Four Steps to Ukraine’s Freedom, or A Plan for Taming Ukraine’s Oligarchs

The prescription for taming Ukraine’s oligarchs that we propose may seem radical. But it is nothing new. Even in early-modern Europe, emerging states tamed grasping nobles and corrupt mercantilists by attacking their economic privileges, hiring competent administrators, and, when necessary, employing a bit of coercion. Doing this in Ukraine would be difficult, but certainly not impossible. It is up to the people of Ukraine to make the first step.

Ukraine’s oligarchs must be brought to heel. On that point, almost everyone is agreed. How to make it happen is another question, one to which remarkably few observers have offered an answer. Claims that the oligarchs control upwards of 70 percent of the economy are probably an exaggeration. But it is not their wealth per se that sets them apart; it is their political influence. The legislative and judicial branches are instruments of oligarchic power. The executive branch is headed by President Petro Poroshenko, himself an oligarch with a questionable past. A mere six individuals control the bulk of Ukraine’s print, radio, and television media.

The oligarchs first came to prominence in the mid-1990s. All of them built their fortunes through dubious means. Whether by securing special privileges in the gas market, raiding private companies, trading on advantageous terms with state enterprises, or privatizing those same enterprises in rigged sales, select government cronies came into massive wealth.

The illicit dealings that lie at the root of their fortunes give the oligarchs a powerful stake in keeping state officials corruptible, market competition anemic, and democratic institutions feeble. Clearly, Ukraine cannot become a Western-style democracy and market economy while its magnates reign supreme.

No more Potemkin palliatives

That the oligarchs must be sidelined is beyond doubt. But more government reshuffles, Western-sponsored rule-of-law programs, and stern warnings from the IMF will not do the trick.

Far more fundamental change is needed. We propose a four-step plan to get the job done.

First, the people of Ukraine must finally bring down the political class that has ruled the country since independence. That might sound like a tall order, but until it happens there will be no real reform. The governing elite is simply too compromised by its ties to the oligarchs to carry out the far-reaching changes the country needs. Instead, Ukraine’s citizens must elect a parliamentary majority from outside the post-communist establishment. That majority must then appoint a government of reputable technocrats.

Second, the new government, once in charge, must replace corrupt officials in the state administration with motivated activists and outsiders. It should start with the judiciary, where crooked prosecutors and judges advance the oligarchs’ interests and protect them from prosecution.

Surely Ukraine’s reformers cannot be expected to replace 10,000 judges and 20,000 prosecutors overnight. What they can do is create a special prosecutor’s office and special courts staffed by honest professionals and charged with pursuing high-level corruption cases.

In December 2015, a new National Anti-Corruption Bureau (NABU) came into force. It has scored some notable successes, even bringing cases against prominent allies of the president. Not surprisingly, however, its prosecutors have come under attack from myriad state bodies under the oligarchs’ thumbs, from the general prosecutor’s office to the security services. They have also encountered a wall of resistance from the country’s notoriously corrupt courts. To become effective, the NABU not only requires a set of complementary special courts in which to try cases; it needs the political class to get out of its way and exit power.

If the first two steps are designed to weaken the oligarchs’ control of the state, the third and fourth aim to reduce their economic clout.

The third step is to scrap the subsidies on which the moguls depend. To begin with, the government should privatize the state enterprises that serve as feeding troughs for oligarch-controlled firms. But the sales must break with tradition by taking place on honest terms and allowing competition from both foreign and domestic suitors. This is the only way to price the oligarchs out of contention and put the enterprises into capable hands. If necessary, the government should blacklist certain businesspeople from participating.

By insulating them from market competition, Ukraine’s byzantine system of regulation and taxation also subsidizes the oligarchs; after all, it is they who are best positioned to bribe their way around the complex and mutually-contradictory rules. This system must be overhauled, simplified, and clarified.

