Ukraine’s system of crony capitalism reflects the absence of a strong state, and an enduring relationship between big business and the political class that puts their own interests before those of society.
The form of crony capitalism that emerged in Ukraine in the late 1990s has proved impressively resilient and adaptive to political and economic disruption since the Orange Revolution in 2004–05, followed by the Revolution of Dignity in 2014. It functions based on a deeply integrated network bound by shared interests described here as systema, but known more commonly in Ukraine as oligarkhiya. Breaking its grip is essential for the consolidation of democratic institutions and the development of rule of law.
Systema is by no means a uniquely Ukrainian phenomenon. Variations of the same model exist to different degrees around the world, including in ‘old’ EU member states such as Greece and Italy as well as ‘new’ ones such as Bulgaria, Croatia and Romania. Unlike its Russian analogue, which rests on a centralized structure of power, Ukraine’s systema reflects the absence of a strong state. The common features of these governance models are high concentrations of capital in the hands of a small number of politically connected business owners in environments characterized by institutions that siphon public money for the benefit of the few, low levels of transparency, limited accountability and weak rule of law. To different degrees, the effects include the undermining of democratic governance, the distortion of economies, and the promotion of criminality and corrupt practices through the influence on public policy of a dominant group’s business interests. In short, these systems seriously hinder the functioning of an autonomous state for the public good.
Analysts often describe the ability of Ukraine’s major financial-industrial groups (FIGs) to penetrate parliament and the agencies of government in order to put their interests before those of the country as ‘state capture’, or ‘regulatory capture’. However, what is happening is not the one-way process that these terms imply. There is a symbiotic relationship between big business and politicians and officials in which each needs the other to sustain a system that allocates resources for their benefit. The FIGs depend on politicians, who are sometimes their direct representatives, to pass favourable laws and ensure the state apparatus implements them. Major business owners such as Rinat Akhmetov, Viktor Pinchuk and former president Petro Poroshenko have even served in parliament themselves, as Poroshenko does again now. At the same time, large numbers of politicians depend on the FIGs to finance their campaigns and to deploy media assets in support of their combined interests. Both sides benefit from their ability to influence the judicial system. ‘Shadow state’ is perhaps a more accurate description of such a model in which institutions are co-opted and subverted rather than ‘captured’.
This pernicious fusion of interests on the part of big business and a ‘service’ class creates systema. While its effects are visible in Ukraine’s poor economic performance for much of the period since independence, and in its disturbingly high levels of inequality, much of the fabric of systema is non-transparent and lives in the shadows.
Ukraine typifies what some social scientists describe as a ‘limited access order’, in which a ruling class artificially restricts political and economic competition to amass wealth and protect itself. Since the Revolution of Dignity in 2014, systema’s stakeholders have shown their ability to continue to manipulate public institutions not just in the face of the deepest set of reforms undertaken since independence, but also in conditions of war. Putting their own interests before those of society, they have shown their determination to allow as little change as possible to the functioning of systema.
They have sustained an economic model of rent seeking that prevents the creation of a level playing field by granting benefits to some companies over others. Not only does a system of this kind allocate resources inefficiently and in ways that do not benefit society, it increases economic costs by reducing competition. A further damaging side effect is the co-optation by its participants of the law enforcement agencies and the judiciary to safeguard their assets and revenue streams as well as to ensure their immunity from prosecution. Over the years, this has limited possibilities for reforming the police, the security services, the Prosecutor’s Office and the judiciary. It is hardly surprising, therefore, that Ukraine continues to score poorly in the World Justice Project’s Rule of Law Index. In 2020, it ranked 72nd overall out of 128 countries and jurisdictions assessed – albeit six places higher than the previous year. However, it ranked 110th in the category ‘absence of corruption’, and 90th in ‘criminal justice’.
The subversion of the legal system also creates possibilities for organized crime to operate alongside business. The problem deepened under Viktor Yanukovych’s presidency in 2010–14: mafia structures in Donbas colluded with government agencies, including the Security Service. There is no evidence to suggest that the problem of organized crime in Ukraine has diminished. It is part of a deeply rooted social culture that goes back to the 19th century, materializing in the form of a brotherhood of ‘thieves’ with its own laws and morals. The revolutionary environment of 2014 and its aftermath created increased opportunities for organized crime, particularly people-trafficking and drug-smuggling, as the new authorities focused on containing the uprising in Donbas.
The power of systema is reflected in the concentration of economic assets. According to 2015 data, politically connected businesses accounting for less than 1 per cent of companies in Ukraine owned more than 25 per cent of all assets and accessed over 20 per cent of debt financing. In the capital-intensive mining, energy and transport sectors, politically connected businesses accounted for over 40 per cent of turnover and 50 per cent of assets.
