Blog | May 24, 2018

Ukraine’s Other War: The Battle Against Systemic Corruption

BY: VALBONA ZENELI

Ukraine is fighting wars on two fronts. While facing Russian aggression on its soil and separatists in the East, it wrestles with systemic corruption that impedes serious reform. Both constitute threats to its sovereignty, prosperity and its Euro-Atlantic aspirations. “It serves no purpose for Ukraine to fight for its body in Donbas if it loses its soul to corruption,” warned then U.S. Secretary of State Rex W. Tillerson during his visit to Ukraine last year.

The conflict in Donbas and the annexation of Crimea have had the positive unintended consequence of supporting nation building, and fostering a strong sense of Ukrainian national identity. On the flip side, weak governance, rampant corruption and a lopsided economy dominated by oligarchs undermine the clear choice of the Ukrainian people to integrate into a Western-European value-based system.

Since the Euromaidan protests in 2014, the reform process underway in Ukraine has been a rocky one. Of course, it is challenging over a short period of time to move on from the disastrous post-independence legacy of a quarter century of self-inflicted bad governance. Moving up a few ranks from the 142nd position in 2014 to the 130th place in 2017 in the ranks of Transparency International indices should be no reason for celebration.

Granted, Ukraine has made progress towards becoming a more functional state. The new electronic public procurement system has won international acclaim. Decentralization is succeeding, and energy sector reform has proven relatively effective, ensuring Ukraine is no longer purchasing natural gas directly from Russia. The new patrol police is more efficient and less corrupt. Also, progress has been made in introducing new legislation and new structures to curb corruption at local levels, but unfortunately these measures have been overshadowed by the less serious struggle against corruption in the higher levels.

As such, observers note the existence of a “dual state” in Ukraine, with the façade of official government institutions being restructured and a secondary oligarchic patronal structure, created in the 1990s, with outsized influence in politics and business—all operating in a fragile political context. The biggest challenge is the underlying architecture of governance, which has not changed much, allowing the existence of the basic preconditions for corruption to flourish.

The current scenario sees a struggle between reformists and post-soviet, corrupt governance leadership practices. Corruption is also being leveraged by Russia as a subversive weapon to bring Ukraine closer into its orbit, weaken resilience in the country, curtail the prospect of Euro-Atlantic integration and damage the image of Ukraine internationally.

At the Core, It’s About the Economy

Ukraine is the second poorest country in Europe, after Moldova, with about 2,500 USD per capita income in current prices in 2017. This is only 7 percent of the EU-28 average Gross Domestic Product (GDP) per capita. While the Ukrainian economy returned to growth in 2017, the dire economic situation has led to a drop in living standards, exacerbating disparities and deepening inequality.

At the beginning of the 1990s after the fall of the Berlin Wall, Ukraine and Poland, two neighboring countries, with populations about the same size, had similar incomes. Today, the GDP per capita in Poland is 13,800 USD, five-times that of  Ukraine.

Ukraine’s economic growth model has been an extractive one, mainly dependent  on imports, driven on the exploitation of natural resources and public property, and on the artificial accumulation of financial capital. The large-scale privatization process of the state-owned enterprises has not been effective, favoring market monopolies and fueling widespread corruption. In absence of real structural reforms, the role of innovation in the economy is limited. In contrast, the shadow economy is significant, and sovereign debt is skyrocketing, reaching 75 percent of GDP in 2017 according to IMF data. All these challenges have seriously impaired economic competitiveness.

To foster economic development it is imperative to create a business friendly environment. Judiciary reforms, clear property rights, simplification of procedures and an effective fight against corruption are key. Such reforms are necessary to attract Foreign Direct Investment (FDI), crucial for Ukraine’s sustainable development. Despite its strategic location and a market of 42 million consumers, Ukraine has attracted less than 75 USD per capita of new FDI in 2016.  

The benefits of FDI extend beyond capital, job creation and tax collection, to fostering productivity gains in the form of technological know-how, knowledge and managerial skills, access to foreign markets, increased competition and spillover effects for domestic firms. Unfortunately, Ukraine has a serious lack of absorptive capacities to attract and utilize FDI effectively.

A Compelling Narrative

There has been no lack of political, financial and human engagement on the part of Western countries in Ukraine. This is for good reason, as Europe is not stable without a stable Ukraine.

International donors have been throwing large amounts of money to finance the transformation in Ukraine. In 2014-2016, the U.S. provided more than 1.3 billion USD of foreign aid and three billion USD in loan guarantees to support the Ukrainian economy and defense. Since 2014, the EU has mobilized about 3.8 billion euro in macro-financial assistance through three consecutive programmes of low-interest loans, and more than 260 million euro in technical assistance, representing the highest amount ever made available by the EU to a third partner.

Since Euromaidan, there have been four key drivers for reforms in Ukraine: support from the international community; an active and engaged civil society; a small core of strong reform-minded political leaders (mainly women in the government and the parliament); and the Euro-Atlantic integration process.

Reforms in Ukraine are crucial to transform the country economically and politically, to allow Ukraine to improve its international image and rebrand itself with a new narrative different from the existing security consumer’s narrative.

The success of Ukraine is the success of the West. The internal situation in Ukraine should be a common strategic interest, and the West needs to remain united and have a comprehensive long-term strategy. This will only be realized once Ukraine weeds out corruption allowing it to get its house in order.

Dr. Valbona Zeneli is the director of the Black Sea and Eurasia Program at the George C. Marshall European Center for Security Studies.

The views presented are those of the author and do not necessarily represent the views of DoD or its components.

 

Photo: "Flag" (CC BY 2.0) by Oleksii Leonov