Ukraine: The politics of institutional reform: Zelenskyi’s “de-oligarchisation” drive, Dec 2021

The president's “de-oligarchisation” drive addresses issues vital for Ukraine’s development, but is unlikely to produce lasting change

(December 2021, for the EIU)

• The president’s claim that a Russian-linked coup is being organised against him may be part of a wider domestic political struggle set off by his “de-oligarchisation” drive. 
• De-oligarchisation addresses the key developmental issue facing Ukraine. This is that, by restricting political and economic competition, the collusive, behind-the-scenes politics of Ukrainian elites has acted as a fetter on economic growth, helping to explain the country’s low living standards.
• Concerns have been raised that the policy could be applied selectively to damage the president’s political rivals. 
• The measures may be too limited to produce lasting change. Moreover, Zelenskyi appears to lack both the resources and the durable domestic political alliances that would be required to affect a long-term transformation of national governance structures. 
• Without such a transformation, however, the country’s growth prospects will remain subdued.

A coup in the pipeline?

At an impromptu press conference held at the end of November, Volodymyr Zelenskyi, the Ukrainian president, claimed that the country’s security service, the SBU, had uncovered information implicating Rinat Akhmetov, a prominent businessmen, in a coup d’état planned for the start of December by “representatives” of Russia. Such a serious, open accusation by the head of state against a figure who has been at the centre of Ukrainian political life for the past two decades is unprecedented, but may reflect a weakening in the president’s domestic political position. In mid-November, for example, only 15% of those polled expressed support for his party, Servant of the People, putting it behind European Solidarity—the party Zelenskyi’s presidential predecessor and main rival, Petro Poroshenko, on 17.1%—for the first time, according to the Kyiv International Institute of Sociology (KIIS), a market research firm. Akhmetov, who is routinely described as the country’s leading oligarch, denied the claim and asserted his commitment to a democratic and independent Ukraine.

Anti-oligarch law

Zelenskyi’s relations with Akhmetov have deteriorated in line with progress in the president’s “de-oligarchisation” drive, which culminated in the passage through the Verkhovna Rada (parliament) of the so-called anti-oligarch law in late September, backed by 279 votes in the single chamber, 450-seat legislature, mainly of Servant of the People deputies, and ratified by the president soon after. Andriy Yermak, the president’s chief of staff, recently described de-oligarchisation as the top policy priority of the Zelenskyi administration. The new law awaits review by the European Council, due for completion in December.

The law establishes a registry of oligarchs. To qualify for inclusion on it, individuals must meet three of the four following criteria:

• have personal wealth of at least HRN2.27bn (just over US$83m);
• be active in politics;
• control a business monopoly; and/or
• exert political influence through mass media holdings.

Those registered will be obliged to disclose the value of their wealth holdings, and subject to a number of restraints, preventing them from taking public office and funding political parties. Government officials must report any meetings that they have with them. The aim of the law is to curb the political and policy influence of a handful of wealthy business leaders, such as Akhmetov, who have skewed Ukraine’s democratic and economic development in their own favour for much of the independence era.  

Earlier, in March, the government froze the media assets of Viktor Medvedchuk, restricting him to house arrest and charging him with treason. Medvedchuk, like Akhmetov, has been a long-term fixture in Ukrainian politics, associated originally with the Kyiv business-political network, then operating as chief of the presidential administration under Leonid Kuchma, Ukraine’s second president, in the early 2000s. Widely viewed as a key link to the current Russian leadership through personal ties to Vladimir Putin, the Russian president, Medvedchuk was also chair of Opposition Platform-For Life, the largest opposition faction in the Rada following the 2019 general election.

Zelenskyi’s actions against such powerful figures have provoked a backlash. This includes not just increasingly hostile coverage from Akhmetov’s media outlets—on which MPs of the president’s party have refused to appear—and his purported organisation of protests against the president, but also an armed attack by unidentified persons on a vehicle carrying Serhiy Shefir, a presidential adviser, at the time of the law’s passing in late September.

