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Democratization
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The rise of the Ukrainian oligarchs
Rosaria Puglisia
a
EU Commission Delegation in Kyiv and a visting research fellow at the Institute of Politics and
International Studies, University of Leeds, UK
Online publication date: 06 September 2010
To cite this Article Puglisi, Rosaria(2003) 'The rise of the Ukrainian oligarchs', Democratization, 10: 3, 99 — 123
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ROSARIA PUGLISI
Like many post-Soviet societies, Ukraine has experienced over the past decade the
emergence of an oligarchic system. Political and economic elites have become locked
into a ‘partial reform equilibrium’. Unfinished political and economic reforms have
fostered the exchange of economic resources against political support, weakened the
state capacity and opened the way to undemocratic outcomes. President Kuchma has
become the centre of a ‘personal rulership’, in which rent-seekers and rent-givers have
forged an alliance aimed at preserving the current state of affairs. The consequent
situation of stall has benefited both economic actors, allowing them access to the
redistribution of national wealth, and political actors, allowing them to consolidate
unchallenged their position of power. The systematic plunder of economic resources,
perpetrated under the oligarchic system, has imposed great costs upon Ukrainian
society, condemning it to a vicious circle of underdevelopment, administrative
weakness and inability to implement change.
The consolidation of powerful economic elites, strategically connected to
when not even merged with political elites, has been identified as a feature
common to many post-Soviet states. Some authors have spoken of a
‘collusion between elites’, where the alliance between political and
economic actors is expressed in terms of a rent-seeker/rent-giver
relationship. On the one side, rent-seekers acquire ‘extra profits by
becoming an exclusive, politically backed monopoly’, while, on the other
side, ‘the payoffs from rent-seeking allow them [the rent-givers] to maintain
and expand their own political power’.1 The most well-known example of
this relationship is the pattern of business–politics interaction established in
Russia during the Yel’tsin presidency. Then, a handful of bankers and
industrialists supporting Boris Yel’tsin’s bid for re-election, gained in
exchange for their material help direct access to the design of key economic
reforms, especially privatization.2
In this article the focus is on Ukraine and the conditions that allowed the
emergence of an oligarchic system during the first term in office of
President Leonid Kuchma (1994–1999). The rise of an oligarchic regime in
Ukraine is seen as tightly connected to the mode of the political and
economic transformations as well as hinging upon the mutual
interdependence between political and economic elites.
Dr Rosaria Puglisi is a political affairs officer at the EU Commission Delegation in Kyiv and a
visiting Research Fellow at the Institute of Politics and International Studies, University of Leeds,
UK.
Democratization, Vol.10, No.3, Autumn 2003, pp.99–123
PUBLISHED BY FRANK CASS, LONDON
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As in other post-Soviet countries, in Ukraine the need to carry on
sweeping economic reforms, aimed at liberalizing the market and reducing
the state presence in the economic sector, coincided with a process of
democratization and state-building, in which the pre-existing ruling elite
played a controlling role. An overemphasis placed on economic
liberalization rather than democratic consolidation laid the foundations for a
degeneration of the system towards authoritarianism, the strengthening of the
presidential administration and the weakening of horizontal checks and
balances on the powers of the executive. Increased law-making authority in
the hands of the president was justified as an instrument to push through
swift economic changes and overcome parliamentary opposition. However,
while extraordinary presidential powers failed to produce a course of
coherent economic reforms, they succeeded in alienating the executive from
both the parliament and civil society.
In this context, it became politically rational for the president and his
administration to lean on the members of a powerful circle of business actors
to provide support against possible challenges from the opposition. A ‘partial
reform equilibrium’ sealed the alliance between the executive and parts of
the economic elite. In this Ukrainian-style neo-patrimonialist regime,
President Kuchma established and maintained his authority through an
extensive network of personal patronage, the redistribution of economic
favours and privileged access to economic resources, rather than ideology or
the impersonal rule of law.
This order was imposed at great economic costs for Ukrainian society.
National wealth was systematically depleted to strengthen presidential rule
and the influence of Kuchma’s clan. Institutional corruption forced new
entrepreneurship underground, while the private use of public resources
reduced the capacity of the young Ukrainian state. The establishment of a
rational-legal administration has proved very difficult because the constant
flow of revenues, which effective tax collection and a fully developed
monetized economy can provide, was absent. The under-capacity of the state
administration, induced by the parasitical character of the oligarchic system,
pushed Ukraine into a spiral of under-development, in which inability to
extract and reinvest economic resources and administrative weakness
became mutually reinforcing.
The findings of this article support Hellman’s conclusions that a ‘partial
reform equilibrium’ is the main outcome of changes aimed at isolating
reformers from societal pressures, while effective economic transformations
are implemented under conditions of periodical scrutiny on political
institutions.3 Because of its focus on the political nature of the Ukrainian
oligarchic regime, this article is also aimed at complementing theories that
explain corruption in Ukraine as a result of political culture.4 Herein, the
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exchange of electoral support for economic advantages is viewed as
politically rational in a system characterized by two conditions. First, the
executive has become largely unaccountable and alienated from both the
parliament and civil society. Second, elections have become the most
important opportunity to alter the nature of the political structure and the
internal balance of power between political and economic actors.
