The striking feature of Ukraine’s systema is the depth of its penetration and replication in national and regional decision-making processes and within the bureaucracies that implement decisions across the country.
The rent-seeking machinery in Ukraine operates at three levels. At the top, big business takes the largest cut. In the middle, systema’s enablers such as senior to mid-level government officials, MPs and managers of state-owned enterprises receive rewards from above and below as the largest and smallest players pay their dues. At the bottom are the low- to mid-level officials who collect bribes. They keep a portion for themselves but pass the greater part to their superiors. This is consistent with equivalent models of systema around the world. However, the striking feature of the Ukrainian version is the depth of its penetration in the national decision-making process and within the bureaucracy that implements decisions.
Systema’s structures are in place not just in Kyiv. Across the country, the same operating principles are replicated at regional level for the benefit of powerful local elites and their accomplices in regional governments and councils. This can sometimes mean that cities and regional administrations, because of their political power, are able to defy the authority of national agencies. This has been evident during the COVID-19 crisis, when some cities have chosen not to comply with restrictions issued by the central government.
Systema’s regional dimension gives it considerable additional stability through a hierarchy of interest groups below the biggest FIGs at the top. The decentralization reform begun after 2014 has strengthened regional and local elites. As the local elections in November 2020 showed, in Kharkiv and Odesa especially but in other major cities as well, mayors have built power bases that rest on their popularity as local leaders rather than on the appeal of national parties. The mayors of Kharkiv and Odesa have significant business interests. At lower administrative levels, the combination of political connections and wealth can also lead to local interests buying influence in regional centres and in Kyiv.
The motivations of the largest business owners often come into conflict over the distribution of rents, but such disagreements have not proved sufficiently disruptive to threaten systema’s foundations. These key business figures share an interest in having a common set of red lines that determine the level of reforms they are prepared to accept. Even if they find themselves marginalized or excluded, they seek a way back into systema rather than trying to transform it. Most know that their businesses would struggle to survive, let alone prosper, in a non-rent-seeking environment, and that they could not easily protect themselves in a law-governed state.
The consequences of this convergence of interests among FIGs are clearly visible in the form of a vicious circle of restricted competition in Ukraine’s politics and its economy, which results in permanently weak institutions, poor legislation and the absence of rule of law. Inevitably, this feeds corrupt practices at all levels, which provide the lubrication to keep systema’s wheels turning.
Systema succeeds in being self-sustaining because it keeps the barrier for entry into top-level politics particularly high for independent actors. This is partly due to Ukrainian politics being a competition of money rather than of ideas. For example, with no cap on campaign finance, only political actors with high levels of monetary support could compete in the 2019 presidential election. Indeed, according to the Centre for Democracy and Rule of Law, a Ukrainian NGO, the three highest-polling candidates each spent between $5 million and $21 million, mostly on TV advertising. By comparison, in Poland, where GDP per head is almost four times higher, campaign spending by candidates in the presidential election of 2015 together amounted to some $4.8 million. The high levels of election spending in Ukraine are partly attributable to the fact that campaigns start earlier than officially permitted, as well as the fact that there are no restrictions on campaign spending. A further problem that restricts competition is that under the current rules, political parties can hide their sources of financing by using intermediaries. At the same time, they do minimal public fundraising.
Transforming a limited access order into an open access order typically takes decades, because of the complexity of changing the calculus of the main players while simultaneously nurturing independent institutions. In the case of Ukraine, however, the evidence of the past six years points to two contradictory patterns of development.
First, despite the exigencies of the armed conflict with Russia, which have revealed many of the country’s weaknesses, there is still no consensus within Ukraine’s ruling class about the need to change the way it is governed. Instead, the main FIGs have continued to compete for influence: Kolomoisky returned to Ukraine in 2019 on the eve of the presidential election; Viktor Medvedchuk (who was President Kuchma’s chief of staff) and Poroshenko were re-elected to parliament – although in May 2021 Medvedchuk was charged with high treason and placed under house arrest; and Akhmetov is once again in favour in the President’s Office. Even so, some reforms supported by Western countries have dramatically reduced certain opportunities for rent seeking and undercut the interests of some of systema’s beneficiaries. The IMF’s insistence on making financial assistance dependent on enacting specific anti-corruption reforms and other measures, including judicial reform, threatens to change the status quo irreversibly to the disadvantage of systema.
Second, while these reforms remain incomplete, and there have been increasing signs that parts of systema have seen Zelenskyy’s presidency as an opportunity to recover ground lost during the Poroshenko years, that a president was chosen from outside the elite group demonstrates a striking rejection of the status quo by the electorate. This represents the most powerful challenge to systema over the past 20 years, one that it has moved fast to interrupt by replacing a reformist government and trying to upend the anti-corruption reforms begun after 2014. To function effectively, however, systema requires political leadership that is accepted by society. The dramatic fall in Zelenskyy’s approval ratings between mid-2019 and early 2020, subsequently magnified by the challenges of the COVID-19 pandemic, carries dangers for systema’s main players. Zelenskyy’s reduced popularity could easily translate into a loss of authority and trigger new elections – although at the time of writing there was growing speculation that he may seek to run for a second term.
The IMF’s insistence on making financial assistance dependent on enacting specific anti-corruption reforms and other measures, including judicial reform, threatens to change the status quo irreversibly to the disadvantage of systema.
To date, there is no single body of research available in or outside Ukraine on how systema maintains its grip on power, let alone any detailed prescriptions for how to reduce or break it. The research conducted so far has tended to focus on specific individuals and their businesses, rather than on systema as a whole. The issue defies easy analysis because the numerous networks in operation extend across different economic sectors, and they reach deep within the machinery of the state and influence public opinion via different channels. It is easier to feel the presence of these networks than to see them because they are not just hidden, they are also fluid.
To understand how systema functions, the chapter that follows identifies the structure of ownership in four main sectors of the economy – banking, energy, transport and healthcare – and the mechanisms of influence used by the principal players in each to protect and advance their interests. They show a consistent pattern of influence that derives from the pillars on which systema rests. The ability to control the legislative process, deploy media and law enforcement tools, and rely on an amenable government system to implement decisions is clearly visible. However, the example of land reform – an issue that is particularly sensitive for the public, and which is supported by Ukraine’s international partners – suggests that sectors where the largest FIGs are not present are less susceptible to systema’s influence.