[Joint House and Senate Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
THE INTERNAL ENEMY
A Helsinki Commission Staff Report
on Corruption in Ukraine
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
October 2017
THE INTERNAL ENEMY
A Helsinki Commission Staff Report
on Corruption in Ukraine
OCTOBER 2017
CONTENTS
1. Executive Summary ............................................................. 1
2. Introduction .................................................................. 2
3. Background .................................................................... 4
4. Historical Analysis .......................................................... 14
4.1. Kravchuk ................................................................... 14
4.2. Kuchma ..................................................................... 15
4.3. Yushchenko ................................................................. 17
4.4. Yanukovych ................................................................ 19
4.5. Poroshenko ................................................................. 19
5. Main Factors Behind the Persistence of Corruption in Ukraine ..................21
5.1. The Oligarchs .............................................................. 21
5.2. Incomplete Economic Liberalization ......................................... 22
5.3. Gas Arbitrage .............................................................. 22
6. Recommendations .............................................................. 24
6.1. Remaining Reforms .......................................................... 25
6.2. Civil Society Including Independent Media .................................. 28
6.3. The International Community ................................................ 30
7. Conclusion ................................................................... 33
8. Appendix ..................................................................... 34
This report was drafted by Helsinki Commission staff.
Paul Massaro, Policy Advisor, served as lead author.
I. EXECUTIVE SUMMARY
Ukraine's struggle with corruption has prevented it from becoming a
full, prosperous democracy and hinders its ability to respond
effectively to Russian violations of its sovereignty. This Helsinki
Commission staff report examines why corruption has been so persistent
in Ukraine. It provides a historical analysis of corruption in Ukraine
from its break with the Soviet system to today, reviewing the current
state of reforms and providing recommendations in context.
The resilience and influence of Ukraine's oligarchs are at the
heart of the country's persistent corruption. Oligarchs have captured
the Ukrainian state, crowding out non-corrupt political parties and
competing with one another to steal Ukraine's wealth. They are not so
much businesspeople as courtiers, who transform political and personal
connections into monopolies supported by the state.
Two phenomena in particular have given rise to this system of
oligarchic competition: (1) the lack of reforms in the early years of
independent Ukraine, which resulted in incomplete economic
liberalization, and (2) gas arbitrage, which has been uniquely
devastating to reform attempts due to building so many oligarchic
fortunes and providing a backdoor for Russia to influence Ukrainian
politics for decades.
Today's Ukraine has implemented many important reforms that have
helped to counter corruption, specifically in energy, finance, and
economics. However, judicial reforms continue to lag behind.
Commentators have observed that progress has slowed and frustration
among civil society and the international community has increased.
This report recommends that Ukraine move forward with remaining
reforms, supported by both civil society and the international
community. Most important is that Ukraine not allow backsliding to
occur. Ultimately, the oligarchs must be transformed from courtiers
into entrepreneurs and businesspeople so as to finally end the
pervasive institutionalized corruption. An empowered Ukrainian civil
society--including independent media--will be paramount to such
reforms, and has proven time and again that it is world class in its
engagement. Key here is to condemn any attempt to hinder or harm civil
society.
The report makes numerous recommendations by sector, with an
emphasis on the importance of reforming the judiciary. In particular,
Ukraine should establish an anticorruption court as soon as possible,
so as to provide the final necessary piece of Ukraine's anticorruption
architecture.
Additional reform areas discussed include the safeguarding and
further empowering of the anticorruption architecture; implementing
privatization and additional regulatory and corporate governance reform
as the next step for energy sector reform; pursuing consolidation and
transparency as ideas for banking sector reform; and limiting
parliamentary immunity.
This report also discusses greater e-government and press freedom
as mechanisms to empower Ukrainian civil society, including independent
media, to monitor the reform process and prevent backsliding. Finally,
it encourages the international community to continue its support for
Ukraine and dig in for the long haul.
II. INTRODUCTION
2.1. The Importance of Ukraine for U.S. Foreign Policy
The issue of corruption in Ukraine is a part of a larger U.S.
foreign policy effort to counter the threat that corruption presents to
U.S. interests around the globe. As Chairman Wicker and fourteen other
Senators wrote earlier this year:
A world that is a more democratic, respects human rights, and
abides by the rule of law strengthens the security, stability, and
prosperity of America. History has demonstrated time and time again
that free societies are more likely to be at peace with one another.
Constitutional democracies are also less likely to fail and become
breeding grounds for instability and migration. Democratic nations that
respect good governance and the rights of their citizens are also more
likely to be economically successful, and to be stable and reliable
trade partners for the United States. \1\
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\1\ Letter to President Donald J. Trump, May 3, 2017, https://
www.rubio.senate.gov/public/_cache/files/07d6ba61-7421-4316-9f3f-
d4485e7529bf/ABA64081874BD3513AB936690A9E8F3A.5-3-17-letter-to-potus-
re-human-rights-and-democracy.pdf (accessed October 3, 2017).
In Ukraine, pervasive corruption has been both a cause and a
symptom of political weaknesses since the country gained its
independence in 1991. It has also rendered Ukraine vulnerable to malign
Russian influence and eventually outright invasion.
Russia, in fact, has weaponized corruption, both to exploit and
undermine the rule of law in countries where Moscow seeks exercise
influence or control and as a means of protecting and laundering the
ill-gotten gains of Russia's power elite. As Brian Whitmore explained
at a 2017 Helsinki Commission briefing, ``The Kremlin's black cash is
the new red menace, and it has to be looked at that way. Corruption as
a tool of statecraft is something that is spreading from Moscow and is
spreading as a tool of influence.'' \2\ Monies stolen by the Russian
government have ended up hidden in real estate in London, Miami, or New
York, or funneled through anonymous companies to offshore accounts.
These corrupt monies have a debilitating effect in their country of
destination, influencing politics and generating resentment. \3\
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\2\ Remarks of Brian Whitmore, senior analyst with RFE/RL, U.S.
Commission on Security and Cooperation in Europe. Kleptocrats of the
Kremlin: Ties Between Business and Power in Russia. 2017, Briefing,
115th Cong., 1st sess., Washington, DC: Government Publishing Office.
\3\ U.S. Commission on Security and Cooperation in Europe. Kleptocrats
of the Kremlin: Ties Between Business and Power in Russia. 2017,
Briefing, 115th Cong., 1st sess., Washington, DC: Government Publishing
Office.
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The corrosive effects of corruption in Ukraine understandably
fueled widespread frustration and anger that, in 2013--ironically, a
year when Ukraine held the Chairmanship of the OSCE--spilled out in the
streets. On its face, the Maidan protests were a reaction to the
government's rejection of an association agreement with the European
Union.
In reality, the European Union had become a stand-in symbol for the
rule of law and good governance and the protests were a demand for
those basic elements of democracy. Perhaps nothing illustrates Moscow's
hand in Ukraine's corruption as concisely as the image of ousted
Ukrainian President Yanukovich fleeing Kyiv by helicopter, after the
deaths of 100 protesters, in a nighttime flight to Moscow where he
continues to enjoy refuge from prosecution. His abrupt departure
enabled protesters to enter the president's extraordinarily lavish
residence which some have dubbed ``a museum of corruption.'' \4\
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\4\ Andrew Higgens, ``Ukraine Palace Is Still Emblem of Dysfunction,''
The New York Times, Sept. 8, 2014.
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At a 2014 Helsinki Commission hearing on corruption in the OSCE
region, then-Chairman Ben Cardin addressed both the general issue of
corruption and the specific challenges before Ukraine:
Democratic societies function based on a high level of trust in
each other and the institutions that underpin democracies. Corruption
undermines that trust, and thus undermines the very foundation of
democracies. Research has shown a high level of correlation between
failed states and endemic corruption. [ . . . ] component of the
Euromaidan protests--the Revolution of Dignity--was the people's
disgust with pervasive governmental corruption. With the election of
President Poroshenko in May and new, pro-European parliament elected
last month, Ukraine has a real opportunity. \5\
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\5\ U.S. Commission on Security and Cooperation in Europe, Combating
Corruption in the OSCE: The Link Between Security and Good Governance,
2014, Hearing, Pub. 95-572, 113th Cong., 2nd sess., Washington, DC:
Government Publishing Office.
Today, the rule of law and corruption are currently engaged in a
struggle for dominance in Ukraine. It is both in the interest of the
United States and the well-being of the Ukrainian people that rule of
law come away victorious.
Finally, for the first time, it seems real reforms are within
reach.
2.2. Structure of the Report
Despite an active civil society and an impressive independent
media, Ukraine seems perennially unable to tackle its corruption
problem. This Helsinki Commission staff report mines the past of
independent Ukraine for hints as to why corruption has proven so
insurmountable in the country. By pinpointing and analyzing the reasons
for the persistence of corruption in Ukraine, it develops
recommendations for further reforms and strategies to address these
reasons.
This analysis will delve into the development of corruption under
each Ukrainian president from independence to present day: how rent was
sought, who sought it, and what was done about it. This report will
then pull out to a wide lens to pinpoint the phenomena of Ukrainian
history that have resulted in the persistence of corruption in the
country and offers recommendations and conclusions based on addressing
these phenomena.
III. BACKGROUND
3.1. Ukraine and the OSCE
The Helsinki Commission is mandated to monitor the compliance of
participating States with commitments made as part of the Organization
for Security and Cooperation in Europe (OSCE). These commitments
include those in the Second Dimension on what is known as ``Good
Governance.'' These commitments were most recently renewed in a 2012
Ministerial Declaration in Dublin, \6\ titled ``Declaration on
Strengthening Good Governance and Combating Corruption, Money-
Laundering and the Financing of Terrorism.'' Via this declaration, all
OSCE participating States:
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\6\ OSCE Ministerials are annual meetings of the Foreign Ministers of
the 57 participating States of the OSCE and provide the second highest
form of political decision-making after a summit, which are irregular
meetings of the Heads of State. As such, Ministerial Decisions are the
most common source of high-level political direction for the OSCE.
. . . reaffirm[ed] their commitment to tackling corruption and
countering money-laundering, the financing of terrorism and related
offenses by making them policy priorities back up by appropriate legal
instruments, adequate financial, human and institutional resources and,
where necessary, appropriate tools for their practical and effective
implementation. \7\
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\7\ Organization for Security and Co-operation in Europe, Ministerial
Council, Declaration on Strengthening Good Governance and Combating
Corruption, Money-Laundering and the Financing of Terrorism, 2012,
Journal No. 2, item 7, 19th Mtg., 2nd Day, Dublin: 2.
The Soviet Union was one of the founding participating States of
the OSCE. Following the dissolution of the Soviet Union, independent
Ukraine became a participating State of the OSCE. In 1994, the OSCE
established a field mission to Ukraine in Kyiv, with a specific focus
on the situation in Crimea and related constitutional questions. Among
other activities, the mission facilitated the engagement of the OSCE
High Commissioner on National Minorities and addressed the status of
returning Crimean Tatars who had been forcibly deported from the
peninsula by Stalin in 1944.
In 1999, this mission was closed and replaced with a scaled-down
OSCE Project Coordinator for Ukraine, which exists to this day. \8\
Although on its face the mandate for the new Project Coordinator was
broader than the original mission mandate, \9\ the Ukrainian
government's goal was to demonstrate that it had ``graduated'' from the
need for a full-scale mission and to diminish the OSCE's presence.
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\8\ Organization for Security and Co-operation in Europe, Permanent
Council, Decision No. 295, 1999, Journal No. 231, item 1, 231st Plen.
Mtg., Vienna: 1.
\9\ The new mandate envisioned that ``particular emphasis will be
placed on the planning and preparation of a large-scale project
entitled `Comprehensive Review of Human Rights Legislation' to be
started no later than fall 1999.'' DECISION No. 295 Decision of the
Permanent Council of Organization on Security and Cooperation in
Europe, PC.DEC/295, June 1, 1999, 231st Plenary Meeting of the
Permanent Council, PC Journal No. 231, Agenda Item 1.