Throughout this article elites are understood as small and cohesive
groups of strategic actors who control administrative and economic
resources and through them exercise substantial and regular influence on
the country. A distinction is drawn between a political and an economic
elite, the first mainly in control of political resources (administration and
policy making), the second mainly in charge of economic resources
(industrial and financial assets, media outlets). Political and economic
elites may overlap; they may also be internally fragmented along fault lines
determined by their interests. As elite groups react to the fluidity of the
political and economic environment, coalitions among different subgroups
emerge and break up when their interests change. Powerful economic
actors who interact with the political institutions and establish with them a
continued relation through which to pursue their own narrow interests are
defined as oligarchs.
The article is organized as follows. In the first section an overview is
provided of the literature on oligarchic systems and their relation to political
and economic reforms. In the second section the political economy of
reforms in Ukraine and the interaction between business and politics are
explored. In the next two sections the relationship between business and the
two main institutions of Ukrainian policy making, namely the parliament and
the presidency, are investigated. Finally, some conclusions are drawn on the
costs that the oligarchic system places on the social and economic
development of Ukraine.
Oligarchy and Reforms
The literature on oligarchic regimes has highlighted two interconnected
characteristics; first, the pre-industrial and pre-democratic nature of
oligarchic systems, and second, their ability to steer pre-modern societies
towards often unintended political changes. Drawing a parallel between
north Balkan and Latin American countries, Nikos Mouzelis has identified
the two main aspects of oligarchy in the ‘semi-periphery’ as control over
state institutions and limited popular political participation. While the
parliament is controlled by ‘a handful of notable families ... able to keep the
parliamentary system functioning stably by manipulating the electorate
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though a variety of legal and illegal means’, the pre-industrial context
restricts the political participation of the new middle and lower classes.5
Perhaps because of the narrowness of the pre-modern arena in which
they articulate their interests, oligarchs have sometimes become unintended
initiators of a process of political and social transformation, eventually
leading to more open systems. In Malaysia, for example, the reformasi
movement has been regarded as an attempt at ‘oligarchic restructuring’
aimed at preserving the rule of a small elite underneath the veneer of a
democratization process.6 In Japan, the Meiji era oligarchs have been
recognized as responsible for an increased popular participation in the
country’s political life as a result of their internecine rivalries and
consequent split.7
These arguments recall Egor Gaidar’s claim that in the late 1980s the
Soviet nomenklatura had not only been in favour but strongly supportive of
economic reforms. Convinced that under capitalism they would still be in
charge of the political and economic system, members of the nomenklatura
pushed towards a process that Gaidar calls ‘privatization of power’, finally
establishing a ‘nomenklatura capitalism’.8 In the majority of the post-Soviet
states, however, the ‘reformist’ role of the nomenklatura has not led to more
open systems, but rather to systems in which concentration of powers has
systematically obstructed democratic change and depleted national resources,
often taking advantage of the double nature of post-communist transitions.
From a ‘transitology’ perspective, Linz and Stepan have appropriately
warned of the dangers of concurrent political and economic liberalization,
pointing out that the collapse of the totalitarian state, with its extensive
command economy, must be matched by the revival of an effective,
democratic state.9 What Robinson calls state capacity, namely ‘the ability to
get things done: rules are made, policies are formulated and the machinery
(institutions) exists to ensure that policies are implemented and rules are
kept’, is crucial at this stage of development.10
Over a decade of post-Soviet transition, instead, Ukraine has
increasingly come to resemble the textbook case of a ‘state with rapidly
eroding capacity’, unable to conduct effective economic reforms, nor to
induce significant political changes.11 The gradual transition towards an
authoritarian rather than democratic political system, and the consolidation
of the presidency as the key institution and its increasing isolation from both
the parliament and the electorate, have led to a situation in which the
president and his administration have become instrumental in the rise,
stratification and consolidation of the Ukrainian oligarchs.
Economists have discussed at length the most effective pace and
sequencing of economic reforms, reaching some consensus that choosing
the ‘correct’ course of the economic transition is not a condition sufficient
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to guarantee successful results.12 Theories of systemic transformations that
take into account only economic factors have been criticized for being
detrimental to new democracies. The high social costs of reforms
undermine the confidence in new state institutions,13 while the distributional
effects provoke opposition from social groups particularly hit by the
changes.14 In this perspective, it has been argued that the shock-therapy type
of reforms is the sole strategy able to reduce opposition, as ‘the losers of
each particular measure benefit from other measures’.15
Anders Aslund has especially endorsed this view, by maintaining that
the sequencing of economic reforms matters little, provided that economic
transformations are radical and broadly disruptive of consolidated power
networks. Political reforms, however, have vital importance for the
achievement of economic growth. In particular, the establishment of
parliamentary rather than presidential systems, coalition governments and
even social unrest appear as factors positively correlated to successful
economic reforms. The merits of these elements rest on the wide checks
imposed on the state institutions and the ruling elites, which in turn, will be
bound to carry on changes.16
Contrary to all these prescriptions, however, the Ukrainian transition has
become characterized by a set of sketched, patchy, unfinished reforms.
