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

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 renewable 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, oligarchy, Feed-in-Tariff, corruption

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 transformation. Also, rent-seeking in Ukraine has some unique features due to its devious politics-business connections, which took place in the innovative 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 practices 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-interest of the governmental officials accelerated the issue.

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 renewable 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

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.

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

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

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

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

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

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 developed 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 renewable 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

INTRODUCTION 14 investments into the sector. Firstly, right after the implementation of the tariff, which was relatively high3, indeed attracted investments and established 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 consequently 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 government debt and arrears to the investors due to the guaranteed pur- chasing of the energy produced by RES rests on the ordinary citizens, that are obligated to consume energy with the higher prices every year (NCSRE, 2016). While the situation gets worse both for the government and consumers, certain interested groups continue to benefit from the imposed tariffs. Hence, my research aim is to explore the rent-seeking patterns and behavior in the renewable energy sector of Ukraine, with the following sub-questions: a) Who are the most important rent-seekers in the industry? b) What are the prevalent rent-seeking practices in the industry?

3 e.g., for solar power plants for industrial use € 0.465 per kWh

THEORY AND LITERATURE 15

2 Theory and Literature

2.1 Theory of Rent-seeking

2.1.1 The concept of Rent-seeking, its most common features, and problems it brings The most prominent authors agree that rent-seeking is an unpro- ductive pursuit of wealth that creates a loss for society (Tollison, 2012, Tullock, 2005, Hillman and Ursprung, 2015). RS will benefit special interest groups but not society, bringing down the economy and waste resources (Tullock, 2005; Roger D et al., 2008; Weede, 1985). Rent-seeking as a concept was originally developed by Anne Krueger and Gordon Tullock. Krueger explains that the governmental restrictions give rise to rents of various forms e.g., import licenses. Rents also can be obtained from such sources as efficient taxes, regulations, and quotas (Tullock, p. 47, 2005), extra income from subsidies, or from owning a resource when the market structure for that resource is oligopolistic, or there is price cooperation, occupational licensing, etc. (Zúñiga, 2017). Actors may compete for obtaining rents (Krueger, 1974, Og- buabor et al., 2020) or preferential treatment and thus become monopo- lists resulting in being victorious in this competition (Lambsdorff, 2002). Such competition occurs because the invested resources for the governmental favor are usually not larger than the value of the service (Tullock, 2005). The existence of rents will result in inefficiency and low economic growth (Khan, 2000, Weede, 1985). According to Khan (2000), the countries that suffered from substantial rent-seeking were poor economic performers, and RS is a significant cause.

THEORY AND LITERATURE 16

The engagement in rent-seeking happens when the individual in- vests in something which will not improve productivity or may even lower it. The “rent” itself is a benefit or profit which a seeker tries to con- ceal using special treatment, privilege, or monopoly of power (Tullock, 2005). Congleton (2008), Hillman and Ursprung (2015) claim that the possibility of influencing public policy for personal gain causes rent- seeking.

Figure 1. The circular flow of the Rent-Seeking economy.

Source: Fonkich (2000).

THEORY AND LITERATURE 17

North (1990) assigns a significant role in the rent-seeking emergence to the institutional framework. It is crucial in the case of developing countries and when institutions are weak. The poorly developed institutions enable the occurrence of rent-seeking because inherent problems such as the lack of enforcement of regulations, the incomplete rule of law, the lack of reliable infrastructure, etc., may all contribute to the rise of rent-seeking behavior (Iqbal, Daly, 2013). Corruption and lobbying are usually considered to be common forms of rent-seeking (Lambsdorf, 2002). Other activities can also influence decision-makers, and rent-seeking can be carried out by starting political campaigns, engaging lawyers and public relations agencies, or by public advertising (Lambsdorf, 2002). Generally, governments do not impose protective tariffs by themselves but have to be lobbied or pres- sured into doing it (Tullock, 1967). As a result, the lobby for the rise of subsidies will benefit recipi- ents but harm taxpayers. Posner (1975) argues that initially, bribes rep- resent pure transfers. A lobby may choose between paying bribes or starting a political campaign.

2.1.2 The manifestation of rent-seeking in different socio- economical cultures (democracies and transitional countries) C. Calderón & A. Chong (2006) discovered that democratic regimes are negatively linked with rent-seeking actions; transparent laws and regulations reduce such activities. This is a relevant factor for Ukraine since it is considered a transitional, hybrid regime (Freedom House, 2020).

THEORY AND LITERATURE 18

Åslund (1999) highlights the problem of a weak democracy and a lack of knowledge and ignorance about the functions of a market economy as one of the issues. Such factors affect the markets, provoking un- regulated activities of a small elite, which would not be allowed in other developed liberal democracies (Åslund, 1999). Iqbal and Daly (2013) claim that with weak democratic institutions, politicians and public officials have fewer checks on their power, making it easier for them to engage in RS. Other factors that may facilitate the emergence of rent-seeking in transition countries are ill-defined property rights being poorly protected in the privatization process (Hillman and Ursprung, 2015), a high degree of government intervention in the economy (Kimenyi and Mbaku, 1993), and others. Morck and Yeung (2004) present an analysis of RS within the oligarchic family control and conclude that the countries with such a pattern suffer more from slow economic growth, lack of innovations, and economies with a depressed level of development. Morck, Yeung (2004), and Fogel (2006) agree that oligarchic families thrive in countries with poor institutions.

THEORY AND LITERATURE 19

2.2 Rent-seeking in Ukraine

The RS practices in Ukraine are usually specified by the relation of the RS with the functioning of ineffective institutions, the presence of oligarchy, and a crony capitalism type of economy (Koziuk et al., 2018, Åslund, 1999).

Authors generally analyze rent-seeking through the prism of the post-Soviet transformation as a focal point of this new politico-economical environment. Fisun (2016) describes the growth of rent-seeking en- trepreneurs who tend to participate in the patron-client network of the president. While the national leader generally controls the political and economic life of the country, the ruling groups, within the conditions of patrimonialism, can enrich themselves, and personal “client” relationships with the leader play a crucial role in amassing personal wealth.

Rent-seeking behavior was accelerated by the institutional inertia inherited from the previous economic model, which includes such barri- ers as bureaucratization of the national economy, low public trust in politicians, the poor performance of law enforcement agencies and courts, violation of property rights and intellectual property rights, and significant amounts of corruption and bribery (Grazhevska et al., 2015). Åslund (2001) also connects the emergence of rent-seeking in Ukraine with the failed transformation of the post-communist institutions during the crucial transition period. Ivy (2012) concluded that the ambiguous phrasing in guidelines covering most regulatory procedures, the unpredictability of the state agencies in interpreting legislation, and unofficial payments which allow maximum freedom to act with a minimum of accountability, resulted in a high level of corruption and increased rent-seeking

THEORY AND LITERATURE 20 opportunities for government officials. Fonkich (2000) also states that a tangled network of non-monetary payments makes monitoring nearly impossible, creating numerous possibilities for RS.

