MOSCOW BLOG: Kudrin and Poroshenko will fail because corruption is the system in Russia, Ukraine

MOSCOW BLOG: Kudrin and Poroshenko will fail because corruption is the system in Russia, Ukraine
Ukrainian President Petro Poroshenko talks to the people.
By Ben Aris in Moscow May 3, 2016

There has been a lot of commentry in the last few weeks on Russia and Ukraine, as sentiment on Moscow warms a little and cools a bit on Kyiv. Faith in Ukrainian President Petro Poroshenko's commitment to reform is foundering, while most commentators were scathing about the chances that former Russian finance minister Alexei Kudrin's assignment to draw up a new reform programme for Russia will lead anywhere.

The irony is that Russia and Ukraine find themselves in exactly the same place: both countries are suffering from an economic miasma and both need deep and far-reaching reforms if they are to prosper. The difference between them is that Russia is half way through the process and will very like actually make some more reforms, whereas Ukraine is at the beginning of the process and is so poor it is barely keeping its economic head above water.

The problem in both countries is their attempts to reform are probably doomed to failure. Most of the articles, particularly a note by Nomura’s Tim Ash, call for the “stamping out of corruption” and how likely that is. But this is to misunderstand how these countries are run. The legacy of the historically unprecedented rapid change from one ideology (communism) to another (capitalism) is that corruption is not a parasite on the system; corruption is the system.

Elections in the east are not about convincing an electorate of the merits of your policies, it is about capturing the state by any means available. Once the state is under your control, you can marshal its resources to maintain your power. Elections are real in that you can't just appoint yourself president and genuinely need to convince a large share of the population you are the man for the job, but that becomes easy once the state is captured. This is the system across the whole of the former Soviet Union (not including the Baltics, which spent the least time in the USSR and were the first to leave when they could).

Money, influence and media manipulation, not laws and elections, are the currency of politics in the east. With the absence of the rule of law or a functioning judiciary, money and power that has the threat of arrrest behind it are the only effective political tools available to a ruler. A few more enlightened despots like Putin, Kazakhstan’s Nursultan Nazarbayev and maybe Azerbaijan’s Ilham Aliyev make some efforts to improve their people’s lives, but not for altruistic reasons, but simply as it is smart politics.

To attempt to surgically remove corruption using a precision scalpel like e-procurement will not cure the patient. One of the few real reforms that the previous Ukrainian government of Arseniy Yatsenyuk made is to set up an e-procurement system that some have said will be “transformational”. Russia already set up the same system several years ago, as the cash-strapped Kremlin is also increasingly interested in reducing corruption in the lower echelons and 56% of all state contracts are now processed online where “computers don't steal”. But the biggest user of the special exemptions to allow a single bidder tender is the presidential administration. The fight against corruption is a two-tier deal in the east: stop the traffic police from taking a small bribe, but dole out multi-billion-dollar contracts to your friends amongst the elite to bind the most powerful people to the president.

In the chaos that followed the collapse of the Soviet Union, corruption was by far the most effective way of getting anything done after Soviet institutions became irrelevant overnight. Thanks to the mind bogglingly large amounts of money available, even the most upright public official would wilt at the prospect of swapping a single signature for tens or even hundreds of millions of dollars when the rest of the country was on its knees. Once this system was established – and it appeared about six months after the fall of the USSR – no one in power had any interest in changing it. Everyone did it – even the so-called “young reformers” like Anatoly Chubais and Boris Nemtsov, both of whom were exposed taking $100,000 bribes in a book scandal in the 1990s.

Two decades on and the new men rising to power in this system have little choice but to turn the endemic graft to their advantage, as it's the only functioning modus operandi. To challenge the system would invite at best a palace coup and at worst death – and several promient opposition leaders or Kremlin critics have been killed. 

