With no end in sight to the slow-motion hybrid war in Donbas, the impetus to reform the Ukrainian state has moved in fits and starts. Attempts to carry out a series of fundamental reforms have fallen far short of expectations. These efforts have produced what some observers have described as a hybrid Ukrainian state. The country boasts new institutions and a vibrant civil society keen to hold leaders accountable. At the same time, a deeply entrenched culture of corruption and impunity is eroding the government’s legitimacy in the eyes of average citizens and key civil society representatives. Coupled with the dismal political theater surrounding the cabinet reshuffle and a public showdown with Western allies over a long-delayed shakeup in the Prosecutor General’s Office, there is no mistaking the fact that the Ukrainian state has been captured by enemies within.

Western observers have tended to focus on the corrosive legacy of more than two decades of misrule by a cynical, self-serving elite and ruthless oligarchs. Now, Russia’s aggression is taking the limelight. What these points miss is Ukraine’s internal fragmentation: the post-Maidan collapse of central authority allowed new financial-political groups (FPGs) to emerge. Since 2014, the FPGs have eagerly and avidly challenged the older generation of well-entrenched oligarchs. While the latter group has largely struggled financially and politically in the new order, the FPGs have capitalized on post-Maidan realities to profit from the weakness of the state and, paradoxically enough, the strengths of civil society.

The West seems to lack institutional memory. For example, Western leaders could have learned from Ukraine’s tiny neighbor Moldova, a state now essentially captured by a single oligarch, Vladimir Plahotniuc, where very similar anticorruption institutions have been developed. Transition in Eastern Europe has been significantly slowed down amid heightened geopolitical tensions despite the best Western intentions.

Amid its zeal to support immediate reform and counter Russian influence in the wake of Russian President Vladimir Putin’s annexation of Crimea and war in Donbas, the West helped lay the groundwork for the success of Ukraine’s FPGs. The West’s unconditional support for Kyiv was an understandable choice, but it translated into a lack of attention to the inner workings of the system that followed Viktor Yanukovych’s fall from power, an approach that Kyiv interpreted as carte blanche for continuing corrupt governance. The anti-Russian framework of the post-Maidan government and its Western backers effectively drowned out the sound of the country’s internal failures.

Mikhail Minakov
Mikhail Minakov is an associate professor, political analyst, and consultant.

Unfortunately, it’s far from clear that the protracted political crisis in Kyiv will mark the end of the West’s cheerleader rhetoric and the beginning of a serious effort to hold the government accountable for delivering items long on the reform agenda: reviving the social contract, establishing legitimate central authority based on the separation of powers among the different branches of government, and building and strengthening state institutions that serve the needs of ordinary citizens rather than corrupt financial interests. None of that will happen, of course, without concerted Western pressure on Ukrainian President Petro Poroshenko, who now effectively controls all branches of power in Kyiv (with the notable exception of parliament). Yet rather than lay out a strategy for overcoming systemic opposition to reform, President Poroshenko seems to prefer to serve as an arbiter for struggles among FPGs.

Manifest Weaknesses

The ongoing government reshuffle highlights one of the key weaknesses of Poroshenko’s rule—his propensity to micromanage any and all problems. The ruling coalition fractured due to frustration with the Rada’s failure to dismiss the deeply unpopular prime minister, Arseniy Yatsenyuk, in February 2016. After two months of political crisis and endless talks among political parties and FPGs, Poroshenko managed to convince Yatsenyuk to step down. But even after Yatsenyuk announced his readiness to resign, Ukraine’s governing elites were barely able to form a coalition and agree on the makeup of a new cabinet.

Poroshenko’s agenda was relatively straightforward: to install his business and political protégé, Volodymyr Groysman, as prime minister. Groysman is a former mayor of Vinnytsia, a city with which Poroshenko and his confectionary business have strong ties. Groysman was also speaker of the parliament, and his steadfast loyalty to the president on occasion dictated the flouting of Rada regulations and procedures. Speaker Groysman embraced the previously widespread practice of button-pushing—letting deputies vote on behalf of other representatives with or without their consent and in direct contravention of constitutional regulations.