2.3 Rent-seeking in the energy sector

Kwon (2015) concludes that poorly designed market regulations, including FiT, can lead to excess profits, increasing policy costs. He also states that since the regulators have limited information on the cost structure of renewable energy sources and RES producers engage in rent-seeking behavior, FITs can be set higher than the actual generation costs, which become sources of rents or excess profits for RES producers (Kwon, 2015).

Helm (2010) analyzes the failures in the policy instruments and concludes that the costs of renewables are still high comparably to fossil fuels. Moreover, hefty subsidies would be needed for large-scale projects. The objective for a subsidy is a political decision for which lobbyists will compete to influence. As a result, the picking of “winners” or the ob- jectives of a subsidy becomes a major rent-seeking activity.

Beard (2013) describes the emergence of rents in the renewable energy sector because the state structures and policies become depend- ent on the influence of social actors—the select few involved in the process of wealth creation.

Overall, most authors agree on the importance of the transitional period and government initiatives regarding market regulation and intervention. Commonly acknowledged is the role of the inherited institutions from the previous regime that could not transform into a modern

THEORY AND LITERATURE 21 democratic, free-market system. This environment later creates new market patterns, including the rise of oligarchy, monopolies, rent-seeking.

METHODOLOGY 22

3 Methodology

3.1 Case Selection

This case study was selected because Ukraine and its RES industry show quite interesting patterns of how the energy transition can be sabotaged and challenged, not only by technical or economic factors but also political and institutional. Rent-seeking, corruption, and kleptocracy discovered in the sector shed new light on how the RES market and support schemes can be developing in a country with weak institutions and significant oligarchic influence. Besides, the critical need of Ukraine to decrease its dependency on oil and natural gas from Russia due to the ongoing conflict and risks, financial and technical issues within the nuclear energy sector operations moves RES more and more into the agenda of Ukrainian strategy planning (Schöning, Zubaka, 2018).

3.2 Data collection

A qualitative theory-guided case study is suitable for my research since it allows us to improve our understanding of “how” and why things happen, identify patterns and relationships (Ridder, 2017). Case inter- pretation guided by the concept strengthens the analytic assumptions and decreases their logical contradictions; it makes it easier to validate or invalidate them empirically (Levy, 2008). The thesis will be primarily based on using secondary data, such as online articles and primary sources, such as reports and governmental documents.

METHODOLOGY 23

Using search engine result keywords such as “renewable energy,” “lobbyism in the energy sector,” “benefits of green energy,” “Klyuyev,” “Akhmetov,” “Yanukovych,” “green tariff,” “investors in RES,” “RES regulations,” “issues of Ukraine’s renewable energy sector,” “oligrachs and green energy,” “offshore companies” enabled me to collect a comprehensive Infobase on the issue. The period of the reviewed articles is 20094 – 2021. Since my goal is to define the RS patterns and behavior, discover the actors and practices, I need to find and collect traces of such practices and their performers within the sector (the pieces of evidence of lobbying, monopoly, cronyism, favoritism, corruption). I will also focus on the actors, who suggest the laws or regulations, thus, might contribute to the rent creation. It is also important to analyze the government’s applied decisions and regulations, which anyhow affected the sector. I will be analyzing the chronological development of the renewable energy market in Ukraine, including its main milestones. It will be needed to discover the networks and schemes that the actors are using to extract the rents; The financial flows and data on money transfers must be analyzed. It will be useful to trace the relations between or within the business and a state, possible pieces of evidence of collusions or conflict of interest. To discover the assets of the interest groups among the political elites, I will be using such registers and databases as Electronic Declara- tions of Officials and Deputies. As a result, collecting such analytical data will allow me to demonstrate RS patterns, define the rent-seekers and their methods.

4 The year of RES market opening.

METHODOLOGY 24

3.3 Operationalization

To better understand the context of the text and the politico-economical culture of Ukraine, I need to define some terms and the concepts with their corresponding indicators. It is important to understand the nature of the concepts because later on, we will be observing the very similar basis of these concepts, which were set in the realities of Ukraine. Table 1. Concepts and indicators.

METHODOLOGY 25

Concept Indicators • Interest groups and self-seeking senior bureaucrats seek to shift legislative outcomes 5 • Interest groups benefit directly from entry restrictions into markets because they thereby gain monopoly rent in marketing their output 6 • Favoritism for the relatives or friends who Rent-seeking are related to the members of the Parliament or who have positions in the state bureaucracy 7 • Government being influenced by lobbying, corruption 8 • The officials’ desire for personal gain 9 • “Client” relationships with the leader to gain personal wealth 10 • efficient taxes, regulations, and quotas, extra income from subsidies or from owning a resource when the market structure for that resource is oligopolistic 11 Rent (s) • difficult to eliminate after establishing since its elimination almost always causes losses for those who exploit the privileges; to avoid those losses, the interest groups will rent-seek again to retain it12 • Embezzlement 13 • Use of public power for private gain Corruption • Collusion • Nepotism 14 • Power abuse

5 Tullock, 2005 6 Anderson et al.,1988 7 Choi and Storr, 2018 8 Lambsdorf, 2002 9 Coolidge and Ackerman, 1997 10 Fisun, 2016

METHODOLOGY 26

• shared membership of two parties in a social network based on kinship, friendship, ethnicity, religion, school, workplace, mutual interest, or another grouping category forms the basis for the favoritism Cronyism • kind of social relations, where personal and family ties play an important role in employment decisions, business dealings, and various efforts to capture rents • a cronyist exchange between parties A and B comes at a cost to party C15 The indicators will allow us to identify RS in the RES of Ukraine, realize its main features, and detect its manifestation after empirical research. There are also other definitions, which we need to classify: Kleptocracy – is a regime where the state is controlled and run for the benefit of an individual, or a small group, who uses their power to trans- fer a large fraction of society’s resources to themselves (Acemoglu et al., 2004). Kleptocrats search to maximize their income by creating and extracting rents (Coolidge and Ackerman, 1997). Lobbying – activity aimed at influencing public officials and especially members of a legislative body on legislation, attempts to change the rules to benefit the interest groups (Harstad, Svensson, 2011). Oligarchy – the rule of a limited group of people, which uses politics to extract more state resources; a government in which a small group exercises control, especially for corrupt and selfish purposes (Åslund, 2005).

