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Ukraine’s Persistent Problem With Oligarchy

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As media attention has been hovering around an allegedly potential military invasion of Ukraine by Russian troops stationed in border regions, a possibly more decisive development is playing out in Kiev. Late last year, Petro Poroshenko – former Ukrainian president, oligarch and currently incumbent President Volodymyr Zelensky’s greatest competitor for next year’s presidential elections – has been charged with treason. Poroshenko was accused of selling coal which helped to fund Russian-backed separatists in the Donbas region – together with the already indicted Viktor Medvechuk (Herszenhorn, 2022). In a recent interview with Politico, he painted himself as the “leader of the opposition” and the “leader of public support” (ibid.).

This case is now the most prominent in a row of judicial proceedings against opposition politicians and oligarchs. Last year in February, Zelensky targeted a new sanctions regime at 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 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 (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.

Kolomoisky is at loggerheads with both Medvechuk and Poroshenko. The former is a rival in the gas sector where Kolomoisky holds large possessions and business interests; the latter had nationalized Privat Bank, then the country’s largest consumer savings bank and one of Kolomoisky’s biggest assets, as investigations brought vast accounting irregularities to the light (Herszenhorn, 2022). Zelinsky’s legal actions against Medvechuk last year were probably motivated by a fall in approval ratings and polls making him realize “he’s on the verge of losing political power” (Olearchyk, 2021). Interestingly, both Medvechuk’s and Poroshenko’s respective partners are junior coalition partners of Zelensky’s People’s Servant (Слуга народу) party.

The 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 key industrial sectors, hold over decision-making processes and public opinion through their media empires. Hence, any high-profile criminal proceeding against an oligarch must be considered within the framework of the oligarchic, factional structure of Ukraine’s political establishment, where oligarchic interests based on rent-seeking opportunities and their preservation by circumventing the rule of law lie at its heart.

Oligarchs’ hold on Ukraine’s political system

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 of 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 are 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.

Poroshenko’s and Zelensky’s lost years

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). At the end of his presidential term, impeachment proceedings had been opened by former prime minister and rival candidate Yulia Timoshenko accusing Poroshenko of corruption in parliament. This coincided with the Ukrainian Constitutional Court striking down a law against “illegal enrichment” by officials, one of Poroshenko’s landmark legislation in his campaign against corruption. According to the court, the law was found unconstitutional violating the principle of presuming innocence since it required officials to prove the legitimacy of their assets. By annulling the law around 65 investigations of judges and other officials would be closed (TOL, 2019). Poroshenko’s disappointing performance to effectively combat corruption was mostly due to not having succeeded in fundamentally changing the judiciary and the court system which perpetuates the established oligarchic system of state capture (Leitner & Meissner, 2018).

In 2014, former President Poroshenko signed a decree to create the National Anti-Corruption Bureau of Ukraine (NABU) (Polyakova, 2019). During his presidency 189 cases went to court without convicting any significant player in the oligarchic system; furthermore, the head of the Special Anti-Corruption Prosecutor’s office allegedly instructed suspects in how to evade charges in the first place (ibid.). Shortly before the 2019 presidential elections several of Poroshenko’s business partners were accused of selling Russian-made components to Ukrainian defense producers at highly inflated prices (Bershidsky, 2019). 

Even though Poroshenko could not (or perhaps was lacking the willingness) to fully root out corruption, he at least kept up the pretense of acting. With time it became clear that the NABU had been ineffective and inefficient, Poroshenko went to establish the High Anti-Corruption Court of Ukraine (HACC) in June 2018. After a promising start the HACC has become the target of political campaigns attempting to hamper its work. Currently, there is a pending filing at the Constitutional Court challenging the constitutionality of the HACC (CMI, 2021). Lawmakers from the Opposition Platform – For Life had called upon the Constitutional Court to declare the NABU or the electronic asset declaration system illegitimate (Peleschuk, 2021). And in fact, in late October 2020, the Constitutional Court stripped another anti-corruption institution founded during Poroshenko’s term, the National Agency for Preventing Corruption, of most of its powers. The agency monitored asset declarations and initiated penalties for violations in them. Besides ruling these powers to be unconstitutional, the court canceled penalties for false declarations by officials (Sukhov, 2020).