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Corruption issues are not explicitly included within the mandate of
the Project Coordinator, although they may be addressed under the
favored OSCE euphemism ``good governance.'' Thus, according to the OSCE
website:
The OSCE Project Coordinator supports Ukraine's reforms and helps
the country meet crisis-related challenges. Its projects actively
contribute to major transformations, critical for the stable and
democratic future of the country. The Coordinator's approach is multi-
dimensional and covers a wide array of activities, such as
constitutional reform, legal and criminal justice reform; human rights
and legal education; dialogue as a tool to deal with crises and
implement reforms; psychological and social rehabilitation of crisis-
affected people; the fight against cybercrime and human trafficking;
mine action and democratic control of the security sector;
environmental protection; border security; media freedom; elections;
good governance; and gender equality. \10\
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\10\ Organization for Security and Co-operation in Europe, Project
Coordinator in Ukraine, ``OSCE Project Coordinator in Ukraine,'' http:/
/www.osce.org/project-coordinator-in-ukraine (accessed July 22, 2017).
Other OSCE institutions that exist today within Ukraine are the
Special Monitoring Mission (SMM), and the OSCE Observer Mission at the
Russian Checkpoints Gukovo and Donetsk. Neither of the missions have an
anti-corruption mandate.
According to the OSCE website:
The OSCE Special Monitoring Mission to Ukraine (SMM) was deployed
on 21 March 2014, following a request to the OSCE by Ukraine's
government and a consensus decision by all 57 OSCE participating
States. The SMM is an unarmed, civilian mission, present on the ground
24/7 in all regions of Ukraine. Its main tasks are to observe and
report in an impartial and objective way on the situation in Ukraine;
and to facilitate dialogue among all parties to the crisis. \11\
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\11\ Organization for Security and Co-operation in Europe, Special
Monitoring Mission to Ukraine, ``OSCE Special Monitoring Mission to
Ukraine,'' http://www.osce.org/special-monitoring-mission-to-ukraine
(accessed July 22, 2017).
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3.2. What is Corruption?
Corruption features heavily in the narratives of all political
systems. Transparency International, a global anti-corruption
coalition, divides corruption into three categories: grand corruption,
political corruption, and petty corruption. All of these forms of
corruption are present in Ukraine.
Grand corruption: ``The abuse of high-level power that benefits the
few at the expense of the many, and causes serious and widespread harm
to individuals and society. It often goes unpunished.'' \12\ The most
common form of grand corruption throughout Ukrainian history has been
gas arbitrage.
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\12\ Transparency International, ``Grand Corruption,'' https://
www.transparency.org/glossary/term/grand_corruption (accessed June 18,
2017).
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Political corruption: ``Manipulation of policies, institutions and
rules of procedure in the allocation of resources and financing by
political decision makers, who abuse their position to sustain their
power, status and wealth.'' \13\ In Ukraine, the parliament has been
the center of political corruption.
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\13\ Transparency International, ``Political Corruption,'' https://
www.transparency.org/glossary/term/political_corruption (accessed June
18, 2017).
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Petty corruption: ``Everyday abuse of entrusted power by public
officials in their interactions with ordinary citizens, who often are
trying to access basic goods or services in places like hospitals,
schools, police departments and other agencies.'' \14\ This is true of
most state administration in Ukraine.
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\14\ Transparency International, ``Petty Corruption,'' https://
www.transparency.org/glossary/term/petty_corruption (accessed June 18,
2017).
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Transparency International also compiles a yearly ``Corruption
Perceptions Index'' (CPI) that ``measures the perceived levels of
public sector corruption worldwide based on expert opinion from around
the world.'' \15\
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\15\ Transparency International, ``Corruption Perceptions Index
2016,'' Transparency International, January 25, 2017, https://
www.transparency.org/whatwedo/publication/
corruption_perceptions_index_2016 (accessed June 18, 2017).
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Currently, Ukraine is ranked 131 out of 176 countries monitored,
\16\ one of the worst rankings in the entire OSCE region. It ties with
Russia, and only Kyrgyzstan (136), Tajikistan (151), Turkmenistan
(154), and Uzbekistan (156) are worse. In contrast, Georgia--another
late reformer from the OSCE region--ranks 44, right below Spain and
tying with Latvia. \17\
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\16\ Transparency International Ukraine, ``CPI-2016,'' Transparency
International, https://ti-ukraine.org/en/research/cpi-2016/ (accessed
June 18, 2017).
\17\ A table of consolidated corruption perceptions index (CPI)
rankings of OSCE participating States is provided in the appendix. Data
is not available for the Holy See, Andorra, Liechtenstein, or Monaco.
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3.3. Corruption in Ukraine
According to Thomas de Waal, senior associate with Carnegie Europe,
`` `Corruption' is an inadequate word to describe the conditions in
Ukraine. Since the country achieved independence in 1991, the problem
is not that a well-functioning state has been corrupted by certain
illegal practices; rather, those corrupt practices have constituted the
rules by which the state has been run. Ukraine's political system is
best described as state capture.'' \18\
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\18\ Thomas De Wall, ``Fighting a Culture of Corruption in Ukraine,''
The Carnegie Endowment for International Peace, 2016: 1.
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3.3.1. The Soviet Legacy
From 1922 until 1991, Ukraine was the Ukrainian Soviet Socialist
Republic and a constituent piece of the Union of Soviet Socialist
Republics (USSR). During this time, Russia nurtured Ukrainian energy
dependence. Edward Chow notes, ``It's not just a matter of pattern of
trade or infrastructure that preserves that pattern of trade, but also
highly centralized and therefore political allocation of energy assets
and energy supply.''
Chow also notes that this is an artificial dependency and does not
have to do with Ukraine's geology, which is actually quite favorable.
``Up until the 1970's, Ukraine used to export gas to the Russian
Republic,'' he adds.
Chow continues, ``The legacy for Ukraine is you have the highest
energy-intensive economy in Europe-energy intensity right after
independence that remarkably is higher energy intensity than Russia
itself. It has about twice the energy intensity of Poland, which had a
rather similar structural economy.'' \19\ At independence, the
Ukrainian economy was largely on par with that of Poland, yet these two
economies would develop in two very different directions.
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\19\ U.S. Commission on Security and Cooperation in Europe, Energy
(In)security in Russia's Periphery, 2017, Briefing.
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Louise Shelley, a scholar of transnational organized crime, adds
that the contemporary state of affairs is the product of the Soviet
legacy, implying Ukraine's inability to break from it: ``The largest
element of the Soviet legacy is that of corruption and the underground
economy. The shadow economy has not diminished since 1991 but is now
estimated at over 50 percent of the economy.'' \20\
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\20\ Louise Shelley. ``Organized Crime and corruption in Ukraine:
Impediments to the Development of a Free Market Economy.''
Demokratizatsiya: The Journal of Post-Soviet Democratization 6, no. 2
(1998): 651.
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3.3.2. A Political System of Oligarchic Competition
The Ukrainian semi-presidential system has fluctuated significantly
since its inception in 1991. The country has existed under an
inconsistent constitutional order that has at times given more power to
the Ukrainian Verkhovna Rada (the parliament) and at times the
President. The constant in the history of independent Ukraine is the
oligarchs, who emerged in the early 1990s under the Presidency of
Leonid Kravchuk. Although the names and fortunes have changed, the
oligarchic system of rule has come to characterize Ukraine and is the
most significant reason why reforms continue to elude the country.
Many of Ukraine's political parties are linked in one way or
another to the oligarchs, who view business and political life as
indivisible. Taras Kuzio, an expert on Ukrainian politics, writes,
``Ukraine's oligarchs do not commit to deeply held ideological
preferences, and personalities matter more than political party
programs. Western Ukrainians have dominated the pro-Russian gas lobby
even though the region was always anti-Russian in its national
identity.'' \21\ Most of the time, two-thirds of parliamentarians have
been business millionaires, who look at their seat as an exchange for
money and state favors.
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\21\ Taras Kuzio, ``Oligarchs, the Partial Reform Equilibrium, and the
Euromaidan Revolution,'' in Beyond the Euromaidan: Comparative
Perspectives on Advancing Reform in Ukraine, ed. Henry E. Hale and
Robert W. Orttung, (Stanford: Stanford University Press, 2016), 187.
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A perennial issue is the existence and abuse of parliamentary
immunity, afforded to every Member of the Rada, which oligarchs exploit
when they feel legally threatened.
3.3.3. Institutionalized Corruption
Institutionalized corruption is pervasive in Ukraine, stretching
from the lowest to the highest rungs of society. Even if they do not
want to, most Ukrainians end up participating in and perpetuating the
cycle. Swedish political scientist Bo Rothstein writes, ``People in
severely corrupt systems put the blame on `the system' for forcing them
to take part in corruption, thus understanding that they are in a
`social trap'-like situation.'' \22\
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\22\ Bo Rothstein, ``Anticorruption: the indirect `big bang'
approach,'' Review of International Political Economy 18, no. 2 (2011):
233.
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The longer this ``social trap situation'' continues, the more it
becomes ingrained in institutions until it becomes the self-
perpetuating norm. As Robert Harris, an expert on political corruption,
puts it, ``Just as a predominantly non-corrupt system will self-correct
to deal with corrupt individuals and the legislative or political flaws
that facilitated their corruption, so will a predominantly corrupt
system self-correct to maintain its corruption following a purge.''
\23\
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\23\ Robert Harris, Political Corruption: In and Beyond the Nation
State (London: Routledge, 2003), 63.
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This is reinforced by anticorruption measures that have, until
recently, almost exclusively been used to settle political vendettas.
For instance, a corruption audit conducted by the Tymoshenko government
(2007-2010) was criticized after it labeled only one out of 14
preceding Ukrainian governments as corrupt. Moreover, politicians have
been reluctant to support criminal charges against members of their own
party and, as Kuzio points out, usually ``defend their colleagues from
accusations of corruption and election fraud by claiming that the
charges are product of `political repression.' '' \24\
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\24\ Taras Kuzio, ``Political Culture and Democracy: Ukraine as an
Immobile State,'' East European Politics and Societies 25, no. 1
(2011): 88-113.
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3.4. Ukrainian Anticorruption Efforts Today
The Carnegie Endowment's April 2017 Ukraine Reform Monitor noted,
``In the past year, Ukraine's reforms proceeded more slowly than
previously against the background of consolidation of executive power
under President Petro Poroshenko, resistance from oligarchs, and
opposition in the parliament.'' \25\
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\25\ ``Ukraine Reform Monitor: April 2017,'' Ukraine Reform Monitor
Team, Carnegie Endowment for International Peace, April 19, 2017,
http://carnegieendowment.org/2017/04/19/ukraine-reform-monitor-april-
2017-pub-68700 (accessed July 25, 2017), 1.
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Nonetheless, there are reasons to be hopeful and there are many
positive indications with regard to anticorruption reform in Ukraine.
These primarily include the establishment of an anticorruption
architecture and the success of reforms in a number of sectors, most
significantly in energy, banking, public procurement, healthcare,
economic regulation, and police.
3.4.1. The Anticorruption Architecture
Rather than opting for wholescale reform of the system of law
enforcement after Euromaidan, \26\ Ukraine has instead implemented
partial reform of the old system and developed parallel anticorruption
bodies.
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\26\ ``Euromaidan'' describes the 2013-2014 protests against
corruption that were spurred by then President Viktor Yanukovych's
sudden decision not to sign an Association Agreement with the EU at the
behest of Russia. Following months of protests that grew violent and
included many attacks on protestors by government-hired thugs and at
least 100 fatalities, Yanukovych fled the country via helicopter and is
now taking asylum in Russia. He is still wanted in Ukraine for his
crimes against protestors as well as the massive corruption he indulged
in as President. The period that includes Euromaidan to the flight of
Yanukovych has come to be known as the ``Revolution of Dignity.''
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Additionally, the State Security Service (SBU) has not been subject
to reform. The judicial system is currently subject to reforms, but the
speed is glacial, offering the corrupt judges within the existing
system ample opportunities to manipulate the reforms.