With the reshuffle, the president has managed to nod to the growing dissatisfaction of Ukraine’s Western backers while keeping the core of the post-Maidan ruling parliamentary coalition formally together. According to one line of argument, with the appointment of a Poroshenko ally as prime minister, the public will blame the country’s lack of progress on the president alone.

With the prime minister and a majority in the new cabinet coming from the president’s group, Poroshenko now will have control of the executive branch to advance reforms. The worry is that Poroshenko may end up forcing active reformers in the government to scale back their ambitions. In recent weeks, two parliamentary deputies from the Poroshenko Bloc who had quit the party in protest were expelled from parliament, a legally dubious move. On March 25, a court ruling granted the Prosecutor General’s Office access to the records of a vocal and respected anticorruption NGO. On March 29, then prosecutor general Viktor Shokin, a Poroshenko associate and a former ally of Yanukovych, managed to dismiss his reformist deputy Davit Sakvarelidze just hours before his own dismissal.

These developments point to two key obstacles to reform. First, there is a lack of political will as leaders are continuing to interpret and even create laws to serve their own short-term, parochial needs. This can be largely attributed to the frenetic push to show a united Ukraine after Maidan, a period during which little attention was devoted to the separation of powers. The accompanying race to pass so-called reformist legislation saw the introduction of poorly conceived laws and the preservation of some arbitrary rules designed to safeguard elite interests.

Second, there is a lack of real authority as Poroshenko’s job increasingly consists of balancing the interests of various FPGs. Despite sometimes looking like a towering figure, Poroshenko is often forced to navigate carefully among competing interests. Similar to his predecessors Viktor Yanukovych and Leonid Kuchma, Poroshenko is concentrating nearly all political and economic power in his hands, but he is not fully in charge.  

Top Dogs

Back in the 1990s, privatization engendered a prolonged turf war among the oligarchs. It was during this period that the infamous Dnipropetrovsk and Donetsk clans evolved. Their basic structure included several individual core owners; pet political leaders and their so-called parties; key public officials; the CEOs of state-owned corporations, privatized corporations, media holdings, charities, and sports clubs; a network of loyal courts and local administrations; and even sympathetic groups of criminal corporate raiders. Some oligarchs also created philanthropic foundations to improve their image and help their grassroots constituencies in lean times. These groups remained regionally based and fought with groups from other regions for control over the central government.

Today, oligarchic clans have evolved into FPGs. While FPGs are better structured, are more flexible, and have adopted the rhetoric of reform and European values, they still serve the same aim of capturing public resources for private gain. Since the concept of private property is highly fragile in Ukraine, these groups convert their political power and economic assets into cash and/or into private property abroad, mostly in the West.

The main focus of these groups is to infiltrate the work of core public institutions, including the Cabinet of Ministers, key ministries, judicial bodies, parliamentary committees, election commissions, and local governments. For FPGs, public posts are a means to manage state-owned companies, to administer customs and tax services, and to control and divert state budget/financial flows. Their influence helps to explain why a public company may have trouble paying taxes and dividends to the government, while key players continue to profit from the very same company. A classic example of a captured company is Ukrnafta, an oil monopoly that belongs to the state on paper yet is de facto controlled by FPGs, even after two years of attempts to return it to state management.

The Diffusion of State Power and the Rise of FPGs

The fall of Viktor Yanukovych marked the beginning of a new era for FPGs: access to power and influence in Ukraine now depends on loyalty to networks of corporate rather than regional power. President Poroshenko’s political-financial network consists of the various branches of his corporate structures and their representatives in local politics. It bears little structural resemblance to the classic Donetsk or Dnipropetrovsk clans of days past. Similar FPGs operate around Yatsenyuk in Kyiv, Mayor Andriy Sadovyi in Lviv, and Internal Affairs Minister Arsen Avakov and Mayor Gennady Kernes in Kharkiv even though these groups typically don’t display clear-cut regional identities. As for the old oligarchs, the war in Donbas is a burning monument to their previous industrial might. Some FPGs have allied themselves with those oligarchs who have survived the revolution, but more often, the groups see opportunities to successfully compete against their aging predecessors.

