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Ukraine’s system of crony capitalism The challenge of dismantling ‘systema’

Українська

John LoughAssociate Fellow, Russia and Eurasia Programme

  • Ukraine’s systema – commonly described as oligarkhiya in Ukraine – grew out of a specific form of crony capitalism that took root in the late 1990s. It has proved impressively resilient and adaptive to political and economic disruption since the 2004–05 Orange Revolution. It allocates resources inefficiently and in ways that do not benefit society, and increases economic costs by reducing competition. At the same time, it weakens institutions and perpetuates high levels of inequality and corruption. As such, it is the underlying obstacle to the development of fully functioning democratic institutions and rule of law.
  • Systema has proved particularly hard to dislodge because it rests on a firm alignment of interests between big business and the political class in favour of rent seeking over wealth creation for the public good. Across the state sector, and at different levels, it has spawned an extensive supporting structure of beneficiaries that service those interests.
  • Systema’s structures are in place not just in Kyiv but across the country. The same operating principles are replicated at regional level for the benefit of powerful local elites and their accomplices in regional governments and councils.
  • The influence of systema across the banking, energy, transport and healthcare sectors rests on the same foundations, and achieves broadly similar results for its stakeholders, even if some reforms have significantly reduced opportunities for the levels of rent seeking seen before the Revolution of Dignity in 2014. The agricultural sector is anomalous partly because of the absence of the main financial-industrial groups (FIGs) and because the issue of land reform resonates strongly with society and has limited the ambitions of some of the influential players.
  • The main FIGs dominate the media sector because ownership of media assets is vital for influencing politics and thereby preserving their influence. Over time, however, a combination of regulatory changes, digital disruption, and the appearance of new channels and new models of media business may erode their control of the sector.
  • Although systema has undoubtedly suffered setbacks since the Revolution of Dignity, it still has considerable residual strength, and the ability to undo some of the most important achievements of the reforms undertaken since 2014.
  • Systema has left Ukraine with a serious lack of expertise in government that contributes to weak state capacity. The major FIGs attract and retain much of the best talent in the country, putting it to work to make governing institutions work for them. This imbalance is likely to take many years to correct.
  • Reducing the influence of systema requires changing the calculus of the main players. Rent seeking needs to become more difficult, to carry greater risk and to be less profitable than wealth creation through the establishment of well-managed, transparent businesses that attract investment and generate employment.
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  • © Chatham House, The Royal Institute of International Affairs, 2021

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