Political and economic elites have become locked into what Hellman calls
‘partial reform equilibrium’. Economic liberalization has been pushed only
as far as allowing the privatization of state assets, but not the correction of
market distortions. The ‘selected introduction of market mechanisms’ and
the consequent generation of concentrated rents has prompted a small group
of actors, net winners under these conditions, to lobby for the preservation
of this newly achieved status quo.17
The mutual dependence of political and economic elites has been
reinforced into the neo-patrimonial character of the Ukrainian regime.18 In a
pattern repeated across many post-colonial states, the power of the Ukrainian
political leadership has consisted in the president’s ability to maintain the
support of strategic sections of the elite.19 The allocation of favours and
economic benefits rather than ideology, the rule of law or the leader’s
charisma has constituted the cement of the system, while a sense of loyalty
and dependence has informed formal political and administrative relations.20
Paradoxically, the ‘personal rulership’ of the president has played an
‘integrative role’ over a potentially heterogeneous political environment,
temporarily unifying competing elite clans through the redistribution of
material incentives and rewards.21 Yet the systematic extraction of rents has
imposed lasting effects upon Ukrainian society. The allocation of income
within a narrow constituency, the corruption of the state apparatus and the
consequent expansion of the illegal economy, the lack of accountability and
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the consequent isolation of the political leadership have weakened rather
than strengthened the capacity of the Ukrainian state.22
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Political Economy of Reforms
Politics and business never became clearly separated in post-Soviet
Ukraine. As a result, the special relationship that members of the economic
circles enjoyed in the political sphere crucially informed the course of
economic reforms. The economic elite systematically pushed through
measures that would help to preserve their status (as in the timely
privatization of strategic assets), while obstructing policies that would
endanger their interests (like the liberalization of banking activity in favour
of foreign financial institutions).23 The consequence was the consolidation
of a rent-seeking system in which economic advantages were afforded only
to those close to the administration, while excluding those who were not
part of it. As administrative resources became a source of income for the
bureaucracy, the bureaucrats became themselves an obstacle to economic
reforms, preventing changes that would unsettle their power and revenues.24
In such a system wealth was generated by special exemptions on
economic regulations, rather than by the development of a productive
activity, by the expansion of ownership over existing assets rather that by
new investments and developmental projects. The burden placed on the
economic system and the state budget by rent-seeking activity was most
certainly one of the factors preventing consistent economic growth.25
As politics and business largely failed to separate, a clear distinction
between the economic and the political elite in Ukraine did not materialize.
Kryshtanovskaya and White identify a Russian economic elite, which
emerged, in the early years of liberalization, as a result of the ‘bifurcation’
of the Soviet nomenklatura into a political elite and an economic elite.26 In
Ukraine this diversification did not take place in the late perestroika years,
and well into the post-Soviet period the economic elite was still identified
with the state apparatus.
In Ukraine, as in Russia, an economic elite appeared as a result of the
late 1980s economic reforms, when ‘miraculous economic exchanges’ took
place, and ‘real billions of dollars were made’.27 Wealth was accumulated
through four main channels. First, through the trade of metals and chemicals
bought in Ukraine at state-regulated prices (equal to 10 per cent of the world
prices) and sold abroad at full market prices. Second, through the trade of
products (like Russian gas) imported at subsidized exchange rates and sold
in hard currency. Third, through subsidized credits issued at a 20 per cent
interest a year when inflation was running at 10,155 per cent. Fourth,
through budget subsidies (equal to 8.1 per cent of gross domestic product in
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1992 and 10.8 per cent in 1993) concentrated mainly in the agricultural
sector, and in the gas and the coal industry.28
Insider privatization (or nomenklatura privatization) provided another
opportunity for the consolidation of the economic elite, turning state
enterprise directors into a property class. Given the lack of a comprehensive
programme of privatization, enterprise managers attained de facto the
property rights of the state enterprises they directed. By mid-1997, 85 per
cent of all shares allocated had been acquired by incumbent managers and
working collectives.29 Because of their previous affiliation to the CPSU in
their capacity as managers of state enterprises, ‘red directors’ gained
representation in the 1990 and 1994 parliaments through seats won within
the ranks of the Communist Party. This situation gave rise to the paradox of
an embryonic capitalist class (the ‘red directors’), which was bound at the
same time by party discipline to an anti-capitalist ideology and by their own
private interests to the development of a market economy.30
The faltering pace of privatization and the way the process was
conducted are the most striking examples of how nomenklatura and
bureaucratic interests intertwined in setting the course of reforms. Initiated
in 1992, privatization was repeatedly halted by the parliament, which was
dominated by a lobby for the ‘red directors’. In 1996, a resolution
exempting more than 6,000 state enterprises, especially in the gas and oil
sector, which were considered of strategic importance, brought the largescale privatization to a standstill. Small-scale privatization was
substantially completed by mid-1997, but such enterprises, which had been
acquired by existing managers and employee groups, totalled only two per
cent of the official industrial output. The great bulk of Ukrainian
production remained instead concentrated in large enterprises, more
resistant to privatization and often successful in lobbying for exemptions
to from anti-monopoly regulation.31
The system of ‘rent with buy out’, according to which enterprises had to
submit a privatization application to local bureaucrats before being
authorized to initiate the privatization procedures, gave rise to widespread
forms of bribery and corruption.32 Finally, a process of substantial
restructuring was obstructed as privatization largely benefited insiders, and
discouraged foreigners and external investors, leaving state enterprises
producing at a loss and begging for state subsidies.
