LONG READ: Ukraine's corruption problem

LONG READ: Ukraine's corruption problem
Ukraine's detractors claim it is the most corrupt country in Europe. That's a hotly disputed claim, but there is no denying it is very corrupt and that is a big problem. President Zelenskiy has made real inroads into fighting corruption but there is a lot still to do. / bne IntelliNews
By Ben Aris in Berlin October 9, 2023

“Ukraine is the most corrupt country in Europe.” This claim is bandied about by Russia’s supporters and those that want to see the war come to an end. But the claim is hotly disputed by Ukraine’s supporters, who point to the raft of reforms and laws that have been introduced in recent years and the growing number of arrests of corrupt officials.

Wherever the truth lies, no one denies that Ukraine has a major corruption problem and that this is now threatening the government’s funding by its international donors and its ability to raise the hundreds of billions of dollars of investment needed to pay for the eventual post-war reconstruction.

Transparency International's 2022 Corruption Perceptions Index (CPI), which scored 180 countries on a scale from 0 ("highly corrupt") to 100 ("very clean"), ranks Ukraine at 116 out of 180 with a score of 33, ahead of Russia’s score of 28 and ranking of 137, which has the lowest ranking of any European country.

Critics of the CPI point out that the score is based on a poll and ranks “perceptions” of corruption. There is no methodology to try to measure actual corruption so that Ukraine benefits from its good image in the international press. On the flip side, Russia has also put through some deep structural reforms and cracked down on corruption. Before becoming Prime Minister, Mikhail Mishustin was head of the tax service and after his revamp tax receipts went up by 20%, while the tax burden went up only 2%.

“Corruption is not a problem of the system. It is the system,” a Ukrainian minister told bne IntelliNews in a private conversation a few years ago. Top politicians use their appointment to a lucrative ministerial job as the incentive to create loyalty to a leader, and their ability to take that job away is the basis of their power.

The debate continues. While it's clear Ukraine remains very corrupt, it is also making progress in stamping out corruption.

“Although it still scores low, war-torn Ukraine is one of few significant improvers on the CPI, having gained eight points since 2013. The country has long struggled with systemic abuse of power, but has taken important steps to improve oversight and accountability,” Transparency International said in its more recent report.

Even while fighting back the invasion of February last year, by June the same year the parliament adopted a National Anti-Corruption Strategy and appointed a new head of the office that brings corruption cases before the courts.

“The strengthening of state institutions and functions vulnerable to corruption has been another vital factor in the country’s progress: research shows that interference in the judiciary by oligarchs and other vested interests was one of the key corruption risks before the war.”  

Corruption threatens Ukraine’s funding

Good, but not good enough. The EU is slated to start Ukraine’s EU negotiations on December 15, but the continuing high levels of corruption have unsettled Ukraine’s supporters and is now threatening its funding by the Western allies.

"All layers of society are corrupt in Ukraine; it is not yet ready to join the EU," former European Commission President Jean-Claude Juncker in an interview with the Augsburger Allgemeine at the start of October.

"We should not make false promises to people in Ukraine who are suffering up to their necks. I am very angry with some voices in Europe who are trying to convince Ukrainians that they can become EU members immediately. This would not be good for the EU or for Ukraine," Juncker said.

"Despite the efforts, it is not ready for accession, it needs large-scale internal reforms. We have had bad experiences with some of the so-called new members, for example, with the rule of law. This should not happen again," Juncker said.

During a conversation with the press on the sidelines of the third Summit of the European Political Community in Granada this week, Zelenskiy said the comments were a rehash of Russian talking points.

"[Russians] realised that they cannot break European unity and European support for Ukraine. And the United States, through its intelligence, sees the roots of all this, where it grows from and how Russia is trying to break the balance of power in the world, to undermine our support," the president said.

"Russia has found information that in some of our government agencies, someone is allegedly stealing some of the funds that come to us as part of support,” Zelenskiy said. "Of course, there are many different people. It is difficult for our judicial system to control everything. This is true. But in any case, we are working to ensure that not a single dollar or euro that comes from partners ends up in the pockets of those for whom they are not intended," the head of state said.

Juncker is probably referring to Romania, which was admitted into the EU on January 1, 2007, three years after the main wave of former Warsaw pact countries were admitted. At the time Romania was considered one of the most corrupt countries in Europe and many said that it was also not ready to join.