Numerous factors favor the rise of the FPGs. Ukraine is now less centralized, and Kyiv’s oversight of industry is more limited. A new wave of privatization is expected to begin in 2016. The unprecedented depreciation of the hryvnia and a strong shadow economy that controls 58 percent of GDP have made it easier for new corporate networks to acquire resources at home, provided that they have access to hard currency assets. And those pesky, well-heeled neighbors from the north no longer represent a direct challenge. In February 2016, Kyiv passed a law banning would-be Russian investors from taking part in the privatization process.

Yet FPGs largely owe their success to having adopted the practices of the old oligarchic clans, while adding several key innovations:

  • FGPs may be created around regional leaders, but they aspire to be national-level players. Unlike old regional clans, FGPs are all about business and rent seeking and are not an expression of regional solidarity and kinship ties borne out of the late Soviet and early post-Soviet experiences of collective survival.
     
  • FPGs tend to have their own NGOs. In many cases, these are supposedly self-defense regional units and associated local cells, which are active in politics at the national and local levels and convert the population’s growing hunger for protest into commercial and political capital. While some oligarchs used this tactic in the past, such services are now more widely available thanks to the Donbas war, the proliferation of various volunteer battalions, and the state’s loss of the monopoly on violence.
     
  • FPGs utilize various forms of Internet-based media, including news agencies, bloggers, and fabricators and distributors of kompromat (compromising material about public figures). These projects began as small group initiatives during the Maidan protests and were soon supported—and co-opted—by FPGs, which turned them into their media wings. With roughly 43 percent of the Ukrainian population on the Internet, bloggers and online investigative reporters can wield significant influence. While national television channels are still largely the territory of old-style oligarchs rather than FPGs, Ukrainian television news appears to be growing less politically influential.
     
  • Aside from providing manpower for the aforementioned volunteer battalions, some paramilitary groups have become integral parts of FPGs. Many FPGs also rely on networks of Western contacts. Ukraine’s traditional oligarchs—figures like former prime minister Yulia Tymoshenko and investor Dmitry Firtash—owed their rise to personal ties with decisionmakers in Moscow, and were involved in gas and oil transit projects with their Russian partners. Only a few, like businessman and former parliamentarian Victor Pinchuk, cultivated networks in both the East and the West. However, a Western orientation is one of the core principles of today’s FPGs, which make contact with their Western counterparts through intergovernmental, regional government, media, and NGO networks. Western connections enhance FPGs’ legitimacy in Ukraine and help them to counteract possible pressure from the central government. As a result, these groups are strongly anti-Russian.

The emerging FPGs are not the antithesis of the old oligarchs—instead, they represent the latest stage of the oligarchs’ evolution. The groups have adapted to the new realities: a less centralized state, a society traumatized by war and hungry for feel-good patriotism, increased crime rates, a significant shadow economy, impending privatization, a redistribution of state assets, and, crucially, the sale of land. Neither the state nor civil society is any match for the FPGs—partly because FPGs have also managed, to some degree, to adjust to civil society’s increased prominence by co-opting some of its members. Some civic icons joined  parliamentary factions after the Maidan uprising instead of building independent political movements that could potentially have posed a real challenge to vested interests.

No Exit?