While often a subject of criticism, the anticorruption architecture
in Ukraine is new and is a significant improvement on anything that has
been stood up in the past. Its subdivisions are as follows:
The National Anticorruption Bureau (NABU): NABU is responsible for
the investigation of officials thought to have committed acts of grand
corruption. It has shown some major success so far, with the website
claiming there are 410 proceedings under investigation, 260 notices of
suspicion, 141 indictments, and 92 cases in court as of October 11,
2017. \27\ Most recently, on October 11, 2017, Deputy Minister of
Defense and Igor Pavlovsky and Director of the Department of Public
Procurement and Material Supplies of the Ministry of Defense Volodymyr
Hulevych were arrested as part of a NABU-led investigation. A NABU-led
investigation also led to the stripping of parliamentary immunity from
Rada Member Oleksandr Onyshchenko, a rare occurrence that demonstrates
NABU's influence. He is now a fugitive outside the country. NABU's
investigation into his corrupt dealings is ongoing. \28\
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\27\ National Anti-Corruption Bureau of Ukraine, NABU Homepage,
https://nabu.gov.ua/en (accessed October 11, 2017).
\28\ ``Ukraine 2016 Human Rights Report,'' Bureau of Democracy, Human
Rights, and Labor, The U.S. Department of State, March 3, 2017, https:/
/www.state.gov/j/drl/rls/hrrpt/2016/eur/265484.htm (accessed July 25,
2017), 37.
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Additionally, its investigations have led to the arrest of the head
of the State Fiscal Service, Roman Nasirov, and one of the alleged grey
cardinals \29\ in the Rada, Mykola Martynenko. Both Nasirov and
Martynenko have been let out on bail by the courts. In the case of
Nasirov, his family managed to pay 100 million hryvnia ($3.7 million)
in bail. \30\
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\29\ Individuals who are in charge of a party's corrupt financing.
\30\ Daryna Krasnolutska, ``Get-Out-of-Jail Cards Frustrate Ukraine's
Anti-Corruption Cops,'' Bloomberg Politics, May 5, 2017, https://
www.bloomberg.com/news/articles/2017-05-05/get-out-of-jail-cards-
frustrate-ukraine-s-anti-corruption-cops.
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NABU has so far performed impressively, but continues to be under
threat from oligarchic interests in Ukrainian society. For example,
Hrant Kostanyan of the Center for European Policy Studies points out,
``The unreformed prosecutor general's office, which retains its Soviet-
style powers of coercion, undermines the work of the NABU, whose
detectives even got into fistfights with members of the general
prosecutor's office in the course of performing their duties.'' \31\
NABU also requires additional investigative authorities, such as the
ability to carry out independent wiretapping, in order to grow in
effectiveness.
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\31\ Hrant Kostanyan, ``Ukraine's unimplemented anti-corruption
reform,'' Center for European Policy Studies, February 10, 2017,
https://www.ceps.eu/publications/ukraine%E2%80%99s-unimplemented-anti-
corruption-reform,2.
The National Agency for the Prevention of Corruption (NAPC): NAPC
is responsible for setting anticorruption policy in Ukraine, and also
administers the online financial disclosures (known as e-declarations)
of public officials.
The implementation of e-declaration requirements has been lauded by
observers as a major anticorruption achievement. \32\ According to the
Annual Country Reports on Human Rights Practices for 2016 by the U.S.
Department of State, there were indications of near total compliance
with e-declaration requirements among officials, and the results
provoked public outcry at the lavish lifestyles of these officials.
\33\
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\32\ Oleksandr Sushko and Olena Prysyatkko, ``Nations in Transit:
Ukraine,'' Freedom House, 2017, https://freedomhouse.org/report/
nations-transit/2016/ukraine, 11.
\33\ ``Ukraine 2016 Human Rights Report,'' The U.S. Department of
State, 39.
The Specialized Anticorruption Prosecutor's Office (SAPO): Although
SAPO is not a legislatively created agency like NABU and NAPC, it
carries out the prosecutions of cases that are investigated by NABU.
The Specialized Anticorruption Prosecutor (SAP) is a deputy to the
Prosecutor General of Ukraine, but even so has demonstrated
considerable independence and integrity.
The missing piece is a National Anticorruption Court, which is
currently a top demand of the International Monetary Fund (IMF), since
NABU and the anticorruption prosecutor must complete their cases in an
ordinary court system that remains pervasively corrupt.
3.4.2. Energy Sector Reform
The most important anticorruption reform has occurred in the energy
sector. Domestic gas subsidies coupled with subsidized Russian gas
imports have long made this sector the source of massive corruption and
the fortunes of many oligarchs. \34\
---------------------------------------------------------------------------
\34\ Gas arbitrage has been the premier source of corrupt fortunes
since Ukraine's independence. Politically connected individuals engaged
in gas arbitrage by purchasing either domestically subsidized gas from
the state or subsidized Russian gas at cut-rate prices and then selling
it at market prices for enormous profits. Russia offered these
subsidized imports for two reasons: (1) in order to gain influence over
and corrupt Ukrainian officials so as to affect the direction of
Ukrainian development and (2) in order to keep the Ukrainian domestic
gas market underdeveloped and corrupt so as to preserve Ukrainian
dependence on Russian gas supplies, which enables Russia to use gas as
a geopolitical tool.
---------------------------------------------------------------------------
By ceasing the practice of hidden energy subsidies, Ukraine has
dealt a major blow to the corrupt practice of gas arbitrage while also
managing to halve the level of domestic gas consumption. The state oil
and gas company, Naftogaz, has also undergone significant corporate
governance reform, transforming it from one of the most unprofitable
companies in Eastern Europe to the largest contributor to Ukraine's
state budget. Finally, Ukraine is no longer purchasing gas from Russia
and has diversified and significantly increased its gas imports from
alternative sources as well as domestic gas production. \35\
---------------------------------------------------------------------------
\35\ Sushko and Prysyatkko ``Nations in Transit: Ukraine,'' 12.
---------------------------------------------------------------------------
3.4.3. Banking Reform
Banking reform has been moderately successful in Ukraine. According
to a summary of the statements of Valeria Gontareva, a governor of the
National Bank of Ukraine, at a recent Atlantic Council forum, ``100
percent of ownership in the Ukrainian banking system is accounted for-
up from only 40 percent when she took over as governor in 2014.''
It continues, ``Ukraine undertook further reform in the banking
sector to solve issues of insolvency and illiquidity, money laundering,
and nontransparent ownership.''
Gontareva commented, ``One of the biggest prior problems of the
Ukrainian banking sector was related-party lending,'' which she
referred to as the ``oligarch banking model.'' \36\
---------------------------------------------------------------------------
\36\ Jack Gloss, ``Ukrainian Officials Tout Banking Sector Reforms,''
Atlantic Council, April 27, 2017, http://www.atlanticcouncil.org/blogs/
new-atlanticist/ukrainian-officials-tout-banking-sector-reforms.
---------------------------------------------------------------------------
The same summary also notes the comments of Susan Schadler, senior
fellow at the Centre for International Governance Innovation, who
concluded, ``A cleaned-up banking system without concerns of non-
performing loans or unclear ownership, and sustainable fiscal practices
generally lead to macroeconomic stability . . . if Ukraine can keep
those conditions in place, the risk of crisis is pretty low.'' \37\
---------------------------------------------------------------------------
\37\ Ibid.
---------------------------------------------------------------------------
3.4.4. Public Procurement Reform
Another anticorruption milestone has been the implementation of
``ProZorro,'' a web platform through which by law all public
procurement in Ukraine must now occur. The platform hinders corruption
in public procurement, resulting in significant savings for the state,
and was lauded at the Public Procurement Awards as ``one of the best
public sector procurement technologies in the world.'' \38\
---------------------------------------------------------------------------
\38\ Sushko and Prysyatkko ``Nations in Transit: Ukraine,''11.
---------------------------------------------------------------------------
The story of how this system came about is illuminating as to the
potential ability of civil society to affect reform in Ukrainian
society. Per Oksana Huss, a scholar of anti-corruption with a focus on
Ukraine at the University of Duisburg-Essen, ``In Ukraine, the
activists from the civil society developed ProZorro independently from
the state. Because of a lack of public trust of the Government, during
the test phase, the activists transferred the ownership license for
ProZorro not to the state, but to the NGO Transparency International on
a free-of-charge basis.'' \39\
---------------------------------------------------------------------------
\39\ Oksana Huss, ``The Perpetual Cycle of Political Corruption in
Ukraine and Post-Revolutionary Attempts to Break Through It,'' in
Revolution and War in Contemporary Ukraine, ed. Olga Bertelsen, vol.
161 ser. Soviet and post-Soviet politics and society (Stuttgart:
Ibidem-Verlag, 2016), 340.
---------------------------------------------------------------------------
3.4.5. Healthcare Reform
Healthcare has long been a neglected sector of reform in Ukraine
and one rife with procurement corruption. However, a 2015 decision of
the government to allow only the United Nations Development Program
(UNDP), the United Nations Children's Fund (UNICEF), and the
international company Crown Agent to procure medications for the state
led to a marked reduction in healthcare corruption related to the
procurement of medications. \40\
---------------------------------------------------------------------------
\40\ Oksana Bedrantenko, ``Why I'm Optimistic about Ukraine's Reforms
in 2017,'' Atlantic Council, December 21, 2016, http://
www.atlanticcouncil.org/blogs/ukrainealert/why-i-m-optimistic-about-
ukraine-s-reforms-in-2017 (accessed July 25, 2017), 1.
---------------------------------------------------------------------------
In addition, a reform plan rolled out by the government on November
30, 2016 seeks to fundamentally transform the sector by making
healthcare available to all Ukrainian citizens and funded via general
taxation. \41\
---------------------------------------------------------------------------
\41\ ``Ukraine Reform Monitor: April 2017,'' Carnegie Endowment for
International Peace, 6.
---------------------------------------------------------------------------
Acting Ukrainian Minister of Health, Ulana Suprun, also has been
proactive about reforming and rooting out the massive corruption within
the country's health care system. Melinda Haring, editor of the
Atlantic Council's UkraineAlert blog, writes, ``Suprun and her team
have designed a system that reforms palliative, emergency, and primary
care simultaneously. The new National Health Service would be an
independent body in the executive branch under the Cabinet of
Ministers, much like the National Anticorruption Bureau of Ukraine.''
\42\
---------------------------------------------------------------------------
\42\ Melinda Haring, ``Ulana Suprun: Tough, Tenacious, and
Transforming Ukraine's Health Care,'' Atlantic Council, June 6, 2017,
http://www.atlanticcouncil.org/blogs/ukrainealert/ulana-suprun-tough-
tenacious-and-transforming-ukraine-s-health-care (accessed July 26,
2017).
---------------------------------------------------------------------------
Unfortunately, the Rada did not pass these reforms. Suprun
acknowledged this, stating, ``Our team worked effectively to prepare
the reform, but there was no political will to continue this at the top
level.'' \43\
---------------------------------------------------------------------------
\43\ Anna Nemtsova, ``The American Doctor Trying to Cure Ukraine's
Corruption,'' The Daily Beast, July 18, 2017, http://
www.thedailybeast.com/the-american-doctor-trying-to-cure-ukraines-
corruption (accessed July 25, 2017).
---------------------------------------------------------------------------
3.4.6. Regulatory Reform
Ukraine has also achieved considerable economic deregulation via a
package of reforms that came shortly after the Euromaidan. This has
been demonstrated by a move on the World Bank's Ease of Doing Business
Index from rank 112 of 189 in 2013 to a rank of 83 in 2015 and 80 in
2017. \44\ \45\ Greater deregulation has helped to counter the
corruption that Ukraine's arcane regulatory codes made possible.
\44\ Oleh Havrylyshyn, ``Reforms and Performance under Poroshenko.
2014-Present,'' in The Political Economy of Independent Ukraine, part
of the series Studies in Economic Transition, ed. Jens Holscher and
Horst Tomann (London: Palgrave Macmillan, 2017), 172.
\45\ ``Ease of Doing Business in Ukraine,'' Doing Business, The World
Bank, 2017, http://www.doingbusiness.org/data/exploreeconomies/ukraine
(accessed June 25, 2017).
