Introduction

Stiftung Wissenschaft und Politik German Institute for International and Security Affairs Comments

“Deoligarchisation” in WP Promising Visions, Murky Realities

Steffen Halling and Susan Stewart S

In 2015, Ukrainian President announced a process of “deoligarchisa- tion”. Not much has happened so far. Some of the oligarchs’ profit sources have run dry in the field of public procurement. Certain efforts have been made to curb the in- fluence of oligarchs with respect to media legislation and financing political parties. However, these reforms have not yet been implemented effectively. In addition, meas- ures in sectors that are fundamentally important to the oligarchs (the energy sector, in particular) have been extremely contradictory. As a result, the oligarchic system per- sists and is being supported and consolidated by the ruling elite. Unless external actors increase their influence, Ukraine is unlikely to free itself from the mire of corruption, despite its many reform endeavours.

The Maidan protest movement that brought Political influence of the oligarchs about the 2014 overthrow of President Viktor Oligarchs in Ukraine are business magnates Yanukovych called for the oligarchs’ influ- who have had considerable influence on ence on the politics and the country’s politics since at least the end to be curtailed. Even President Poroshenko of the 1990s. They employ various means, declared that, in the fight against corruption, but always with the primary aim of cham- “deoligarchisation” would be given top pioning their own business interests. The priority. However, unlike after the Orange considerable financial resources of the oli- Revolution of 2004, this process was to be garchs are the result, but also the basis of ‘evolutionary’ and without the need for their political activity. Generally, oligarchs nationalisation or reprivatisation. Instead, employ three strategies of political activity: the intention was to destroy existing mo- Informal (corruption) networks between nopolies, strengthen state control in the oligarchs and the political elite, with the resource sector and reduce the political former securing economic profits and, in influence of the oligarchs. However, there return, the latter providing political sup- are questions as to whether this process is port, constitute the basis of their influence. actually taking place, especially since the These networks or cliques are found in all President himself is an industrialist and organs and institutions of the state – in par- arguably ranks among the oligarchs. liament, but also in bureaucratic agencies,

Steffen Halling is a Doctoral Fellow in SWP’s Eastern Europe and Eurasia Division SWP Comments 51 Dr. Susan Stewart is a Senior Associate in SWP’s Eastern Europe and Eurasia Division December 2016

1 such as the Customs Office or the Anti- with a lack of legal certainty and strikingly Monopoly Committee. Furthermore, oli- high levels of corruption, all have a nega- garchs in Ukraine frequently take on politi- tive effect on the willingness of foreigners cal office themselves. This not only consoli- to invest in Ukraine. dates their political relationships but also makes them immune from prosecution. The third way oligarchs in Ukraine exert The oligarchs after Maidan political influence is through the media. The political and economic crisis that befell Oligarchs have controlled the country’s Ukraine during the Maidan protests placed most important mainstream media for years the oligarchs under intense pressure. Al- – especially the key medium of television. most all of the nearly two dozen oligarchs Particularly in the context of elections, tele- lost considerable sums of money in the vision gives oligarchs plenty of opportunity deep recession. Possibly the best example is to garner support for their own political the wealthiest member of the group, Rinat projects or political allies and weaken the Akhmetov. It is estimated that his fortune opposition. In order to diversify and max- shrank from US$12.5 billion in 2014 to imise their influence, they sometimes sup- US$2.3 billion currently. The number of port multiple parties simultaneously. Ukrainian billionaires has also halved since Since the oligarchs in Ukraine compete 2014 from ten to five. Only President Poro- against each other, their past political activ- shenko has managed to increase his assets. ities have tended to counteract any trends The value of his company holdings increased toward autocratic development. As a result, by an estimated US$100 million last year. they also contribute to a certain political In particular, those oligarchs with a and media pluralism in the country. Never- close relationship to Yanukovych suffered theless, their presence in the political an enormous loss of power. Their influence system remains a formidable obstacle to also decreased due to the collapse of the Ukraine’s democratisation. Firstly, they use ‘’. Serhiy Kurchenko, whose their considerable financial resources to rise only began under Yanukovych’s presi- distort conditions between the actors in dency, is, however, the only oligarch against political competition. Secondly, they ma- whom criminal investigations have been nipulate the process of shaping policies for launched in Ukraine. His holding company their own benefit. And thirdly, they pro- was confiscated. Just like other members of mote practices that are harmful to democ- Yanukovych’s innermost circle of power, he racy, such as corruption and clientelism. left the country after the fall of the regime, The symbiosis between politics and while managed to retain business promoted or personified by the his oligarch status, even though he lost in- oligarchs also has a massive economic fluence after the regime’s collapse. Firstly, impact because the oligarchs will usually Akhmetov has limited access to separatist only push through those economic reforms areas of the controlled by . that maximise their incomes. In the past, Secondly, although he is still in control of this was particularly evident when it came part of the , the importance to issues of privatisation or legal changes of this political force as the de facto succes- in the area of public procurement, govern- sor of the Party of Regions – formerly the ment subsidies or energy trading. More- strongest parliamentary faction – declined over, monopolies created by the oligarchs dramatically after severe losses in the 2014 in certain sectors of the economy further elections. Akhmetov’s reduced influence hamper the development of small and in post-Maidan Ukraine was immediately medium-sized enterprises (SMEs). Ultimately, noticeable in the energy sector. In the years the dominance of the oligarchs and their prior to the elections, the company he con- economic competitive advantages, coupled trolled, DTEK, became the largest private