A similar pattern of administrative favouritism appeared in the foreign
trade regime, where liberalization took place only at a formal level, while in
fact new regulations were introduced, increasing opportunities for
corruption.33 Equally, in the banking sector, Ukrainian financial institutions
lobbied the National Bank of Ukraine to restrict access into the domestic
market to competitive Russian and Western banks.34
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Asymmetrical control over the political institutions drew a line of
divergent interests and possibilities between big and small-medium
businesses. Political power allowed representatives of big businesses to
shape the rules of the market to fit their own preferences, defending their
newly acquired property rights and preserving their privileges on the market.
Small and medium businesses, on the other hand, were generally divorced
from political power and were therefore exposed to the full force of market
fluctuations and to the unpredictability of the economic environment.
As events often demonstrated, a businessman’s fortune could change
abruptly ‘not because of the business cycles, but because of the
government’s action, or inaction’.35 Continuous revisions of business
legislation led economic actors to develop an attitude of distrust towards the
state. As one commentator put it, ‘You can start [by] playing chess, then you
find, in the middle of the game, that you are playing basketball, or soccer’.36
With rules being so uncertain, the economic environment was characterized
by a permanent search for ways to survive and shortcuts to reach the heart
of the system:
People try to steal. You can take anybody, and there is something he
disobeyed in the law, because laws and regulations can be in the way,
and you have to overcome any barrier. It is not always intentional, but
there are some gaps in the system which allow people to escape or bypass the laws.37
Excessive bureaucratic requirements, the arbitrariness of business
regulations and a punitive tax system pushed business to face the alternative
between exit (capital flight, migration or withdrawal into the shadow
economy), and voice (choosing a political affiliation). While up to the late
1990s capital flight in Ukraine has been estimated in the region $25–50
billion,38 an increasing number of leading businessmen chose to emigrate,
fearing ‘to be caught in a civil war, to become a victim of crime, or to be
kidnapped’.39 Among these was Vadim Rabinovich, President of the
Ukrainian Jewish community, media magnate and Israeli citizen. But capital
export and emigration were options open only to big business, as small and
medium entrepreneurs were left with only the option of illegality. Even
Anatoliy Kinakh, from his position as President of the Ukrainian Union of
Industrialists and Entrepreneurs and Prime Minister since May 2001,
admitted the state’s failure in fostering private, legal entrepreneurship: ‘The
problem of the shadow economy is a result of the lack of trust from the
entrepreneurs toward state power. It manifests a problem of stability, quality
and transparency in the legislation that regulates the economic and business
activity, it is a problem of civilized relations between the state and the
business sector’.40
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Two surveys conducted among managers of privatized large- and
medium-sized enterprises in 1998 confirmed this picture. The overall
economic situation in Ukraine was described as very bad by 69 per cent of
those interviewed, while a total of 89 per cent considered the country a
negative environment for the development of private entrepreneurship. When
asked to name the most critical problems for their enterprise, 80 per cent did
not hesitate to identify oppressive taxation, and 27 per cent blamed constantly
changing rules and regulations. The main reason why business stagnated in
Ukraine was identified by 96 per cent as high taxes, and 75 per cent put the
reason down to corruption by national government officials.41 Reflecting this
spirit of pessimism, in November 1998 a business magazine speculated
whether the government would soon introduce a tax on breathing air.42
According to data provided by the Kharkhiv-based TACIS Enterprise
Assistance Centre, a typical owner of a small business spent annually 4,200
hryvnas (about US$1,100) in fines paid to local or national authorities.43 At
the same time, the ‘unofficial price-list’ for services granted by the local
authorities to enterprises was widely publicized.44 Small business
representatives called insistently for the establishment of a system which
would allow the entrepreneur to ‘work normally’. If business was
administered effectively, it was argued, the state would benefit from it; at
least tax revenues would increase. However, in an unstable and corrupted
environment, unprotected small business was ‘forced’ to illegality. As the
director of a small enterprises association paradoxically put it, ‘I will cheat,
I will start producing in the shadow, I will earn money on which I will not
pay taxes, I will cheat on custom duties’.45 Under conditions of lawlessness,
the choice between the state and the parallel criminal structures became in
Ukraine a rational economic calculation. Political observers estimated that
if the tax load for a legal business could reach up to two-thirds of a
businessman’s income, the racket required only between 10 and 30 per cent
of it.46
Business associations, which could play a crucial role in mediating
between the state and entrepreneurs, were weak, very numerous, and
scarcely significant on the political scene. Kubicek characterizes them as
‘infiltrated by and subservient to the communist party’; they were
‘intertwined with state structures and dependent heavily upon state
sponsorship and recognition for their present power’.47 A line of financial
dependence was created between the Ukrainian Union of Industrialists and
Entrepreneurs (UUIE) and the state in the form of subsidies paid to the
enterprises constituting the organization.48
The UUEI worked as an extraordinary political platform for Leonid