11 Tullock, 2005, Zúñiga, 2017 12 Tullock, 2005 13 theft of entrusted funds 14 favoritism (as in appointment to a job) based on kinship. 15 Khatri et al., 2005

METHODOLOGY 27

Favoritism – the showing of special favor. Clientelism – is a system based on the close personal relationships of a client to a patron, including the exchange of goods or services with a response to deliver a reciprocal benefit by the other party or the credible promise of such a benefit (Hicken, 2011).

CASE DESCRIPTION: THE ECONOMIC GOVERNANCE IN UKRAINE 28

4 Case description: the economic governance in Ukraine

4.1 Post-Soviet Ukraine: Privatization and Oligarchy

First, let us look at some historical background regarding privatization following the dissolution of the USSR, which allowed influential businessmen to gain resources to such an extent that they could be directly involved in the country's political life. In the 1990s and 2000s, Ukraine was going through several stages of privatization to eventually establish a liberalized market free of governmental intervention (Palm- ert, 1991). As the result of a difficult environment for the private enterprises, burdensome bureaucracy during the privatization process, and post-communist economic restructuring, an insufficient institutional framework allowed such elements as oligarchic clans and structures to emerge (Elborgh-Woytek, Lewis, 2002). The existing loopholes in the regulations enabled the interest groups to significantly increase their control of enterprises and bypass transparent sales procedures using such methods as bankrupting previously attractive enterprises to take control of assets at minimum values (Elborgh-Woytek, Lewis, 2002). As Grazhevska and Virchenko (2015) write: “The major desire of such clans is not an economic prosperity of the whole nation, but redistribution of available resources through the state budget and acquisition of certain privileges.” After 1991, interest groups successfully transformed individual power into personal wealth and accumulated political influence (Schöning and Zubaka, 2018).

CASE DESCRIPTION: THE ECONOMIC GOVERNANCE IN UKRAINE 29

Summarizing the results of privatization and establishing the new business elites, crony capitalism has been strengthening in Ukraine starting in the 2000s. The interest groups expanded their influence and then infiltrated both the economy and politics.

4.2 Donetsk clan and Yanukovych in power

In 2010 Viktor Yanukovych was elected as president, and at the same time, an active phase of FiT implementation has started. Yanu- kovych originally came from the Donetsk region, the same as other important actors – Rinat Akhmetov and the Klyuyev brothers. Donetsk is a rich region replete with raw materials and industry, experienced waves of violent criminal activities in the 1990s, submerged into the nexus of crime-business-politics-law before privatizing the post-Soviet industries, gaining assets and redistribution of the power in the region (Kuzio, 2014). Yanukovych, represented by the Party of Regions in his first years as Governor of Donetsk (1997-2002), aimed to establish a political and economic monopoly of power in the Donetsk region. Toward this goal, he eliminated competitors and integrated criminal and business allies into the Party of Regions, the political face of the Donetsk clan. Governor, Prime Minister (2002-2005, 2006-2007), and party leader Yanukovych provided political protection to the Donetsk clan to become fabulously wealthy. In return, Yanukovych received a percentage of the growing business assets (Kuzio, 2014). Leshchenko (2014) said that half of Rinat Akhmetov’s business assets in 2013-14 belonged to Yanukovych, explaining why Akhmetov was loyal to the president until the bitter end before he fled from power (Kuzio based on Leschenko, 2014). As Åslund (2014) concludes: “For the past

CASE DESCRIPTION: THE ECONOMIC GOVERNANCE IN UKRAINE 30 four years (2010-14), Mr. Yanukovych’s sole ambition has been to enrich his family and cronies.”. During his prime minister and later presidential (2010-2014) terms, Yanukovych tried to consolidate and strengthen his power through such tactics as coaxing members of opposition parties to join the Party of Regions and using the financial backing of key oligarchs like Akhmetov (Hall, 2017), thus creating a broad coalition to achieve a majority in the Parliament. As A. Motyl (2010) writes: “Most of Yanu- kovych’s political appointees hail from his home regions and have little experience with democratic politics or the technical know-how required to run a clean government and a functioning market economy.” Yanu- kovych also achieved control of key ministries by using expanded Prime Ministerial powers. He could appoint allies to key positions, which he did by placing a supporter as head of the SBU (Ukrainian Security Services), which allowed him to monitor the opposition extensively and easily (Hall, 2017 based on Mostovaya). Throughout the years of presidency, the Yanukovych administration developed tactics of winning elections through fraud, voter bribery, reducing the presence of the opposition in Parliament, refusal to register or cancel the registration of candidates from the opposition parties (Balan, 2010). Overall, the rule of Yanukovych signified the period of competitive authoritarianism, consolidation of power, and strengthening already strongly existing corruption, solidifying the status of Ukraine as a kleptocracy. Since the 1990s, political, business elites, and criminal elements were intertwined, creating various schemes and activities with one goal – to enrich themselves with no regard for the population’s welfare (Koziuk et al., 2018).

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 31

5 Rent-seeking in Ukraine: Actors and Practices

5.1 Feed-in-Tariff

The market of RES became a potential source of rent extraction after the implementation of the Feed-in-Tariff, which was introduced in 2009 through the adoption of the Green Tariff Law. According to the Law of Ukraine (2009) regarding renewable energy sources: a “green” tariff is a special tariff at which electricity is pur- chased, produced at power facilities, in particular on the commissioned construction lines of power plants (start-up complexes), from alternative energy sources (and with the use of hydropower - only micro, mini - and small hydropower plants). The Green Tariff Law introduced a guaranteed minimum FiT for electricity produced from solar – as well as other renewables – at the same time replacing a renewable incentive scheme that had been unsuccessful due to insufficient economic incentives and legislative uncertainties (Sysoiev, 2012). The fixed size of “green” tariffs was converted into euros as of January 2009 to protect investors from possible inflation and fluctuations in the hryvnia (UAH) exchange rate against the Euro/US dollar. According to Kurbatova et al. (2014), the green tariff in Ukraine was one of the highest in Europe. In the United Kingdom, FiT for solar energy was 0.1–0.22 USD/kWh, 3–5 times lower than feed-in tariffs for solar energy in Ukraine. Such a generous starting setting served as a clear trigger for future rent-seeking.

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 32

Table 2. Comparison of the tariffs in the different countries during 2009 – 2013.

