Ukraine’s vicious circle of corruption begins with the power groups that have created and sustained a system in which citizens believe that it is impossible to live without corruption. The process of cleaning up institutions must start at the top.
3. Conclusion
The experience of the past four years has shown that in the Ukrainian system at its current stage of development, it is far easier and more effective to shrink the space for corrupt practices than to deter corruption by punishing corrupt individuals. To this extent, Ukraine’s anti-corruption reforms have been working. The overhaul of Naftogaz, the clean-up of the tax system and the establishment of the ProZorro procurement platform are specific examples of progress.
Despite these achievements, anti-corruption activists and the donor community have focused heavily on the establishment of the High Anti-Corruption Court to preserve the credibility of NABU. The agency clearly cannot continue its work without securing criminal convictions. In theory, the court will be the first genuinely new judicial body with the capacity to act independently, although this will depend on how exactly the recruitment process for judges and other civil servants takes place, and to what extent civil society and donor countries are involved.
Even in the best-case scenario, however, the High Anti-Corruption Court will not per se be a silver bullet, since it will not be able to address the systemic causes of corruption.73 Ukraine’s elites are likely to make common cause to limit the court’s effectiveness, either by direct sabotage or by trying to integrate it into their system of power. However, if the court focuses on bringing to justice those individuals who impede efforts to close the space for corrupt practices, it can play a valuable role in promoting systemic transformation by disrupting the limited access order and forcing the key players to make a choice. They will either have to agree to stop their rent-extraction activities, or face the possibility of criminal investigation with outcomes that go beyond what they have come to expect.
For now, international donors and creditors rank second after the ‘oligarchs’ in terms of their ability to influence the ruling elites. The influence of international donors and creditors is finite, and must be exercised carefully to achieve maximum possible systemic transformation. They have an important role to play in further closing down the space for corruption across different economic sectors.
It is essential therefore that civil society and international partners do not lose sight of the considerable progress made in restricting the possibilities for long-established corrupt schemes that caused such damage to Ukraine’s development over more than 20 years. The reforms of the gas sector, the tax system, the banking sector and the procurement system are substantial, even if they are not complete. Initial progress on deregulation and vastly increased transparency are contributing to a slowly improving business environment. Decentralization has removed some funds from the control of the poorly regarded Ministry of Regional Development,74 and public administration reform is finally under way. The latter has the potential to revolutionize the concept of public service in Ukraine, and to raise administrative competence from its current desperately low level. Five years ago, such achievements were inconceivable.
Yet there are no grounds for complacency. Enormous scope remains for further progress in all these areas, particularly in an energy sector that is still disturbingly opaque in parts, as well as in SOEs. Transparency in the defence budget is a particular area of concern, and must be addressed as a priority if Ukraine is to make further progress in increasing its defence capacity. President Poroshenko’s repeated claims that the war with Russia is limiting Ukraine’s capacity to reform lack credibility. It is precisely because of the war and the need to increase the resilience of state and society that the government must act quickly to reduce corruption across the board.
Moreover, many of the successes so far in preventing opportunities for corruption are also reversible. Ukraine’s bureaucracy is skilled at finding ways around rules, or at delaying their implementation. Recent efforts to restrict the scope of ProZorro or weaken it, and to introduce corruption opportunities in the taxation of small business, as well as the introduction of the Rotterdam+ formula for coal purchases, are examples of the system’s capacity to resist reforms. Efforts to undermine the Ministry of Finance’s control of the SFS are a particularly discouraging development. At the same time, a combination of vigilance by civil society and Ukraine’s increasingly competent investigative media, as well as by international partners and businesses seeking transparent and stable rules, can hold the government to account and make it harder to subvert reform measures.
Predictably, there have been limited efforts to address the problem of corruption in the law enforcement agencies, and none at all in the SBU. These deficiencies, combined with tentative reform of the judiciary, are part of a pattern: in the absence of a viable alternative, the power groups wish to preserve their system of administrative control in order to protect themselves and their assets. This requires a system of governance that serves their interests, not those of the country. This is the essence of a limited access order. The challenge for reformers is to prise this system open further, and to accelerate its transformation by challenging its key economic players to relinquish their monopolies and the practices that sustain them.
