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Rent-Seeking in the Development of the Renewable Energy Market in Ukraine

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Rent-Seeking in the Development of the Renewable Energy Market in Ukraine FACULTY OF SOCIAL STUDIES Rent-seeking in the Development of the Renewable Energy Market in Ukraine Master's Thesis ANTON PUSHKO Supervisor: doc. Mgr. Jan Osička, Ph.D. Department of International Relations and European Studies Energy Policy Studies Brno 2021 2 2 RENT-SEEKING IN THE DEVELOPMENT OF THE RENEWABLE ENERGY MARKET IN UKRAINE Bibliographic Record Author: Anton Pushko Faculty of Social Studies, Masaryk University Department of International Relations and Euro- pean Studies Title of Thesis: Rent-seeking in the development of the renewa- ble energy market in Ukraine Degree Programme: Energy Policy Studies Supervisor: doc. Mgr. Jan Osička, Ph.D. Academic Year: 2021 Number of Pages: 77 Keywords: renewable energy, rent-seeking, Ukraine, oligar- chy, Feed-in-Tariff, corruption 3 RENT-SEEKING IN THE DEVELOPMENT OF THE RENEWABLE ENERGY MARKET IN UKRAINE Abstract This thesis aims to investigate and examine the political economy of rent- seeking in the renewable energy sector of Ukraine, involved actors, and practices. Rent-seeking significantly affects the development of the Ukrainian renewable energy market, and it is one of the main compo- nents challenging the industry. Rent-seeking is one of the major issues in developing economies, and Ukraine presents an interesting example to investigate this phenomenon in the context of post-communist transfor- mation. Also, rent-seeking in Ukraine has some unique features due to its devious politics-business connections, which took place in the innova- tive green energy sector as well. In this theory-guided case study, I ex- plored the concept of rent-seeking and empirically examined financial flows, political-business relationships in the country, corruption cases, and lobbyism to reveal a comprehensive picture of the rent-seeking prac- tices and behavior in the renewable energy sector. The results indicate that the institutional weaknesses in the post-Soviet economy played a significant role in the rent-seeking occurrence, kleptocracy, and self-in- terest of the governmental officials accelerated the issue. 4 RENT-SEEKING IN THE DEVELOPMENT OF THE RENEWABLE ENERGY MARKET IN UKRAINES Statutory Declaration I hereby declare that I have written the submitted Maste’s Thesis con- cerning the topic of Rent-seeking in the development of the renewa- ble energy market in Ukraine independently. All the sources used for the purpose of finishing this thesis have been adequately referenced and are listed in the Bibliography. In Brno 30 May, 2021 ....................................... Anton Pushko 5 RENT-SEEKING IN THE DEVELOPMENT OF THE RENEWABLE ENERGY MARKET IN UKRAINES Acknowledgments I want to thank my supervisor, doc. Mgr. Jan Osička, Ph.D., without whom I would not be able to write this thesis. I am also thankful to my friends and classmates for their support and suggestions. 6 TABLE OF CONTENTS Table of Contents List of Figures 9 List of Tables 10 List of Terms and Acronyms 11 1 Introduction 13 2 Theory and Literature 15 2.1 Theory of Rent-seeking ........................................................................... 15 2.1.1 The concept of Rent-seeking, its most common features, and problems it brings .................................................................................... 15 2.1.2 The manifestation of rent-seeking in different socio- economical cultures (democracies and transitional countries) ..... 17 2.2 Rent-seeking in Ukraine .......................................................................... 19 2.3 Rent-seeking in the energy sector....................................................... 20 3 Methodology 22 3.1 Case Selection .............................................................................................. 22 3.2 Data collection ............................................................................................ 22 3.3 Operationalization .................................................................................... 24 4 Case description: the economic governance in Ukraine 28 4.1 Post-Soviet Ukraine: Privatization and Oligarchy ........................ 28 4.2 Donetsk clan and Yanukovych in power .......................................... 29 5 Rent-seeking in Ukraine: Actors and Practices 31 5.1 Feed-in-Tariff .............................................................................................. 31 5.2 Klyuyev’s business empire ..................................................................... 33 5.2.1 Actor(s) and their assets............................................................... 33 5.2.2 Practices .............................................................................................. 