South Tariff Ukraine Turkey Serbia Taiwan Africa (c€/kWh) Solar 42.6 – 46.5 13.3 – 20 16.25 – 21 – 32 21 – 29 c€ power c€ c€ 20.66 c€ c€ Wind 6.4 – 11.3 7.3 – 11 c€ 9.20 c€ 8 – 22 c€ 13 c€ energy c€ 13.3 – 18.9 8.2 – Biomass 12.38 c€ 9.5 c€ 12 c€ c€ 13.26 c€ Hydro 7.3 – 9.6 7.38 – power 5.3 – 7.7 c€ 6 c€ 10 c€ c€ 12.40 c€ plants Sources: Author based on IFC (2012), Ministry of Energy of Serbia (2013), PwC Turkey (2012), Chen (2013), National Energy Regulator of South Africa (2009). The tariff for solar energy is significantly higher than in the mentioned countries. Solar energy is precisely the niche that will become the most profitable “rent” for the interested actors in the future. Figure 2. The capacity of the renewable electricity facilities, which work under the “Green” tariff (MW).

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 33

The capacity of the renewable electricity facilities , which work under "Green" tariff (MW)

9000 8000 7000 6000 5000 4000 3000 2000 1000 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Q1 2020

Wind Solar Biofuels Small hydroelectrc power plants

Source: Author based on State Agency for Energy Efficiency and Energy Saving of Ukraine (2020), KPMG (2019). The drastic increase between 2018 – 2020 happened because, in July 2020, the Law on Restructuring of FiT was passed, which provides the decrease of the tariff (Energy Community, 2021). In addition, in 2019, Parliament voted to introduce auctions, which, however, would start in 2020. Consequently, the completed constructions in 2019 could be selling electricity for ten years according to the old tariffs (Kalyuzhna, 2020).

5.2 Klyuyev’s business empire

5.2.1 Actor(s) and their assets Andriy Klyuyev was one of the most influential people during the Yanukovych administration (2010-2014) and at the same time one of the

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 34 biggest rent-seekers in the industry of RES. He was a close associate of Yanukovych, and in the 1990s he was working in various governmental positions in the Donetsk regional bodies (Nashi Groshi, 2013). In 2010 he became the First Deputy Prime Minister – Minister of Economic De- velopment and Trade of Ukraine and, according to his official duties, also a head of the Commission for Coordination of Activities related to the Im- plementation of Investment Projects, per the Government Resolution (Leshchenko, 2010). This permanent advisory body of the Cabinet of Ministers decides what projects should be financed by the state from the Stabilization Fund of the state budget. Andriy Klyuyev and his brother were controlling several assets around Ukraine, including PJSC Semiconductor Plant and PJSC Ukrpid- shipnyk. Both companies were owned through the Austrian companies Activ Solar GmbH and Slav Handel Vertretung und Beteiligung AG (Slav AG). Activ Solar GmbH and Slav AG are registered at one address - Wip- plingerstraße 35; 1010 Vienna (Nashi Groshi, 2013). Slav AG, a company founded in 1994, provides a broad spectrum of services including renewable energy through subsidiaries and has operations in many countries: Poland, Czech Republic, Bulgaria, Israel, Den- mark, Hungary, Romania, France, Turkey, Russia, Kazakhstan, Great Brit- ain, India, the Netherlands, Pakistan, Slovakia, Slovenia, and Switzerland (Shulga, 2013). The main company involved in the industry was Activ Solar GmbH. This company was registered on 15 February 2008 in Austria by Slav Beteiligung GmbH, which in turn was founded on 7 December 2005 and is owned by Slav AG. At the end of 2008, the owner of Activ Solar GmbH was changed, and the sole owner became Serhiy Klyuyev’s son-in- law, Kave Ertefay (Nashi Groshi, 2013).

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 35

In 2009 the owner of Activ Solar GmbH had changed once again to Liechtenstein’s P&A Corporate Trust with Reinhard Proksch as a director (Leshchenko, 2011). This Liechtenstein trust also owns shares in a British company called Blythe (Europe) Ltd, which, in turn, owns 35% shares of the Kyiv’s LLC Tantalit – the owner company of the Mezhyhirya Residence – Yanukovych’s luxurious estate with a yacht pier, an eques- trian club, shooting range, tennis court and other recreational facilities (Leshchenko, 2011). The same firm, Blythe (Europe) Ltd, is the 100% stakeholder of the British Astute Partners Ltd. The latter is an owner of another company, Forester’s House, which controls the Dnieper-Te- terivka forestry in Sukholuchye, where Yanukovych’s hunting residence is located (Leshchenko, 2010). The assets of both Yanukovych and the Klyuyev brothers were leading to the same addresses and offices. Figure 3: the network of subsidies and affiliated companies within Klyuyev and Yanukovych ownerships. Figure 3. The network of subsidies and affiliated companies within Klyuyev and Yanukovych ownerships.

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 36

Source: Author, based on: Leshchenko (2010), Nashi Groshi (2013), Ukrayinska Pravda (2012). De-facto Activ Solar was controlled by the Klyuyev family. This company united many others – Oriol Solar, Ozil Solar, Ospriy Solar, and many other “Solars” – to participate in lending under state guarantees. All of them planned to build solar power plants in Crimea (Ukrayinska Pravda, 2012). Moreover, the state ensures the connection of solar electricity production facilities to the national grid. Besides, Klyuyev owned the Zaporizhzhia Semiconductor Plant - the only factory in Ukraine that produced polysilicon for solar panels. In total there were around 70 of Klyuev’s companies in Ukraine that are directly or indirectly associated with the above-mentioned Aus- trian holding companies. These are large industrial plants, financial holding companies, banks, and “gasket” companies used to optimize taxation, use budget money, and hide the real owners of businesses (Shulga, 2013). In addition, the business empire includes dozens of offshore

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 37 companies in Cyprus, the Netherlands, Luxembourg, and other European states.