SWP Comments 51 December 2016

2 electricity producer in the country. How- new law put a stop to this practice. When ever, the National Energy and Utilities the government removed Kolomoiskyi’s Regulatory Commission of Ukraine (NEURC), crony from the Executive Board of Ukr- whose leadership was newly appointed nafta, he tried to take over the company under Poroshenko, decided to lower tariffs by force, but failed. He finally had to relin- paid by the state for the purchase of elec- quish the post of governor in early 2015. tricity, which led to considerable losses for The subsequent dismissal of , Akhmetov. one of Kolomoiskyi’s partners who had Another oligarch, , who been governor of Odesa Oblast since May was considered an important supporter of 2014, was a clear sign of his loss of power. Yanukovych and beneficiary of the klepto- The port city of Odesa is considered an im- cratic system, also lost power after the coup portant transit point for smuggling, and in 2014. For several years, Firtash profited Kolomoiskyi profited from this with the from a monopoly on gas imports. He is also aid of the local customs office. supposed to have received gas for his own companies from Russia under special con- ditions and to have acted as a Kremlin The comeback of the oligarchs stooge in Ukraine. After the change of gov- Despite the political dynamics described ernment, he was initially arrested in above and the temporary curtailing of the Vienna on suspicion of corruption in the influence of some oligarchs, their role has spring of 2014 at the request of a US court. hardly changed. This is evident from an He nevertheless continued to play a role in examination of the current parliament, Ukrainian politics and business, apparently which has gained importance since Ukra- protected through informal agreements ine’s return to the 2004 constitution and with Poroshenko and (now the re-introduction of a more parliamen- the mayor of ). However, this did not tary-dominated system of government. prevent the Yatsenyuk government can- Although today there are undoubtedly celling leases on two metallurgical plants more reform-oriented members of parlia- and confiscating 500 million cubic metres ment in the than ever of from his holding company, before, the oligarchs’ influence nonethe- Ostchem. less remains undiminished. They recently The fall of Yanukovych and the ensuing managed to assert their influence even marginalisation of his nepotistic clan, further, benefitting from the weakness known as the ‘family’, created room for of the ruling coalition, particularly in the other cliques. Alongside Poroshenko, the wake of the government crisis in the spring oligarch Ihor Kolomoiskyi also gained a of 2016. At the same time, however, Poro- great deal of power. In March 2014, Kolo- shenko also managed to gain additional moiskyi was appointed governor of - power. petrovsk Oblast. He managed to ensure Both trends were clearly confirmed with stability in the region bordering the Don- the appointment of Volodymyr Hroisman bas. In the spring of 2015, however, a con- as Prime Minister. Hroisman is a long-time flict surrounding his investments in the friend of the President. He previously served state oil and gas company and as the mayor of Vinnytsia, Poroshenko’s in the pipeline company Ukrtransnafta political home, before being elected into escalated. Until then, it had been common parliament on the party list of the pro- practice for Kolomoiskyi to prevent a quor- presidential Petro Poroshenko Bloc and um at shareholders’ meetings by using his becoming Chairman of the Verkhovna Rada. blocking minority – meaning that, among The dismissal of Yatsenyuk’s government other things, dividend payments to the and the appointment of Hroisman in April state had to be negotiated with him. But a 2016 marked a discernible shift in the bal-