The dismantlement of anti-corruption agencies under Zelensky’s presidency does not only undermine his self-proclaimed stance against corruption, it is also dangerous for the political and societal development of Ukraine. One of Poroshenko’s rival oligarchs, Ihor 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. Officially, the relationship between Zelensky and Kolomoisky remains unclear (Peleschuk, 2021). However, Zelensky’s policies have never importuned Kolomoisky’s holdings in diverse key sectors; for instance, Zelensky has failed to start any legal proceedings against Kolomoisky over his involvement in the fraudulent failure of PrivatBank (Olearchyk, 2021). Instead, the independence of state-owned enterprises (SOEs) like the National Bank and Naftogaz have been limited and other SOEs have come under oligarch control; while changes to the tax code have left oligarchs mostly unaffected targeting instead small businesses and households (Radik, 2021).

The latest proof of Zelensky’s failure to seriously combat corruption is last year’s so-called Anti-Oligarch Law or “On Prevention of Threats to National Security Related to Excessive Influence of Persons Who Have Significant Economic and Political Weight in Public Life (Oligarchs)”. The law defines “a person who has significant economic and political weight in public life (oligarch)” if three of the following four characteristics are deemed to be fulfilled: 1. “participates in political life”, 2. “has a significant impact on media”, 3. “is the ultimate beneficial owner of an economic entity, which (…) occupies a monopoly (dominant) position in the market”, 4. “the confirmed value of the assets of the person and business enitities of which he is the beneficiary exceeds 1 million subsistence minimums” (President of Ukraine, 2021). Left unmentioned in the official presentation was that the National Security and Defense Council, whose members are personally appointed by the president, makes the decision who falls under the established definition barring them from seeking or holding a public position (Radik, 2021).

The formulation of the law is vague and allows for much interpretation of who would fulfill these features. A telling sign was when members of the People’s Servant party argued that Poroshenko – after selling his media assets immediately following the law’s signing – could still be identified as an oligarch “due to uncertainties of the new law” (ibid.). On the other hand, Kolomoisky seemed to have not been affected by this law at all; it is not known that he would have ridden himself of any of his assets in several industrial areas and the media. In a representative poll by the independent Razumkov Center found that 79% of respondents did not believe that this law was aimed at reducing the influence of oligarchs. A third (33%) deemed it a populist measure to improve Zelensky’s popularity, a quarter (23%) believed the law to help redistribute property in the economy to Zelensky and his close associates, while another 11% saw it as a means to fight political opposition (IMI, 2021).

Conclusion

With the backing of Kolomoisky Zelensky has been taking advantage of the turmoil in the international arena over the presumed Russian threat to Ukraine to introduce legislation which can target his main rivals a little over a year before the next presidential elections. Zelensky openly betrayed his election promises to be more effective in the de-oligarchization of Ukraine than his predecessor, Poroshenko. Instead, his actions resemble more Poroshenko’s predecessor’s, Viktor Yanukovich’s, who tried to eliminate his political opponents by enacting questionable legislation.

The measures to limit oligarchs’ power are known: “the creation of an independent judiciary; strengthening of antitrust laws and antitrust authorities; corporate governance reform in the public sector; elimination of tax benefits for big business; and greater transparency in media funding” as Ukrainian MP Kira Radik pointed out for the Atlantic Council (Radik, 2021).

Ukraine’s main problem remains the state capture by a few oligarchs. Their hold on the judicial system and parliament makes any real changes impossible. And since presidential candidates are either oligarchs themselves or backed by oligarchs, nothing will change as Poroshenko’s and Zelensky’s presidencies have shown. Instead, the competition between oligarchs will decide over the next Ukrainian president yet again.

Andreas Roesl

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By The European Institute for International Law and International Relations.

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