5.2.2 Practices A. Klyuyev promoted the initial implementation of FiT itself and the establishment of the industry. In 2006, he introduced to Verkhovna Rada 16 a draft law on amendments to the Law “On Electricity” (on the establishment of a special tariff for electricity – “green tariff”) (Verkhovna Rada, 2006). Another fact that for the first time, FiT was provided to Activ Solar’s 2 SPPs in Crimea – “Okhotnikovo” and “Perovo” (Scherbyna, Lyamets, 2012) Klyuyev also lobbied for a legislative consolidation of the norm according to which the green tariff was set only in the case of the pur- chase of Ukrainian equipment 17 (Nashi Groshi, 2013). The norm was successfully implemented, and only those companies that bought from Klyuyev’s factory could receive a tariff. None of the potential investors had permission to connect to the power grid. The permit could, hypo- thetically, be obtained only after the start of construction (Novoye Vremya, 2019), (Бизнес Цензор, 2018). In October 2010, the Commission for Investment Projects provided state aid to PJSC “Semiconductor Plant” of about UAH 200 million to implement the innovative project of photovoltaic products production (Nashi Groshi, 2013). A. Klyuyev, being head of a commission and using the provided competencies, financed his own company. Furthermore, during 2009 to early 2010, PJSC “Semiconductor Plant,” as a loss-making

16 Tha parliament of Ukraine 17 It was required that the applicant had more than 50% of the equipment produced in Ukraine

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 38 enterprise, signed several loan agreements with the state-owned bank “Ukreximbank” for a total amount of around 458 million Euros loans to finance an investment project to create modern production of tri- chlorosilane, polysilicon, etc. (Nashi Groshi, 2013). Within this network of subsidiaries and foreign registered companies, Klyuyev benefited from the green tariff, and 25 subsidiaries of Activ Solar, which were registered in 2009-2012, were already using the tariff. Activ Solar was marked as the first biggest and most powerful company in the RES market. The tariff was implemented when both brothers were members of the Parliament (Scanner Project, 2019). Moreover, the head of the National Commission for State Regulation of Energy (NCSRE) was Serhiy Titenko – a close acquaintance of both Yanukovych and An- driy Klyuyev, with whom Titenko was familiar in the 1980s while working at the Donetsk National Technical University (INSIDER, 2014). The NCSRE is an important body responsible for issuing a license for electricity production and green tariff setting.

5.2.3 The outcomes for the actor and a state The construction of the solar power plants was financed by state- owned banks using generously provided loans. For example, Activ Solar received six loans from Ukreximbank totaling 109 million euros, 224 million dollars, and 528 million hryvnias (UAH). The guarantor of these loans was the company “Active-Insurance,” which through the company “Ukrpidshipnik” and the Slav AG also belongs to Klyuyev (DW, 2017). An- other state-owned Oschadbank also gave loans to the Klyuyev companies to construct 16 solar power plants in Crimea until 2013. The outstanding debt on these loans amounts to more than UAH 19 billion. After the annexation of Crimea and a loss of control over these assets, the brothers

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 39 escaped to Russia, and state-owned banks were left with nothing but record losses. In 2014 Oschadbank had a loss of UAH 8.5 billion. In order for the bank not to have problems with the capital adequacy ratio, the government provided it with UAH 11.6 billion from the state budget (DW, 2017). Figure 4. The flow of the banking loans.

Source: Athor, based on DW, (2017), Центр Протидії Корупції (2015). In 2016, in Vienna, Slav AG and two affiliates filed for bankruptcy because of the EU sanction with more than one hundred million euros of outstanding debt (Teise, 2016). In the same year, also in Vienna, Activ Solar went bankrupt as well. It accumulated more than 500 million euros

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 40 in debt. As a result, the Vienna Commercial Court ordered the company to begin the restructuring process (Dubensky, 2016). It must be noted that since the start of the implementation of the green tariff and until 2013-2014, the market of RES was completely dom- inated and monopolized by Activ Solar. Based on the INSIDER’s request to the National Energy Market Regulation Commission (NERC) to indicate the installed capacity of all SPPs that received the “green tariff”, Ac- tiv Solar was controlling 87% of the installed capacity of all Ukrainian enterprises selling solar energy (INSIDER, 2014). After the revolution in 2013 and the removal of Yanukovych from office, the Klyuyev brothers were wanted both by Interpol (from 2016) and by the Interior Ministry and SBU. The latter stated that Andriy Klyuyev has not been on the territory of Ukraine since 2014 (Ukrayinska Pravda, 2019). In October of 2015, the General Prosecutor’s Office opened a case against A. Klyuyev under Part 5 of Art. 191 (misappropriation, embezzlement of property or taking possession of it by abuse of official position) of the Criminal Code of Ukraine on suspicion of embez- zling UAH 1.5 billion of a loan from a state bank (Liga.net, 2020a). Serhiy Klyuyev is involved in cases of abuse of power, appropria- tion of property, fraud, and money laundering. The SBU suspects Andriy Klyuyev of illegal obstruction of peaceful actions, abuse of power, and misappropriation of property. In 2014, the EU imposed personal sanc- tions against the brothers until 2018-2019 (Scanner Project, 2019). In 2019 Interpol stopped looking for them, but in Ukraine, both brothers are still wanted (Novoye Vremya, 2020). After the revolution and annexation of Crimea in 2014, the market of RES has changed. Some of Klyuyev’s stations remained in Crimea. The

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 41 remainder was formally taken over by the Chinese CNBM International Corporation, which credited Activ Solar (Бизнес Цензор, 2018).

5.3 New players in the post-2014 market

Since 2014-15 the green tariff was decreasing every year at around 10% (e.g., till 2013 for solar energy – 0,465264 EUR /kW, after 2015 – 0,3053295 EUR /kW), and restrictions on the “local component” were lifted, which stimulated an even bigger flow of investments, but now also international ones (Novoye Vremya, 2019). The tariff was still relatively high compared to the EU median even after the decrease. The new conditions reshaped the market and marked the rise of the new actors. In September 2020, the share of RES in the total energy mix was 13.3% (Ministry of Energy, 2020). While the RES share is growing, the prices for consumers and the government debt for the payments of the green tariff are increasing as well, and RES requires 26% of the total cash payments in the sector (Zaika, 2020). The state enterprise “Guaranteed Buyer” has billions of UAH of debt to pay to the investors, and they consider arbitration against the state in case of non-payment (Zaika, 2020). As of 2020, the top 10 players in the sector look in the following order:

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 42

Installed capacity MW

197 81 148 171 1050

535

174 301

289 335

Rinat Akhmetov CNBM Carl Sturen, Johan Bodén Andriy Gordienko Khripkov Sergey Richard Deitz Zinovy Kozytsky Vasyl Khmelnytsky Edward Mkrtchan Yuliia Lyovochkina, Igor Tynny

Figure 5. Installed capacity (MW) of the biggest producers.

Source: Author based on Liga.net (2020).