SWP Comments 51 December 2016

3 ance of power within the Ukrainian execu- are added for energy sources mined locally. tive in favour of the President. The dualism Also, the pressure on Kolomoiskyi has eased that had existed between the President, on visibly in recent months. The National Bank one hand, and Yatsenyuk representing the of Ukraine agreed to reschedule debts owed strongest parliamentary faction, on the by PrivatBank, which is the country’s largest other, disappeared. But because the govern- financial institution and part of Kolomois- ment coalition no longer had a majority kyi’s Privat Group. Instead of insisting on a due to the departure of the ‘Fatherland’ repayment of €641 million that was origi- and ‘Self Reliance’ factions, the new cabinet nally due in March 2016, the National Bank was only elected thanks to votes from in- accepted a payment of only €22.6 million dependent members of parliament and, in April. Since 35 percent of deposits at in particular, the parliamentary groups PrivatBank are owned by Ukrainian citi- ‘People’s Will’ and ‘’. Independent zens, Kolomoiskyi could potentially cause members of parliament with no direct man- the Ukrainian banking system to collapse if date are frequently considered to represent his bank defaulted. In addition, the restruc- oligarchs’ interests in Ukraine. This also turing of Ukrnafta, a company he previously applies to both the parliamentary groups owned, is still not complete. Although the mentioned above. While the Revival group legal change to shareholder quorums men- is said to be influenced by Kolomoiskyi, the tioned above has allowed the state to regain People’s Will group consists mainly of for- control over the oil and gas company, mer representatives of the Party of Regions, newly appointed CEO Mark Rollins named several of whom have connections to the Kolomoiskyi’s cronies to important key state gas extraction company Ukrhazvydo- posts. Other people in Kolomoiskyi’s close buvannia. , who was pre- circle have merely changed their positions viously leader of the Petro Poroshenko Bloc rather than leaving the company. and has no legal training, was ultimately appointed Prosecutor General of Ukraine with the votes of these parliamentary forces. Poroshenko’s patronage network The transition to a new government in The government crisis that began with the conjunction with Yatsenyuk’s departure resignation of the progressive Minister of from the post of Prime Minister has seen Economic Development and Trade Aivaras more allowances made for the interests of Abromavičius in February 2016 has ulti- the established oligarchs. For example, mately raised questions about the role of Akhmetov’s energy company DTEK recently President Poroshenko and his circle. With recorded considerable profits again. These support from civil society and from abroad, profits are only possible because on 1st Abromavičius had pushed for the reform March 2016 the NEURC raised the previously of public procurement and set up an elec- lowered tariff on the purchase of electricity tronic platform called ProZorro aimed at by up to 20 percent. This increase was ac- improving the transparency of the process companied by a rise of 25 percent in elec- for awarding public contracts. However, tricity prices for Ukrainian consumers. Abromavičius tendered his resignation in Moreover, the NEURC allowed electricity February 2016 on the grounds that people suppliers to raise their tariffs by up to three from the President’s inner circle had pres- percent per month from January 2017. The sured him and tried to exert direct influ- price of coal was also recalculated in Akh- ence on the ministry. His accusations were metov’s favour and he controls large seg- directed explicitly at ments of the Ukrainian coal mining indus- Ihor Kononenko, deputy head of the Petro try. The price is now based on the Rotter- Poroshenko Bloc. Kononenko is a long-time dam Coal Futures index, whereby fictitious business partner of the President and is delivery costs from Rotterdam to Ukraine often referred to as a key link between par-

