The ability of big business to control the legislative process, deploy media and law enforcement tools, and rely on an amenable government system to implement decisions is clearly visible across multiple economic sectors.
State-owned institutions today account for around 60 per cent of Ukraine’s banking sector assets. PrivatBank, Oschadbank and Ukreximbank are the biggest, with combined assets exceeding UAH 1 trillion. Close to 20 banks with foreign ownership have combined total assets of over UAH 500 billion, followed by nearly 50 domestically owned banks with total assets worth around UAH 250 billion.
The clean-up of the banking sector after 2014, by a reformist team at the National Bank of Ukraine (NBU), was far-reaching, and ended a large number of the extensive schemes associated with related-party lending that had operated for many years. Around 100 banks, most now closed, stand accused of siphoning abroad a total of $15 billion of taxpayers’ money.
Influence of systema
The authorities have so far put little effort into recovering these and other funds stolen from the state during the Yanukovych years, and there is evidence to show that parts of systema succeeded in obstructing attempts to do so. Under the Poroshenko administration, not only did the Prosecutor General’s Office fail to take appropriate action; the Deposit Guarantee Fund also dragged its feet, despite its power to initiate civil proceedings against individuals responsible for losses to banks. The president nominates the heads of both agencies.
PrivatBank provides a particularly good example of residual resistance to reforms. It was nationalized in 2016, after the discovery of a $5.5 billion hole in its balance sheet. Its former owners started an unprecedented legal campaign to challenge the nationalization in the courts, initiating hundreds of cases and threatening the credibility of banking sector reform as a whole.
The NBU’s assault on many of the old schemes for misappropriating public money has met with resistance not just from the former owners of PrivatBank. Parliament’s initial hesitation in 2018 in adopting IMF-backed legislation to establish independent supervisory boards for state banks reportedly demonstrated the power of some of the biggest holders of non-performing loans. These actors were able to lobby parliament from within because they were also sitting MPs. The legislation was, however, eventually approved in July 2018. Subsequently, in early 2020, a small group of MPs tabled 16,000 amendments to a draft law on banking insolvency that was required by the IMF as a condition for future lending. This was clear evidence of the influence of external interest groups that wanted to block legislation intended to prevent the former owners of insolvent banks from regaining control of them. However, the urgent need for IMF support because of the economic problems caused by the COVID-19 pandemic undermined their campaign. Parliament passed the legislation, and Zelenskyy signed it into law in May 2020.
The campaign against the NBU’s management in late 2019 and early 2020, and the highly personal targeting of former governor Valeria Hontareva, are reminders that some of the opponents of banking reform are prepared to go to extreme lengths to protect their interests. The listing of Hontareva as a suspect in a criminal case ostensibly unconnected with PrivatBank raises suspicions about manipulation of the legal process. Media owned by Kolomoisky and others have played an important role in depicting the NBU as acting against Ukraine’s interests. The NBU issued a statement in November 2019 that held Kolomoisky responsible for attacks on its reputation, including alleged paid-for demonstrations outside its building.
In July 2020 Zelenskyy forced the resignation of Yakov Smolii as NBU governor. After leaving his position, Smolii referred to ‘systematic political pressure’ on the bank, and did not rule out a coincidence of interest between the President’s Office and Kolomoisky. He said that the President’s Office wanted to replace the NBU’s leadership with people it could control. Smolii’s resignation came shortly after Ukraine had received the first tranche of a new $5 billion IMF stand-by arrangement. A key condition for continued IMF support was the independence of the NBU, and the IMF had made it clear that it held Smolii and his team in high regard.
The energy sector has been the source of the largest rents in Ukraine over the past nearly three decades. For this reason, energy companies form the foundation of the business empires of many of the country’s wealthiest business figures. For example, Rinat Akhmetov remains the biggest player in the coal industry. In 2017, his company DTEK accounted for 86 per cent of Ukraine’s total production of 28 million tonnes of thermal coal. Akhmetov also has interests in the production of gas and renewables, as well as in electricity production and distribution.