5.3.1 Actor(s) and their assets Currently, the biggest investor in the RES in Ukraine is Rinat Akhmetov, the richest person in Ukraine and, in the past, a close partner of V. Yanukovych (Kuzio, 2014). He receives his income from more than 90 enterprises, which are directly or indirectly controlled by the largest management company in Ukraine, System Capital Management (SCM). SCM includes transport business, agricultural business, media group, investment company, real estate holding (Samofalov et al., 2019). Besides, Akhmetov owns FC “Shakhtar” (Donetsk), the network of gas stations Gefest, and many other assets. The number of enterprise employees operating in SCM’s orbit is more than 160 000 people (Liga.net, 2020b).

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 43

In 2011 DTEK installed 30 wind turbines with a capacity of 90 MW on the shores of the Azov Sea. By 2013 the company increased the capacity of the wind station in the Azov region to 200 MW, and it ac- counted for 40% of wind generation in Ukraine (Petrushko, 2020). By 2020 DTEK had invested in the industry 1.2 billion euros, having built more than 1 GW of RES electricity generation, which is 25,5% of the share on the market (Liga.net, 2020c). DTEK is the biggest private energy company in the country and has a broad spectrum of operations in the energy sector (coal, electricity, RES, etc.). In the renewable energy sector, DTEK operates mostly Solar power plants, totaling 950 MW (Zaika, 2020). In 2019 company gained UAH 4.7 billion from production under the “green” tariff (Zaika, 2020). Besides Akhmetov, who lobbies the suitable conditions for green energy and seeks the “rent” in this niche, several MPs, and their relatives are also involved in the industry. Accordingly to the study of Econom- iczna Pravda (2019), there are 22 enterprises, or 14.6% share of the total RES installed capacity (262 MW), which are concentrated in the owner- ship of MPs or their relatives. Sometimes companies are also related to the assistants or former assistants (Stavniychuk, Kryvko, 2019). Three MPs are direct beneficiaries or shareholders in the firms with a “green” tariff. In their hands are concentrated 16 companies with an installed generation capacity of 239 MW (Stavniychuk, Kryvko, 2019). • Yulia Levochkina, “OPZH,” is the final beneficiary of 6 small HPPs with a total capacity of 29.82 MW receiving a “green” tariff. The largest enterprise is Hydroenergoinvest LLC (15.85 MW) (Elec- tronic Declarations of Officials and Deputies, 2020a). • Stepan Ivakhiv, which is on the list of the wealthiest people in the country ($116 million), has three companies that produce solar

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 44

energy at a green tariff with around 100 KW installed capacity each (Novoye Vremya, 2018). • Maxim Yefimov is an owner of “Furlender Windtechnologies” and “Wind Farms of Ukraine,” which produce wind power equipment (Public Register of Politically Exposed Persons of Ukraine, 2020). He owns 7 enterprises, which work with the tariff, but 4 are located at the occupied territories, and the other 3 have 68 MW installed capacity. Besides mentioned MPs, accordingly, to the declarations (2020b), there are also involved members of the other MPs families, which have corporate rights in the firms, getting a green tariff: • Yuriy Chyzhmar – his wife, is the ultimate beneficiary of one company and has corporate rights of one more LLC (HPPs – 2.90 MW, 2.20 MW). • Bohdan Dubnevych – his son, is a beneficiary of 2 companies (SPPs – 20 MW), • Oleksandr Livik – his father, is a beneficiary of biogas enterprise (0.13 MW), got a green tariff in 2018 (Unified State Register of Companies, 2021). There are also several other MPs and their assistants who are involved in the sector. • MP Viktor Romaniuk’s assistant Taras Chyhryniuk is the director of Agroprom-Energo (Smal HPP – 0.5 MW). • MP Alexander Dombrovsky’s two former assistants Volodymyr Zhytnyk, Oleksandr Nikitorovych, and his current Volodymyr Pid- lisny.

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 45

Zhytnyk and Nikitorovych are stated among the owners of LLC “Grand Solar” (3.62 MW), ZEO “Novosvit” (5.378 MW), LLC “Servistransavto” (2.52 MW), LLC “Energoinvest” (3.86 MW), LLC “Vin Solar” (2. 42 MW). Pidlisny is the beneficiary of Agrobudtechnologies LLC (Biogas plant – 0.63 MW). • MP Yuriy Vozniuk’s assistant Oleksiy Kernytskyi, a former deputy of the Rivne City Council (2010-2015), is the director of Patriot Energo LLC (0.09 MW SPP). • MP Valery Lubinets’ assistant, BPP, Alina Skomorokhova, is listed as the founder of two companies - Ekotekhnik-Yarmolyntsi LLC, which operates two SPPs of 1.98 MW. • MP Yuriy Levchenko’s former assistant Yevhen Kerechanyn is the founder of SPP Eco-Foture LLC, 1 MW. • MP Mykhailo Dovbenko’s former assistant, Andriy Semaniv, is a beneficiary of two enterprises with facilities with about 13 MW: Pavlovsk Solar Power Plant LLC (5.91 MW), Solar Karpaty LLC (7.12 MW). Figure 6. MPs directly or through relatives and assistants are involved in the business and benefit from the green tariff.

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 46

Source: Author based on Stavniychuk, Kryvko, Register of Assistants to Deputies of the Verkhovna Rada (2019). One more businessman in the industry is Levochkina’s partner Igor Tynny, founder and co-owner of Gidroenergoinvest-Akvanova energy holding. Tynny owns 35 small hydroelectric power plants and 6 small solar power plants, totaling 88 MW or 2% of the whole market share. (Ryasny, Topalov, 2020, Zaika, 2020).

5.3.2 Practices Despite that Akhmetov is not involved in the politics directly, un- like the brothers Klyuevs were, the oligarch still has a prominent network of lobbyists in the Parliament and other bodies, which allows him

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 47 to influence the decisions in such important institutions as The National Commission for State Regulation of Energy and Public Utilities or Anti- Monopoly Committee, in his favor, applying the suitable changes to the regulation or the tariffs (e.g., the upper limit of the price at which a “guaranteed buyer” can sell “green” electricity had been raised almost three times, which led to higher market prices for the day-ahead market) (To- palov, 2020). In October 2020, NCSRE appealed to the State Bureau of Investigations regarding the interference of a group of MPs in the Regulator's activities. It is said in the statement that a group of MPS “systematically exerts public and non-public pressure on members of the NCSRE.” Accordingly, to the regulator, such actions of the group are connected with lobbying of the interests of DTEK. (NCSRE, 2020). There were several pieces of evidence prompting the suspicion that Olha Buslavets, Minister of Energy and Environmental Protection from 16 April 2020 until 20 November 2020, was Akhmetov’s lobbyist (Zayants, 2020, Бизнес Цензор 2020, Polunina, Gavrish, 2020, Ekonomiczna Pravda, 2020). In December 2020 National Anti-Corrup- tion Bureau of Ukraine (NABU) intercepted a fragment of a conversation between the top manager of the company “DTEK” and a “foreign person” about a candidate for the post of head of the Ministry of Energy (Tkaczuk, 2020). In this conversation, the top manager mentions that there is “a woman, with whom we have good relationships, and if she is being in- vited and gets support – it will ease our lives.” Subsequently, Olga Buslavets was appointed for this position (Tkaczuk, 2020). The lobbyism of Akhmetov is related to the decision of the Minis- try of Energy to release a new forecast balance for 2020 (Sinitsin, 2021, Economiczna Pravda, 2020). It envisages a reduction in production at all