---------------------------------------------------------------------------
3.4.7. Police Reform
Among the first reforms in post-Euromaidan Ukraine was the law
creating the National Police of Ukraine. \46\ This was accompanied by
the recruiting of Georgia's Eka Zguladze, former Acting Interior
Minister of Georgia, and former Georgian President Mikhail
Saakashivili, as First Deputy Minister of Internal Affairs and Governor
of Odessa, respectively, in hopes of carrying out police reforms
similar to the dramatic ones that were carried out in Georgia. \47\
\48\ \49\ oth of these individuals have since left their Ukrainian
government posts. Nevertheless, the Ukrainian police have undergone
significant reform, with a smaller, more professional, better paid
police force, who entered through a rigorous recruitment system.
---------------------------------------------------------------------------
\46\ Thomas De Waal, ``Fighting a Culture of Corruption in Ukraine,''
The Carnegie Endowment for International Peace, April 18, 2016, http://
carnegieeurope.eu/2016/04/18/fighting-culture-of-corruption-in-ukraine-
pub-63364.
\47\ As governor of Odessa, Saakashvili discredited himself by voicing
approval for a pogrom carried out against Roma in Odessa in August
2016. Former OSCE Office of Democratic Institutions and Human Rights
(ODIHR) Director Georg Link responded by calling ``upon the Ukrainian
authorities to enforce the law, based on the principles of equality and
non-discrimination. Authorities need to firmly counter violence against
and scapegoating of Roma.''
\48\ Pigman, Lincoln. ``Mob in Ukraine Drives Dozens of Roma from
Their Homes.'' The New York Times. August 30, 2016, https://
www.nytimes.com/2016/08/31/world/europe/ukraine-roma.html.
\49\ ``Ukrainian authorities must stand against anti-Roma violence,
address interethnic tension, restore respect for rule of law, says
OSCE/ODIHR Director.'' Office for Democratic Institutions and Human
Rights, Organization for Security and Co-operation in Europe, September
2, 2016, Press Release, http://www.osce.org/odihr/262301.
---------------------------------------------------------------------------
Recently, Ukrainian Chief of Police Khatia Dekanoidze, another
Georgian who formerly served in the Georgian government, stepped down.
Carnegie's Ukraine Reform Monitor notes that her replacement was chosen
via an open process with civil society and international expert
participation.
As a practical matter, there is a shortage of qualified personnel.
\50\ Finally, the public enthusiasm over patrol police reform has
faded. The old police have remained in parallel and they often oppose
the actions of the new patrol police. When the patrol police arrest a
criminal, prosecutors let those with good connections out and sensitive
cases rarely reach courts.
---------------------------------------------------------------------------
\50\ ``Ukraine Reform Monitor: April 2017,'' Carnegie Endowment for
International Peace, 5.
---------------------------------------------------------------------------
3.4.8. Skepticism
Despite progress, Carnegie's April 2017 Ukraine Reform Monitor
notes, ``The public perception is that corruption is still very high.''
\51\
---------------------------------------------------------------------------
\51\ ``Ukraine Reform Monitor: April 2017,'' Carnegie Endowment for
International Peace, 2.
---------------------------------------------------------------------------
Last year, Pierre Vimont, senior fellow at Carnegie and former
French Ambassador and European External Action Service official,
commented, ``A vast majority of Ukrainians have little trust in the
success of these reforms. Because of perceptions of corruption, the
persistent power of oligarchs, incompetence, or a lack of real
commitment, public support seems to be lagging behind.'' \52\
---------------------------------------------------------------------------
\52\ Pierre Vimont, ``Ukraine's Indispensable Economic Reforms'' The
Carnegie Endowment for International Peace, April 29, 2016, http://
carnegieeurope.eu/2016/04/29/ukraine-s-indispensable-economic-reforms-
pub-63490.
---------------------------------------------------------------------------
The total amounts of corrupt revenues have undoubtedly declined,
but what people notice is how often they are asked for bribes, and that
frequency does not appear to have declined. In particular, the
judiciary continues to resist reform.
Oleh Havrylyshyn, an expert on Ukrainian economic policy, comments:
The lack of real action is most often discussed with reference to
prosecutors bringing cases to the courts; it suffices to note that
while corruption charges have been laid out, expert observers for the
most part consider them low level, and not a single case exists against
senior officials of the Yanukovych regime, nor against judges, nor the
security personnel responsible for the killing of 100 demonstrators at
the Euromaidan. \53\
---------------------------------------------------------------------------
\53\ Havrylyshyn, ``Reforms and Performance under Poroshenko. 2014-
Present,'' 179.
Does this lack of demonstrable action mean that Ukraine is headed
for a post-Orange Revolution \54\ return to corruption once Ukrainian
people become fed up enough with the slow pace and return to political
disillusionment? Havrylyshyn notes, ``So far there appears to be a
somewhat uneasy consensus among observers that important areas of
progress are visible, but on the whole not enough has been done.'' \55\
---------------------------------------------------------------------------
\54\ The Orange Revolution describes the peaceful demonstrations that
occurred in Ukraine in reaction to the rigging of the 2004 presidential
elections. Demonstrators successfully demanded a revote, which occurred
with international observers present and led to the election of Viktor
Yushchenko.
\55\ Ibid., 168.
---------------------------------------------------------------------------
Ultimately, it would seem that the reform currently taking place in
Ukraine is having an effect, but must continue to be pushed hard. While
there are pitfalls that could yet emerge, Ukraine is moving in the
right direction. However, these potential pitfalls are plentiful and
require constant vigilance on the part of the international community
and Ukrainian civil society.
IV. HISTORICAL ANALYSIS
4.1. Kravchuk (1991-1994)
The early days of independent Ukraine were tumultuous. A laser
focus on nation-building at the expense of all other state policy left
organized crime, and therefore also corruption, to thrive.
When Ukraine regained its independence economic chaos reigned.
Serhiy Kudelia, a scholar of Ukrainian politics, comments:
After the Soviet breakup, Ukraine emerged as a financially
impoverished state with a factionalized political elite, rapacious
entrepreneurial class, and a weak civil society. This situation created
a favorable environment in which political and business actors, guided
primarily by short-term interests of quick wealth accumulation, could
prey on the state without limits. \56\
---------------------------------------------------------------------------
\56\ Serhiy Kudelia, ``Corruption in Ukraine: Perpetuum Mobile or the
Endplay of Post-Soviet Elites?'' in Beyond the Euromaidan: Comparative
Perspectives on Advancing Reform in Ukraine, ed. Henry E. Hale and
Robert W. Orttung (Stanford: Stanford University Press, 2016), 68.
He calls this phase atomized corruption, arguing that it set the
stage for the more structured oligarchic corruption that would come
later. \57\
---------------------------------------------------------------------------
\57\ Ibid.
---------------------------------------------------------------------------
Corruption under President Leonid Kravchuk was notable for its
free-for-all nature. Kudelia says, ``The multitude of actors involved
in corrupt dealings with the state maintained their access to spoils
largely through personal ties and commitment to share acquired wealth.
The system of grand corruption, however, was decentralized and devoid
of unified political purpose.'' \58\
---------------------------------------------------------------------------
\58\ Ibid.
---------------------------------------------------------------------------
However, grand corruption was not absent as petty corruption and
organized crime thrived. Ukrainian Prime Minister Yukhym Zviahilsky
(1993-94) indulged in what Anders Aslund, an expert on post-communist
economic transitions at the Atlantic Council, calls ``unabashed rent
seeking'' during this phase of history, as he and Kravchuk attempted to
rebuild the command economy. \59\
---------------------------------------------------------------------------
\59\ Anders Aslund, How Ukraine Became a Market Economy and Democracy
(Washington DC: Peterson Institute for International Economics, 2009),
46.
---------------------------------------------------------------------------
Aslund notes, ``The only winners of this policy reversal (back to a
command economy) were Zviahilskiy and his business partners. They made
money on foreign trade arbitrage between low domestic prices of energy,
metals, and chemicals and much higher world market prices. Since they
controlled foreign trade licensing, they ensured that profits stayed in
their circle.'' \60\
---------------------------------------------------------------------------
\60\ Ibid., 47.
---------------------------------------------------------------------------
Zviahilskiy was a pioneer of corruption. This method of trade
arbitrage--buying goods at artificially low prices at home, selling
them at global market prices abroad, and pocketing the difference--
would become the main method through which the various Ukrainian
oligarchs would make their fortunes, specifically through gas
arbitrage. \61\ The other method of gas arbitrage, via the purchase and
sale at global market prices of artificially cheap Russian gas imports
originated at this stage as well. \62\ State credits and subsidies were
also handed out. \63\
---------------------------------------------------------------------------
\61\ Anders Aslund, Ukraine: What Went Wrong and How to Fix It
(Washington DC: Peterson Institute for International Economics, 2015),
186.
\62\ Aslund, How Ukraine Became a Market Economy and Democracy, 55.
\63\ Ibid., 56.
---------------------------------------------------------------------------
To hear Aslund tell it:
In this way, a small group of privileged insiders usurped a huge
share of GDP in the early years of transition and grew even stronger.
Their wealth was not based on property but on arcane financial flows.
For society, the result was untold social suffering and sharply rising
income differentials. Ukraine reached a Gini coefficient \64\ of 47,
about as much as Russia or the Latin American average. \65\
---------------------------------------------------------------------------
\64\ A Gini coefficient is a statistical measure of distribution, most
often used as a way to measure
inequality.
\65\ Ibid., 56.
Virtually no efforts at anticorruption were made during this period
of Ukrainian history. The chaotic nature of the state, a single-minded
focus on nation-building, and a lack of the formal institutions
required to address organized crime left Ukraine helpless to confront
the cancer of corruption growing in its midst. \66\
---------------------------------------------------------------------------
\66\ Louise Shelley, ``Organized Crime and corruption in Ukraine:
Impediments to the Development of a Free Market Economy,''
Demokratizatsiya: The Journal of Post-Soviet Democratization 6, no. 2
(1998): 648.
---------------------------------------------------------------------------
Havrylyshyn claims that this interpretation is too generous to
Kravchuk and that he really could have done more to kick-start the
economy and combat corruption. ``History needs to revise its relatively
benign interpretation of Kravchuk's Damascene conversion to the
independence cause, as the nation builder who may have made a `small'
mistake in giving too little priority to economic reforms,'' he says.
\67\
---------------------------------------------------------------------------
\67\ Oleh Havrylyshyn, ``Ukraine: Greatest Hopes, Greatest
Disappointments,'' in The Great Rebirth: Lessons from the Victory of
Capitalism over Communism, ed. Anders Aslund and Simeon Djankov
(Washington DC: Peterson Institute for International Economics, 2014),
172.
---------------------------------------------------------------------------
Louise Shelley, writing in 1999, comments on the ubiquity of
organized crime early on in the country's history, ``The political
costs of organized crime for Ukraine are staggering. The pervasive
corruption and the penetration of organized crime into the political
process are inhibiting the development of new laws needed to develop a
democratic free market economy.'' \68\
---------------------------------------------------------------------------
\68\ Shelley, ``Organized Crime and corruption in Ukraine: Impediments
to the Development of a Free Market Economy,'' 649.
---------------------------------------------------------------------------
Aslund concludes, ``Ukraine's fundamental problem is that it did
not experience any clear break from the communist system. Its tardy
transition to a market economy bred pervasive corruption by giving the
old elite ample opportunities to transform their power into personal
wealth.'' \69\ The failure to implement liberalizing reforms set the
stage for institutionalized corruption that has proven remarkably
resilient since. In a manner of speaking, Ukraine got itself into
``good governance debt'' and has been trying to get out since.
---------------------------------------------------------------------------
\69\ Aslund, Ukraine: What Went Wrong and How to Fix It, 40.
---------------------------------------------------------------------------
4.2. Kuchma (1994-2005)
The two terms of President Leonid Kuchma saw the largest paradigm
shift in the history of corruption in Ukraine as the free-for-all of
the Kravchuk days gave way to the rise of the oligarchs.