Influence of systema
The major FIGs exercised powerful influence over the energy industry from the time of the Kuchma presidency (1994–2005) until 2014 – particularly over arrangements for the supply of gas, which favoured imported gas from Russia over domestic production. Illegal arbitrage schemes exploiting the difference between subsidized gas prices for households and market prices for industry were a source of enrichment for large sections of the ruling class. Gas traders ‘captured’ the national regulator to create this differential. Such practices not only distorted the gas market and discouraged households from restricting consumption; they also had profound national security implications by creating a dangerous dependency on Russian gas. By 2014, Naftogaz had amassed a deficit equivalent to 5.7 per cent of GDP.
The gravity of the situation brought about the most serious reversal of a FIG’s influence seen so far. The reforms undertaken at Naftogaz led to the cessation of gas supplies from Russia, the removal of the previous arbitrage margins and a dramatic improvement, through corporate governance reforms, in the transparency of the company’s dealings. By common consent, the biggest loser of these reforms was Dmytro Firtash, who not only no longer had access to cheap Russian gas but also could no longer profit from the arbitrage business. Even so, he retained control of most of Ukraine’s regional gas companies, a part of the sector still considered highly opaque.
However, if Firtash could no longer shape the gas sector to the same extent as before, another group was able to dictate policy in the coal and electricity sectors. In 2016, the National Energy Regulatory Commission (NERC) took the controversial decision to set wholesale electricity prices at levels favouring domestic coal producers, following the ‘Rotterdam +’ formula that favoured Akhmetov’s DTEK. Commentators viewed this as the product of a reconciliation between Akhmetov and President Poroshenko, after a deterioration in relations between the two following the Revolution of Dignity. In return for NERC’s decision, it seems that Akhmetov offered Poroshenko the support of MPs loyal to him. Akhmetov’s main business partner, Vadim Novinsky, and several of the senior managers in his companies entered parliament in 2014 as representatives of Opposition Bloc, a remnant of Yanukovych’s Party of the Regions.
The secretariat of the Energy Community was scathing in its 2018 review of the NERC’s performance, noting that its members were apparently ‘under the pressure of certain political and business groups which actually influence the outcome of the decisions’. The resignations of several members of the NERC after Zelenskyy became president reportedly took place under political pressure.
While it is still too early to say whether the NERC will function differently with its changed membership, it seems likely that the same lobbying tactics on the part of the FIGs will continue. The core problem that weakens the possibility for independent regulation is a shortage of expertise and the absence a cadre of specialists who can stand up to business interests. This is particularly visible in the Ministry of Energy and Environmental Protection and in parliament’s Energy and Utilities Committee. The greatest energy expertise is not in the public sector; instead, it is in the FIGs, where salaries are much higher and there are better opportunities for professional development.
Planned efforts to de-monopolize household gas supply, for example, are likely to run up against Firtash’s interests. As he demonstrated after 2014, he was able to deploy powerful lobbying capacity to protect his businesses. The embargoes on fertilizers produced in Russia helped his company Ostchem to reinforce its monopoly on the domestic market. The cessation of imports from Russia disadvantaged Ukrainian farmers by denying them access to cheaper fertilizer supplies. However, Zelenskyy’s imposition of sanctions on Firtash in late June 2021 suggested that his position had weakened significantly.
The core problem that weakens the possibility for independent regulation is a shortage of expertise and the absence a cadre of specialists who can stand up to business interests.
If necessary, the FIGs are also able to use the media to support their position against the government, as well as funding friendly trade associations or Ukrainian and foreign think-tanks. They have also successfully used the courts in the past to challenge NERC decisions on tariffs. There has been speculation, too, that the blocking of efforts by the Honcharuk government to change the management of Centrenergo and three regional energy companies was a key factor in its dismissal.
