None of the country’s reforms can succeed while the oligarchs still rule. Here’s how to take them out.
BY NEIL A. ABRAMS Neil A. Abrams, PhD, is a political risk consultant for investors in emerging-market countries. He is completing a book on corruption in post-communist Europe. M. STEVEN FISH M. Steven Fish is a Professor of Political Science and Katherine E. Michel is a Ph.D. student in the Department of Political Science at the University of California, Berkeley.
JUNE 13, 2016
Ukraine’s oligarchs are its biggest problem. If there is a single obstacle to establishing a functioning state, a sound economy, and true democratic accountability, it is the tycoons who control the country.
The oligarchs first emerged in the years following Ukraine’s independence from the Soviet Union in 1991. They grew rich by gaining privileged access to the gas market, expropriating companies from private owners, trading with state enterprises on advantageous terms, and privatizing those same firms at pennies on the dollar. The crooked dealings that lie at the root of their fortunes give them a vital interest in keeping state officials corruptible, the economy rigged, and the rule of law weak. A world in which regulators abide by the rules, prosecutors and judges behave scrupulously, democratic procedures hold leaders accountable, and market competition works as intended is one in which the oligarchs cannot live and work.
Calls to finally stamp out their influence are growing ever louder and more numerous. But few observers have offered workable plans for doing so. With that in mind, we present a roadmap for how it can be done.
The key to the plutocrats’ power is, unsurprisingly, their money.
The key to the plutocrats’ power is, unsurprisingly, their money. Claims that they control upwards of 70 to 85 percent of the economy are probably exaggerated. But the oligarchs are extremely rich, and their wealth affords them a degree of influence unfathomable by the standards of most democracies. А mere six individuals own the bulk of the country’s television, radio, and print media. Parliament is little more than an arena for competing moguls. A corrupt judiciary allows them to pilfer the state and rig elections with impunity. The executive branch is headed by President Petro Poroshenko, himself an oligarch with a dubious past. Real reform does not stand a chance unless the tycoons suffer a severe blow to their wealth and influence. For that to happen, the following four steps must occur.First, the political class that has ruled Ukraine since independence must fall. Its members have maintained their grip over the country even in the face of successful popular uprisings in 2004 and 2014 against electoral falsification and massive executive corruption. Any government that hails from this class, including the current one, will be too compromised by ties to the oligarchs to transform the country.
Replacing the ruling class requires popular action at the polls. Ukrainians must elect a parliamentary majority and a president from outside the post-communist political establishment. Once elected, this coalition must appoint a government dominated by reputable technocrats instead of the usual insiders.
Such a feat, virtually inconceivable for most of Ukraine’s post-Soviet history, now appears increasingly possible. Since the Euromaidan revolt of 2014, civil society has flourished and even placed a new “Euro-optimist” contingent into parliament. If this trend continues, it could produce a political opposition that is both credible and independent from establishment elites.
Ironically — and quite unintentionally — Putin’s invasion of Ukraine has added further life to this possibility. His war has united the country around the goal of Europeanization and effectively amputated the most heavily russophilic parts of the electorate that might oppose such a project.
Once Ukraine’s new government is in place, the second step — replacing corrupt officials in the state administration with motivated activists and outsiders — can begin. Expelling the magnates’ stooges from the government is crucial to depriving the oligarchs of their political protection and access to state largesse. The judicial system must be the first target of this campaign.
This process will take time. 20,000 prosecutors and 10,000 judges are not going to be replaced overnight. But that reality must not serve as yet another excuse for inaction. A new government could readily establish a special prosecutor’s office and special courts staffed by reputable professionals and tasked with pursuing high-level corruption cases.
The National Anti-Corruption Bureau, which became operational in December 2015, seems to provide a good start, but it is grossly inadequate in its present form. While it can investigate and prosecute crimes, it faces serious legal restrictions and staff shortages. It also lacks a set of special courts where it can try cases and is stymied by corruption in the regular courts. This situation is hardly surprising, given the stake that Ukraine’s current leaders have in preventing the agency from doing its job.
With the first two steps having loosened the oligarchs’ grip on the state, the third and fourth aim to break their hold on the economy.
The third step is to eliminate the subsidies on which most of the oligarchs depend. This first requires privatizing state enterprises that the moguls use to enrich themselves. The notorious regional power companies would be a good place to start. These privatizations must break with tradition by being fair, honest, and open to both foreign and domestic participants. This would weed out oligarchic suitors in favor of capable new owners.
The new leadership must also simplify Ukraine’s byzantine system of regulation and taxation.
The new leadership must also simplify Ukraine’s byzantine system of regulation and taxation. This system funnels a massive subsidy to the oligarchs by insulating them from market competition; it is they, after all, who excel in the influence-peddling required to circumvent the bewildering maze of rules.
Even if deprived of their cherished subsidies, Ukraine’s crony capitalists will still have at their disposal a formidable arsenal of cash and assets they’ve already acquired. If their wings are to be truly clipped, the government must compel them to relinquish a substantial part of their ill-gotten fortunes.
The fourth and final step aims to do just that. The newly-established special prosecutors should carry out arrests on corruption-related charges of as many oligarchs as possible. It should then offer them a plea bargain: Either pay a giant, one-time tax on the assets they’ve stolen or face prosecution for past misdeeds. Such an approach worked in Georgia after the Rose Revolution of 2003. It could work in Ukraine, too.
The main goal is not to punish the oligarchs; it is to use the credible threat of prosecution to force them to cough up a significant chunk of their wealth. This would undercut their ability to buy virtually everything and everyone and thereby diminish their fabled aptitude for stymying reforms.
True, plea bargains would allow the tycoons to escape justice. But calls to prosecute all the oligarchs are not realistic. Concluding plea bargains with most while prosecuting the holdouts is more feasible. To expect Ukrainian prosecutors to pursue complex corruption cases against the entire oligarchic class is to presume that the rule of law already exists. It does not.
The scheme we propose would pave the way for rule-of-law reforms by undermining those who stand in the way. With the oligarchs sidelined, the process of establishing a robust democratic regime and a vibrant market economy could finally begin.
Western countries can help. First, they can deny Ukraine’s reprobate political class access to the billions in aid that enable it to stay in power. Far from supporting reforms, Western aid has propped up the country’s rulers and freed them from the need to build a functioning state and market economy. Continued aid will only prolong the elite’s hold on power. Assistance that bypasses the government and supports civil society should continue. And all aid could resume once genuine reformers come to power and install a government free of oligarchs and their hirelings.
Second, the West is home to the world’s two biggest offshore tax and secrecy jurisdictions, the United Kingdom and the United States. These and a slew of other tax havens in Western Europe shelter the fortunes of oligarchs and kleptocrats from Ukraine and elsewhere. If the plea-bargain strategy is to work,
Ukrainian prosecutors must gain access to information about the oligarchs’ offshore holdings.
Ukrainian prosecutors must gain access to information about the oligarchs’ offshore holdings. Western law enforcement agencies can assist their Ukrainian counterparts in this task.
But the first step is for the people of Ukraine to eject their political masters and replace them with competent outsiders and professional technocrats. Without this, none of the other measures we propose can succeed. It won’t happen this year. But Ukrainians are seeing as never before the necessity of replacing rather than just reshuffling their rulers. With the right leaders, a few good policies, and a little help from the West, Ukraine’s interminable reign of rot may yet come to an end.
Re-printed with kind permission of FP Magazine