The Failed Promise of Deoligarchization in Ukraine

The oligarchic system, which inseparably involves informal ties and corruption between the the top tiers of government and oligarchs, did not disappear after the Revolution of Dignity. It merely evolved slightly to adapt to the new political situation. A closer look at the relationships between the government and big business shows that all post-Maidan statements of Ukraine’s top officials about ‘deoligarchization’ are pure wishful thinking. The long-established main oligarchic groups started more or less close co-operation with the government elite, which needed their support and was at the same time too weak or lacked the political will to really undermine the oligarchs’ positions.

Simple reshuffling

Most of the oligarchs emerged considerably weaker after 2014 (also due to the economic crisis), no longer enjoy the same level of influence on the government, and cannot participate in public procurement on the same scale as before. However, they nonetheless continue to rank among the most influential actors in Ukrainian politics, especially the most powerful among them including Ihor Kolomoyskiy or Rinat Akhmetov. It is possible mainly thanks to their traditional assets: financial resources and dominance of some strategic sectors of the economy, control over the media market and significant influence in the parliament. In combination with the weakness of the government in Kyiv, the oligarchic groups still possess strong instruments to defend their positions. As a result, despite some reshuffling (the disappearance of the so-called Family, i.e. the group centred around ex-President Yanukovych, and the weakness of Dmytro Firtash’s group) the oligarchic system persists.

However, the main cause behind the persistence of the major ’old’ oligarchs has been the decision, taken by part of the post-Maidan elite, to enter into tactical alliance with the oligarchs. This alliance benefits both sides. The government officials have gained the support of important deputies from the oligarchic groupings in the Verkhovna Rada, as well as informal sources of financing and media support (which was particularly important in view of the parliamentary and local elections). In return, it seems that the oligarchs were granted personal safety, protection for their businesses and the ability to continue lobbying for their business interests. Because of this forced symbiosis, the new leadership of Ukraine has chosen not to revise the Yanukovych-era privatisations, of which the oligarchic groups were the main beneficiaries.

After the revolution, as in the previous period, the oligarchs started exploiting their advantage over the politicians. In a poorly managed state with an ineffective and corrupt bureaucracy, they are the best-organised groups that are also best-prepared to govern. They can afford to use expensive legal counsel or hire lobbyists, and they have their own powerful television stations at disposal, which have practically dominated the Ukrainian media market.

In a poorly managed state with an ineffective and corrupt bureaucracy, they are the best-organised groups that are also best-prepared to govern. They can afford to use expensive legal counsel or hire lobbyists, and they have their own powerful television stations at disposal, which have practically dominated the Ukrainian media market.

Yet in order to ensure that their businesses are protected, the oligarchic groups constantly need to use tools only available to state authorities, which means that they have had to find some common ground with the political leadership. The oligarchs do not have any constant allies among the political parties, but instead enter temporary deals that are subject to revision depending on what is needed to safeguard their interests at a given moment.

As a result of the ‘old’ oligarchs entering alliances with the political camps of President Poroshenko and Arseniy Yatsenyuk & his People’s Front, a bipolar arrangement has formed within the oligarchic system. Thus, the oligarchs’ co-operation with the government has led to the formation of a specific type of pluralism. The ‘old’ oligarchs’ efforts to find protection for their business interests also contributed to this outcome – the co-operation between Rinat Akhmetov and Arseniy Yatsenyuk’s circle is a case in point: the oligarch’s interests in the electricity sector, in which he had been the dominant actor for many years, had come under threat as a result of the expansion of people with links to President Poroshenko, i.e. Ihor Kononenko and Konstantin Grigorishin, who were seeking to gain more influence in that sector.

New oligarchs

There is nothing to suggest that Prime Minister Groysman will be willing or able to change the rules according to which the system operates, especially since the ruling coalition only has a thin majority in the Verkhovna Rada, and in many votes it will have to look for additional support from the oligarchic factions – and pay the price for doing so. Another indication that the status quo between the government and the oligarchs will continue comes from a statement by Groysman who said that “the same rules should apply to the oligarchs (…), exclusively market mechanisms, no preferences (…). The position of the oligarchs should be as follows: let them take care of the country’s economic development and not interfere in [the government’s] affairs”. Such an approach rules out any radical action against the oligarchs, including an open conflict with some of them, although it does display an intention to cautiously and slowly ‘civilise’ the oligarchic system. It can be explained, as mentioned before, by weakness of the government in Kyiv but also by the fact that it is preoccupied with the war in defence of the country’s territorial integrity.