Kuchma and Anatoliy Kinakh, who had both been president of the
organization before the former ascended to the presidency and the latter
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became prime minister. Business associations, however, proved generally
unable to represent effectively the interests of file and rank business actors,
failing to lobby for the introduction of uniformly applicable rules of the
game.49 When asked why his organization was not taking up a more critical,
independent attitude towards the presidency, a high officer of the Union of
Industrialists and Entrepreneurs admitted, ‘You cannot bite the hand that
feeds you’.50
Polling among entrepreneurs confirmed that ‘lobbying the Government
is not seen yet as a way to advocate the interests of enterprises before local
and national government officials, at least partly because existing lobbying
organizations are not seen as effective’. In the above-mentioned survey, 73
per cent of respondents recognized that, should they need to defend their
interests in the political sphere, they would resort to personal contacts.
Only 11 per cent of business people said that they would rely on business
associations.51 Thus rent-seeking was essentially an economic undertaking
that afforded members of the elite privileges and means that they would not
earn through productive activities. Engagement with political and often
with criminal power became a constituent part of this system. A high
degree of interlocking between political and economic positions blurred
even further the distinction between politics and business, and led
observers to believe that ‘the economic elite controls the state by bringing
in its own members, through direct connections, without even the need to
camouflage them’.52
The list of representatives of business interests in key political positions
was noteworthy. For example, Serhiy Tyhypko, deputy prime minister in
Valeriy Pustovoytenko’s government, had been from 1991 to 1992 vice
director of the Dnipro Commercial Bank. He then became director of the
Dnirpopetrovsk branch of Privatbank, the second largest bank in Ukraine,
before being appointed in 1997 to the position of deputy prime minister in
charge of the economic reforms.53 Oleksandr Tkachenko, speaker of the
parliament in 1998–2000, was the chairman of the agriculture-based
financial-industrial group Zemlya i Lyudi. Oleh Ishchenko, chairman of the
Ol-bank, Mikhailo Brodskyi, chairman of the concern Dendi, Leonid
Chernovetskii, chairman of Praveksbank, Hryhoyi Surkis, president of
Dynamo Kyiv and of the financial industrial group Slavutchyk, and Viktor
Medvedchuk, president of the BIM International Legal Company, which
served Slavutych, were only few of the conspicuous wave of business
people who entered the parliament following the March 1998 elections.
The next two sections examine the structure of relations between
business and political power in the two most important centres of Ukrainian
policy making, the parliament and the presidential administration. Despite
the stronger influence ascribed to the presidential administration, the
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analysis begins with the Verkhovna Rada, as this was the first institution
where business interests became organized.
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Business and the Verkhovna Rada
In post-independence Ukraine, the parliament became the main channel for
the former nomenklatura to defend their positions, lobby for state subsidies,
obstruct reforms and acquire personal immunity. In the March 1994
elections, enterprise directors (including farm directors) were the third
largest individual group in the parliament, following high governmental
officials and professionals. The July 1994 moratorium on privatization
(lifted the following December) was arguably the most remarkable success
in the strategy of business leaders to halt economic reforms, but throughout
its entire legislative mandate the conservative majority voted consistently to
grant subsidies to unprofitable enterprises. Red directors and Party
nomenklatura strongly opposed President Kuchma’s promises of economic
restructuring and finally provoked a conflict between the executive and the
legislative that eventually resulted in the weakening of the parliament.54
The April 1998 elections marked a significant turn in business
representation within the Ukrainian political institutions, as a large number
of economic actors ran for and won seats in parliament. As many as 127
representatives of business, equal to 28 per cent of the total number of
legislators, were finally elected.55 While the energy sector was most
successful in gaining representation, electing 15 deputies, the banking
sector was the most active; 49 bankers ran under different party tickets, a
few dozen campaigned in single-mandate constituencies and Privatbank
even established its own party. 14 members of the banking community were
finally elected. The Sixth Congress of the Association of Commercial
Banks, held the previous February, had signalled a general consensus in the
sector on the necessity to establish a banking lobby in Parliament.56
Political observers noted that it was the first time that representatives of
business structures had taken such a bold position, announcing publicly
their plans to influence the decision-making process from the inside.57 Such
a massive ‘politicization’ of the economic elite was due to two main
reasons. On the one side, small- and medium-sized business actors,
frustrated by the years of legislative inactivity that had stalled the economy,
were hoping that parliamentary representation would foster the introduction
of more business-oriented legislation.58 On the other side, however, the
majority of large business actors were engaged in an operation of ‘business
promotion’ to gain a political affiliation.59 ‘In order to defend his own
business every businessman looks for a krysha (roof), including a political
one, against the state’, commented the former Speaker of the Rada Ivan
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Plyusch.60 What concrete advantages could a parliamentary seat offer to the
economic elite?