SWP Comments 51 December 2016

4 liament, the Prosecutor General’s Office and Parties and the media the Cabinet of Ministers. He is said to con- Some minor ‘deoligarchisation’ successes trol a number of state-owned companies have been achieved in the areas of party through a network of front men. Among financing and the media. The system of other firms, this is supposed to include Zentr- party funding is particularly significant for energo, which is responsible for supplying the political influence of oligarchs since the coal to other state enterprises and, under lack of legal frameworks currently makes Yanukovych, favoured companies connec- Ukrainian political parties highly depend- ted to his son Oleksandr. Today, Zentrener- ent on contributions from individual donors. go’s state coal purchases are mainly handled Furthermore, oligarchs have always been through foreign companies whose owner- able to establish their own political forces. ship structures are largely opaque. How- Recent examples of this include the Ukrain- ever, journalists in Ukraine have recently ian Union of Patriots (UKROP) and Vidro- revealed that coal from contested areas in dzhennia (Revival), both of which are con- Donbas had officially been declared as hav- sidered Kolomoiskyi’s political technology ing originated in South Africa. This implies projects and appeared in the course of local that Zentrenergo makes profits based on elections in 2015. Meanwhile, smaller and illegal transactions and false statements. more reform-oriented parties have found it After accusations by the former Minister very difficult to compete with financially of Economic Development and Trade, the powerful parties. As a result, the Ukrainian National Anti-Corruption Bureau (NABU) landscape is marked by a high opened investigations against Kononenko, susceptibility to corruption, a lack of con- suspecting him of abusing his office. How- solidation and enormous fragmentation. ever, it soon dropped these investigations Legislation introducing state party due to a lack of evidence. Nevertheless, the financing which came into force on 1st July allegations against Kononenko and other 2016 should help redress this imbalance. It close friends of the President still stand. But provides for parties to receive state funding Poroshenko is not only in trouble because depending on their election results. Initially, of these dubious relationships. The publi- however, this only applies to parties elected cation of the ‘Panama Papers’ also raised into parliament in 2014 and to those that questions as to whether the President him- achieve at least two percent of the vote in self is involved in offshore transactions and subsequent elections. Furthermore, the tax evasion. The political leadership lost legislation also regulates the type and scope further credibility recently due to an at- of private donations to political parties. tempt by the government to subordinate Monetary and in-kind donations by natural the state-owned company Ukrtranshaz, and legal persons may not exceed a certain which controls the Ukrainian gas transit amount. In addition, party and election pipeline network, directly to the Ministry funds are separated to prevent donations of Economic Development and Trade. Since to the party being transferred to election the departure of Abramovičius and due to budgets. Parties are also required to create his accusations (see above), the ministry detailed financial reports and undergo is widely suspected of being influenced internal and – if participating in elections – by Poroshenko and his inner circle. Trans- external audits. Additionally, the National ferring Ukrtranshaz, a daughter company Agency for the Prevention of Corruption of Naftohaz, to the ministry would have (NAPC) will publish full audit reports on undermined the promised “unbundling” the Internet in order to increase transpar- of the energy sector, to which an indepen- ency. It remains to be seen how these legal dently administered Ukrtranshaz is in- provisions will be implemented in practice. tended to contribute. Nevertheless, electoral law reform is still inadequate. For example, campaign fund-