Economic significance

The significance of “de-oligarchisation” is not confined to its potential to set off destabilising domestic political infighting at a time of rising external risks, however. Rather, it is probably the most important domestic political and economic development issue facing Ukraine, with implications not just for general prosperity, but also for national security, and possibly even for the long-term viability of Ukraine as a sovereign state.

Modern approaches to economic development stress the role of widening political participation to ensure the production of laws that reflect the interests of a range of social groups, as well as the necessity of a reasonably robust central state to implement them. This sets the framework for secure investment on which technological innovation, and so income-raising productivity, depend. In Ukraine, by contrast, the collusive behind-the-scenes elite politics of the oligarchs, in cahoots with leading politicians and state officials, both weakens state capacity and restricts competition, deterring investment. In turn, Ukraine’s weak investment record helps to explain its poor economic performance, and high vulnerability to economic shocks, since its recovery from the deep post-communist slump of the 1990s. As a result, Ukraine has one of the worst records of economic growth of any of the countries which broke with Soviet-style communism in 1991, leaving it among the poorest countries in Europe. 

Prospects

A number of criticisms have been levelled at Zelenskyi’s anti-oligarch law. This includes the law’s alleged lack of precision in its definition of an oligarch, as well as the absence of an independent body, following a transparent process, to implement it. In particular, the decision on who qualifies for official registration as an oligarch has been assigned to the National Security and Defence Council (NSDC), which falls under the president’s jurisdiction. In light of Zelenskyi’s association with another leading oligarchic network—that of Ihor Kolomoiskyi and his Privat organisation—which he and his team have found hard to shake off, this has stoked concerns that the new legislation could be applied selectively as a way of undercutting domestic political rivals and aiding allies.  

Alongside these concerns, there are at least three reasons to doubt the prospects for success of Zelenskyi’s policy. These are that the measures taken so far appear both somewhat mis-calibrated and too limited in scope to affect lasting systemic change. It is also unclear whether the Zelenskyi team has the resources, knowhow, durable political alliances or popular support to see the policy through over the long term.

On the first of these, while the anti-oligarch law aims to break the links between politics and big business, it does not seem to address all of the channels—even key ones, such as payments to state officials, and especially to MPs—through which oligarchs’ political influence is achieved. On the second, it should be stressed that one or two oligarchs, or even a handful of them, do not constitute Ukraine's oligarchic system, which is a much broader-based institutional governance structure, encompassing not just oligarchs and their business networks, but also the holders of high political office and civil servants working at different levels within the central national and regional administrations, reaching across a range of state bodies and economic sectors. This implies a considerable constituency of people within Ukrainian society with a material stake in the maintenance of the status quo.  Any programme of political transformation that does not take this into account is likely to fail.

Lastly, as entertainment industry outsiders, Zelenskyi and his team would appear to lack the highly concentrated material resources, practical backroom political knowhow and extensive network contacts on which the crucial informal dimension of Ukrainian politics depends. Alongside Zelenskyi’s position as an outsider in the relatively hermetic world of Ukrainian elite politics, this limits his ability to affect change mainly to the levers of formal politics at his disposal—that is, through the executive power of the presidency, backed by the presidential administration, and through his dominance of the Rada. 

One possible way of making headway on systemic transformation, it has been suggested, would be to develop durable links not only with Ukrainian civil society, which has flourished since the Euromaidan revolt of 2013/14, but also with more forward-thinking members of the elite who are able to see that the protection of their own domestic business interests would be improved on the development of a reasonably proficient state able to implement the law in a more or less even-handed fashion. It is unclear, however, whether Zelenskyi’s team has done the political work to forge such alliances, even as his popular support wanes. So far, Zelenkyi and his team have tended to adopt a more partial, voluntarist, top-down approach to the question of the long-term transformation of Ukraine’s national governance structures. Without at least some success on this, however, Ukraine’s prospects on economic growth will remain subdued, and its geo-political position sandwiched somewhat precariously between the EU and Russia unchanged.