During 2020, there was significant political pressure on Naftogaz and the gas transmission system operator that was unbundled at the beginning of the year. The deep reforms of the gas sector to cut energy dependence on Russia and align Ukraine’s gas market with the free-market principles enshrined in EU energy legislation have helped the country to integrate rapidly into a wider EU market, but they have not been popular in some quarters in Ukraine. In May of that year, 47 MPs from former prime minister Yulia Tymoshenko’s Fatherland party and Medvedchuk’s Russia-friendly Opposition Platform – For Life jointly called on the Constitutional Court to examine the legality of the unbundling of the transmission system. The government’s decision, in January 2021, to regulate household gas prices for the rest of the heating season may have had an economic justification to limit continued price-gouging by companies associated with Firtash that control 75 per cent of the retail gas market. Yet among the supporters of the government’s move were forces hostile to Western-style reforms and thus happy to damage Ukraine’s relations with the IMF. The fund had previously insisted on Ukraine raising domestic gas prices to market levels as a condition for its continued support.
The transport sector is largely state-owned, but provides a stark example of how the interests of major FIGs can distort an SOE’s functioning for their own purposes. Direct losses to the sector from FIG-led schemes amount to an estimated $5 billion per year. Exceptionally, Ukraine International Airlines (UIA) is a private company, owned by offshore entities affiliated with Ihor Kolomoisky.
Influence of systema
Influence over pricing mechanisms for use of the transport system are crucial for the FIGs that operate commodity-producing businesses. This is particularly visible in the case of the railways. The cheapest and most efficient means of transporting bulk commodities such as coal, iron ore, steel, corn, wheat and sunflower oil is by rail, in part because of the unsatisfactory quality of roads. However, the FIGs’ strategy of driving down costs for rail use has left the railways in a deplorable state. Poorly maintained infrastructure and a shortage of rolling stock, particularly locomotives, have created costly bottlenecks for the system as a whole.
FIGs have succeeded in keeping in place a system of tariffs established in the 1960s that makes it cheaper to transport raw materials than finished goods. As a result of hryvnia depreciation, tariffs are 10 times lower than their equivalents in Poland or Hungary. According to one analysis, the main beneficiaries of the tariffs are SCM (owned by Rinat Akhmetov) and Ferrexpo (owned by Kostyantin Zhevago).
The FIGs have also profited from their participation in tenders to supply goods, fuel and maintenance services to Ukrainian Railways (Ukrzaliznytsia). For example, Akhmetov’s Metinvest supplies rails, while Viktor Pinchuk’s Interpipe is a supplier of wheels for locomotives and rail cars. Companies connected with Petro Poroshenko and his associate Ihor Kononenko have supplied fuel. In some cases, business interests have hijacked certification procedures within Ukrzaliznytsia to allow only purchases from monopoly suppliers. A company connected with Yaroslav Dubnevych, the former chairman of parliament’s Transport Committee is alleged to have supplied components to Ukrzaliznytsia at inflated prices. In October 2019 parliament revoked Dubnevych’s parliamentary immunity, and prosecutors arrested him on suspicion of stealing UAH 93 million through corrupt procurement schemes. He was later released on bail. In April 2020, the Specialized Anti-Corruption Prosecutor’s Office reported that it was filing charges against Dubnevych and forwarding the case to the High Anti-Corruption Court for review.
FIGs also exercise influence over the operations of the 13 seaports managed by the Ukrainian Sea Ports Authority (USPA) to obtain logistical and other advantages, including customs privileges. The ports are vitally important to these groups for their exports of metals and grain as well as imports of coal and oil products. Access to limited port capacity is a key issue. One analysis notes that the FIGs influence port operations through the law enforcement agencies, MPs and the top management of the USPA. An indication of the latter is that, in 2018, 11 of 13 heads of seaports were ‘acting’ rather than permanent appointments. This is a mechanism used in other areas such as customs to induce officials, concerned for their job security, to be more receptive to certain interests.
In the aviation sector, Kolomoisky exercises influence through appointees in the management of Kyiv’s Boryspil airport. As a result, UIA reportedly benefits from privileged conditions there. Although Kolomoisky’s lobbying of the government and legal action were not sufficient to prevent the entry of the low-cost carrier Ryanair into the market, before the COVID-19 crisis his oil products business had benefited from the growth of demand for aviation fuel. Around 30 per cent of the volumes supplied in Ukraine came from Kolomoisky’s Kremenchug refinery.