SWP Comments 51 December 2016

5 ing and political advertising during elec- of one member from each parliamentary tions are insufficiently regulated, leaving faction or group and representatives of them open to influence from the oligarchs. various NGOs. These civil society represen- In addition, current electoral law has tatives are guaranteed a majority vote by always favoured the oligarchs – not only law. At present, the reform is far from because half of all parliamentary seats are meeting its intended purpose of establish- distributed via direct mandate, but also ing public service broadcasting as a real because the electorate are not given any competitor to the commercial media sector say in the composition of party lists. controlled by the oligarchs. This is partly Given the importance of the media to due to unresolved bureaucratic and legal the political influence of business mag- issues surrounding the merger of existing nates, reform of media laws could ultimately state television and radio stations. In addi- help restrict the power of the oligarchs. tion, broadcasting companies currently This is one of the objectives of legislation funded solely from state coffers are com- which came into force in October 2015 plaining of financial problems. The Direc- intended to increase the transparency of tor General of the National Television Com- media ownership. It requires broadcasters pany of Ukraine, Zurab Alasania, resigned to disclose their ownership structures in recently, blaming political leaders for the detail. Furthermore, companies and indi- lethargic implementation of the reforms, viduals registered in ‘offshore zones’ are claiming they had little interest in estab- not allowed to set up or operate broadcas- lishing public service broadcasting that ting companies in Ukraine. The revised actually worked. legislation was expressly welcomed by the Organization for Security and Co-operation in Europe (OSCE) Representative on Freedom Weakening the oligarchs of the Media, Dunja Mijatovic. She pointed Nearly three years after the Maidan, the out that ensuring transparency and pre- symbiosis of politics and business is far venting excessive concentration in the from passé. Most of the oligarchs that have media sector are important prerequisites been politically active for an extended for freedom of expression and diversity of period have remained influential, albeit opinion. At the same time, however, there weakened by the country’s economic prob- was criticism in Ukraine that violations of lems and unfavourable international con- this law cannot be adequately sanctioned. ditions. Newer players from Yanukovych’s Even more important than increased ‘family’, however, have lost considerable transparency in the media landscape is power. At the same time, others have begun the establishment of a public service broad- their rise to the top. They are closely linked casting model similar to those found in to today’s elite, especially to the President, Western Europe. Not only would this model who has managed to strengthen his posi- represent a counterbalance to television tion in many areas. broadcasters controlled by the oligarchs, it Ukraine has taken steps in important would also strengthen the independence of spheres, such as party financing and the the media in general. Legislation on setting media, that could limit the power of the up public service broadcasting companies, oligarchs in future. However, these meas- which came into force in early 2015, en- ures have not yet been fully implemented. sures that existing state radio and television In other domains, particularly the energy entities will be transformed into a public sector, developments are considerably more broadcasting company, which will be regis- contradictory. Here, elite representatives tered as a public limited company under claim they are meeting the demands of the state ownership. The highest controlling international community, while the spirit body is the supervisory board consisting of the agreements reached is thwarted by