The era of Kuchma began with at least the recognition that
corruption was a problem for the country and an internal enemy that
would have to be defeated if Ukraine ever desired to be a prosperous
democracy. The first push to fight corruption came in the form of a
series of presidential decrees in 1994 that addressed a large variety
of issues from taxation to deregulation in an effort to create a proper
free market economy that, on its own, would help to battle corruption.
\70\ Unfortunately, most of these decrees were later reversed.
---------------------------------------------------------------------------
\70\ Aslund, How Ukraine Became a Market Economy and Democracy, 74.
---------------------------------------------------------------------------
The first major piece of legislation targeting corruption, the Law
on Combating Corruption, ``was adopted in 1995 and detailed ways to
control and punish corruption offenses for a relatively broad range of
public officials.'' \71\ This law, like so many after it, proved
toothless and unable to address the issues of pervasive grand
corruption that had developed in Ukraine.
---------------------------------------------------------------------------
\71\ Kudelia, ``Corruption in Ukraine: Perpetuum Mobile or the Endplay
of Post-Soviet Elites?'' 62.
---------------------------------------------------------------------------
Kuchma, like all presidents after him, paid lip service to
combating corruption. As Huss writes:
Under Kuchma, the Law on Prevention of Corruption and the Concept
on Fight against Corruption for 1998-2005 were introduced. Yushchenko
developed the Concept of Overcoming Corruption ``On the Way Toward
Integrity'' and formed the National Bureau of Investigation
subordinated to the Prosecutor General. Yanukovych advanced the
National Anticorruption Strategy for 2011-2015 and the National
Anticorruption Committee. \72\
---------------------------------------------------------------------------
\72\ Huss, ``The Perpetual Cycle of Political Corruption in Ukraine
and Post-Revolutionary Attempts to Break Through It,'' 320.
Despite an early reform drive in the first two years of Kuchma's
administration, corruption remained much the same free-for-all that it
had been under Kravchuk. This changed with the introduction of the 1996
president-centric constitution, which led to the rise of the oligarchs
as Kuchma cultivated ``loyal business clans'' and developed
``clientelistic relationships with subordinate officials who had direct
access to cash flows to the state budget and capable of diverting them
for his political purposes.'' \73\ Kudelia calls this phase patronal
corruption. \74\
---------------------------------------------------------------------------
\73\ Kudelia, ``Corruption in Ukraine: Perpetuum Mobile or the Endplay
of Post-Soviet Elites?'' 69.
\74\ Kudelia, ``Corruption in Ukraine: Perpetuum Mobile or the Endplay
of Post-Soviet Elites?'' 68.
This was also the era of another infamously corrupt Prime Minister,
Pavlo Lazarenko. \75\ During his single year in office, Lazarenko built
upon Zviahilskiy's legacy of grand corruption with massive fraud and
money laundering, which involved ``defrauding the state budget of more
than $200 million in the period from 1993 to 1997 through gas trading
and other schemes,'' according to Kudelia. \76\
---------------------------------------------------------------------------
\75\ Aslund, How Ukraine Became a Market Economy and Democracy, 95.
\76\ Kudelia, ``Corruption in Ukraine: Perpetuum Mobile or the Endplay
of Post-Soviet Elites?'' 70.
---------------------------------------------------------------------------
Ultimately, Lazarenko was ousted by Kuchma after the latter
realized that Lazarenko's stolen funds were to be used to finance
Lazarenko's own presidential bid. \77\ Eventually, Lazarenko wound up
in a Californian jail after he fled to the United States and was tried
and found guilty for money laundering by a U.S. court.
---------------------------------------------------------------------------
\77\ Ibid., 70.
In 2000, Ukraine was at the brink of default. An alliance of
oligarchs requested that Viktor Yushchenko, a young reformer and head
of the national bank, be made Prime Minister. As a result, ``The first
four months of 2000 saw the greatest reform drive that Ukraine had seen
since the fall of 1994.'' \78\
---------------------------------------------------------------------------
\78\ Aslund, How Ukraine Became a Market Economy and Democracy, 133.
Yushchenko was ousted by Kuchma after little more than a year after
having been too successful for the taste of the oligarchs. Aslund
comments, ``In April 2001 Yushchenko was ousted, but Ukraine had been
reformed, and its rent-seeking society had been transformed into a
productive market economy.'' \79\
---------------------------------------------------------------------------
\79\ Ibid., 128.
Productivity does not mean an end to corruption though, and rent-
---------------------------------------------------------------------------
seeking may have been transformed, but it did not stop.
In 2000, Prime Minister Yushchenko was the first to make a dent in
Ukrainian corruption. His reforms targeted large swaths of the economy,
with regulatory reform and privatizations that helped fight the state
policies that made arbitrage possible. Most importantly, Yushchenko
teamed up with Tymoshenko for the first time to take on rent-seeking in
the energy sector.
Aslund comments that an important reason why these reforms stuck
and the 1994 ones did not was that ``the 2000 reforms were largely
legislated, while the 1994 reforms had been imposed through decrees.''
\80\
---------------------------------------------------------------------------
\80\ Aslund, How Ukraine Became a Market Economy and Democracy, 150.
He writes, ``They (Yushchenko and Tymoshenko) had transformed the
oligarchs from rent seekers to producers, and the producers needed a
functioning market economy, although they did not mind tax privileges
and some protectionism.'' \81\ Corruption in Ukraine had fundamentally
transformed from an entity that continually threatened the existence of
the state to one that had merged with it.
---------------------------------------------------------------------------
\81\ Ibid., 153.
Kuchma's loss of political legitimacy as a result of audio tapes
implicating him in the murder of journalist Georgiy Gongadze, among
other scandals and corrupt activity, neutered his power and brought on
the era of Ukrainian corruption as it has largely existed, with many
fluctuations, from 2001 to today: a grand political competition of
---------------------------------------------------------------------------
self-serving oligarchs that precludes most reform.
By the end of the Kuchma era, the oligarchs had come to dominate
the political as well as business worlds of Ukraine as Kuchma himself
became a lame duck. Nonetheless, the situation had strangely improved
since the beginning of the era thanks to a clever set of anticorruption
reforms that made it in the interest of the oligarchs to not milk the
corrupt system to the brink of financial ruin.
4.3. Yushchenko (2005-2010)
Corruption during the Yushchenko administration, which immediately
followed the Orange Revolution, is best described by the word
``retrenchment.'' The hopes of the Orange Revolution came to a
screeching halt and started moving in reverse, setting Ukraine up for
its worst era of corruption yet. Despite a handful of victories such as
the Law on Joint Stock Companies, this era ``restored the gridlock of
the Kravchuk presidency.'' \82\
---------------------------------------------------------------------------
\82\ Ibid., 232.
While many instances of dubious political financing existed in the
saga of the Orange Revolution, as in many Ukrainian elections, this
triumph of the Ukrainian people was much more about the democratic
---------------------------------------------------------------------------
development of Ukraine and its rejection of authoritarianism.
Despite initially high hopes for combating corruption and making
necessary reforms during Yushchenko's presidency, those individuals
that led the Orange Revolution, notably Yushchenko and Tymoshenko,
quickly fell into infighting and enabled corruption to thrive once
again.
The 2004 passage of the reactionary constitutional amendments,
backed by oligarchs opposed to Yushchenko and the Orange Revolution had
led to a significant neutering of presidential power. Combined with the
implosion of the Orange Coalition, this resulted in what Kudelia calls
``party cartel'' corruption, which he claims continues in Ukraine to
this day. \83\
---------------------------------------------------------------------------
\83\ Kudelia, ``Corruption in Ukraine: Perpetuum Mobile or the Endplay
of Post-Soviet Elites?'' 68.
These ``party cartels'' are a clean break with ad hoc funding and
individual-driven politics of the past. They function largely as
bureaucratic rent collection and financing mechanisms to which
oligarchs can contribute large sums anonymously and oftentimes still be
---------------------------------------------------------------------------
in compliance with Ukrainian law.
In addition to being better financing mechanisms and remaining
politically engaged year-round, ``party cartels serve as a reassurance
mechanism to funders concerned with the durability of the politicians'
commitments.'' Kudelia continues, ``The notorious practice of party
leaders to offer positions on the parties' electoral lists in exchange
for campaign contributions, which became widespread in the early 2000s,
has been one of the most effective ways for them continuously raise
funds.'' \84\
---------------------------------------------------------------------------
\84\ Ibid., 72.
Yushchenko's first Prime Minister, Tymoshenko, initiated a policy
of re-privatization that largely targeted her political enemies. This
was followed by the short-lived Yekhanurov government before Viktor
Yanukovych, who had only recently been defeated in the 2005
presidential election, even after attempting to win via electoral
---------------------------------------------------------------------------
fraud, became Prime Minister in 2006.
As Prime Minister, Yanukovych pursued a policy of corruption.
Aslund writes, ``Corporate raiding was thriving as never before, and
the government did nothing to stop it. Gas trade corruption was
rampant, as was tax corruption. A constitutional court judge was caught
red-handed accepting a bribe of $12 million. Yushchenko sacked her, but
Yanukovych's side reinstated her.'' \85\
---------------------------------------------------------------------------
\85\ Aslund, How Ukraine Became a Market Economy and Democracy, 219.
The Yanukovych government was eventually followed by a second
Tymoshenko government, but the damage had been done. Yushchenko became
---------------------------------------------------------------------------
an uncooperative, combative President who no longer engaged on reform.
If the Kuchma era led to the rise of the oligarchs as the dominant
movers and shakers of the Ukrainian political system and therefore also
of Ukrainian corruption, the Yushchenko era displayed for all to see
the supposed futility of trying to defeat them. The disillusionment
that resulted from the failure of Yushchenko and the Orange Coalition
led to the most corrupt era in Ukraine's history following the election
in 2010 of an unlikely candidate: Viktor Yanukovych.
4.4. Yanukovych (2010-2014)
Grand corruption on the grandest scale was the modus operandi of
the Yanukovych administration. In particular, Yanukovych did everything
he could to enrich his family, going to lengths that none before him
had gone. This grand corruption was made much more easily attained by a
reversion to the 1996 president-centric constitution of Kuchma after
the Constitutional Court of Ukraine found the 2004 amendments limiting
presidential power unconstitutional. Yanukovych was the first president
to enjoy a steady durable majority in both parliament and government,
and he quickly seized control over the Constitutional Court as well.
Aslund comments:
The Yanukovych family allegedly enriched itself during its four-
year reign through energy subsidies, discretionary public procurement,
embezzlement from the state, privileged privatization, fraudulent
refunds of value-added tax to exporters, extortion, and corporate
raiding (i.e., forcing a businessman to sell his enterprise
involuntarily at a low price). \86\
---------------------------------------------------------------------------
\86\ Aslund, Ukraine: What Went Wrong and How to Fix It, 92.
He adds, ``Another source of corruption was outright theft from the
government . . . the Yanukovych family mastered this art.'' \87\
---------------------------------------------------------------------------
\87\ Ibid., 94.
---------------------------------------------------------------------------
The system was being transformed from the productive, if corrupt,
equilibrium that had been established by the 2000 Yushchenko reforms
back into the rent-seeking Kuchma era. Had this kept up, the state
would have been in danger of eating itself alive, as it had nearly done
in the past. Indeed, Aslund writes, ``In its last year, the Yanukovych
regime grew increasingly surreal. The president concentrated power and
wealth to an ever smaller group of family and friends, while doing
nothing to satisfy his population. Ukraine's already fragile
institutions were further undermined.'' \88\
---------------------------------------------------------------------------
\88\ Ibid., 101.
---------------------------------------------------------------------------
The Euromaidan was a protest movement that started as a
demonstration against corruption in as much as it was a protest against
Yanukovych's pulling out at the last second of the European Union
Association Agreement. Unlike the 2004 Orange Revolution, which was
bloodless and peaceful, Euromaidan saw over a 100 fatalities.