37 5.2.3 The outcomes for the actor and a state ................................... 38 5.3 New players in the Post-2014 market ............................................... 41 7 TABLE OF CONTENTS 5.3.1 Actor(s) and their assets ............................................................... 42 5.3.2 Practices .............................................................................................. 46 5.3.3 The outcomes for the actor and a state ................................... 49 6 Discussion and conclusion 51 Bibliography 57 8 TABLE OF CONTENTS List of Figures Figure 1. The circular flow of the Rent-Seeking economy. ......................... 16 Figure 2. The capacity of the renewable electricity facilities, which work under the “Green” tariff (MW). ................................................................... 32 Figure 3. The network of subsidies and affiliated companies within Klyuyev and Yanukovych ownerships. ...................................................................... 35 Figure 4. The flow of the banking loans. ..................................................... 39 Figure 5. Installed capasity (MW) of the biggest producers. ....................... 42 Figure 6. MPs directly or through relatives and assistants are involved in the business and benefit from the green tariff. .................................................. 45 9 TABLE OF CONTENTS List of Tables Table 1. Concepts and indicatos. .................................................................. 24 Table 2. Comparison of the tariffs in the different countries during 2009 – 2013. ............................................................................................................. 32 10 TABLE OF CONTENTS List of Terms and Acronyms RS – Rent-seeking RES – Renewable energy sources UAH – Ukrainian hryvnia EUR – Euro c€ – Euro cent USD – United States dollar MW – Megawatt KW – Kilowatt kWh – Kilowatt hour UKR – Ukraine FiT – Feed-in-Tariff EU – European Union SPP – Solar power plant WPP – Wind power plant HPP – Hydropower plant NCSRE – National Commission for State Regulation of En- ergy MM – Million B – Billion PJSC – Joint-stock company LLC – Limited Liability Company Ltd. – Limited Company MP – Member of Parliament SBU – Ukrainian Security Services 11 INTRODUCTION 13 1 Introduction Ukraine, a country with a high corruption level1 and crony-capital- istic economy, heavily penetrated by the oligarchic structures, reached such extreme statistics that by the year of the RES market opening2, the combined wealth of Ukraine’s 50 wealthiest oligarchs was equal to 85% of Ukraine’s GDP (Kuzio, 2016). Since the beginning of its independence in 1991, Ukraine lacked nor- mal political, market, economic and legal institutions, which meant that few formal restrictions were in place (Åslund, 1999). The privatization of state enterprises in the 1990s allowed some people to obtain not only positions in business but also extend their influence on governmental cabinets. Through the years, business and government in Ukraine devel- oped close connections, which de-facto spawned the ingrained oligarchic schemes and rent-seeking. In the aftermath of the lack of reforms in the 1990s and the dominance of oligarchs within Ukraine’s energy market, their influence on the decision-making processes in the country, as well as governmental favoritism, Ukraine became the most egregious rent- seeking economy among other post-communist countries. The renewa- ble energy sector became a source of profit for a narrow circle of people, excluding the possible potential entrance of the new investors (Åslund, 2014). Ukraine started its path of renewable energy development in 2009, when the government imposed the green tariff, aiming to stimulate 1 in 2009 – 146th place out of 180 in corruption perception index accordingly to Transparency international 2 2009 13 INTRODUCTION 14 investments into the sector. Firstly, right after the implementation of the tariff, which was relatively high3, indeed attracted investments and es- tablished the growth of the renewable energy sector in the country. The investments in the RES and the goals of decarbonization were replaced by a pragmatic desire of money-making by few big players on the market, using governmental preferences, lobbying its interests, and conse- quently sabotaging the competitive development of the market. Ukraine has a 13.3% share of electricity being produced from renewable energy sources (Ministry of Energy of Ukraine, 2020). Although statisti- cally, Ukraine increased its share of renewables through the years, it does not lower the prices for the consumers nor positively affects the market. Since Ukraine always had a relatively high green tariff, the large amounts of investments complicate the state’s fulfillment of the obliga- tions given to the investors (Kurbatova et al., 2014). The burden of gov- ernment
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