Ukraine and the oligarchs: Endless delays to reform

The coronavirus has hit Ukraine hard, but the IMF has promised the country less funding than seemed likely only months ago. Self-interested oligarchs are delaying necessary new reforms and pushing back against those Ukraine has already made. 

The big story in Ukraine in early March centred on a disastrous change in the government: President Volodymyr Zelensky’s decision to fire Prime Minister Oleksiy Honcharuk and several leading reformers. Ukraine paid a heavy price for the move in capital outflows and soaring borrowing costs but, by the end of the month, Zelensky seemed to have rescued the situation. Parliament passed, at first reading, land and banking reforms that could have cleared the way for new loans from the International Monetary Fund (IMF).

There was talk of Zelensky finally breaking with leading oligarch Ihor Kolomoisky. Yet he has failed to do so, at an ever-increasing cost to the country. Kolomoisky’s supporters initially prevented a second reading of the banking bill through “legislative spam”, the proposal of thousands of frivolous amendments. The government was slow to respond, while implementing a stringent response to the coronavirus that has already tipped the economy into a severe recession (partly to limit protests at backsliding on reforms, and partly to mitigate damage to the economy). There is little sense that the ruling elite is sufficiently supportive of the IMF-backed reforms for the measures to succeed. Indeed, earlier this month, the IMF moved its talks with Ukraine from the long-term Extended Funding Facility for assisting reform – which they agreed to in December – to a smaller, short-term Stand-By Arrangement, which is confined to budgetary support.

Before March, Ukraine was a post-election multiverse. There were enough reforms to sustain the hopes of cheerleaders for change, particularly the European Union. But there was so much backsliding in other sectors as to confirm pessimists’ worst fears: the triple threat of restored Russian influence, the return of some of the most controversial figures from the Yanukovych regime, and seeming confirmation that Zelensky was in hock to Kolomoisky. Zelensky missed several key opportunities to distance himself from the oligarch, most notably when Kolomoisky’s supporters tried to storm the National Bank in November. Another such incident came in January, when it was alleged that Kolomoisky was behind the release of a tape of Honcharuk mocking Zelensky’s economic knowledge.

Kolomoisky pushed hard for compensation for the nationalisation of PrivatBank – which he co-owned until 2016, when the government took control of it due to the $5.6 billion hole its balance sheet. But the real economic payback appeared to occur elsewhere, as the government showered debt and delivery favours on the Kolomoisky-controlled Ukrnafta and Centrenergo. The government opened corruption cases, but seemed to concentrate on Kolomoisky’s enemies from the National Bank of Ukraine and the interlinked leadership of the Investment Capital of Ukraine, often dubbed “[Petro] Poroshenko’s bank”, after the former president.

Zelensky could have just fired Honcharuk. Instead, he gradually picked off nearly all the ministers who had reputations as reformers.

Judicial reforms the government announced in October were sabotaged by many actors. Kolomoisky used TV and social media platforms, particularly Telegram, to launch a sustained campaign against all reformers and pro-reform NGOs, which they described as Sorosyata ([George] Soros’s piglets). Having been lauded as a born-again Ukrainian nationalist when he helped finance battalions at the height of the war in east Ukraine in 2014-2015, Kolomoisky now indulged in increasingly strident rhetoric that overlapped with that of pro-Russian oligarch Viktor Medvedchuk’s media empire. Indeed, Andrian Prokip and Mykhailo Minakov at the Wilson Center have characterised Ukraine as a “leakocracy” – whose shadowy politics are increasingly steered by online information wars.

Zelensky could have just fired Honcharuk. Instead, he gradually picked off nearly all the ministers who had reputations as reformers, even as Ukraine was trying to restart talks with the IMF. Two of them were Chief Prosecutor Ruslan Ryaboshapka and Customs Minister Maxim Nefyodov, the architect of the successful ProZorro reform of state procurement. Ludicrously, Ryaboshapka is now under threat of prosecution himself. And Parliament backed a bill that would allow it to fire the head of NABU, the National Anti-Corruption Bureau, without a critical audit.

Not everything went Kolomoisky’s way. There were some signs that Zelensky was trying to rebalance the oligarchy by promoting people linked to Rinat Akhmetov, Kolomoisky’s rival. But that hardly improved Ukraine’s international image. The markets were particularly unimpressed by the firing of Finance Minister Oksana Makarova and ongoing attacks on the National Bank of Ukraine allegedly instigated by Kolomoisky. As it coincided with the coronavirus crisis, Zelensky’s decision to fire the reformers was spectacularly bad in its timing. As capital flowed out of Ukraine, the country’s interest rate began to climb once more.

On 30 March, Zelensky seemed to dramatically reverse his approach, by pushing through two key prerequisites of a deal with the IMF: a long-term project designed to privatise land and thereby boost agricultural output, and a banking measure so specifically designed to block any backsliding on PrivatBank that it was widely called the “anti-Kolomoisky bill”. But a closer look at the parliamentary arithmetic shows things are not so simple.

Zelensky’s party, Servant of the People, is increasingly divided – while alternative coalitions are unstable. In theory, with 248 MPs, Servant of the People easily has the 226 votes needed for a parliamentary majority. But Kolomoisky has the support of around 20 MPs in Servant of the People and around 22 in the For the Future faction – together known colloquially as his “bayonets”. The land law and the first reading of the banking law, for example, were passed with only 206 votes – 198 of them from Servant of the People MPs. The rest came from an alliance with two pro-European parties: European Solidarity, grouped around Poroshenko, and Voice, a new party led by rock star Svyatoslav Vakarchuk. Yet European Solidarity will not vote with Zelensky in the long-term if its leaders continue to be prosecuted.

In parallel, former prime minister Yuliya Tymoshenko’s Fatherland party has made use of parliamentary disruption tactics and anti-European rhetoric. Zelensky has even had to fish for votes from the Faith faction, a motley crew of independent businessmen. As such, he could not even acquire a majority for the gimmick appointment of former Georgian president Mikheil Saakashvili as deputy prime minister. (Saakashvili now heads the powerless Executive Committee for Reforms instead.)

A vote on 30 April fast-tracked the banking bill. But further delay meant it was only finally passed on 13 May, and may still end up in the Constitutional Court. Meanwhile, Ukraine’s economy is in free fall. Ordinary Ukrainians in lockdown have few resources to fall back on; migrants previously provided around $1 billion a month in remittances to Ukraine, but many of them have been forced to come home due to the coronavirus. Unemployment has doubled to 14 percent since the crisis began. And the budget deficit is set to triple, from $3.5 billion to $11 billion. If even Zelensky’s apparent change of heart on 30 March has not been enough to turn things around, $5 billion from the IMF will not do so either.

The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.


Senior Policy Fellow

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