• Ukraine: The Kingdom of the Oligarchs

    Posted by: Balázs Jarábik March 25, 2015

    A year after the collapse of Viktor Yanukovych’s government, hope that the new Ukrainian government can check the power of corrupt oligarchs and install a new generation of reform-minded elites is shaky at best. Ukraine’s old elites and their ways of doing business are prevailing over those who seek to build a transparent political system and a modern state built on the rule of law. So far the new government’s legitimacy rests not on its track record of success in promoting reform, but on external factors, namely its ability to respond to Russian aggression and to drum up support for Ukraine in the West. Yet it is no exaggeration to suggest that prospects for the country’s long-term success and cohesion will be determined by its ability to pursue far-reaching reforms to modernize the state and to check the power of the oligarchs.

    Conditions are harsh, most notably a deep, unresolved humanitarian crisis in eastern Ukraine that has left more than 6,000 Ukrainians dead. With no serious international aid forthcoming and Kyiv distracted by an urgent financial crisis, the humanitarian situation in the east has been festering. The refugee crisis is growing, and the central government’s ability to handle refugee flows should be among the key short-term indicators of its performance. Meanwhile, runaway inflation and falling wages impose serious economic hardships on average citizens. In the short term, the terms of the IMF bailout will only increase average Ukrainians’ misery—a fact that few in the West have chosen to acknowledge. The government, for example, will be forced to cut social spending and raise electricity tariffs by 350 percent before 2017. Industrial output has already declined by 22 percent, which in turn has caused a spike in poverty and crime rates while also increasing the size of the shadow economy. Oligarchs are fighting each other, property and businesses are being expropriated by criminals, and a number of former Yanukovych-era officials are dying mysterious deaths—all of which raises questions about the country’s political stability.

    The Hidden Hand of Ukraine’s Oligarchs

    Ukrainian government officials and their backers in the West tend to focus on Russia aggression as the main reason behind Ukraine’s political and economic fragility. Yet Russia’s undeclared war on Ukraine alone cannot explain all of Ukraine’s problems. Corruption, economic mismanagement, huge weaknesses in the financial sector, lackluster reform efforts, and infighting among elites and other vested interests are not Russian inventions. Rather, they are homegrown problems that Russia has been exploiting.

    The EuroMaidan Revolution may have brought down Yanukovych (an important symbol in his own right), but it failed to diminish the role that oligarchs play in Ukrainian politics or to legitimize fully the power of the central government—especially in the eyes of oligarchs. The Maidan was an important symbol of the desire of the Ukrainian people for accountable and transparent governance. But it did not change the social contract between the people and the government because the existing patterns of governance were too strong. Ukraine’s current government is arguably its most competent since independence. However, it has not yet managed to impose significant reforms to modernize the state or to re-focus the mission of the state on serving the interests of the general public. This is because the political forces of post-Maidan Ukraine—civil society activists and fighters from Donbas among them —are still too weak compared to the oligarchs.

    The centrality of the oligarchs in the Maidan itself has largely been overlooked. They had their own reasons for supporting the movement: although many of them lost money, positions, and influence due to subsequent Russian aggression, Yanukovych’s grip on power directly threatened their interests. These oligarchs, united against Yanukovych step-by-step, funded key resistance groups, shaped news coverage of the movement, and worked with law enforcement behind the scenes. In fact, growing oligarch support for the Maidan may help explain the extent of Yanukovych’s contingency planning: perhaps it was the loss of many longtime allies that led him to pack his bags long before he actually fled the country.

    While the Maidan was undoubtedly a “people power” movement directed against a hated, corrupt regime, oligarchs also played a key role in brokering the post-Yanukovych government. It was none other than Dmytro Firtash who, despite being under house arrest in Vienna, reportedly forged the deal that united political parties led by Poroshenko and Vitali  Klitschko ahead of the May presidential election.

    Ukraine continues to be run by oligarchs today. Yet the power dynamics between oligarchic groups has shifted dramatically. Most importantly, the overall influence of the traditional power brokers with control over Ukraine’s metallurgical and coal assets is waning. Having lost 5.8 billion dollars of his net worth in 2014, Rinat Akhmetov—Ukraine’s richest man before the war—appears to be the biggest loser. However, he remains powerful and has the ability to broker relationships between Kyiv (where he lives) and Donbas (where he still controls assets). Akhmetov has ties with Aleksander Zakharchenko, the self-proclaimed leader of the Donetsk People’s Republic, and he is widely believed to be working with forces on both sides of the ceasefire line. His energy business, however, has come under pressure from fellow oligarch Ihor Kolomoysky, who, until quite recently, was believed to be the biggest winner of the post-Maidan era in terms of political influence.