According to 2015 data, politically connected businesses accounting for less than 1 per cent of companies in Ukraine owned more than 25 per cent of all assets and accessed over 20 per cent of debt financing.
Since the second half of the 1990s, when systema originally took root under President Leonid Kuchma, these businesses have used their political relationships to pursue a wide range of rent-seeking opportunities, including rigged public procurement tenders and privileged access to state aid, tax benefits, soft loans and debt guarantees from state banks. Several of these practices have continued since 2014 despite the closure of some of the largest schemes, notably in the banking, energy and healthcare sectors. However, political influence still translates into the capacity to gain business advantage by encouraging monopolistic practices. This is particularly visible in the energy industry. It is no coincidence, for example, that Ukraine ranked 128th out of 190 countries for ‘getting electricity’ in the World Bank’s 2020 Ease of Doing Business rankings.
Systema has proved particularly hard to dislodge because it rests on a firm alignment of interests between big business and the political class in favour of rent seeking over wealth creation for the public good. Across the state sector at different levels, it has spawned an extensive supporting structure of beneficiaries that service those interests. Including dependents, this interest group comprises millions of people. This translates into a sizeable constituency in Ukrainian society that wishes to preserve this model and sees danger in reforms that could undermine it.
It is unclear to what extent President Volodymyr Zelenskyy and his team have ever felt able to disrupt systema in order to achieve their declared goals of rapid economic growth and reduced levels of corruption. On the face of it, Zelenskyy’s election mandate in 2019 gave him an unprecedented opportunity to use his popularity and his parliamentary majority, based on first-term MPs, to start developing a new model of governance – one that prioritizes society’s interests over those of the ruling class. However, his performance so far, exacerbated by the impact of the COVID-19 crisis, suggests that he cannot govern without systema and will bow to its interests.
A number of significant developments in 2020 pointed to the renewed influence of interest groups opposed to changing the established rules of the game. First, in March 2020, was the dismissal of the government of prime minister Oleksiy Honcharuk, followed, a day later, by the removal from office of the reformist prosecutor-general, Ruslan Ryaboshapka. Then, in April, came the Constitutional Court’s blocking of judicial reforms, and a ruling by the same court, in October, that effectively paralysed the work of the National Agency for Corruption Prevention. Evidently, the Revolution of Dignity did not bring about the dismantling of these old networks, which also oppose Western influence on the reform agenda and, in some cases, propagate anti-Western disinformation. In the case of the Constitutional Court, four of the 15 sitting judges in October 2020 were holdovers from the Yanukovych era who had taken up their positions before the start of post-revolutionary judicial reform and the adoption of a new anti-corruption strategy. Those appointed later were part of the same ‘judicial corporation’, with its own interests and culture.
This paper shows how Ukraine’s systema remains in place across the main sectors of the economy, and identifies the main mechanisms of control that enable its stakeholders to preserve their privileges and divert public resources. It also considers the factors that may change the behaviour of systema’s participants.
The analysis deliberately avoids the terms ‘oligarchs’ and ‘undue influence’, as both mischaracterize the underlying governance problem facing Ukraine. One challenge for reformist forces is to develop a new vocabulary in Ukrainian and English that will more accurately describe certain features of systema and the obstacles to reducing its influence.
Ukraine is not an oligarchy in the classic sense because it is not ruled by a small group of individuals. As noted above, while the owners of the largest business groups hold considerable sway over aspects of economic policy, they depend on a wider group of government officials, members of parliament, policy experts and managers of state companies to exercise their power. Some among this ‘service class’ are direct representatives of FIGs, but the majority are not. They have their own interests and influence channels. Competing regional interests further complicate the picture. Thus, to this extent, power is shared. Adopting policies requires consensus building and trading of positions with individuals that these business owners do not always directly control.
‘Undue influence’ is a misnomer for two reasons. First, the main stakeholders are more than just influencers. They are often actors in their own right, as systema allows them to participate directly in decision-making on state policy outside formal institutions. Zelenskyy’s request, in March 2020, to leading businesses to support the government’s efforts to tackle the impact of the COVID-19 pandemic is a recent example of how this can happen openly. Poroshenko’s appointment of two leading businessmen, Igor Kolomoisky and Serhiy Taruta, in 2014 to run southeastern regions is another. Second, Ukraine’s system of governance has not yet evolved to the point at which it is possible to describe key stakeholders’ influence as ‘undue’ or excessive. In a limited access order, this is the norm.