The key to this ‘de-oligarchization’ of the economy is political reform. At Ukraine’s stage of institutional development, it is not surprising that its national wealth is concentrated in the hands of a small number of individuals who control the media and exert disproportionate influence in parliament. The history of Western Europe is replete with examples of identical problems that countries eventually overcame in different ways. The imbalances created by this ‘oligarchic’ influence are evident in laws that meet only the narrow needs of the elites as a whole, or sections of them, in parties that are simply short-term mechanisms for election rather than generators of new ideas, and in institutions that fail to represent the people and gain their trust. These distortions are the direct consequence of political corruption. The result is a fragile order built on pluralism among the elites that is prone to sudden shifts. As demonstrated in 2004 and 2014, these shifts can trigger revolution. This is not a recipe for stable economic growth, and it makes it hard to attract foreign direct investment because of the perception of unstable property rights.
Ukrainian civil society designed largely on its own the far-reaching corruption-prevention measures described above. However, while it understands how to open up the political system and foster wider representation of society’s interests, civil society lacks funding, and its leverage over the authorities is in decline. This is a result of its conspicuous failure after 2014 to establish a counter-systemic force to serve as an effective political opposition to the current power groups.
A full-blooded fight against corruption will require a complete overhaul of law enforcement agencies, the SBU, the tax service, the agencies that inspect business, the judiciary and other corrupt government bodies. A full audit of their tasks and performance will be necessary, followed by the abolition of superfluous or irredeemably corrupt agencies. In addition, there will need to be privatization of most SOEs and very high levels of transparency imposed on the ones that remain in state hands. Radical deregulation must go together with streamlining of all administrative procedures, with the aim of minimizing contacts between officials and citizens as well as reducing all forms of regulatory inspections to a minimum. Finally, wholesale revision of legislation will be necessary, including the completion of the tax reform, to reduce the extent of discretion, ambiguity and excessively restrictive norms that lead to abuse by officials. In short, Ukraine needs to emulate many aspects of the reforms implemented in Georgia after 2003 that were so successful at reducing low-level corruption and changing the habits of society.
For this to happen, Ukraine’s elites and the general public alike need to have confidence that they will gain from changing their behaviour, and that they will lose out if they continue to support the status quo. The elites will commit themselves to dismantling the limited access order only if they have sufficient trust that they will not have to pay for their past sins in the form of criminal prosecution or expropriation. At the same time, citizens must be confident that this is a better option than the superficially attractive solution of putting the elites in jail. Ultimately, they must also recognize that it is no longer acceptable to live with the contradiction that senior officials should not engage in lucrative corruption while the public continues to be open to the possibility of paying bribes as an easy way to ‘settle issues’. These are two sides of the same coin.
The process of cleaning up institutions must, however, start at the top. Ukraine’s vicious circle of corruption begins with the power groups that have created and sustained a system in which citizens have concluded that it is impossible to live without corruption.
Policy recommendations
- Ukraine’s reformist forces, together with its international partners, should focus more on preventing corruption than on punishing corrupt officials. There is currently a disproportionate focus on the establishment of the High Anti-Corruption Court. Prevention and punishment should be viewed as instruments of a broader systemic transformation of the social order, with punishment being an important but secondary element that can support prevention.
- De-monopolizing politics and the economy, while progressively reducing opportunities for government officials to exercise discretion and increasing accountability, will drive the systemic change needed to make a decisive breakthrough in reducing corruption. The debate needs to prioritize this in order to generate concepts and programmes to address the roots of the problem.
- Building strong and capable institutions staffed by a new body of officials of great integrity should remain a high priority. After a slow start, reform of public administration is moving in the right direction. This momentum must be maintained. NABU is a powerful example of how it is possible to create a new professional agency with different values. Rigorous selection procedures for appointments, including involving civil society, were essential in the process.
- Root-and-branch judicial reform remains essential as part of the process to limit the space for corrupt practices, and should be a priority. Efforts undertaken so far are insufficient. Far greater attention needs to be paid to the problem of the political dependence of the judiciary, and to ways to change its culture. The High Anti-Corruption Court offers an important chance to create a new part of the system that operates under different rules.
- Anti-corruption investigations should target the staunchest opponents of the reforms in the power groups. More accommodating forces should ultimately receive amnesties in return for not obstructing the implementation of the reforms.
International partners should:
- Devote more effort to understanding the nature of the problem of corruption in Ukraine and recognize that it is not a disease, but rather a manifestation of deep-rooted systemic and cultural phenomena that should not be regarded as permanent. Broader appreciation of the origins of the problem and of the ways to overcome it should lead to support programmes that target not just the symptoms but also the underlying causes. The present reality is that at some levels in international agencies and donor governments, including in their embassies in Kyiv, there is sometimes only fragmentary understanding of the problem.