On October 1, the US government voted through a new spending bill to avert a government shutdown; however, a $300mn provision for Ukraine was removed, which has had in effect frozen Ukraine’s US funding for the meantime. The Pentagon later said that it still has $5.2bn of funds in the kitty of pre-approved money, enough to last another six months, but after that is gone the mooted new $24bn package will have to be approved.

The issue that removed Ukraine’s $300mn provision from the spending bill was a lack of accountability. “The American people want to know how their money was spent,” said then-Speaker Kevin McCarthy ahead of the vote.

Less well publicised, the EU has precisely the same reservations with its mooted €50bn support package that is to be paid out over the next four years. This week, the EU voted through a new multi-year budget for 2021-2027 that locks in €50bn of funds for a special Ukraine fund. But in the talks in Kyiv this week between EU foreign ministers and Ukrainian President Volodymyr Zelenskiy, the EU included reform of the justice system, corruption, money laundering elimination and better accountability of the spending.

The European Parliament's budget and foreign affairs committees overwhelmingly supported a proposal for a multi-year, €50bn plan, but one of the key demands from MEPs was for safeguards against corruption, fraud and other violations in the use of European funds in Ukraine. Among other things, the deputies stressed that companies with oligarchic influence should not receive funding as well as changes to promote greater transparency with all the spending and procurements published on a special website. The whole project will be put to a vote in the Rada on October 16-19.

Huge amounts of money have been sent to Ukraine in the last year. The EU has allocated €85bn in macro and military support in 2022, according to EU foreign policy chief Josep Borrell, while the US has spent about $46bn in just macro support, and military aid brings the total up to around $113bn.

But the West was not always so generous. While military aid was immediately forthcoming, as the West sent physical weapons to Ukraine, not the money to buy them, for the first six months of the war the West was very reluctant to send the government cash to fill in a gaping $4bn a month hole in the budget. By the summer of 2022 Ukraine was running out of money and the government was in danger of shutting down.

Kyiv was desperate for cash to cover the deficit, but US senators blocked any transfers, demanding accountability for any aid they sent. Likewise, the EU was reluctant to send money, saying it feared the corruption in Ukraine and worried all the funds would simply be stolen. However, as a budget crisis loomed ever larger, both Brussels and Washington bit the bullet and promised packages of €18bn and $18bn respectively. (The US later quietly reduced its contribution to $9bn.)

Part of the reason for the West’s enthusiasm for sending arms to Ukraine and not cash is that buying more arms boosts the Western economies and is a de facto easy-sell new tax on their citizens, whereas sending cash to Kyiv is lost money that brings no benefit to the donor’s economy.

These worries over corruption have not gone away. POLITICO reported this month on a leaked US strategy paper that sees corruption as a much bigger issue than the Biden administration is willing to admit in public.

“Biden administration officials are far more worried about corruption in Ukraine than they publicly admit, a confidential U.S. strategy document obtained by POLITICO suggests,” the magazine reported.

“Perceptions of high-level corruption” the confidential version of the document warns, could “undermine the Ukrainian public’s and foreign leaders’ confidence in the war-time government,” the article says.

A second US official familiar with the discussions confirmed to POLITICO reports that the Biden administration is talking to Ukrainian leaders about potentially conditioning future economic aid on “reforms to tackle corruption and make Ukraine a more attractive place for private investment.” Military aid will not be made conditional, the report said.

Attack on the oligarchs

Worries about endemic corruption run as a thread through all of Ukraine’s post-Maidan recent history. In 2014 Ukraine was given an Extended Fund Facility (EFF) in March 2015, an International Monetary Fund (IMF) support programme that runs over several years, but half the money was never distributed and eventually Ukraine was downgraded to a 14-month $3.9bn standby agreement (SBA) in 2018 for foot-dragging by the Poroshenko administration – largely for the lack of action on corruption related issues.

The IMF has also swallowed its fears and loosened the purse string because of the demands of keeping Ukraine Inc. running during the war, but those fears remain. Ukraine is back on an EEF and the IMF just signed off on its second assessment of Ukraine’s compliance with the terms of the deal, but like the EU, the many of the strings attached to the facility are related to judicial reform, corporate governance and transparency.