The steps Ukraine must take toward recovery are clear. First and foremost, the country needs a sustainable solution to the war in its east. The current deadlock over the Minsk arrangements plays into the hands of FPGs, whose members revel in populist rhetoric about how the agreements are doomed to fail. Ukrainians elected Poroshenko in the hope that he would restore peace and unity. In order to follow through on his promises, he now needs to present a solid plan to manage the Donbas conflict. The war-torn region has been described as a poisoned chalice for Ukraine. Fewer and fewer Ukrainian politicians are eager to deal with an embittered local population that they suspect will serve as a conduit for Russian influence for many years to come. However, the de facto isolation of Donbas fosters a burgeoning smuggling industry, which directly benefits criminal groups. If Kyiv wants to retain its viability as a state, it cannot continue to leave Donbas to its own devices—or heed the growing calls to disown it and let Russia clean up the mess. Nor can Kyiv rely on crafty tactics, such as the rumored appointment of coal magnate Rinat Akhmetov as Donetsk governor. If territorial integrity is a priority, there is no way around reintegration, nor can there be any shortcuts.

Public controversy about the Minsk deal largely revolves around a provision calling for changes to the Ukrainian constitution that would provide for broader autonomy for regions and municipalities. One way to break out of the deadlock could be to hold a referendum on the mooted constitutional changes. This not only would ease the path to the reintegration of Donbas but also could pave the way for managed decentralization nationwide, in which local leaders would gain broader mandates and become more accountable to their constituents. This would be a welcome change from the current process of decentralization by default that FPGs have turned to their advantage.

In order to win hearts and minds across the whole of Ukraine, the reshuffled government will also need to take tangible steps to address the damage wrought by the war. Kyiv has, putting it mildly, underperformed when it comes to providing social services for war veterans and the approximately 1.6 million internally displaced persons, repairing infrastructure damaged during the war, and restoring state services in the so-called liberated territories. While Western pressure for fiscal austerity is high, Kyiv risks disaster by failing to address the dire living conditions of many of its constituents.

Reform-minded Ukrainians need to regain perspective as far as their priorities go—namely, they need to turn their attention to systemic reform rather than taking down corrupt individuals. The fixation with the freshly dismissed prosecutor general, Viktor Shokin, called the “billion dollar man” by the media (his presence in the office delayed a billion-dollar support package for Ukraine), symbolizes the counterproductive nature of the current approach. For months, reformers have arguably been preoccupied with securing his resignation at the expense of changing the law enforcement system as a whole.

Civil society actors also need to revisit their strategy. Those who have been co-opted by political parties should return to their roots in civic education and advocacy, where there is much work to be done. Basic rules of government transparency and how to behave in a market economy remain poorly understood in Ukraine. As a group of Slovak economists in public service pointed out recently, successful states work according to the “value for money” principle, meaning that it is the government’s responsibility to prove to citizens that funds are being used effectively. By embracing this concept, civil society groups could make it harder for FPGs to abuse state budget flows.

As academic and diplomat Michael McFaul argued shortly after the Orange Revolution, “There was a time when championing state sovereignty was a progressive idea, since the advance of statehood helped destroy empires. But today those who revere the sovereignty of the state above all else often do so to preserve autocracy, while those who champion the sovereignty of the people are the new progressives. In Ukraine, external actors who helped the people be heard were not violating the sovereignty of the Ukrainian people; they were defending it.” Yet in today’s Ukraine, reforms have little to do with championing the people’s sovereignty. Instead, their main aim is simply to preserve the state’s fragile existence.

If and when Ukraine gets on a path to peace, the country’s reformers can begin to address the need for the separation of powers and the concurrent checks and balances. Decentralization, along with Western support, will aid this process. In a decentralized Ukraine, a bicameral parliament can be introduced along with a proportional electoral system—another way to check the power of vested interests and ensure active citizen participation in the political process.

All of this is easier said than done. But the only other option is for Ukraine to remain an internally captured, or hybrid, state. And as long as it does, its grievous lack of capacity will make it vulnerable to outside threats.

Mikhail Minakov is an associate professor, political analyst, and consultant. He has taught at the Kyiv-Mohyla Academy since 2001 and has published the Ideology and Politics Journal since 2011. He also contributes to the Carnegie Endowment for International Peace’s Ukraine Reform Monitor.