The 1995 Power Bill had been the first step towards the shift of decisionmaking powers from the parliament to the president, which had then been
confirmed with the approval of the 1996 constitution. Even though the
president had been awarded considerable powers to conduct political and
economic reforms, the parliament had nonetheless been left with significant
authority in the economic area, which made it the key player in the
privatization process.61 In fact, the parliament was not only put in charge of
‘approving the list of state-owned objectives which [would] not be made
subject to privatization, determining the legal principles for appropriating
privately owned objectives’, but it also received control over the State
Property Fund, which supervised privatization.62
By virtue of these powers, a parliamentary seat still presented significant
advantages to representatives of the economic elite. First, the deadline on
the freezing of the sale of 32 large enterprises (especially in the energy
sector) was due to expire during the lifetime of the 1998 parliament, and
regulation to privatize these enterprises would be issued by the legislature.63
Second, it was still expected that new legislation on economic activity (as
for example regarding the new tax code) would be debated and adopted
within the parliament. Finally, the parliament could guarantee immunity
from criminal charges to perspective deputies who had been caught up in
corruption scandals.
Bidding for immunity was arguably one of the most powerful
motivations for candidates to run in the elections. ‘Business in Ukraine if it
is not entirely criminal is semi-criminal. The status of Deputy gives [the
businessman] more or less four years to cover and to solve the problems of
his business’, commented a member of the presidential administration.64
Statistics seemed to prove him right, as between 1990 and 1994 over 500
deputies were not committed for trial because either a local council or the
Verkhovna Rada had failed to grant approval.65 Louise Shelley has estimated
that following the 1998 parliamentary elections more than 20 members of
the parliament faced criminal prosecution if they were stripped of their
parliamentary immunity, while 44 legislators elected to local political
bodies also had criminal backgrounds.66
The 1998 elections highlighted how by dispensing favours to business
structures, the president and his administration were trying to expand their
control over the legislative power. Support to individual businessmen,
parties entering parliament for the first time, or coalitions established
around business interests were all part of the complex strategy adopted by
the presidential entourage in anticipation of the 1999 electoral campaign.
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Business and the Presidential Administration
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In the years of the first Kuchma presidency an oligarchic system emerged
and consolidated thanks to the special privileges awarded by the president
and his administration to the members of his inner circle. The president’s
patronage network set relations between political power and business on
new foundations. Closeness to the president guaranteed access to the
administration, redistribution and utilization of state financial or
administrative resources (‘a property nobody knows whom it belongs to’),
creating large and unexpected fortunes.67 As an observer commented,
The formula ‘capital forms power’, traditional in all developed market
economies has been completely inverted into its opposite – ‘power
forms capital’. Those who have power can also have capital, while the
power of an owner disloyal to the authorities could, at any moment be
alienated, and on quite legal grounds.68
Despite his repeated pledges to establish a stable and reliable business
environment, the most tangible result of Kuchma’s economic policies was
not the creation of an economic elite, but its ‘ierarkhizatsiya’. The
president’s intervention drew a distinction within the business elite and
placed on a hierarchy of influence those who were granted access to budget
resources, those who enjoyed political connections and those who were
altogether banned from the circles of power.69
Kuchma’s patronage networks developed along three lines. The regional
clan of Dnipropetrovsk constituted the president’s primary power base,
which fragmented and evolved, at the time of the 1998 parliamentary
elections, into an embryonic party system. The alliance between business
and politics consolidated then in a more stable form centred on ‘holdings’,
whose main task was to mobilize resources in preparation of the 1999
presidential elections. In the remainder of this section the role and structure
of regional clans, parliamentary parties and business ‘holding’ as
instruments to consolidate Kuchma’s authority will be examined.
With President Kuchma not only the economic elite, but first and
foremost his ‘Dnipropetrovsk family’, came to power. It has been estimated
that in the months following Kuchma’s election in 1994, something like 206
apparatchiki moved from Dnipropetrovsk to Kyiv to occupy key positions
in the state administration and control the process of resource allocation.