One of the issues that caused the previous downgrade was former President Petro Poroshenko's reluctance to set up an independent Anti-Corruption Court (ACC), part of the anti-corruption triumvirate composed of the National Anti-Corruption Bureau of Ukraine (NABU) that was independent of the government and could investigate wrongdoing; Specialised Anti-Corruption Prosecutor’s Office (SAPO), that is also independent of the regular police and could arrest wrongdoers; and the ACC that is also independent of the judicial system where the wrongdoers could be prosecuted and jailed.

According to RBK-Ukraine, there was an informal condition for allocating US money proposed in September; preparing a draft law to strengthen institutional independence and operational efficiency of the SAPO. The law's adoption by the end of 2023 is one of the conditions for allocating macro-financial assistance from the EU and lending from the IMF, RBK reports.

The main problem lies in the powers of the head of the SAPO, which was created as an independent unit of the Prosecutor General's Office to investigate corruption cases involving high-ranking officials. However, the SAPO still has no separate legal status and remains administratively and procedurally dependent on the Prosecutor General Office, the US complained.

NABU made its first attempt to hook its first big fish, when it arrested Roman Nasirov, the government’s financial controller and former President Petro Poroshenko's right-hand man, and charged him with embezzling millions of dollars in March 2017.

Despite damning evidence, the case went nowhere. Nasirov's wife turned up at the courthouse the next day with a million dollars in cash and bailed him out. The charges were eventually dropped and Nasirov was not only reinstated in his old job, but went on to stand against Zelenskiy for the job of president in the 2019 elections.

The ACC was finally created on April 11, 2019, only ten days before Poroshenko lost his job in the presidential elections that year. One of the issues that Zelenskiy campaigned on was to end the endemic corruption and the rule of the oligarchs.

And Zelenskiy has been true to his word. After dithering for the first year, and maintaining a worrying close relationship with oligarch Ihor Kolomoisky, whose media empire backed Zelenskiy election campaign, the former comedian has ratcheted up his attacks on the oligarchs.

It began with Kolomoisky’s aggressive campaign to try to retake control over PrivatBank, which was nationalised in 2016 after bne IntelliNews reported that its former owners had looted the bank of its deposits and left a $5.5bn hole in the balance sheet.

After Zelenskiy's election, Kolomoisky began what the National Bank of Ukraine (NBU) dubbed a campaign of terror, physically threatening the central bank’s staff and launching 200 legal cases in one of Ukraine’s most notoriously corrupt courts. Worried that the state would hand the bank back, the IMF made it clear that any more aid was linked to heading Kolomoisky off.

In a dramatic vote, Zelenskiy persuaded the Rada to push through the so-called Anti-Kolomoisky law in May 2020 that made it impossible for the former owner of a bank that has been nationalised to retake control of it.

That story finally came to a head when Kolomoisky was arrested on September 2 this year by the Ukrainian Security Service (SBU), which is wholly under the president’s direct control, not NABU, which has been investigating him for years. However, shortly afterwards more charges were brought against Kolomoisky of embezzling $250mn from his bank PrivatBank on September 8. Those charges were brought by NABU and Kolomoisky is still in pre-trial detention at the time of writing. His trial, if it happens, will be a landmark event.

Campaign broadening

It is becoming increasingly clear to Zelenskiy that he has to fulfil his promise to stamp out corruption, as it has become an existential issue for Ukraine.

Now it is fairly clear that the West will not authorise handing the roughly $300bn of Central Bank of Russia (CBR) reserves frozen by the West in the first days of the war to Ukraine to pay for its reconstruction.

At the Recovery conference held in London in June Ukraine it became clear that the plan is now to have the private sector come up with the hundreds of billions of dollars that Ukraine needs, not the international financial institutions (IFIs) and not the international community.

That is not going to work unless corruption is defeated. Despite the strength of its investment story – Ukraine remains one of the last unreformed countries of the Former Soviet Union (FSU) with most of its “catch up” growth ahead of it – the country has an abysmal foreign direct investment (FDI) record because of the lack of the rule of law and weak property rights. In several years since the Maidan revolution, Ukraine took in no FDI at all.

In a recent interview, the chairman of the board of Deutsch-Ukrainische Industrie- und Handelskammer (AHK Ukraine), Reiner Perau, said many German companies are interested in the Ukrainian market, but “active and widespread corruption in Ukraine stops them.” According to Perau, very often officials in local administrations demand a bribe of €500 and more for one or another permit. There are also problems in relation with the Tax Service, Perau said.

