Reforming Ukraine from within: the problem of the oligarchs

Even as the war between Ukraine and Russian-backed separatists continues to grind on, and with the Minsk ceasefire regularly broken by exchanges of fire, attention in Kiev is returning to the domestic front. The government of President Petro Poroshenko and Prime Minister Arseny Yatsenyuk has promised Ukrainians they will implement reforms to cut corruption and boost economic growth. In Kiev there is growing dissatisfaction with the slow pace of change, coupled with determination to hold political elites to account. If the current government does not accelerate the pace of reform it risks losing popular support – meaning Ukraine could sink deeper into crisis.

Even without the conflict with Russia, Ukraine faces deep structural challenges. Since becoming an independent country in 1991, the country’s government has been systematically hijacked by private interests. The country holds elections but they have only limited effect on the implementation of policy or the actions of the bureaucracy. The problems are many. A small number of powerful oligarchs own most media outlets and shape news coverage in their interests. Oligarchs also “buy” members of parliament – sometimes literally – who are often more loyal to their oligarch backers than to the political parties they ostensibly represent. Corruption is rife and legislation is riddled with provisions that benefit special interests at the expense of the wider population. Courts, police and prosecutors are seen by most Ukrainians as resembling private mafias rather than trustworthy governing institutions.

Over the course of a quarter century of independence, the social and economic results of this political system have been disastrous. Lacking any real accountability to the public, the officials who control Ukraine’s government have directed their energies toward stealing from the state. Poverty and economic stagnation have been the result. Even before the Maidan protests, the economy was in a dire state. After a year of political turmoil followed by foreign invasion, Ukraine’s economy now teeters on the brink of collapse, sustained only by a multi-billion dollar aid program from the International Monetary Fund and Western donors.

Ukraine’s government recognizes the scale of the problem and faces tremendous popular demand to improve the country’s short- and long-term outlook. But progress so far has been tepid because the power of special interests – big oligarchs plus entrenched bureaucratic groups – remains vast. So far, reforms have only taken place where the government has faced immense pressure both from Kiev-based civil society groups and from Western donors.

For example, activists in Kiev – including several young journalists who are now prominent members of parliament – have heckled and shamed the government into setting up an anti-corruption bureau that is designed to be sufficiently independent to bring corruption cases against top politicians. If all goes according to plan – still a big if – the bureau could play an important role in cleaning up Ukrainian politics. Low level police corruption is also being slowly addressed by the government. Kiev and Odessa, a large southern city, are seeing their entire police forces replaced by new, better paid, and hopefully less corrupt police officers.

Meaningful changes have also begun to take place in the economic sphere. Facing bankruptcy, the government signed a deal with the IMF in 2015, receiving $17 billion in funding in exchange for committing to implement economic reforms. For example, the energy sector is being restructured, and price hikes on gas and electricity tariffs are closing a vast hole in the government budget and – more importantly – reducing scope for corrupt energy trading. The banking sector, too, is experiencing real change, as talented new central bank officials close dozens of small banks that served primarily as money-laundering outfits for powerful oligarchs. Here, too, changes are palpable.

Yet Ukraine’s problems remain vast, and on many fronts there is little positive change. The government bureaucracy continues to be immensely powerful, and uses much of its authority for nefarious purposes. A hugely complicated and contradictory tax code and regulatory environment make it all but impossible for individuals and businesses to obey the law. Judicial rulings are still sold to the highest bidder. The population justifiably treats entire branches of government with nothing but disgust. On all of these fronts, Ukraine’s government needs to take action immediately.

Yet the country’s greatest problem remains the power of its oligarchs. Businessmen such as Igor Kolomoisky, Rinat Akhmetov and others retain vast influence, controlling dozens of members of parliament, hijacking state-run corporations, and using their power to siphon huge sums from state coffers. They are a prime reason why reform has been so slow, as honest institutions would remove the main source of their political power – and their economic influence.

The government has taken tentative steps to curb the oligarchs’ power, but only when pushed by Kiev’s civil society or foreign donors. If Ukrainian voters could oust the oligarchs, they gladly would— – but businessmen such as Kolomoisky and Akhmetov control local electoral processes across much of the country. Unless the power of these oligarchs is curbed, Ukraine’s democracy and economy will remain stunted, and reforms will stall. Western governments looking to help Ukraine should put taking on the oligarchs at the top of their agendas.