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 48 power plants, except for thermal power plants and the most expensive “green” generation, where Akhmetov controls about 25% of the market (Topalov, 2020). In April 2020, O. Buslavets initiated a shutdown of three NPP units with a capacity of 3,000 MW and a reduction of production at another five units (Ekonomiczna Pravda, 2020). At the same time, such decisions cause losses to Energoatom 18, and the company already had UAH 5.3 billion losses in 2020 (State Watch, 2021). This decision reduced the production of the cheapest nuclear power in favor of expensive “green” and thermal electricity, which allowed DTEK to keep production high. In October 2019, O. Buslavets, who back then was a Director-General of the Energy Markets Directorate of the Ministry of Energy and Environ- ment, was one of the developers of a draft Cabinet resolution proposing to give to one of DTEK enterprises a gas price discount, which is lower than Naftogaz’s 19 price to the public and other protected consumers at 46% - 69% (Nashi Groshi, 2020). The proposition is stated in the documents with Buslavet’s sign, which are available at the disposal of “Nashi Groshi”20 (2020). On March 11, 2021, Serhiy Leshchenko21 informed that the head of the energy regulator publicly announced Akhmetov’s keepers who lobby his interests: L. Buimister, O. Kucherenko, M. Volynets, V. Nalyvaichenko, and O. Goncharenko (Golovko based on Leschenko, 2021). All these people take seats in the Parliament, committees,

18 A state-owned company, operating all NPPs 19 Largest state-owned gas and oil company 20 The project of the journalist investigations 21 A journalist, MP, and member of the Verkhovna Rada Committee on Corruption Pre- vention and Counteraction

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 49 labor/trade unions. Akhmetov also has its group of lobbyists in the Op- position Platform - For Life (OPZH) political party, which currently has 44 seats in the Parliament and consists of the personalities directly em- ployed in Akhmetov’s enterprises (Sereda, 2019). OPZH also consists of many former members of the Party of Regions. In 2015 MPs Chyzhmar, Livik, Yefimov, and Dombrovsky initiated a bill 2010-d, which proposed establishing a premium (5% to 20%, de- pending on the degree of localization) to the green tariff for companies that use Ukrainian equipment. The bills provision the preferences to the actors buying the products from Yefimov’s enterprises (Golovnev, 2018). The bill was successfully implemented (Verkhovna Rada, 2015a). Yuri Chyzhmar also proposed another bill, 8449-6, which was implemented. The feature of this bill is that national quotas for supporting RES must necessarily include at least 20% of quotas for energy from biomass, biogas, and small hydropower (Verkhovna Rada, 2018b). At the same time, this initiation represents the interests of the mentioned businessman Tynny (Golovnev, 2018).

5.3.3 The outcomes for the actor and a state The mentioned MPs achieved the implementation of the proposed bills, shifting the regulation of RES in their favor. When the boom of the new installations became too heavy for the governmental budget, for two years, there were discussions of the implementation of the auctions instead of the set tariff, which would ease the pressure on the budget by introducing the new rules (Kalyuzhna, 2020). As Victoria Voytsitska, a member of the Energy Committee of the Verkhovna Rada of the 8th convocation, recalls – “In the committee itself the adoption of a quick decision regarding the auctions was blocked. I

RENT-SEEKING IN UKRAINE: ACTORS AND PRACTICES 50 saw a mighty lobby of DTEK representatives” (Kalyuzhna based on Voytsitska, 2020). It is clear that the interested actors wanted to pre- serve the existing conditions to benefit themselves. Even despite that, the payment to the investors for the green tariff was already problematic, creating more and more debts for the “Guaranteed buyer.” In November 2020, non-payment of the FiT reached around UAH 21-22 billion22 (Economiczna Pravda, 2020). It caused the investors' con- cerns and raised the discussions about the investment arbitrations in case of the retrospective reduction of tariffs. However, in February of 2021, “Guaranteed buyer” started paying out the debts (Ukrinform, 2021).

22 Around 620 million euros

DISCUSSION AND CONCLUSION 51

6 Discussion and conclusion

My research aimed to explore the rent-seeking patterns and behavior in the renewable energy sector of Ukraine, the main actors, and the most common RS practices. After collecting empirical data and analyzing it, I can highlight the following results and points of the exploration of RS patterns and behavior: • The post-soviet privatization and lack of effective reforms created a weak institutional structure in the contemporary economy and, consequently, gave an environment for the RS emergence. In addition, with the high corruption and favoritism, the rent-seeking opportunities become even bigger. • Wrongly chosen market regulations and support schemes may accelerate the rise of rent-seeking in RES – the possibility of benefiting directly from the entrance to the market and gaining a monopoly. The rationale of the implemented support schemes by the decision-makers is vulnerable because the latter may be influenced by lobbyists, businesses, other actors, • The desire of government officials for personal gain accelerate the emergence of RS opportunities, the continuance of conflict of interests and transparency in the governance pro- voke RS behavior, • A new perspective and innovative industries in Ukraine are under the risk of being seized by the established oligarchic structures and other rent-seekers.