How Estonia did it

The case of Estonia shows how the rise of a reformist coalition, the appointment of competent professionals to state posts, and the eradication of subsidies for grasping elites can pave the way for the rule of law. Estonia was an unlikely success story. When it became independent from the USSR in 1991, it was home to a burgeoning class of economic criminals. At the same time, the former colonial outpost of Moscow lacked even the most basic trappings of a state administration.

But in 1992, Estonians elected a parliamentary majority made up of parties from outside the former communist establishment. The reformist government appointed motivated activists and honest professionals to state positions, most crucially in the sphere of law-enforcement. This helped deprive political capitalists of patrons in the state. In addition, Estonia’s new leaders reined in the crony-engineered loans, underpriced privatizations, and other forms of state support, which would have otherwise spawned a class of predatory oligarchs. With crony capitalists out of the way, Estonian leaders were free to reform the country. In time, Estonia would become the model of a post-communist democracy governed by the rule of law.

An offer they can’t refuse

Unfortunately, Ukraine’s plutocrats are far more entrenched today than Estonia’s were in the early-1990s. To cut them down to size, a fourth and final step is needed.

Namely, the newly-appointed special prosecutors should make the oligarchs an offer they can’t refuse: Either pay a massive, one-time tax on their ill-gotten gains or face prosecution for their past misdeeds. A similar strategy worked in Georgia after the Rose Revolution of 2003. It could work in Ukraine too.

The point is not to punish the oligarchs; it is to sap their wealth to such an extent that they can no longer use it to hijack the state. True, a plea bargain would allow scores of law-breakers off the hook. But Ukraine’s prosecutors are in no position to pursue complex corruption cases against the entire oligarchic class. It is far more realistic to conclude plea bargains with most while prosecuting the holdouts.

How the West can help

The West can assist Ukraine’s reformers in their battle to subdue the oligarchs. In particular, tax havens in the United States, the United Kingdom, and the European Union service oligarchs and kleptocrats in Ukraine and beyond. For the plea-bargain strategy to work, Western law-enforcement agencies must provide their Ukrainian counterparts with information on the oligarchs’ offshore holdings.

A commitment to such bold action would do more for Ukraine’s future than would yet another round of seminars on the rule of law in Kiev or still another IMF bailout backed by solemn promises by the elite to clean up its act.

But does the plan have a chance?

The prescription we propose may seem radical. But it is nothing new. Even in early-modern Europe, emerging states tamed grasping nobles and corrupt mercantilists by attacking their economic privileges, hiring competent administrators, and, when necessary, employing a bit of coercion.

Unfortunately, it is a difficult feat to pull off, not least in a country like Ukraine where predatory plutocrats are so entrenched. The chance that Ukraine’s nascent reformers will be able to gain a parliamentary majority and form a government in the next five years is low. Even if they do, they may not find much support from abroad. With Western Europe distracted by economic turmoil and populist agitation, and a Putin suck-up in charge in Washington, the task of reforming Ukraine will not be high on the West’s to-do list.  

Nevertheless, one can already see the stirrings of change. Ever since the Maidan uprising of 2014, Ukrainian civil society has flourished. It even has representatives in parliament in the form of a “Euro-optimist” group of MPs, whose young leaders might one day form the basis for a credible and independent opposition capable of unseating Ukraine’s long-dominant political class.

Ironically, the Kremlin has unwittingly made such a scenario more likely. Putin’s war in Ukraine has cut off the most russophilic territories from the country. Electorates in these regions and their representatives in Kiev had long impeded pro-Western, reformist leaders from taking and consolidating power at the national level.

Ultimately, it is up to the people of Ukraine to dislodge their political masters and put the reformers in charge. Until they pull off this first step, none of the next three steps we propose stand a chance of being implemented. Ukraine’s democracy may not be perfect. But unlike in Russia, elections matter; the people still have the power to choose who governs them. With a crop of new leaders, a few good policies, and a little help from the West, Ukraine might finally see its age of oligarchy draw to a close.