4.5. Poroshenko (2014-Present)
Shortly following Yanukovych's flight to Russia, Russia
unilaterally annexed Crimea and initiated the conflict in the Eastern
Donbas through a combination of backing for pro-Russia militant forces
in Ukraine and an invasion by Russian military personnel. Amid this
aggression, Ukraine held presidential elections, which led to Petro
Poroshenko becoming president of Ukraine.
For the first time in the history of Ukraine, it looks as though
reducing the power of oligarchs significantly enough to render them
nothing more than influential businessmen may be within sight. Aslund
comments, ``The oligarchs have suffered considerable damage to their
assets in the war-torn areas of Ukraine, rendering them weak. The
crisis offers a chance to finally break their disproportionate
influence over the state for good.'' \89\
---------------------------------------------------------------------------
\89\ Aslund, Ukraine: What Went Wrong and How to Fix It, 23.
---------------------------------------------------------------------------
The efforts to combat corruption in post-Euromaidan Ukraine have
been many, although some have criticized that they have been too slow.
Sympathetic commentators have argued that it is difficult to fight
corruption when a country is being invaded by Russia. However,
Havrylyshyn points out that other commentators argue, ``Instead of
pointing to the war as an excuse for slow reforms, one should, on the
contrary, see the war as further reason to move as quickly as
possible.'' \90\
---------------------------------------------------------------------------
\90\ Havrylyshyn, ``Reforms and Performance under Poroshenko. 2014-
Present,'' 182.
---------------------------------------------------------------------------
V. MAIN FACTORS BEHIND THE PERSISTENCE OF CORRUPTION IN UKRAINE
Even though the persistence of corruption in Ukraine has been
remarkable, it by no means is insurmountable. The following factors are
the three most important behind the persistence of corruption in
Ukraine:
The oligarchs represent the single most significant
factor behind the persistence of corruption in Ukraine.
Incomplete economic liberalization enabled the
consolidation of power for the early oligarchs.
Gas arbitrage. Although other sectors have been the
source of rampant corruption in Ukraine, nothing has engendered
corruption quite like the gas trade, which has also offered Russia a
back door to political influence in Ukraine. Luckily, much has already
been done in post-Euromaidan Ukraine to combat corruption in this
sector.
5.1. The Oligarchs
Ukrainian oligarchs have successfully managed to block the creation
of parties that could have promoted reforms that would have been in the
interest of all Ukrainian citizens.
Kuzio writes, ``Oligarchs prevent the emergence of a level playing
field in politics by blocking the entrance of genuine political parties
into the political arena.'' \91\ Every party is a piece in the
oligarchs ``politics-as-business'' and reliant on oligarchs for the
funding necessary to compete. Thereby, parties become indebted to
oligarchs and support their political preferences, which are non-
ideological and tolerant of corruption. This influence peddling is
facilitated by Ukraine's lack of constraints on political donations.
---------------------------------------------------------------------------
\91\ Kuzio, ``Oligarchs, the Partial Reform Equilibrium, and the
Euromaidan Revolution,'' 181.
---------------------------------------------------------------------------
Moreover, Ukraine's ``winner-take-all'' political system makes it
possible for oligarchs to prevent the emergence of any truly national
force that could crack down on corrupt practices.
Oligarchic interest groups have promoted politicians and parties of
all kinds who have focused solely on securing clear regional voting
bases, and pitting different segments of Ukrainian society against each
other, by exploiting the fault lines in Ukrainian identity and
historical memory for their own political and economic purposes. Kuzio
comments, ``Their funding of pro-Western political forces (for example)
should not be misunderstood as backing reforms, fighting corruption, or
promoting European integration, but instead understood as opportunism
and survival tactics.'' \92\
---------------------------------------------------------------------------
\92\ Kuzio, ``Oligarchs, the Partial Reform Equilibrium, and the
Euromaidan Revolution,'' 187.
---------------------------------------------------------------------------
For example, a pro-Russian campaign targeting primarily
southeastern Ukrainian citizens, mainly Russian-speaking and ethnic
Russian, led to Kuchma's first electoral win in 1994. Only five years
later-once his oligarch supporters' personal, political, and economic
calculations required a change in political orientation-he managed to
campaign and win elections on a pro-Western, ethnic Ukrainian platform
targeting mostly western Ukrainians, a traditionally more nationalist
voting base.
While Presidents Yushchenko and Yanukovych did not flip-flop on
their core constituencies, both built their presidential campaigns, and
later governed, based on the divisions of identity in Ukrainian
society, instead of attempting to build real national parties. Kuzio
concludes, ``The key to Ukraine breaking free of the partial reform
equilibrium and entering the path of European integration is the
political will to demonopolize Ukraine's economy, politics, and media
by reducing the power of the oligarchs and separating business and
politics.'' \93\
---------------------------------------------------------------------------
\93\ Kuzio, ``Oligarchs, the Partial Reform Equilibrium, and the
Euromaidan Revolution,'' 196.
---------------------------------------------------------------------------
Now is the moment for Ukraine to strike. The general weakness of
the oligarchs in the post-Euromaidan world, exemplified by Rinat
Akhmetov's tremendous financial losses, has led to corruption
retreating to the Rada, where parliamentary immunity protects against,
or at least delays, prosecution and grey cardinals finance
parliamentary factions through corrupt funds in exchange for loyalty
guarantees. \94\ Until this holdout is tackled, business and politics
will not be separate in Ukraine.
---------------------------------------------------------------------------
\94\ ``Rinat Akhmetov,'' Forbes, June 25, 2017, https://
www.forbes.com/profile/rinat-akhmetov/ (accessed June 25, 2017).
---------------------------------------------------------------------------
5.2. Incomplete Economic Liberalization
A major reason that Ukraine continues to lag behind other post-
Soviet states, and post-communist states more generally, is Ukraine's
lack of reforms early on. The years under Kravchuk exacerbated Soviet-
era corruption and led to the development of institutionalized
corruption in the country that only became worse over time.
This failure to complete economic liberalization is exacerbated by
the crisis situation that Ukraine currently finds itself in. If the
necessity of reforms was not clear enough, the war in the eastern
Donbas and Crimea have further amplified the need to address Ukraine's
institutionalized corruption because Ukraine will be more successfully
able to confront those problems with its internal house in order.
5.3. Gas Arbitrage
No single corrupt activity has been more destructive to Ukraine
than the gas trade. It has built more fortunes of more oligarchs than
any other. It is arguably more vital to the life of every Ukrainian
citizen than any other. Most importantly, it is the only one that has
been traded at such high volumes with Russia, almost always at an
absurd discount, in its efforts to export corruption into Ukraine.
By and large, Russia has succeeded. Oleh Havrylyshyn writes, ``In
Ukraine, the very low price of imported gas . . . not only fed the
rents of gas oligarchs, but induced related corruption with payoffs to
politicians.'' \95\
---------------------------------------------------------------------------
\95\ Oleh Havrylyshyn, ``Controlling Corruption: The Elusive Golden
Fleece?'' in The Political Economy of Independent Ukraine, part of the
series Studies in Economic Transition, ed. Jens Holscher and Horst
Tomann (London: Palgrave Macmillan, 2017), 266.
---------------------------------------------------------------------------
Aslund comments, ``Gazprom should be treated as an organized crime
syndicate with which no links are advisable.'' \96\ He notes that
Ukraine is not the only country that Russia has implemented this policy
against. ``Russia's oil transit through Latvia and Lithuania was the
main source of high-level corruption in those two countries, and its
end greatly helped both countries to check corruption.'' \97\
---------------------------------------------------------------------------
\96\ Aslund, Ukraine: What Went Wrong and How to Fix It, 203.
\97\ Ibid., 204.
---------------------------------------------------------------------------
Local gas subsidies and the subsidized gas that is offered by
Russia has hobbled the development of the local energy sector and
enabled the gas arbitrage that has been taken advantage of time and
again throughout Ukraine's history. The dependence of the oligarchs on
subsidized gas to continue growing their fortunes provides a strong
incentive for them to keep the energy sector underdeveloped and
corrupt. This also enables Russia to use its gas monopoly as a
geopolitical tool to demand concessions when necessary.
Ukraine's recent energy sector reforms are extremely welcome and
should be lauded. They speak to the ability of Ukraine to implement
reform successfully. Although those who have built their fortunes
through gas arbitrage will be able to seek rents elsewhere, these
reforms are a serious blow to impunity, especially given the Russia
connection. Nonetheless, more must be done to create a competitive
energy sector.
VI. RECOMMENDATIONS
Three main recommendations follow from this analysis. These are
aimed at realizing a democratic and prosperous Ukraine with robust
public institutions and rule of law. All policy leaders and activists
involved in Ukraine's fight against corruption can play a part in
implementation, monitoring, or advocacy, depending on how they are
positioned. Taken together, these make up the three most important
pieces to defeating corruption in Ukraine.
Ukraine must implement remaining reforms. Ultimately, the
oligarchs must come to realize that the rule of law is favorable to
them in the long run and cease corrupt political manipulation, becoming
productive private sector businessmen. This is sure to be an
exceptionally difficult and complicated process.
Ukraine must safeguard and take advantage of its civil
society, including independent media. Anything further that can be done
to increase their effectiveness should be. Nothing should be done to
hinder them.
The international community, and specifically the United
States, the EU, and the international organizations that are a part of
the Ukrainian struggle against corruption, should keep up the pressure
and assistance.
In general, those that wish to see successful reform in Ukraine
should keep in mind the lessons of Georgia, a country that successfully
saw through its catch-up reforms. Havrylyshyn writes, ``[Georgia]
achieved the same rapid results in reforms and performance as the
[central European and the Baltic countries] CEB, but did so in an
environment of deeply entrenched rent-seekers, those with vested
interests, their political pawns and pervasive corruption, perhaps
worse than Ukraine.'' \98\
---------------------------------------------------------------------------
\98\ Oleh Havrylyshyn, ``Controlling Corruption: The Elusive Golden
Fleece?'' 275.
---------------------------------------------------------------------------
He goes on to summarize some of the World Bank's lessons for
combating corruption that it derived from the Georgian case:
Exercise strong political will
Establish credibility early
Launch a frontal assault
Attract new staff
Limit the role of the state
Adopt unconventional methods
Develop a unity of purpose and coordinate
Tailor international experience to local conditions
Harness digital technology \99\
---------------------------------------------------------------------------
\99\ Ibid., 272.
---------------------------------------------------------------------------
6.1. Remaining Reforms
Sector-based reforms should be tackled in whatever order possible,
simultaneously when possible or one-at-a-time as necessary. The most
important thing is for the international community and Ukrainian civil
society including independent media to keep a close watch for
backsliding and sound the alarm at any deviations. Another danger that
should be considered is the tendency of reforms to be enacted, but not
implemented. Continued monitoring is necessary following the passage of
any given reform. If Ukrainian officials know they will not get away
with cheating, they may not try to. \100\
---------------------------------------------------------------------------
\100\ Antonidis et al., ``Strengthening Ukraine: Policy
Recommendations for the New Administration,'' 7.
---------------------------------------------------------------------------
6.1.1. Judicial Reform
The judiciary is far and away the sector most in need of reform in
Ukraine in order to successfully combat corruption. While the new
anticorruption investigation architecture is impressive and is working,
it will amount to little if cases continually come before corrupt
judges.
Although constitutional amendments and a new legislative framework
have been approved by the Rada that could eventually lead to the
necessary reforms, they must be implemented properly. \101\
---------------------------------------------------------------------------
\101\ Sushko and Prysyatkko ``Nations in Transit: Ukraine,'' 3.
---------------------------------------------------------------------------
These amendments will overhaul the Supreme Court with new judicial
appointments based on an open and transparent selection process. They
will also streamline lower courts and establish a Citizens' Integrity
Council, to consist of 20 NGO representatives. This Council will
oversee judges and communicate to the Higher Qualification Committee of
Judges regarding the extent to which judges are upholding professional
standards. This will hopefully result in speedier and more transparent
trials. \102\
---------------------------------------------------------------------------
\102\ Ibid., 10
---------------------------------------------------------------------------
A new ``High Council of Justice'' has also been formed to monitor
the judiciary, with the power to submit judicial appointments to the
President and pursue disciplinary action, including dismissal.