SWP Comments 51 December 2016

6 numerous actions. The same is true of the Ukrainian institutions, such as the Customs fight against corruption. This means that Office, the Anti-Monopoly Committee, the existing oligarchic structures are being State Fiscal Service, the State Property Fund, strengthened rather than weakened. In the Prosecutor General and the NEURC. addition, old and new players are currently These commissions should receive exten- consolidating their positions in order to be sive rights of access to oral and written well placed for the next round of privatisa- communications and to the decision-making tions, for example. In short, future ‘reform processes of these authorities. They would, steps’ will be implemented by a thoroughly however, merely be observing these pro- ‘oligarchised’ elite and will therefore be cesses, not intervening in the decision- largely undermined as a result. To avoid this making authority of Ukrainian entities. The happening, the EU and other actors should commissions would report back to relevant further develop and refine their current international formats – to the EU-Ukraine strategy, particularly with regard to condi- Association Council, for example – with tionality and cooperation with civil society. their findings and suggestions for more tar- Both the EU and the IMF have significant geted forms of conditionality. In the case of influence on Ukraine because they provide the EU, the existing advisory mission could the country with considerable funding. be given an extended mandate and corre- Moreover, Germany and France support the sponding budget to set up and operate such country politically through the Normandy commissions. The OSCE could provide the format. However, the pressure exerted to Representative on Freedom of the Media date by these actors has clearly not been with more support and accompany the pro- sufficient to substantially reduce the power cess of establishing a public service broad- of the oligarchs. New mechanisms should caster. The Energy Community could moni- therefore be used to break the symbiosis of tor the ongoing NEURC reform, the trans- politics and business. The temporary pres- parency and success of which are crucial for ence of a number of competent members reducing oligarchic influence and corrup- of government with foreign origins and tion in the energy sphere. It is more diffi- experience (e.g. Minister of Finance Natalie cult to exert external influence on parlia- Jaresko, Minister of Economic Development ment. Nevertheless, the OSCE Office for and Trade Aivaras Abromavičius and Deputy Democratic Institutions and Human Rights Minister of Internal Affairs Eka Zguladze) (ODIHR) and the could has shown that the impact of people who urge the adoption of legislation providing are familiar with other models of gover- for full proportional representation and nance and are not trapped in Ukrainian open electoral lists and monitor the imple- power networks can be positive. Conse- mentation of legislation on party financing. quently, the EU and the IMF should make Finally, Western actors could put substan- further financial aid conditional on the tially more pressure on Poroshenko to dis- willingness of the Ukrainian leadership pose of his companies as promised. to allow foreign influence in key areas. To It will be paramount for the EU and IMF achieve this, it would be useful to bring to agree to link their financial tranches to together representatives of various organi- the establishment and satisfactory function- sations involved in the Ukrainian reform ing of the proposed monitoring commis- process, including the EU, the IMF, the sions. Otherwise the Ukrainian elite will OSCE, the Council of Europe and the Energy lack sufficient incentive to permit the Community. Each actor could expand its required level of observation. Even though activities in one or more areas in Ukraine there are now some reform-oriented offi- depending on the content. cials in almost every Ukrainian agency who One idea would be to set up international would welcome additional external control, commissions to monitor the work of key resistance to greater transparency and ob-

SWP Comments 51 December 2016

7 jectivity is still significant among the top leadership. For all the areas mentioned, there are competent individuals and civil society structures in Ukraine that can support foreign observers with expertise and élan. In particular, these include the “Reanima- tion Package of Reforms” initiative, which has already successfully pushed through important legislation with the help of reformist parliamentarians. In this context, specialised organisations can be consulted, for example ANTAC or Hroshi (Our Money) for the fight against corruption,

© Stiftung Wissenschaft und Dixi Group for the energy sector, Detector Politik, 2016 Media for the media, OPORA and the Com- All rights reserved mittee of Ukrainian Voters for party financ- These Comments reflect ing and electoral law. the authors’ views. Developments to date have shown that SWP without tougher external monitoring the Stiftung Wissenschaft und oligarchs will further consolidate their Politik German Institute for positions and eventually torpedo genuine International and changes in the political system. Inter- Security Affairs national insistence has already forced the Ludwigkirchplatz 3­4 Ukrainian leadership to take substantial 10719 steps towards fighting corruption and Telephone +49 30 880 07-0 Fax +49 30 880 07-200 introducing economic reforms. Targeted www.swp-berlin.org initiatives from outside supported by civil [email protected] society actors within Ukraine can signifi- ISSN 1861-1761 cantly increase the likelihood of a “deo- Translation by Martin Haynes ligarchisation” actually taking place. With- out increased external pressure, the reforms (English version of SWP-Aktuell 69/2016) will most likely fail in the medium term and a new wave of political and social unrest will ensue.

SWP Comments 51 December 2016

8