In the road-building sector, there are strong suspicions that the interests of FIGs influence decisions at the state agency Ukravtodor to favour their businesses by determining which roads should be built, the routes these should take, and which roads should be prioritized for repair. In addition, according to one report, in 2018 and 2019, three companies won one-third of all contracts from Ukravtodvor, one of them allegedly connected with the mayor of Odesa, Hennady Trukhanov, who has been subject to multiple investigations by the National Anti-Corruption Bureau related to suspected embezzlement of state property, money laundering and other offences. None of these has so far resulted in a criminal conviction.
The healthcare market is competitive, with no single company accounting for more than 6 per cent. The largest FIGs are absent from the sector. The owners of healthcare companies are often significant donors to political parties, and have their representatives in parliament’s Public Health Committee. The pharmaceutical sector as a whole accounted for only 1 per cent of GDP in 2018, according to NBU data. This almost certainly explains why it is not a sector that is attractive to the main FIGs.
Influence of systema
Before 2015, manipulation of the tendering process through collusion between government officials and companies supplying equipment and medicines led to purchases at vastly inflated prices. The two sides shared the proceeds. In some cases the prices were two to three times higher than those paid for the same medicines in Poland.
According to one 2017 estimate, 40 per cent of the Ministry of Health’s spending on procurement of medicines was ‘black cash’. In 2014, six companies, four of them controlled by the same person, supplied 95 per cent of the drugs for treating AIDS, cancer, hepatitis and tuberculosis. Under the leadership of Ulana Suprun as acting minister from 2016 to 2019, the Ministry of Health succeeded in closing down much of the space for these practices by outsourcing the procurement of medicines to international specialists. Manipulation of the process for registering medicines produced abroad in favour of domestic manufacturers and distributors was another major problem confronting Suprun’s team.
The backlash from the interest groups that lost out because of the removal of these schemes was immediate and sustained. Representatives of the Accounting Chamber visited the Ministry of Health on several occasions to investigate the new procurement process. Government agencies suddenly also showed an interest, including the Security Service, the Prosecutor General’s Office and the National Police. Parliament’s Public Health Committee contained several individuals who were on the payroll of pharmaceutical companies. Glib Zahoriy, the owner of one of the largest such companies, Darnitsa, was an MP from Poroshenko’s party. He lobbied against changes to the procurement process in parliament and tried unsuccessfully to appoint a close associate to head the State Expert Centre that was responsible for registering medicines.
At the same time, there were intense media attacks on Suprun and her team as well as efforts using the Prosecutor General’s Office to intimidate two prominent health reform NGOs by opening criminal cases against them for alleged mismanagement of foreign grants. In February 2019, a Kyiv court instructed the State Bureau of Investigations to open a criminal case against Suprun for interfering in the work of the court. She has said that at one point, her team faced up to 20 court appearances a week that was part of an effort to waste their time and slow down the reforms.
The current chairman of parliament’s Public Health Committee is Mykhaylo Radutsky, the former owner of the Boris network clinics, who was elected on the Zelenskyy’s Servant of the People list. Due to his close relationship with the president, he reportedly received carte blanche from the President’s Office to reform the health service. According to some sources, Radutsky was in effect running the Ministry of Health at the beginning of 2020. In addition, an alliance of pharmaceutical companies and distributors lobbied the government not to extend the system for outsourcing procurement of medicines to international agencies that was due to end in 2020. Their efforts failed as a result of a dispute between the Ministry of Health and its own procurement agency that required the government to call again on the services of international partners at the beginning of 2021, amid urgent efforts to procure vaccines against COVID-19.
Ukraine’s procurement practices during the COVID-19 pandemic point to efforts to bypass the Prozorro electronic auctions system to purchase protective equipment for medical staff. This has resulted in the state paying more than double the cost than in other countries for equipment meeting the same quality standards.
As noted above, Zelenskyy convened a meeting in March 2020 with the country’s leading business owners and demanded their financial assistance and other support in providing urgently needed medical supplies. This was recognition that the government had neither the financial nor the organizational resources to manage the crisis on its own.