There is a great deal of optimistic reporting on Ukraine that assumes a prioiri Ukraine will manage to break out of its vicious corruption circle and flourish. There is an equal amount of pessimism, even schadenfreude, in the Russian reporting that it will fail and collapse. But according to Transparency International the situation with corruption in Russia is getting better, albeit slowly, whereas Ukraine ranks dead last in Europe and things appear to be getting worse. In terms of progress and criticism, Russia and Ukraine's roles should be reversed.

Stepping back a little and despite their differences, the prospects for prosperity in the near term is poor. Russian President Vladimir Putin is too deeply invested in the captured state model to try and smash it now. He would have to jail or disenfranchise his closest political allies in the elite at a time when his electoral base is vulnerable. However, he does acknowledge the need for reform and bne IntelliNews has been arguing for some time that he has a “plan K” in reserve, where Kudrin is brought in to make the reforms. But notably Kudrin would have to be made prime minister, with all the substantial political power that comes with the job, if these reforms are to be effective. As he has been appointed to the president’s economic council, all that will happen is Kudrin will make some improvements, but the core transformational reform of breaking the oligarchic system will remain off limits.

The situation in Ukraine is exactly the same. The disappointment is that unlike Putin, Poroshenko had an opportunity to make a fresh start. Ukraine is sufficiently chaotic that it would be much easier to make sweeping reforms (and a few have actually been made, most notably in the banking sector) and break the oligarchs' power. But Poroshenko’s decision to oust the liberal technocrats and stack the cabinet with this own stooges means he intends to use the same oligarchic system with himself at the top of the tree in precisely the same way that Putin runs Russia surrounded by his St Petersburg clique.

The challenge that Poroshenko faces is far more difficult than Putin. Just before the Euromaidan protests began in November 2013, it was calculated that the assets of Ukraine’s 50 richest individuals made up over 45% of GDP, compared to less than 20% in Russia and less than 10% in the US, says Andrew Wilson in a paper entitled “Survival of the richest”. Moreover, thanks to the war in Donbas, Ukraine’s oligarchs have armed militias under their control. An attempt to disenfranchise Rinat Akhmetov, Ihor Kolomoisky or any of the other oligarchs could go very wrong indeed.

The recent change of government in Ukraine will probably be seen as a missed opportunity to set off on a new path by historians. It has probably condemned Ukraine to a generation-long wait to get those European values that the people want.

Still, there is a short cut. Putin’s power stems from the cash the state controls. The torrents of cash Russia earns remains under the direct control of a tiny number of men. During the boom years non-state oligarchs were flourishing simply by doing business. If the economy recovers and these business people flourish again, they will push for the rule of law and good governance to protect their wealth. As the private sector grows, the private businessmen will quickly end up in the majority and hold the Kremlin to account. For its part, the Kremlin will still control a large amount of cash, except increasingly this will come from things like VAT and corporate profit tax, not oil. 

In Ukraine’s case, the prospects for this prosperity are much closer at hand. After two decades of chaos Ukraine still has all the catch-up growth ahead of it that Russia has already exhausted. The amount of reform Ukraine has to do to boom is very little and very easy. Once the virtuous circle of investment-growth-profits-wages-spending starts to turn, as it did in Russia in the noughties, introducing liberal reforms becomes much easier. Russia on the other hand faces a Catch-22: to grow it has to reform, but it is unlikely to reform unless it is growing. 

The final irony here is that the international sanctions on Russia only impede its ability to grow. If the West wants to break Russia's oligarch-captured state model, then the most productive role it can play is to encourage Russia's growth and prosperity by doing business with it. Sanctions and combatative politics are almost entirely counterproductive, as all they do is hand Putin ready-made propaganda tools at a time when the weak economy should have made him vulnerable. And as long as Russia is mired in recession, it will be ever more dependent on oil and gas exports for cash and that only concentrates power in the hands of the same old oligarchic circle that surrounds Putin. And those guys have no incentive to change anything. Unfortunately, it seems that Poroshenko is about to make the same mistake. 


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