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How Western Anticorruption Policy Is Failing Ukraine
It Should Focus on Institutions, Not Individuals
By Adrian Karatnycky and Alexander J. Motyl
Western aid programs designed to attack corruption in Ukraine are failing. Instead of acknowledging the significant degree to which Ukraine has changed for the better, Western-backed approaches misrepresent ongoing reforms as woefully inadequate. In so doing, they discredit the reforms, polarizing the country’s elites, promoting mass mobilization, encouraging left- and right-wing populism, weakening Ukraine at a time of war and Russian occupation, and contributing to the country’s instability.
Ukraine is a pivotal country on the frontline of an aggressive Russian state. Its success in countering Russia is a crucial part of the West’s effort to contain and push back against President Vladimir Putin. But as a country under constant Russian pressure, Ukraine can benefit from a more comprehensive reform approach. More specifically, it needs a pragmatic anticorruption and reform policy, carefully designed to enable Ukraine to progress without reinforcing Russian efforts to undermine the state and create instability.
THE RECORD SO FAR
Ukraine is a pluralistic society with highly competitive democratic politics. Twice in its recent history it has seen months-long mass protests (once in 2004 and again in 2013–14). Its citizenry has demonstrated a high degree of grass-roots organization and activism in support of democracy and rule of law.
At the same time, as a legacy of its transition from communism, the country has inherited an oligarchic economic system, widespread corruption, massive tax evasion through a gray economy estimated at around 40 percent above the official GDP, weak protection of property rights and contracts, and largely dysfunctional courts. Not surprisingly, efforts to root out widespread corruption have been a long-standing policy priority of Western aid since independence in 1991. Progress in this area was negligible until 2014, when the Euromaidan revolution toppled then President Viktor Yanukovych and brought to power pro-Western and pro-reformist elites. That same year, businessman Petro Poroshenko, one of the principal financial backers of the protests, was elected president and created a largely reformist coalition government.
Western donors saw in the government’s mix of new and older faces the signs of political change and an opportunity to rapidly reform the country. To aid in this project, they funded a wide array of proxies in the form of anticorruption nongovernmental organizations (NGOs) and public policy institutes with the aim of developing, lobbying, and speeding through legislation and institutional changes.
Initially, the new government and legislature pliantly implemented virtually every reform idea that was presented. Simultaneously, a team of reformers succeeded in making deep inroads into the major corruption schemes that had been in place for decades and had metastasized under the Yanukovych regime.
A major reform of gas pricing eliminated arbitrage that had resulted in billions of dollars in ill-gotten gains for government-linked gas traders and intermediaries. The state gas and oil monopoly was taken over by a team of reformers, who increased transparency and led the company to profitability.
A transparent public procurement system, ProZorro, was introduced in 2015, saving the state hundreds of millions of dollars each year. The militia, traditionally a source of corruption and abuse, was overhauled as a new national police force.
As 2016 drew to an end, Ukraine had also begun to clean its banking sector of zombie banks, so called because they had been made insolvent by giving loans to businesses and shell companies related to their owners. This new tougher policy included the government’s takeover of the Pryvat bank, Ukraine’s largest, which the state charged with making over $5.5 billion in dubious or corrupt loans to related shell companies. Through coordinated action by the Prosecutor General’s Office, $1.5 billion in assets belonging to the “organized crime group led by Yanukovych” was confiscated and returned to the state treasury.
Tighter administrative controls and personnel changes in Ukraine’s remaining state-owned companies dramatically cut annual losses that many experts believed were the result of corrupt practices.
The state also largely eliminated so-called currency conversion centers. These illicit facilities charged exchange fees of between six and 12 percent, which were then shared with tax inspectors who rubber-stamped fictional transactions and expenses to facilitate money laundering and tax evasion. These schemes and machinations amounted to several billion dollars per year.
Finally, the introduction of an electronic system for the claiming and payment of value-added tax injected transparency into the process and eliminated a major source of corruption.
By any objective measure of change, Ukraine’s efforts to reduce corruption have achieved more positive change in the last four years than in the two decades preceding them. They did so by altering the structure of incentives: making honest behavior more profitable than dishonest behavior and turning fraud into an increasingly risky undertaking. This decreased the likelihood of corruption, since the old method of prosecuting individuals without changing the root cause meant they could always be replaced. According to a forthcoming study by Ukraine’s Institute for Economic Research and Policy Consulting, the abovementioned reforms are estimated to have saved as much as $6 billion in annual losses to the state.
WESTERN POLICYMAKERS' FATAL CONCEIT
Amazingly, in the eyes of U.S. and European policymakers, these major gains were insufficient and inadequate. Prosecuting and punishing wrongdoers increasingly became the true measure of change. Western governments continually increased pressure and encouraged their well-funded NGO surrogates to put out a steady drumbeat of criticism at the supposedly slow pace of reforms. It is no wonder that large numbers of Ukrainians believe that “nothing has changed” and that “all is lost.” A poll taken by the respected Democratic Initiatives Foundation in early 2018 showed that 80 percent of people felt that the war on corruption in Ukraine had failed, despite the abovementioned reforms.
Western aid groups pressed for punitive measures to root out corruption, such as through new investigative and prosecutorial institutions, and for unprecedented levels of transparency within the state sector. At the same time, comprehensive reform of the courts was put on the back burner.