Previously, only the Rada could dismiss judges, resulting in a high
level of political rather than professional dismissals. This Council
can also void judicial immunity, enabling arrest and prosecution of
judges thought to be corrupt. However, the President continues to
influence decisions with regard to transferring and promoting judges.
This power should also be ceded to the Council so as to guarantee the
independence of the judiciary. \103\
---------------------------------------------------------------------------
\103\ Antonidis et al., ``Strengthening Ukraine: Policy
Recommendations for the New Administration,'' 8.
---------------------------------------------------------------------------
The new legal framework also calls for the establishment of an
anticorruption court, a missing link of the anticorruption
architecture, where NABU's cases of grand corruption can be tried
independent of the standard, unreformed judiciary itself mired in
corruption until such a time as the standard judiciary is fully
reformed.
This report strongly recommends that this be the next large civil
society and international community push. The IMF and the EU are also
strongly in favor; establishment of an anticorruption court is a
structural benchmark included in the IMF's most recent review. \104\ A
selection procedure for judges that includes international involvement
would be a central part of this process.
---------------------------------------------------------------------------
\104\ International Monetary Fund, European Department, ``2016 Article
IV Consultation and third review under the Extended Arrangement,
Requests for a Waiver of Non-Observance of a Performance Criterion,
Waiver of Applicability, Rephasing of Access and Financing Assurances
Review--Press Release; Staff Report; and Statement by the Executive
Director for Ukraine,'' International Monetary Fund, p. 29.
---------------------------------------------------------------------------
The proper implementation of this new judicial framework will be
fought every step of the way by the oligarchs. Civil society and the
international community must remain vigilant in their push to see that
it is implemented to the highest possible standards.
There are a handful of practical measures that can also be taken in
addition to pursuing a new judicial framework to combat corruption in
the judiciary. One such measure is increasing judicial wages. Much like
the abysmal wages for police that have led to petty corruption in the
past, low wages for judges make them particularly vulnerable to bribes.
\105\ Relatedly, judges have been included in e-declarations processes
and have come under investigation, which is a welcome development.
\106\ An even more potent combination of carrots and sticks should be
pursued. In addition, more judges and prosecutors need to be replaced.
---------------------------------------------------------------------------
\105\ Antonidis et al., ``Strengthening Ukraine: Policy
Recommendations for the New Administration,'' 9.
\106\ Natalia Zinets, ``Fighting corruption, Ukraine starts to judge
its judges,'' Reuters, May 25, 2017, http://www.reuters.com/article/us-
ukraine-corruption-insight-idUSKBN18L0HC.
---------------------------------------------------------------------------
The ``Strengthening Ukraine'' report of the Bush School and U.S.-
Ukraine Foundation also recommend judicial exchanges. These exchanges
would enable Ukrainian and European legal officials to better
understand one another's judiciary with the goal of bringing Ukrainian
judicial standards more in line with the European ones. \107\
---------------------------------------------------------------------------
\107\ Antonidis et al., ``Strengthening Ukraine: Policy
Recommendations for the New Administration,'' 11.
---------------------------------------------------------------------------
6.1.2. Energy Sector Reform (Cont.)
Despite steps forward, necessary reforms remain in the energy
sector. While the reduction in energy subsidies, the corporate
governance reform of Naftogaz, the cessation of purchases from Russia,
the increase of gas imports from the rest of Europe, and the increase
of domestic gas production is a start, what is needed now is the
privatization of the energy sector. Regional energy distribution
companies must be the targets of privatization efforts. \108\ Ukraine
is on its way to accomplishing this thanks to the signing of the recent
electricity market law. \109\ Now, this law, accompanied by
deregulation, must be successfully implemented.
---------------------------------------------------------------------------
\108\ IMF, ``2016 Article IV Consultation and third review under the
Extended Arrangement, Requests for a Waiver of Non-Observance of a
Performance Criterion, Waiver of Applicability, Rephasing of Access and
Financing Assurances Review--Press Release; Staff Report; and Statement
by the Executive Director for Ukraine,'' p. 95
\109\ Interfax-Ukraine, ``Law on electricity market enters force,''
Kyiv Post, June 12, 2017, https://www.kyivpost.com/ukraine-politics/
law-electricity-market-enters-force.html.
---------------------------------------------------------------------------
In addition, corporate governance reform and the introduction of
ever greater transparency must continue and should include areas like
procurement and transfer pricing. Chow argues, ``The aim should be to
break up state-owned energy monopolies in order to promote competition
and market efficiency, release the value of state assets, and remove
the temptation for special interest groups to control energy
franchises. It is not just the management, but the business model of
Ukraine's energy sector that must change.''
Finally, regulations governing the taxation of independent
companies should be simplified to enable the development of a
competitive and independent market. \110\ While the introduction of
corporate governance structures to Naftogaz as part of reforming the
company was a good start, the unbundling of former Soviet bureaucratic
behemoths must continue. Additionally, the exploration of oil and gas
fields is still governed by outdated regulations that need to be
revised in order to boost domestic gas production. \111\
---------------------------------------------------------------------------
\110\ This should occur not only in the energy sector, but in the
private sector as a whole and especially with regard to small and
medium-sized, i.e. non-oligarchic, enterprises (SMEs). Non-oligarchic
businesses are harmed by corruption unlike their oligarchic brethren
and have interests that line up with those of civil society and the
international community. They could potentially become a powerful voice
in advocating for reforms.
\111\ Edward Chow, ``The High Stakes of Ukraine's Energy Reforms,''
The American Interest, October 21, 2016, https://www.the-american-
interest.com/2016/10/21/the-high-stakes-of-ukraines-energy-reforms/.
---------------------------------------------------------------------------
Supporting the development of domestic production should be a key
priority as, once Ukraine's domestic energy production is no longer
captured by corrupt interests, it could achieve energy independence.
``The problem is not geology, but the absence of a stable and
attractive business climate for non-politically connected and honest
investors,'' argues Chow. \112\
---------------------------------------------------------------------------
\112\ Ibid.
6.1.3. Safeguarding and Further Empowering the Anticorruption
---------------------------------------------------------------------------
Architecture
NABU's independence and jurisdiction over all high-profile
corruption cases in Ukraine should be preserved. NABU's external audit
commission, which can provide the grounds to dismiss the head of NABU,
should also be selected via transparent and accountable processes and
consist of independent individuals with impeccable reputations and
experience in investigations in international corruption cases.
To promote transparency and curtail the ability of the oligarchs to
manipulate Ukrainian politics, \113\ NABU should be strengthened to
more effectively perform its investigative duties. Besides being
granted the authority to independently wiretap, NABU should also be
empowered to monitor donations to parties and politicians. Accompanying
reforms that establish limitations and regulations on political
donations would be needed, and the party financing law that was passed
in July 2016, but has not been enforced, must be implemented. \114\
---------------------------------------------------------------------------
\113\ Antonidis et al., ``Strengthening Ukraine: Policy Recommendations
for the New Administration,'' 6.
\114\ Kostanyan, ``Ukraine's unimplemented anti-corruption reform,'' 3.
---------------------------------------------------------------------------
NAPC's admirable work in e-declaration can also be improved by
establishing verification mechanisms for e-declaration.
6.1.4. Banking Sector Reform (Cont.)
Although the Ukrainian banking system has seen significant reform
and is not as rife with corruption as it was in 2014, experts agree it
still has a long way to go. \115\ The ``Strengthening Ukraine'' report
of the Bush School and the U.S.-Ukraine Foundation recommend
consolidation and full transparency as ways to further combat
corruption in the banking sector. These reforms will make Ukraine's
banks easier to monitor, enabling the government to ensure that they
are complying with the law. Given the centrality of a corrupt banking
sector to the wealth of the oligarchs, this sector will be especially
difficult to reform. \116\
---------------------------------------------------------------------------
\115\ Gloss, ``Ukrainian Officials Tout Banking Sector Reforms.''
\116\ Antonidis et al., ``Strengthening Ukraine: Policy
Recommendations for the New Administration,'' 14.
---------------------------------------------------------------------------
According to Francis Malige, the managing director for Eastern
Europe and the Caucasus of the European Bank for Reconstruction and
Development, the most important four building blocks of any future
banking reform are ``good conditions facilitating lending from banks
which lower interest rates and shift lending to the real economy,
rather than to the government; the development of capital markets; land
reform that would allow banks to accept land as collateral; and
privatization in the banking sector.'' \117\
---------------------------------------------------------------------------
\117\ Gloss, ``Ukrainian Officials Tout Banking Sector Reforms.''
---------------------------------------------------------------------------
6.1.5. Limit Parliamentary Immunity
Parliamentary immunity should be carefully limited so that it is no
longer a form of de facto blanket immunity. Ranking Helsinki Commission
Senator Cardin has worked to limit parliamentary immunity in the OSCE
region.
Most notably, this included the adoption by the OSCE Parliamentary
Assembly (OSCE PA) of a resolution proposed by Senator Cardin calling
for the limiting of parliamentary immunity, entitled ``Resolution on
Limiting Immunity for Parliamentarians in Order to Strengthen Good
Governance, Public Integrity and the Rule of Law.'' \118\ The OSCE PA
is an independent international institution related to, but not part of
the intergovernmental OSCE made up of parliamentary delegations from
the 57 participating States of the OSCE, which every year gather in an
annual session to pass resolutions based on majority votes. \119\
---------------------------------------------------------------------------
\118\ Organization for Security and Co-operation in Europe,
Parliamentary Assembly, Brussels Declaration of the OSCE Parliamentary
Assembly and Resolutions Adopted at the Fifteenth Annual Session, 2006,
Brussels: 32-33.
\119\ Troy C. Ware and Shelly Han, ``Corruption: A Problem that Spans
the OSCE Region and Dimensions,'' Helsinki Commission 41, no. 13,
December 30, 2009, http://lawandorderinrussia.org/2009/corruption-a-
problem-that-spans-the-osce-region-and-dimensions/.
---------------------------------------------------------------------------
6.2. Civil Society Including Independent Media
The Ukrainian people have proven now on three different occasions--
as protesters during the Orange Revolution and the Euromaidan, and as
volunteers assisting troops fighting Russian aggression--that their
organizational capacity and desire for democracy and prosperity is
greater than the forces that would bankrupt their country.
Civil society has played a fundamental role in Ukraine's democratic
transition, and remains a critical element of combating corruption. It
is the first to the scene, pushes for change, and, ultimately, sees to
it that changes stick. The independent media is no different. Ukrainian
journalists played a critical role in the Euromaidan Revolution and
continue to play an essential role as corruption watchdogs to this day.
The big question then is how to safeguard and take advantage of
these comparative advantages of Ukraine's. First, do no harm. Civil
society and especially independent media should continue with their
work without the introduction of any additional constraints. It is
largely thanks to them that Ukraine remains politically competitive and
that the country has not long since fallen to the siren song of
authoritarianism. Moreover, their ability to uncover corruption is
unparalleled. Who knows where Ukraine would be today without
publications such as Ukrainska Pravda and Dzerkalo Tyzhnia. \120\
---------------------------------------------------------------------------
\120\ Aslund, Ukraine: What Went Wrong and How to Fix It, 97.
---------------------------------------------------------------------------
Unfortunately, harm is being done. A recent law requires civil
society activists who are working in anticorruption to complete e-
declarations similar to those that officials are now required to
complete in an attempt to burden them needlessly. \121\ In addition, a
recent article by Josh Cohen also explains how the SBU is harassing
civil society activists on behalf of oligarchs. In order to counter
this harassment, the SBU should be reformed in line with NATO
standards. Any harm to civil society must be condemned and prevented
such that civil society can do its job and continue to push for
reforms. \122\ That said, it is also a demonstration of the fear that
oligarchs have for civil society. Oligarchs would not be working so
hard to stop Ukraine's civil society if they were not profoundly active
and effective.