The core of the clan was composed of some 200 individuals, among whom
were figures like the future Prime Minister Valeryi Pustoyvotenko,
Volodymyr Horbulin, secretary of the National Security and Defence
Council, and Serhiy Tyhypko, first vice prime minister in charge of the
economic reforms.70 In 1997 Ukrainian media sources counted five
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‘Dnipropetrovtsy’ among the members of the presidential administration,
and 20 in the government’s apparatus.71
The structure of regional clans in the Ukrainian political landscape dated
back to the Stalinist years, when, in an attempt to resist the persecution of
the political police, communist activists joined forces in tight and exclusive
regional teams. Regional clans were formed according to the country’s
division of labour. If Donetsk was the core of the mining area and of the
metallurgical industry and Kharkiv the centre of the machine-building
sector, Dnipropetrovsk’s strength lay in its high level of industrialization
and the consequent importance of its party organization. Thanks to the high
concentration of enterprises in the military–industrial sector,
Dnipropetrovsk was also one of the most strategically important regions in
the Soviet Union. These factors put the region in the position to place its
own political representatives in key positions of the Soviet apparatus.72
The secretive nature of the clan and the mutual support (financial and
administrative) it provided to its members characterized the clan structure
also in the years of the Kuchma presidency. The Dnipropetrovsk clan could
draw from and administer a large pool of resources. The top managers of
two of the largest Ukrainian banks, Mikhailo Bairaka, deputy chairman of
the Board of Directors of Bank Ukraina, and Volodymyr Matvienko,
chairman of the Board of Directors of Prominvestbank, were recognized
members of the clan.73 Solidarity between members of the clan often proved
a useful asset to escape critical situations. In March 1995, Yulia
Tymoshenko, at the time a close ally of Pavlo Lazarenko and member of the
Dnipropetrovsk alliance, was arrested at the Zaporizhzhia airport on charges
of attempting to smuggle $26 million to Moscow. Examination of the case
was moved from Zaporizhzhia to Dnipropetrovsk, where Lazarenko was
speaker of the regional parliament and head of the regional administration.
The regional procurator was conveniently promoted to general procurator in
Kyiv, allegedly on an expressed request of Lazarenko. The case against
Tymoshenko was subsequently dropped, and the documents related to it
were made inaccessible.74
With the appointment of Pavlo Lazarenko to the position of prime
minister in the autumn of 1996, the Dnipropetrovsk clan consolidated its
position. For the first time the group gained, as one observer put it, the
‘controlling packet of shares’ in the country, achieving the position of
president and prime minister at the same time.75 Kuchma and Lazarenko,
however, represented the two conflicting sides of the clan: the former the
Soviet military–industrial complex and the latter the agrarian sector.
Lazarenko was considered instrumental in Kuchma’s 1994 presidential
victory, bringing with him the votes of the rural areas of the region; with his
appointment to the premiership the president rewarded him for his loyalty.
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But Lazarenko’s presidential ambitions and growing charges of corruption
surrounding him caused the two groups to split.76
In July 1997 Lazarenko was forced to step down. His resignation
represented the open fracturing of the clan, and the politicization of the
conflict. Lazarenko established the main opposition party, Hromada, and
became its leader. Kuchma found support in the newly established Party of
Popular Democracy (NDP), immediately titled the ‘party of power’. The
NDP, in turn, derived from the bloc of Constitutional Centre, which had
supported Kuchma in the 1994 presidential campaign.
The fracture between Kuchma and Lazarenko produced, paradoxically,
a positive outcome for the Ukrainian political system, as the structure of
regional clans seemed to evolve into a system of political parties, albeit no
less antagonistic and personalized. Observers believed that the main reason
for the transformation was that the structure of regional clans could not be
preserved any longer in the same form as it effectively operated under
Brezhnev. While under the command-administrative system, it had been
possible to retain the monopoly in managing economic resources, in postSoviet Ukrainian society a plurality of contrasting political and economic
factions had emerged. In this complex arena, the new leader would have to
demonstrate his ability to play all the conflicting forces to his advantage.77
The creation of the NDP as the backbone of the presidential
administration could then be read as a shift from a policy of cadres based on
their regional origin, to a policy of cadres based on political (or party)
belonging. Being economically grounded on the large resources of the
energy sector, the NDP could channel and actually expand the president’s
political support beyond the borders of Dnipropetrovsk. At the same time,
however, thanks to its ties with the government (the party included the then
Prime Minister Pustoyvotenko as its leader and a large number of
ministries), the NDP was envisaged as an instrument to increase the
president’s control over the executive.