DISCUSSION AND CONCLUSION 52

By examining the Ukrainian post-Soviet transformation, we understand that the roots of contemporary rent-seeking lay in the very beginning of the country’s independence when Ukraine did not even have an economic policy in the first three years of its independence (Åslund, 2014). In turn, weak institutions increase the rise of oligarchic families and clans (Fogel, 2006). Fragile democracy, tolerance of corruption, and cronyism are also potentially dangerous for the emergence of RS, especially in transition economies. Yanukovych’s regime signified the decline of democracy and a stronger concentration of wealth in the hands of one clan. Yanukovych and his close circle, including the Klyuyev brothers and Akhmetov, formed a system to influence public policy, leading to a quest for personal gain. Thus such a system allowed to create rents, extract them, monopolize the market, and conduct the embezzlement of millions of UAH from the state budget (Congleton et al., 2008, Åslund, 2015). Poorly designed market regulation for the RES stimulation is another reason for the rent emergence. Even with the changing of governments and political elites, the initially implemented tariff remained high. Any attempt to decrease it would face resistance from the lobbyists and deputies due to their private interests and business assets. And as Tullock (2005) concluded: “The successfully implemented rents are hard to eliminate since the interest groups will seek to retain them.” As there were attempts to consider implementing “green auctions” already in 2015- 2017, the political decisions were being influenced by lobbyists and did not develop any further (24TV.UA). The presence of the interest groups within the lobbyist networks and among members of the Parliament themselves naturally increases the risks of rent-seeking. “Deputies and bureaucrats play a significant role in the political market and take full advantage of their status as a small,

DISCUSSION AND CONCLUSION 53 privileged special interest group” (Tullock, 2005). Several Ukrainian MPs involved in the RES business prove this argument since this small group of interested actors still initiate the bills and make changes to the laws to turn them to their advantage. The thrive of monopolism and the lobbyist decisions (such as a local production component) also halts the prospective industry from the bigger international involvement and investments. The self-interest of the officials was strong enough to sabotage or slow down the implementation of any more progressive amendments into the law or more suitable regulations to ease the pressure on the government. It was done for the sake of the interests of a few and created an uncertain situation on the market, a growing financial burden, and established the overall reputa- tion of the RES sector as a problematic one. In the future, such problems and risks may lead to the investor’s distrust and reluctance. In my sub-questions, I aimed to look at rent-seeking in the sector from the actors’ and their practices’ perspectives. a) Who are the most important rent-seekers in the industry? A. Klyuyev, R. Akhmetov, and several members of the Parliament are the biggest rent-seekers in the industry. Both A. Klyuyev, R. Akhmetov were close associates of former president V. Yanukovych, all 3 coming from the same region and being familiar with each other since the 1990s. By the end of 2013, Klyuyev was majorly controlling the solar power industry, and Akhmetov was already gaining solid positions in the wind power industry. Such disposition of control became possible because of the president's favoritism and influence on both executive and legislative powers. Both were having a direct and indirect impact on the decision making Klyuyev and Akhmetov were extracting rents in the RES sector

DISCUSSION AND CONCLUSION 54 in the form of the high FiT, at the same time causing deficits for the state banks and debts of the governmental bodies Klyuyev was not only an interested actor in gaining wealth in the RES sector but, at the same time – one of the country’s top officials. The market overall was shaped by him; Klyuyev firstly made a proposition of the regulatory framework of FiT. Then he could direct regulations and support schemes in his favor and start extracting rent from RES already in 2010-2011, right after the market opening, and shortly after – becom- ing a monopolist (Anderson et al.,1988). Akhmetov, who gained significant assets during the privatization process and being a close partner of Yanukovych since the early years, kept his influence throughout the whole period of a state’s independence and found a common language with any government. Akhmetov has enough lobbying resources such as “his” deputies in the Parliament, media, a network of informal lobbyists, as well as people loyal to the SCM group in all the government agencies it needs (Liga.net, 2019). MPs involved in the industry also affect the regulatory framework to keep being a part of this profitable “green” business. They will seek to shift legislative outcomes away from the median preferences of relatively ill-informed voters because of self-interest (Tullock, 2005). b) What are the prevalent rent-seeking practices in the industry? In the case of Ukraine, lobbying and corruption in the RS environment are the most common practices, often being accompanied by the conflict of interests, cronyism, and patronage - the ability to have “its people” on the crucial governmental positions and economic bodies in the country give the rent-seekers plenty of opportunities to influence and extract rents.

DISCUSSION AND CONCLUSION 55

Such practices as using the state banks’ loans and exercising the governmental competencies to develop their business show the scale of the power abuse and embezzlement in establishing the new innovative sector. The use of public power within the branches of government for rent creation and extraction was behind the inadequately high FiT for solar energy in the first place. That again leads us to the functioning of ineffective institutions with the unpredictability of the state agencies in interpreting legislation, unofficial payments, which allow firm maximum freedom to act with a minimum of accountability, and high corruption (Ivy, 2012). Lobbying of the interested groups is also a commonly used prac- tice to sustain the high tariffs, introduce some beneficial amendments to the laws or anyhow influence the whole energy sector to keep gaining wealth from RES. Overall, the favoritism and clientelism within and between the government and business produce the system, which allows exercising dozens of the practices (Fisun, 2016). These practices of such scale as we see in Ukraine would be barely possible in any other well- functioning economy.

The analyzed case the Ukrainian renewable energy brings out some interesting findings of the nature of rent-seeking there. Considering the increase of the RES in the total energy mix and its growing potential, rent-seeking still is a severe problem and burden for the state. RS behavior which developed and grew during the 30 years of independence, now seems to be ingrained in the political-economic life of the country. In line with Åslund (2014) and Grazhevska et al. (2015), I can conclude that the inherited institutional weaknesses since the 1990s distort the function of the market. The business and political elites are not only involved in the rent-seeking practices, trying to “capture” the industry for their

DISCUSSION AND CONCLUSION 56 interests, but they also can create these rents themselves, build and ad- just the industry in a suitable way. In such realities, the ambitious and prospective goals of Ukraine’s energy transition look rather uncertain and unreliable. The idea of decarbonization or energy transition itself, supported by the nominal statistical growth of the RES will be refuted once we look “behind the curtains” of the industry and realize that it may be just another money-making tool for a few, rather than a perspective sector and part of the national economy. Furthermore, the phenomena of rent-seeking in the RES becomes wider spread, and if there are going to be no changes within the regulatory and institutional frameworks, we might observe a tendency of the growing attraction and involvement of “people of power” into the sector. Oligarchy and kleptocracy will be further on slowing down Ukraine in its plans of the closer integration with EU markets as well as slowing down the liberalization and democratization of its national electricity market. Supporting Khan’s (2000) argument, we also see that Ukraine remains a poor economic performer, including immense rent-seeking as one of the main causes. To succeed in the energy transition, decrease its imports and accelerate the closer integration with the EU, Ukraine needs to build a transparent institutional framework. The governmental bodies and regulators must be held accountable for their actions, be independent and build a strong strategy of the deoligarchization and RES development. My research can contribute to the further study of rent-seeking both in contemporary Ukraine and in the RES industry. The theme of the failed post-communist transformation and its effects on the energy sector can be applied to the other states with similar economic or political models.

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