---------------------------------------------------------------------------
\121\ Adrian Karatnycky, ``Watching the Watchdogs: Why Ukraine's NGOs
Should Disclose Assets, Too,'' Atlantic Council, March 29, 2017, http:/
/www.atlanticcouncil.org/blogs/ukrainealert/watching-the-watchdogs-why-
ukraine-s-ngos-should-disclose-assets-too.
\122\ Josh Cohen, ``Something Is Very Wrong in Kyiv: Ukraine Brags
about Reforms and Harasses Activists,'' Atlantic Council, May 18, 2017,
http://www.atlanticcouncil.org/blogs/ukrainealert/something-is-very-
wrong-in-kyiv.
---------------------------------------------------------------------------
In her piece ``Corruption in Ukraine in Comparative Perspective,''
Daphne Athanasouli, a scholar of corruption at the University of Derby,
recognizes Ukraine's civil society including independent media as a
comparative advantage that it has to combat corruption.
She recommends improving upon this advantage further through the
introduction of greater e-government, essentially giving Ukraine's
civil society including independent media a megaphone. She comments,
``Progress in e-government can decrease corruption, rent-seeking, and
regulatory capture in Ukraine by strengthening the accountability of
public officials and politicians.'' \123\
---------------------------------------------------------------------------
\123\ Daphne Athanasouli, ``Corruption in Ukraine in Comparative
Perspective,'' in Beyond the Euromaidan: Comparative Perspectives on
Advancing Reform in Ukraine, ed. Henry E. Hale and Robert W. Orttung
(Stanford: Stanford University Press, 2016), 80-105.
---------------------------------------------------------------------------
She adds, ``E-government can also reduce the time of interaction
with public officials and their discretionary power, thereby reducing
administrative corruption.'' \124\ Finally, she concludes, ``The
development of e-government and access to online information about
government services help increase accountability and tackle petty
corruption by limiting the discretionary power of government officials
and public servants.'' \125\
---------------------------------------------------------------------------
\124\ Ibid., 98.
\125\ Ibid., 100.
---------------------------------------------------------------------------
Already, Ukraine has made some progress here. Athanasouli writes:
In 2012, Ukraine endorsed a new Open Government Plan (OGP) with the
active participation of civil society organizations and the United
Nations Development Program (UNDP) office in Ukraine. The OGP included
initiatives to improve the provision of public services to citizens and
the introduction of administrative services in digital format by the
end of 2014. Many of these reforms were successful. \126\
---------------------------------------------------------------------------
\126\ Ibid., 99.
A second method to empower civil society including independent
media recommended by Athanasouli is increasing press freedom. She
writes, ``An environment that can also support free media is pivotal
for (combating corruption) since it helps support an anticorruption
agenda, expose corrupt practices, and exert pressure on the government
for reforms.'' \127\ While even during Yanukovych's presidency, when
Ukraine was threatened by an unfree media environment, independent
publications stepped up to fill the void, Athanasouli is correct when
she states, ``Oligarchs continue to own the main television networks
and they determine the content of their broadcasts.'' \128\
---------------------------------------------------------------------------
\127\ Ibid., 100.
\128\ Ibid., 100.
---------------------------------------------------------------------------
One need look no further than Ukraine's President, Petro
Poroshenko, owner of Kanal 5, to find an example. Although Poroshenko
has largely allowed Kanal 5 to be a home for real journalists, this has
not been the case for much other media in Ukraine, and it remains a
significant issue. Dunja Mijatovic, former Representative for the
Freedom of the Media of the OSCE, has commented, ``If Mr. Poroshenko
intends to sell his assets, in my view, his TV station should be the
first to go.'' \129\
---------------------------------------------------------------------------
\129\ Simon Shuster, ``Ukraine's New Leader Clings to His TV
Channel,'' Time, May 29, 2014, http://time.com/137020/ukraine-petro-
poroshenko-channel-5/.
---------------------------------------------------------------------------
Ukraine's impressive independent media will not evolve into an
impressive free media until this oligarchical stranglehold on the main
television networks has been broken. Yet, ``Following the Euromaidan
revolution, the media situation improved considerably.'' \130\ As with
other reforms relating to the oligarchs, now is the time to deal the
knockout punch.
---------------------------------------------------------------------------
\130\ Athanasouli, ``Corruption in Ukraine in Comparative
Perspective,''100.
---------------------------------------------------------------------------
Athanasouli writes, ``The citizens and the media can act as
monitoring agents against both administrative and grand corruption,
promote anticorruption reforms and the work of law enforcement
agencies, and increase political accountability by tracking the
progress of reforms and exposing mischief or delays in the
implementation of specific measures.'' \131\ This report could not
agree more.
---------------------------------------------------------------------------
\131\ Ibid., 101.
---------------------------------------------------------------------------
The reality in Ukraine is that it will come down to ``citizens and
the media'' to make reforms happen and keep them in place. This is the
Ukrainian people's greatest test, but they need not go it alone. The
international community should push the Ukrainian state as hard as it
can too and offer as much assistance as is responsible to assist
Ukraine in realizing a democratic and prosperous future.
6.3. The International Community
External pressure was critical to the successful implementation of
the all-important 2000 Prime Minister Yushchenko reforms. Aslund
describes the influence of external pressure on these reforms:
External pressure was important. The IMF defined the threat of
external default and made the rulers ware of the dangers.
Paradoxically, its pressure was stronger when it provided no credit.
The West strongly influenced the government's ideas, notably the German
advisory group, but also the IMF and the World Bank. Ukrainian
officials were anxious to be respected by the West and Yushchenko
greatly benefited domestically from being considered so highly in the
West. \132\
---------------------------------------------------------------------------
\132\ Aslund, How Ukraine Became a Market Economy and Democracy, 149.
Then, as now, Ukraine is in a position where it needs the West more
than ever, having cut many ties with Russia. Many western-educated
Ukrainians are in Ukrainian government and civil society and Ukraine is
seen in the foreign policy of western countries as the litmus test for
democracy and anticorruption in an era where both are falling out of
favor globally.
It is imperative that the international community not become
frustrated with the pace of reform in Ukraine. The historical analysis
of this report provides insight into the resilience of the oligarchs.
Ultimately, the international community, along with Ukrainian civil
society, will have to show that it is even more resilient. As such, the
international community should prepare itself to be invested in Ukraine
for the long term, so as to avoid past mistakes.
6.3.1. The IMF
The IMF is the international organization with which Ukraine has
had the most interaction. After a board meeting on April 3, 2017, the
IMF decided to proceed with a $1 billion loan payment to Ukraine, the
fourth installment of a $17.5 billion aid-for-reform program spanning
four years. Financial support for the program is being released in
installments contingent upon progress in reforms in the country.
When the IMF board initially adopted the stabilization program on
March 11, 2015, it decided to issue a credit of $5 billion immediately.
The green-lighting of additional funding in April surprised many
experts, as the Ukrainian government has struggled to implement many of
the structural reform conditions outlined for the fourth tranche, only
meeting five out of fourteen conditions from the agreement. In the
press release that accompanied the most recent disbursement, the IMF
commented on the successes of implemented macroeconomic policies, while
calling for additional anticorruption efforts. \133\
---------------------------------------------------------------------------
\133\ International Monetary Fund, ``IMF Executive Board Concludes
2016 Article IV Consultation and Completes Third Review of Ukraine's
EFF, Approving US$1.00 Billion Disbursement,'' International Monetary
Fund, April 3, 2017, https://www.imf.org/en/News/Articles/2017/04/03/
pr17111-imf-executive-board-concludes-2016-article-iv-consultation-and-
completes-third-review (accessed June 18, 2017).
---------------------------------------------------------------------------
Ukraine has received funding totaling $8.8 billion under the
program. Aslund credits these loans with stabilizing exchange rates and
containing inflation, as the Ukrainian economy outperformed
expectations when finishing 2016 with a budget deficit at only 2.3
percent. \134\ Furthermore, he credits the IMF program for the creation
of NABU, as the corruption bureau was created at the behest of the
reform program. The IMF is applying pressure for the establishment of a
Ukrainian anticorruption court.
---------------------------------------------------------------------------
\134\ Anders Aslund, ``Why Does the IMF Keep Funding Ukraine?''
Atlantic Council, April 11, 2017, http://www.atlanticcouncil.org/blogs/
ukrainealert/why-does-the-imf-keep-funding-ukraine.
---------------------------------------------------------------------------
While additional structural conditions need to be implemented,
economic reforms have proven easier to enact than judicial reforms,
where opposition from private interests blocks attempts to strengthen
and enforce anticorruption frameworks. \135\
---------------------------------------------------------------------------
\135\ Anders Aslund, and John Herbst, ``Take It to the Next Level:
Create a Biden-Poroshenko Commission,'' Atlantic Council, December 7,
2015, http://www.atlanticcouncil.org/blogs/ukrainealert/take-it-to-the-
next-level-create-a-biden-poroshenko-commission.
---------------------------------------------------------------------------
6.3.2. The United States
The United States has shown and must continue to show its support
for the territorial integrity as well as the ongoing reform process in
Ukraine. It continues to put pressure on as well as support Ukraine
both symbolically and via financial, security, and technical
assistance. There are multiple bills in the 115th Congress that could
increase or change the nature of this aid. USAID and Department of
State International Narcotics and Law Enforcement Affairs Initiatives
are highly active in Ukraine and provide assistance, financial and
otherwise, to a variety of programs.
6.3.3. The EU
The Euromaidan advocated for a European direction for the country
and the goal remains the eventual accession of Ukraine to the EU. The
EU has an active assistance program within Ukraine. In addition, a new
Danish-led initiative focused on combating corruption has become active
on Ukrainian issues. The recent realization of the EU-Ukraine visa-free
travel agreement was a significant achievement for Ukraine. \136\
---------------------------------------------------------------------------
\136\ Diane Francis, ``It Was a Very Good Spring for Ukraine,''
Atlantic Council, June 7, 2017, http://www.atlanticcouncil.org/blogs/
ukrainealert/it-was-a-very-good-spring-for-ukraine.
---------------------------------------------------------------------------
VII. CONCLUSION
The persistence of corruption in Ukraine can be explained by the
influence of the oligarchs, who were enabled early on by the incomplete
economic liberalization of the country and the corrupt gas trade, which
historically was the most corrupt sector of the Ukrainian economy and
deeply influenced by Russia. The oligarchs' capture of the state
structure has proven exceptionally resilient; civil society and the
international community must prove that they are more resilient.
Indeed, Ukraine's civil society including independent media is and
will continue to be the most central piece of the struggle against
corruption in Ukraine. As the Nations in Transit 2017 Report on Ukraine
states, ``Civil society remains the strongest element in Ukraine's
democratic transition.'' \137\ The international community and the
Ukrainian state should do everything it can to improve the capacity of
civil society including independent media to hold politicians' feet to
the fire.
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\137\ Sushko and Prysyatkko, ``Nations in Transit: Ukraine,'' 7.
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Vested interests will do everything in their power to prevent
meaningful reform in Ukraine. It is bound to be an arduous battle, but
it will be well worth it if Ukraine is finally able to defeat its
internal enemy.
VIII. Appendix: Consolidated Corruption Perceptions Index (CPI) Rankings of
OSCE Participating States
1--Denmark 54--Slovakia
3--Finland 55--Croatia
4--Sweden 57--Hungary
5--Switzerland 57--Romania
6--Norway 60--Italy
8--Netherlands 64--Montenegro
9--Canada 69--Greece
10--Germany 72--Serbia
10--Luxembourg 75--Bulgaria
10--United Kingdom 75--Turkey
14--Iceland 79--Belarus
15--Belgium 83--Albania
17--Austria 83--Bosnia and Herzegovina
18--United States 87--Mongolia
19--Ireland 90--The FYR of Macedonia
22--Estonia 95--Kosovo
23--France 113--Armenia
29--Poland 123--Azerbaijan
29--Portugal 123--Moldova
31--Slovenia 131--Kazakhstan
38--Lithuania 131--Russia
41--Spain 131--Ukraine
44--Georgia 136--Kyrgyzstan
44--Latvia 151--Tajikistan
47--Cyprus 154--Turkmenistan
47--Czech Republic 156--Uzbekistan
47--Malta
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