Ukraine’s Rotten Front

Forget Russia -- if the new government wants to save the country, it needs to drum corruption out of its ranks.


Ukrainian leaders, it has been said, never miss an opportunity to miss an opportunity. Though it’s still unclear whether the new government can break this pattern, the opportunity before it now is nothing less than to undo the system of institutionalized corruption that has held Ukraine down since independence, and made it vulnerable to aggression and dismemberment. Despite the enormous strains imposed by the conflict in the east, there is reason to hope that this year Ukraine can begin the shift from failing state to one where the rule of law prevails. If it can change the corruption equation, Ukraine may be able — at long last — to have a political system that mirrors its European neighbors.

There is popular support to run corruption out of the government. Revulsion at the corruption and impunity of Viktor Yanukovych’s regime, even more than pro-EU sentiment, became the rallying cry of Maidan protesters as the movement expanded in late 2013. Indeed, the Maidan only became a mass movement after police beat the few hundred original, mostly student, protesters who had gathered to oppose Yanukovych’s abrupt decision not to sign the EU Association Agreement. One year after Yanukovych’s departure, the demand for institutional change remains, to a large degree, unrealized. Nothing would help cement national unity or spur resilience against the aggression in Donbass more than success in the fight against institutionalized corruption.

Systemic corruption in Ukraine predated the Yanukovych kleptocracy, and has lived on after its demise. Ukraine ranked 142nd out of 175 countries in Transparency International’s Corruption Perceptions Index in 2014 — six places below Russia — and the worst in Europe. Yanukovych and his cohort shamelessly plundered the state budget, stealing billions — perhaps tens of billions — in a few short years. Insider deals on state procurement contracts were a favored method. But the habit of using public office for private gain is nothing new, and extends far into the civil service. In a 2011 Transparency International survey, Ukrainians identified the judiciary as their most corrupt institution, followed closely by the police and parliament. The combination of labyrinthine regulations and low pay for the civil service and law enforcement perpetuates widespread bribery.

If it is true that a fish rots from the head, then the only way to successfully combat corruption is to secure a firm commitment from the top leadership. Without such buy-in, anti-corruption efforts amount to little more than a kabuki dance. Yanukovych, after all, formally headed Ukrainian government anti-corruption efforts during his rule. This time, the buy-in from the leadership appears to be for real. Both President Petro Poroshenko and Prime Minister Arseniy Yatsenyuk have repeatedly pledged their commitment to anti-corruption efforts, and stated that the push would come following the election of a reformist parliament. That parliament is now in place. They have also stressed that the conflict in Donbass is no excuse for postponing reform.

One sign that Poroshenko and Yatsenyuk might be the real deal is their selection of non-Ukrainian experts to serve in key ministries. American Natalie Jaresko is minister of finance; the minister of the economy is a Lithuanian and the minister of health is Georgian. This unprecedented step sent the signal that these portfolios were reserved for independent technocrats untainted by the entrenched patronage networks.

While the Orange Revolution failed in governance, it did succeed in removing constraints on civic activism and press freedom. Yanukovych’s attempts to reverse these gains faltered. As a result, Ukraine today has a wealth of civic organizations, human rights groups, independent journalists, and other activists. Many of these individuals played important roles in the Maidan movement and can be counted on to hold the government’s feet to the fire on anti-corruption efforts.

Last spring, civil society organizations helped frame the reform agenda through a “Reanimation Package of Reforms,” which involved hundreds of independent experts who developed a comprehensive platform and lobbied the parliament (Rada) for the passage of reform bills. Some of the leaders of that effort are now themselves in the Rada. They are among a cadre of about 30 young Maidan activists elected in October from various parties who have united around a reformist, pro-EU agenda. The presence of such activists in the Rada represents a major change for that body. Civil society, previously at odds with the governing class, is now embedded in it.

In short, a window for reform is open this year. Failure to seize this opportunity could have dire consequences for Ukrainian statehood.

Still, old habits will be hard to break. Oligarch Igor Kolomoisky, appointed governor of Dnipropetrovsk, earned praise for his decisive actions to prevent pro-Russian agitators from gaining ground in his oblast and is on the rise. But he is widely suspected of using strong-arm tactics in his business practices over many years — no one’s idea of a reformer. Similarly, many of those who have gotten rich in the civil service and judiciary by trading on their positions remain in place.

Weeding out corruption means overhauling institutions both large and small. Perhaps no institution is more in need of reform than Naftogaz, the state gas monopoly, for decades a wellspring of corruption.

The budgetary subsidies for energy — much of them for Naftogaz — amounted to a stunning 7 to 9 percent of GDP in 2014, several times Ukraine’s defense budget. Economist Anders Aslund has observed that rent-seeking in the Ukrainian gas sector has been the main source of enrichment of oligarchs over the past two decades. With state prices fixed at $30 per thousand cubic meters of gas, connected individuals could buy at that rate and then sell to the market at over 10 times the price.