The processes that allowed the ‘old’ oligarchic groups to retain much of their former influence and the rules governing Ukrainian politics to remain unchanged overlapped with the emergence, in the aftermath of the Revolution of Dignity, of new political-business groups around the two major centres of political power in Ukraine. Since 2014, people from these groups have been able to take operational control over many of the most important state-owned companies. They have managed to gain control of those companies’ financial flows while de facto assuming no responsibility for those companies’ performance, and have been able to take convenient starting positions ahead of the planned privatisations of many of the businesses in question, thanks to their control of the key parliamentary committees, ministries and state agencies. One good example is Mykola Martynenko, a member of Arseniy Yatsenyuk’s People’s Front party, who allegedly controls some strategic state-owned companies, including Energoatom, the operator of Ukrainian nuclear power plants. Another one is Ihor Kononenko, President Poroshenko’s long term friend, who is in charge of the State Property Fund and many state-controlled enterprises.

The business base of the ‘new’ oligarchs, however, is considerably weaker than that of the ‘old’ oligarchs. The former usually do not own any major business assets, but merely manage state-owned property, and – crucially – do not control any of the major television stations, which are an important political instrument in Ukraine. The fact that the monopoly of the traditional players in the media market has not been overcome is another reason why the ‘new’ oligarchs and the politicians associated with them have had to reach some kind of agreement with those who control the television stations.

Impact on the reforms

The still robust oligarchic system and the Ukrainian leadership’s inability and lack of political will to really challenge it have been affecting the reform process in Ukraine directly. After the Maidan, Ukraine found itself in a paradoxical situation. On the one hand, members of the new government are fully aware that they have to reform the system because that is what the people (and the West) expect, and is objectively necessary in view of the fact that the post-Soviet economic and political model has exhausted its potential. On the other, however, they are unable to consistently pursue reforms because they themselves are products of the system. Most of the leading politicians who have been in power in Ukraine since 2004 were shaped in the 1990s and have already held high state offices in several previous governments. It can therefore hardly be said that a new political elite has come to power in Ukraine and, as a result, what the country gets is adaptation and adjustments instead of earnest attempts at structurally changing the situation.

It can hardly be said that a new political elite has come to power in Ukraine and, as a result, what the country gets is adaptation and adjustments instead of earnest attempts at structurally changing the situation.

The fragmentary reforms carried out so far have not curbed oligarchic influence to any significant degree. Even the positive solutions adopted by the Verkhovna Rada, which should have undermined the oligarchs’ clout, have been watered down or delayed (e.g. the introduction of public financing of political parties has been postponed until 2017). Thanks to the President’s control of the General Prosecutor’s Office, it has been possible to effectively thwart some inconvenient investigations. Norr has any substantial deregulation of the economy taken place, which could have created the right conditions for the development of small- and medium-sized enterprises and undermined the preferential conditions on which the oligarchic businesses operate. A situation around Ukrnafta is an excellent case showing that some of alleged government efforts to get rid of oligarchic influence are merely a PR-campaign or imitation. This key oil company, de iure controlled by the state, is de facto still owned by Ihor Kolomoyskyi’s Pryvat Group.

The experience of the last two decades clearly demonstrates that the oligarchic model of Ukrainian economy cannot provide a viable alternative to an effectively functioning market because it cannot create stable sources of growth. The oligarchs, who have taken over entire economic sectors, have been mainly interested in maximising their profits and have cared little about the development of their assets. As a result of this extensive and anti-development economic model, almost none of the big business-dominated sectors of the Ukrainian economy has undergone any modernisation (e.g., mining and metallurgy).

The government has yet to deliver on one of its key post-Maidan promises – to strip the oligarchic groups of influence as part of a deep reform process. While the highest-ranking members of the Ukrainian leadership regularly re-assert their commitment to de-oligarchisation in their policy statements, little is being done to actually achieve that goal. Given the scale of their observable lack of political will to do anything to that end, one should presume that the oligarchs will keep their influence as long as the current balance of power in Ukrainian politics prevails. Some more or less serious conflicts may emerge between the government and individual oligarchs, but this will not affect the system in any significant way.

Moreover, even if a snap election were to be held in the coming months, it would be very unlikely to lead to a qualitative change in the Verkhovna Rada and elevate parties free of oligarchic influences to power. Faced with costly election campaigning, each of the major political parties would need to reach for the financial and media support of the oligarchic groups, and would have to put the oligarchs’ representatives in its election lists in return. In view of the general weakness of the state and the other, previously described instruments of oligarchic influence, this means that in the foreseeable future, the oligarchs will continue to act as ‘stakeholders’ of Ukrainian politics with a blocking package.

The author recently published a detailed report: Keystone of the system. Old and new oligarchs in Ukraine.