- Apply strict conditionality for further financial, economic and defence assistance to Ukraine that should be, among other things, tied to the following:
- Radical overhaul of the SFS.
- Measurable improvements in the running of the customs service.
- Curtailment of the SBU’s responsibilities for ensuring economic security and fighting corruption. Creation of a single agency to investigate large-scale economic crimes to replace the departments of the SBU, the SFS and the Ministry of Justice that currently have responsibilities in this area. This agency should not be subordinate to any law enforcement body. Nor should it enhance the president’s power – or that of any other official.
- Greater transparency of defence spending.
- A programme of corporate-governance reform at SOEs.
- Electoral-reform measures to ensure better representation and to increase political competition.
- Demonstrable efforts to improve the integrity, independence and professionalism of the judiciary.
- Establishment of the State Bureau of Investigation based on a new culture and working principles.
- Increase assistance programmes to local governments to mitigate risks of corruption related to management of local resources arising from decentralization.
- Facilitate training of civil society organizations on holding local officials accountable for mismanagement of local resources.
- Continue contributing to increasing the technical skills of anti-corruption organizations and investigative media, so that they have the legal, financial and accounting expertise to carry out their work.
- Increase support for civil society initiatives aimed at reducing the space for corruption in different areas, while avoiding efforts that can potentially lead to increased corruption opportunities (for example, by introducing impracticable norms) or reduced competition in the economy and politics. This should be one of the leading criteria in the assessment of grant applications.
- Signal to major business owners that, if there is evidence of their engagement in corrupt practices, their assets held abroad may come under scrutiny as part of anti-money laundering policies.
- Review existing election-monitoring methodology to assess more effectively the deficiencies of the current electoral system in Ukraine.
- Take a proper look at their own immigration and financial regulatory systems to consider how they are in some cases contributing to the preservation of corrupt practices in Ukraine by offering safe havens to the perpetrators of corruption, as well as to the assets they have stolen.
Ukraine’s policymakers should:
- Develop a detailed roadmap for further reducing the space for corrupt practices in:
- The energy sector;
- The land market;
- The tax system (including a concept for radical reform of the SFS);
- The customs service;
- The banking system;
- The procurement system (in particular, the tendering process);
- The system for regulation and licensing; and
- The judiciary.
- Take urgent measures to raise the transparency of defence procurement and the system for certifying suppliers.
- Develop procedures for vetting relevant draft legislation to include anti-monopoly assessments to prevent damage to competition by discriminatory norms.
- Use the establishment of the High Anti-Corruption Court to create space for putting into practice judicial independence by increasing accountability of the judges for unlawful rulings and corruption.
- Accelerate public administration reform and communicate its objectives to society.
- Accelerate privatization and reform of SOEs.
Civil society should:
- Communicate to citizens the achievements of the anti-corruption reforms so far and build on success stories, in healthcare and administrative services.
- Channel citizens’ energies away from justifiable anger at the lack of progress in punishing high-level korruptsioneriy, and towards addressing the institutional roots of corruption by creating open and fair competition in politics and business.
- Prepare citizens for land reform, countering the fears of the rural population that are exploited by rent-seekers who deliberately seek to undermine the concept of property rights in order to maintain the status quo.
- Push harder for electoral reform and enlist the active support of donors for parliament’s adoption of the Election Code.
- Develop a concept for rebooting the NAPC and empowering it to fulfil its mandate, including in the analysis of asset declarations and vetting of legislation.
- Develop a bold vision for shaping the future development of the law enforcement agencies.
- Ensure that all draft legislation undergoes anti-corruption vetting and is complemented by similar anti-monopoly assessments to prevent damage to competition by discriminatory norms.
73 The example of Guatemala is instructive. Despite the jailing of large numbers of senior officials instigated by a UN-sponsored anti-corruption agency, corruption levels have not fallen.
74 In June 2018, the former minister of finance, Oleksandr Danylyuk, said that he had come under pressure to support a spending programme for socio-economic development in Ukraine’s regions based on ‘the distribution of money to the projects of … lawmakers’, Zinet, N. and Williams, M. (2018), ‘Ukraine finance minister says was told to back corruption or quit’, Reuters, 6 June 2018, https://www.reuters.com/article/us-ukraine-finmin-dismissal/ukraine-finance-minister-says-was-told-to-back-corruption-or-quit-idUSKCN1J213I (accessed 14 Sept. 2018).