While presiding over huge losses, the former heads of Naftogaz nonetheless conspicuously enriched themselves under Yanukovych, as widely circulated images of their opulent riverfront palaces reminiscent of Yanukovych’s infamous Mezhyhirya residence testified.

If the goal of Ukrainian energy policy was to keep Ukraine hooked on expensive Russian gas, discourage domestic production, enrich oligarchs, and encourage wasteful consumption, then it succeeded spectacularly. The cure for such distortions has long been known: Remove massive subsidies for gas consumers and end price controls on domestically produced gas.

Market pricing should be phased in, with social payments for the neediest consumers as compensation. With the right price signals, Ukraine, currently the most inefficient energy user in Europe, could cut energy consumption per unit of GDP by half, as Poland did. This, along with increased domestic production, could end the need for any gas imports from Russia.

Implementing these reforms requires more than buy-in from the Ukrainian leadership — it needs to be spurred by rigorous conditionality from the donor community. The Feb. 12 announcement by the IMF of an agreement on a $17.5 billion Extended Fund Facility stressed the importance of Ukraine’s commitment to reach market levels in gas pricing by April 2017. On March 2, the Rada approved raising home heating and cooking gas prices by about three times, effective April 1 — a dramatic jump.

The IMF also underlined the importance of maintaining a safety net of targeted payments to the poorest consumers to compensate. The minister of the economy, Lithuanian-born Aivaras Abromavicius, has pledged to offset the rise in home gas prices with direct assistance to low-income consumers amounting to 2 percent of GDP.

With many Ukrainians suffering from the consequences of economic contraction, a vigorous public information campaign to explain the reforms to the public must be a priority to avert a backlash. In the past, Ukrainian leaders have agreed to initial IMF demands for price increases, only to back off on subsequent increases out of fear of the public reaction. While moving toward market pricing, Ukraine must also lower the high tax rates faced by independent operators in domestic energy production if it wants an increase in domestic supply.

The failing state Yanukovych left behind has necessitated the launching of a wide range of additional anti-corruption efforts, many of them involving fundamental change. In December, Yatsenyuk announced plans to reduce the number of regulatory agencies from 56 to 28, to be followed by additional reductions. The goal, he stated, is to “abolish the Soviet-time state standards” that burden businesses with an onerous system of permits and inspections and open up massive opportunities for bribery. Economy Minister Abromavicius defined the objective as “maximally deregulat[ing] all processes in the economy to enable … business to breathe.”

Another reform is the pending establishment of an Anti-Corruption Bureau with investigatory powers and a mandate to keep an eye on senior public officials. Such officials are now required to make full declarations of income, with the bureau on the lookout for lifestyles at variance with declared earnings.

Civil service reform will be a longer-term effort. In December, Yatsenyuk declared that the number of state officials would be cut by 10 percent in 2015, and committed the government to “reducing the quantity [of the civil service] and increasing efficiency and wages.” In addition, a “lustration” law came into force in October to vet public servants for past corruption and illegal acts. The law responds to societal outrage over widespread corruption in the judiciary, prosecutor general’s office, and other agencies, during and before the Yanukovych period. However, the Venice Commission has criticized the law for being too broad, and only minimal implementation has taken place to date.

Over the longer term, the harmonization of Ukrainian governmental systems to EU norms and structures via the Association Agreement and the Deep and Comprehensive Free Trade Agreement will be transformative for Ukraine. The Association Agreement is, in essence, a detailed blueprint for reform and transparency across all sectors and institutions. Large-scale EU mentoring and technical support will be crucial to helping the Ukrainian government accomplish this historic task.

It is said that nothing focuses the mind like the prospect of one’s hanging. Only by getting its act together on governance can Ukraine hope to gain the strength it needs to overcome the challenge Russia is posing to its statehood. Viktor Yushchenko frittered away his opportunity to reform the crony capitalist system he inherited after the Orange Revolution. His failure paved the way for Yanukovych to install a system of unbridled kleptocracy. Ukraine may not be able to survive another governance failure.

The conflict in the east diverts attention from reform. But the sacrifice of so many thousands of lives also makes it imperative for the leadership to make good on the anti-corruption demands voiced at the Maidan. Major Western financial and technical assistance — and monitoring — is needed to support the reform effort. With its back against the wall, Ukraine nonetheless has the chance this year to demonstrate that it can move decisively to replace kleptocracy with rule of law. Success in this historic effort would not only shore up the imperiled Ukrainian state, but also reverberate throughout the post-Soviet realm.

Correction, March 12, 2015: Transparency International’s 2014 Corruption Perceptions Index analyzed 175 countries, not 172 countries, as an earlier version of this article mistakenly said.

Suhaimi Abdullah / Stringer

Colin Cleary is an Interagency Professional in Residence at the U.S. Institute of Peace. He served as political counselor at the U.S. Embassy in Kiev from 2008-2012. The views expressed are those of the author and do not necessarily represent the views of the Department of State or the U.S. government.

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