In the renewable energy sector, the only sector to attract any significant investment since 2014, the companies that invested had to threaten to take the government to court after it reneged on its obligation to pay for the nearly $1bn of power it bought from the new firms. The risks associated with investing into Ukraine remain extremely high. Attracting the more than $414bn of investment needed to rebuild, according to the World Bank, already looks like an impossible task.

European Commission President Ursula von der Leyen put her finger on the issue during her speech at the event, appealing to the assembled captains of Western industry in London: “Total predictability, clarity and transparency are needed.”

Ukraine is still a long way from that benchmark, but Zelenskiy has ramped up his anti-corruption campaign, which is looking increasingly creditable.

After the specific fight to reign Kolomoisky in, Zelenskiy broadened the campaign with his oligarch speech in March 2021 highlighting the businessmen as a problem.

He followed that up with the oligarch law in September 2021 which effectively created a registrar of oligarchs and banned government officials from talking to them.

Ukraine’s businesses are also starting to react. They have created a register of "raiders and corrupt officers" among law enforcement staff, the Kyiv Independent reports. Investment bank Concorde Capital’s founder Ihor Mazepa announced the creation of a new platform to track and rate law enforcement officers and judges who use their authority for illegal purposes and called on the president to legislate a ban on using state law enforcement agencies in corporate disputes that do not concern national security.

“If the government cannot end this madness, then the united business community is ready to do it,” Mazepa said.

Judicial reforms have also started to appear. The Ukrainian parliament adopted a draft law on changes to the procedure for appointing judges of the Constitutional Court of Ukraine (CCU) in September, which is necessary to meet the European Commission’s EU membership criteria. A key element here is that two of the Advisory Group of Experts that recommend judges have to be proposed by international organisations, something that Poroshenko also resisted.

The reform of the judge selection system for the notoriously corrupt Constitutional Court is one of the seven criteria from the European Commission, the implementation of which are necessary for further EU accession progress.

Zelenskiy also enacted a decision of the National Security and Defence Council of Ukraine "On accelerating judicial reform and overcoming corruption in the justice system" on July 1 that increases the penalties for court corruption.

Most significantly of all, following the failure to jail Nasirov for blatant corruption, officials are starting to be arrested and jailed. In the most high-profile case to date, Zelenskiy sacked Ukraine’s defence minister, Oleksii Reznikov, in September, who was widely seen as competent, but was linked to multiple large-scale corruption scandals such as buying overpriced eggs and winter jackets.

While Reznikov himself was not accused of corruption, his ministry is riddled with it. In a parallel move, Zelenskiy also fired most of Reznikov’s deputies and in a move reminiscing of former Georgian president Mikheil Saakashvili’s’ decision to fire all of the corrupt traffic cops in Tbilisi, Zelenskiy sacked all of the regional recruitment officers.

He also removed several medical conditions from the list that exempted men from serving in the army to get rid of some of the favoured dodges for getting out of serving in the army. However, all that happened was the cost of buying a medical exemption jumped from a few thousand dollars to $20,000, according to one recent report.

Zelenskiy's reforms are not going perfectly. Despite objections from anti-corruption activists, the Ukrainian government appointed Olena Duma as the new head of the Asset Recovery and Management Agency (ARMA) at the end of June, which has a bad reputation for corruption. ARMA is a special governmental body, authorised to formulate and implement state policy in the sphere of tracing, finding of assets that are subject to seizure.

Likewise, the nominally independent NABU has been accused of drifting into the president’s orbit under the newly appointed head, Semen Kryvonos, as Zelenskiy has clearly been concentrating more power in his own hands in the last year.

But Zelenskiy is clearly trying to break the “corruption is the system” mould and to start holding bureaucrats accountable. His anti-corruption campaign is broadening. In the most recent example, he vetoed a law in September that would have reinstated the e-declaration requirement on all public servants, but which had an amendment that the information submitted remains secret.

The IMF-sponsored law was one of the few really effective anti-corruption measures pushed through by Poroshenko, but was suspended after martial law was imposed at the start of the war. Now it is being brought back, but Zelenskiy wouldn’t let it pass until the public disclosure clauses were included that allow the press and the public to check the sources of a public servant's wealth.

On September 22 the Rada passed a new version of the law with the disclosure requirements reinstated. In a televised interview on August 27, Zelenskiy proposed equating corruption with treason during wartime.

"I set a task. Legislators will be asked to equate corruption with treason in wartime," Zelensky said. "I understand that it cannot work permanently, but for wartime, I think it will help."