    In the meantime, Firtash, who is fighting extradition by the United States from Austria, recently announced his intention to return to political life. He, like other oligarchs who made their fortunes in Ukraine’s south and east, claims to support greater Western engagement but purports to be increasingly disturbed by the West’s inability to deliver for Ukraine, especially in geopolitical terms. Akhmetov, Kolomoysky, Firtash, and others also have an interest in decentralization of Ukraine’s political structures. Poroshenko has been smart enough to control this process, which is being handled by the Constitutional Commission headed by Rada speaker Volodymyr Hroisman, a staunch Poroshenko supporter.

    The Vulnerable South-East

    The war in the Donbas has led to a rise in patriotism across the country, but the population in south-eastern Ukraine continues to harbor pro-Russian sympathies. Of course, that does not mean many residents of region actually want to be ruled by Moscow (nor does Moscow actually want to annex Donbas) or—even worse—by the separatists. Their attitudes are shaped by growing and legitimate grievances about Kyiv’s governance shortcomings in the region and worsening socioeconomic conditions.

    In Kharkiv, an eastern city that remains vulnerable to separatist-led violence, the cooperation of local elites has been the key to maintaining stability. When Russia’s “little green men” began showing up in the region, it was not the central government that came to the rescue. Rather, it was only through the combined efforts of the Kharkiv mayor, the minister of the interior, and a private security group hired by Kolomoysky that the situation stayed under control. But this was only a tactical alliance. There are new frictions within the regional elite in Kharkiv, and popular frustration is growing with the region’s faltering economy—all of which may leave the city vulnerable once again.

    Odessa, a southern city along the Black Sea, is equally vulnerable to separatist violence. Similar elite frictions combined with a host of murky ties to the underground economy and criminal groups create a potentially combustible mix. Until recently, Odessa seemed firmly under Kolomoysky’s political control. The regional governor is known to be one of “his men,” and the city’s major reportedly has struck a deal with the Dnipropetrovsk oligarch. Still, Kolomoysky does not have full control over the region: now that he has withdrawn his armed battalions from Odessa, it is now up to state security forces to ensure peace. Either the pro-Kyiv authorities will be able to do so on their own or Kyiv will remain dependent on Kolomoysky and his associates to maintain order and stability in a region where Russia might easily foment violent conflict.

    Taking on Kolomoysky

    The conflict with Kolomoysky and his March 25 removal from his government post as governor of Dnipropetrovsk may be a watershed. To their credit, the Poroshenko administration has been trying to protect the state’s interests. It undercut Kolomoysky’s economic influence, in part by removing his proxies from UkrNafta and UkrTransNafta, a majority state-controlled energy company that has long been his cash cow, even though he only holds a minority stake.

    As governor of Dnipropetrovsk, Kolomoysky was Kyiv’s key ally in the war in eastern Ukraine. He deployed his private army to fight pro-Russian separatists and prevent the spread of conflict into other regions. But he seems to have gone too far in attacking other oligarchs and has been showing his true colors in his handling of the conflict over UkrNafta and UkrTransNafta. At this point, the relationship between Kyiv and Kolomoysky has not broken down. The new interim governor of Dnipropetrovsk is not Kolomoysky’s protégé. Poroshenko’s hard-edged response may be viewed as remarkable as Kolomoysky is far less predictable than his fellow oligarchs since he has far fewer assets in the West. It appears that there may have been an agreement between the two men that allows Kolomoysky to keep his business interests while Poroshenko strengthens central authority. If so, that suggests that the threat of oligarch-controlled battalions may be overestimated and that the Minsk II agreement may be alive.

    Removing Kolomoysky is only part of the story, and Poroshenko will have to work with others to contain the fallout. The other big question is whether the rest of the oligarchs find themselves being targeted by the regime in Kyiv ahead of the upcoming local government elections. All the while, competition over a shrinking pool of state resources may—quite understandably—fuel even more infighting.

    The West has no choice but to support what it sees as the legitimate representatives of the Ukrainian people: President Poroshenko and his administration. Poroshenko has been cautiously building up central authority in Kyiv: a new law gives the president the power to appoint the head of the National Guard, in addition to his already significant influence over the National Bank, the ministries of defence and foreign affairs, and the new anti-corruption bureau. He can also count on close relationships with Rada Speaker Volodymyr Hroisman and Oleksandr Turchynov, the head of the National Security and Defence Council. Viktor Shokin, the new prosecutor general, has long been a close associate of Poroshenko’s, having worked with the President in the wake of the Orange Revolution. There is no evidence to suggest that Poroshenko has been using his political power to expand his personal business interests. Still, Poroshenko is an oligarch himself, and he is seen that way by his peers. He needs to continue balancing competing groups and individuals, instead of repeating Yanukovych’s mistake of aggrandizing power and property solely for himself and his entourage. And if he can’t deliver a better life, a smoother functioning state apparatus, and a more effective, EU-oriented government then winning the peace in the east may mean little.

    Polls suggest Ukrainian support for integration with Russia has collapsed, while support for the EU has increased slightly. At the same time, pro-EU integrationists do not have a firm majority. Growing frustration with the West may eventually foster growing sympathy toward Russia. There won’t be another U-turn, of course. Ukraine will certainly stay pro-Western. But the real question is whether its leaders and elites slowly return to the time-tested balancing act between east and west that former President Leonid Kuchma developed.