The main investigative body that the West sought to empower was the National Anti-Corruption Bureau of Ukraine, which was founded in October 2014 with significant Western financial support and technical assistance. Although it struck a position of independence from state officials and won cheerleaders among Western diplomats and NGOs, its most senior personnel included solid members of the old prosecutorial and police establishment. Moreover, some of the bureau’s practices were revealed to be decidedly corrupt, including the alleged use of illegal means to gain evidence, reliance on pliant judges who were themselves being investigated by the bureau for corruption, wiretapping of conversations without a court order, use of unregistered eavesdropping devices, and the sharing of confidential case materials with favored journalists.
The new Western-backed National Agency on Corruption Prevention operated at a snail’s pace, bringing very few charges to bear against politicians whose asset declarations showed surprising storehouses of money and property. Both institutions, as well as the main Prosecutor General’s Office, suffer from weak knowledge of business law and commercial transactions, which in the end are likely to constitute the bulk of cases on which anticorruption prosecutions will hinge. Meanwhile, a proliferation of Western-funded investigative journalist projects provided a constant diet of TV and news stories about corrupt schemes, unexplained riches, and unanswered questions. Sometimes the programs adopted a vindictive agenda focusing on critics of some of the reforms.
When government asset declarations became public, they didn’t lead to many prosecutions or convictions but instead opened a Pandora’s box that led to the widespread loss of confidence in Ukraine’s elites, anticorruption reformers included. A large portion of Ukraine’s parliamentarians and government officials, many of whom came from business, held multimillion-dollar assets, including lavish homes, fine artwork, and expensive cars. In a country where pensions and wages outside the major cities average $200–$300 per month, the evidence of upper-middle-class and rich lifestyles among the country’s government officials, legislators, and NGO activists heightened public anger that in turn fed the politics of resentment.
As new investigations and law enforcement efforts documented wrongdoing, the failure to address court reform kicked in. Judges were overwhelmed with mounting caseloads and began a de facto slowdown that enabled them to put off taking decisions in sensitive anticorruption cases involving the rich and powerful.
Ironically, the Western-supported anticorruption campaign did not contribute to the consolidation of pro-reform forces. It did, however, diminish public appreciation for the real gains that had been made and dragged down support for those in power, including Poroshenko. The public began to lose faith in the reformers, whom they now considered a feckless alternative. Not surprisingly, polls today show three worrying trends: political fragmentation, with as many as eight parties on the verge of making the five percent threshold to gain office when elections are held in November 2019, with no party commanding even ten percent support; the strength of populist movements; and the absence of a serious liberal alternative. Similar trends of fragmentation and populism are reflected in presidential electoral preferences, with no candidate polling above eight percent in a crowded field gathering for a March 2019 vote.
The root cause of the failure of the West’s anticorruption effort is depressingly familiar: the flawed belief that the key to change was individual politicians and not institutions. As analysts and policymakers increasingly argue that Poroshenko has to go, they overlook the fact that systemic reform is always a complex process highly dependent on changing structural relationships and institutional practices and not on changing the personalities that head them. Poland and Hungary, which seemingly leaped toward democracy and the market in the early 1990s, demonstrate this nonlinear process quite well, with both lapsing into right-wing populism that threatens to dismantle democratic institutions. Inflated Western expectations that former Russian President Boris Yeltsin would transform his country in the 1990s further illustrate the dangers of emphasizing personalities and ignoring institutions.
The Ukrainian public’s alienation from those in power is all the more unfortunate because of the significant steps these leaders have already taken in implementing reforms. They legitimately felt that they had taken great political risks in challenging a large part of the old order, including oligarchs Dmitry Firtash and Ihor Kolomoysky, who wielded tremendous influence through their national TV channels.
Western anticorruption policies in Ukraine are failing because they have focused on creating and empowering adversarial structures rather than creating cooperative relationships with the state. Future pro-reform diplomacy needs to factor in three realities about the country: first, that the authorities will never pursue a policy that will lead to the defection of their shaky ruling majority; second, that the country is under a relentless hybrid military and political attack from Russia; and finally, that if the ruling elite is to be shaken from its moorings, the alternatives need to be electorally viable and the new political configurations need to be capable of promoting further reforms.
A BETTER ANTICORRUPTION POLICY
How should the United States, Europe, and international financial institutions adapt their anticorruption strategy to allow reform to succeed at a time of Russian aggression? Simply put, Western policy should focus on building on the impressive institutional changes that Ukraine has already adopted and further reducing the structural incentives for corruption. To this end, the West should pursue five policies.
Western policy should focus on building on the impressive institutional changes that Ukraine has already adopted and further reducing the structural incentives for corruption.
First, Western anticorruption policy should focus on the reduction of the scope for rent seeking and other corrupt schemes rather than on wide-ranging punishment for those engaged in them. Such a new policy focus could include the creation of truly independent licensing bodies, regulatory agencies, and tariff-setting entities. To this end, remaining state holdings should be privatized, as should Ukraine’s vast agricultural lands. Second, reformers should introduce competition to the entrenched business elite through de-monopolization. Third, Western bodies should renew and repair cooperation with Ukraine’s main law enforcement and justice institutions by committing to improve their professional capacity and internal continuing education. Fourth, Western governments should show neutrality in their relations with Ukraine’s various state institutions and promote the monitoring of all criminal justice institutions, including those that Western policy has helped birth. Finally, grant providers should strictly warn their grantees that engagement in political projects and movements requires their withdrawal or recusal from administrative, executive, and supervisory roles in Western-funded NGOs. These approaches are likely to win support within segments of the oligarchic elite, part of which seeks to legitimate and make transparent its businesses.
The current policy toolbox is insufficient to transform Ukraine. Ukraine’s first few years of reform occurred with the support and concurrence of its governing elite and many of its business leaders and oligarchs, as well as of its new generation of reformers. Further progress will require that Western policymakers continue to engage all these forces.
