 2013; Pogarska et al., 2015). Already since 2011, Russia had been imposing targeted trade sanctions on Ukrainian companies putting additional stress on the economy (Cenusa et al., 2014). The de facto loss of Crimea and Eastern territories exacerbated this situation further.
Yanukovych’s successor, the oligarch Petro Poroshenko announced a de-oligarchization policy which in reality did not go far, personally never even fulfilling his campaign promise to sell his own businesses (Kuzio, 2016). Will expand on this part
At the moment, Kolomoisky controls the For the Future (За Майбутнє ) party in a coalition with Zelensky’s People’s Servant (Слуга народу) party, their vote is decisive in obtaining majorities in the parliament (SOURCE); relationship between Zelensky and Kolomoisky at the moment unclear (Peleschuk, 2021)
lawmakers from Oppostion Platfrom – For Life have called upon the Constitutional Court to declare the National Anti-Corruption Bureau of Ukraine or the electronic asset declaration system illegitimate (Peleschuk, 2021)
Zelensky has failed to start any legal proceedings against Kolomoisky over his involvement in the fraudulent failure of PrivatBank (Olearchyk, 2021).
The gas and energy sector in Ukraine
According to the BP Statistical Review of World Energy 2020, Ukraine ranks second in Europe after Norway in terms of proven gas reserves amounting to 1.1 trillion m³. Ukraine is also the leader regarding the reserves-to-production ratio (55.7) which is three times higher than the European average (BP, 2020).
“Ukraine’s gas transportation system is one of the largest in the world, consisting of main gas pipelines, distribution networks, gas storage facilities, compressors and measuring stations. And the Ukrainian gas transportation system (UKRGTS) has remained integrated with the systems in Russia, Belarus, Poland, Slovakia, Hungary, Romania and Moldova, through interconnecting pipelines. Moreover, Ukraine has a lot to offer particularly in terms of gas storage. The country’s underground storage facilities have over 14 bcm of free storage that can be rented to European partners” + “Transit capacity from the main gas pipelines in Ukraine amounts to 145 bcm per year from Russia to EU countries, and around 30 bcm per year from Russia to Greece and Turkey. However, only 30% of the UKRGTS capacity to the EU is currently used and just 5% of the southern capacity is in use. This is because of the launch of Gazprom’s Nord Stream 1 and Turkish Stream. On top of that, with the imminent introduction of Nord Stream 2, Russia plans to abandon the use of the UKRGTS by the end of 2024. This will cause a significant shortfall: the current five-year contract is worth $7 billion.” (Borzhemska, 2021)
planned investments in gas exploration for the next few years in the range of Hryvnia 10 bn ($360 mln); new discoveries may cover overall domestic demand (Elliott, 2021)
main companies and their ownership; mostly state-owned but a range of oligarchs have decisive influence on boards of executives through large stakes in enterprises; important oligarchs involved: Medvechuk, Kolomoisky, etc.;
Kolomoisky co-owns two state-owned companies in the energy sector: Centrenergo (producer of 15% of UA’s energy) & Ukrnefta (43% of shares);
Medvechuk …
others …
Firtash: controls almost 90% of gas supplies to Ukrainian households, in early 2021 “sharp rise in gas tariffs” caused by gas market reforms “sparking protests”, temporary state regulation of prices to support smaller suppliers get into the market and break stranglehold of oligarchs (Mendel, 2021)
gas reserves remain mostly untapped (in the West of UA) because of lack of investment (?) or lie areas not under Ukrainian control (in the Donbas and in the waters surrounding Crimea); {already before Russian navy ships would importune Ukrainian or Russian exploration of gas reserves in Black Sea}
I
mpact on Europe – economically and geopolitically
how much influence has the Ukrainian energy sector in Europe? contribution/percentage in South-East Europe? firstly, most of energy flows towards EU is transit gas from Russia;
planned energy collaboration between Ukraine and Turkey
Bibliography
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By Mahmoud Refaat: The European Institute for International Law and International Relations.
Contribution: Andreas Rösl, The European Institute for International Law and International Relations.