    By manipulating corruption schemes and playing the vested interests of Ukrainian elites off each other, Vladimir Putin could find himself, paradoxically, in a position to restore harmony in Ukraine. Such an unlikely development would, of course, take Ukraine “back to future.” Yet, de-oligarchization is a work-in-progress. The recent parliamentary vote on UkrNafta/UkrTransafta directly contravened Kolomoysky’s interests. The government’s moves were well-choreographed and managed, came as complete surprise to Kolomoysky. The spirit of the Maidan appears to live on, giving the forces in favor of civic accountability a significant amount of support and trust from society at large. Western conditionality also plays a role, leading to substantial and critical legislative changes.

    Therefore, the West may drop its “don’t just talk, do something” attitude. Rather than focusing on the gap between the government’s words and concrete actions, a realistic policy that stresses conditionality would be a welcome good step forward. After weeks of political confrontation, the Ukrainian parliament passed budget legislation necessary for the country to receive the IMF bailout. It was pushed through at the last minute and under external pressure that included a warning that Ukraine remains “subject to exceptional risks.” Perhaps somewhat ironically, the risk of financial collapse gives the reformers and the West an upper hand. The reform process is also gaining some traction in the agricultural, energy, law enforcement, and social services sectors. Rents on public tenders have dropped, according to a corruption watchdog. (Unfortunately, according to a recent poll, over 80 percent of Ukrainians see corruption as either having not improved or having worsened since the formation of the new government).

    If Ukraine continues to stay mired in its current difficulties, the current framework for Western policy is just about the only option. The challenge is in many ways similar to what we confronted before the Maidan. The ball is decidedly in Kyiv’s court.

    Correction: An earlier version of this article incorrectly identified the new interim governor of Dnipropetrovsk as a protégé of Kolomoysky.

  • A Chechen Dragon Splits Moscow

    Posted by: Thomas de Waal Wednesday, March 25, 2015

    The Chechen connection to the Nemtsov’s murder has split the ruling elite. Putin’s problem is that Kadyrov has completely cleared Chechnya of all rivals, either Chechen or Russian—having fed and groomed his “dragon,” he has no Plan B in Chechnya.

  • Long Live Minsk II?

    Posted by: Balázs Jarábik Friday, March 20, 2015

    The Minsk agreements are fragile.How effectively they are implemented will depend primarily on the Europeans’ ability to convince Moscow to pressure separatists into observing the ceasefire, and on Kyiv’s ability to keep nationalist militias in line. If either side fails to do so, the fighting is likely to resume.

  • Imitating Chavez: A Year of Nationalization in Crimea

    Posted by: Andrey Sambros Thursday, March 19, 2015

    Although it began with state-owned assets, the nationalization project in Crimea quickly consumed Ukrainian and Russian private property. One year on, every significant Crimean enterprise is in the hands of local authorities, and there is little hope for privatization.

  • Will the Chechen Connection Lead to Ramzan Kadyrov?

    Posted by: Alexey Malashenko Tuesday, March 17, 2015

    Putin and Kadyrov resemble Siamese twins, whose separation will result in complication for both of them, and thus for the country at large. Neither one of them stood to benefit from Boris Nemtsov’s death.

  • Who Benefits From Ending Russian-Ukrainian Cooperation in the Space and Defense Sectors?

    Posted by: Vladimir Dvorkin Monday, March 16, 2015

    The Russian government’s decision to end cooperation with Ukraine on two space launch programs is likely due to political motivations alone and goes against the economic and technological interests of Russia, Ukraine, and many other countries. This decision is worth reconsidering.

  • The Chechen Connection?

    Posted by: Alexey Malashenko Friday, March 13, 2015

    It is impossible to imagine Ramzan Kadyrov calling his subordinates and directly instructing them to commit the murder of Boris Nemtsov. However, the xenophobia and fear of the West characteristic of some segments of Russia’s Muslim community, including Muslims in the North Caucasus, creates a favorable climate for such acts.

  • Left Behind? Russia in the New Industrial Revolution

    Posted by: Akio Kawato Thursday, March 12, 2015

    If Russia does not develop and produce technological innovation, it will not be able to keep pace with the outside world.

  • Armenia, Turkey Clashing Over April 24

    Posted by: Thomas de Waal Wednesday, March 11, 2015

    The Turkish government’s decision to hold a ceremony to commemorate the Gallipoli battles on April 24, in competition with the Armenian commemorations in Yerevan, looks like a political mistake.

  • What’s Behind Lithuania’s Restored Compulsory Military Service?

    Posted by: Luke Coffey, Konstantin Ranks Tuesday, March 10, 2015

    About seven years after abolishing compulsory military service and amidst the tense situation in Ukraine, Lithuania has restored conscription. Eurasia Outlook asked its experts to weigh in on the deeper meaning of this maneuver and what its consequences might be.



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