In the 1998 parliamentary elections, the Party of Popular Democracy
was by far the most successful of the business-led parties, initially gaining
a total of 28 deputies, all of whom came from an economic background. The
group proved, however, very unstable. Controversies over the redistribution
of gas contracts led 23 of its deputies to abandon the faction at different
stages.78 Seven of them subsequently established the group Working
Ukraine, while eleven moved to reinforce the Party of Regional Revival.79
Anatoly Kinakh, who became prime minister in 2001, was one of the
deputies loyal to the faction. Oleksander Volkov, adviser to President
Kuchma, was, instead, one of the promoters of Regional Revival. Also, Ihor
Baikai, an influential ally of President Kuchma subsequently appointed to
chair the energy company NaftoHaz Ukrainy, was elected as a
representative of the NDP.80
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The second pillar in the administration’s strategy to create parliamentary
support for the president was the Social Democratic Party (United) (SDP),
whose 14 deputies elected among the ranks of the business elite were later
joined by a further 25 members of parliament. The SDP revolved around the
business–political partnership of the ‘Kyiv Seven’, people like Bohdan
Gubskii, chairman of the Slavutych Board of Directors, Hryhoryi Surkis,
chairman of Dynamo Kyiv and president of the Slavutych Board of
Directors, and Viktor Medvedchuk, president of the BIM International
Legal Company, also connected to Slavutych, who had accumulated their
financial empires thanks to control over big monopolies.81
The ‘diversification’ of Kuchma’s support between the NDP and the
SDP was interpreted as an attempt to send a signal to the business
community that, in advance of the presidential campaign, they could look
for the president’s favour regardless of their party affiliation.82 With the
1998 elections the parliament gained importance in the estimation of the
economic elite as a place to present and advocate business interests.
Political tactics and the significance of decisions adopted meant, however,
that effective lobbying in the Verkhovna Rada required coalition building
and inter-faction co-operation. The presidential administration still
remained the focus of business lobbying, thanks to its ability to provide
immediate protection for individual interests.
The parliamentary party structure appeared to rest in fact on a complex
and unstable network of five or six economic clans that enjoyed a close
relationship with the president, supported his electoral campaign and
secured for themselves political revenues thanks to this privileged position.
The 1999 presidential electoral campaign was inevitably perceived as a
delicate phase for the economic groups’ precarious cohesion. As one
commentator put it, this would be a ‘time of divisions and redistribution, St
George’s Days and Bartholomew’s nights’.83 The economic groups that
were assembled in preparation of the electoral campaign were called by
Ukrainian analysts ‘holdings’, even though they resembled more political
coalitions built upon financial capital. Holdings were created from the
confluence of a number of relatively small business empires, whose owners
realized that it would be impossible for them to reach political power on
their own. As in business, they negotiated, concluded agreements and made
mutual concessions within their political alliances. In contrast to the
Russian oligarchy, however, because of their limited scale and capital
Ukrainian holdings were forced to work out co-operative rather than openly
hostile strategies.84
The possible emergence of conflicting interests made holdings unstable
affiliations, likely to break when one set of preferences overlapped with the
interests of another holding, as happened, for example, to the short-lived
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alliance between Vadim Rabinovich and Hryhoryi Surkis. Nicknamed the
‘Ukrainian little Berezovskii’, Rabinovich was at the time in control of the
television channel ‘1+1’, when he lost influence over it, the coalition with
Surkis also collapsed. Ukrainian journalists speculated that, as Rabinovich
was of no more use to the president because he no longer controlled one of
the most popular TV stations, he would most likely see his access to the
president curtailed and his business activity endangered.85
The Rabinovich case was not, however, an isolated one. Other examples
of the poisonous atmosphere that existed within in the presidential circles
and which led to instability in parties and holdings can also be found.
Frequently frictions occurred over the way the president and his
administration employed public money and assets to secure the support of
the oligarchs.
In October 1998, the government transferred the controlling packet of
shares of the Oriana chemical concern (50 per cent plus 1 share) from the
state property fund to the management of Shelton, whose president was a
deputy for the Green Party. Ihor’ Nasalyk, chairman of the competing
Tekhnotsentr and NDP deputy, frustrated in his aspiration to gain control of
the same packet of shares, left the parliamentary faction, contributing in the
split that led to the creation of Working Ukraine. Similar episodes involving
behind-the-scenes agreements between and among the presidential
administration and leading business people took place in relation to the
enterprise South-Pipe in Nikopol’, which had recently been included in
the list of assets undergoing privatization, and the Nikolaevsk refinery.86
Following a similar pattern, the government handed over to the Ukrainian
Credit Bank, part of Hryhoryi Surkis’ economic group, the controlling
packets of shares of the Zaporizhzhia Ferrous Alloy Plant and a number of
regional power engineering companies such as Kirovograd, Ternopil
and Kherson.87
In anticipation of the presidential race, Ukrainian observers agreed that
the electoral campaign would work as a catalyst for the different and
contrasting interests of the economic holdings. There were expectations that
during the political process, more stable coalitions would be created, even
though they would only have a temporary character. Building up alliances
with political forces would arguably increase the financial power of the
holdings.88 Commentators bitterly remarked that Ukrainian political
institutions existed only as a mechanism to legalize decisions made by
economic organizations, which enjoyed direct access to power. If an
oligarchy had not materialized yet in Ukraine, this was only a matter of
time: the process of consolidation was still at an early stage.89
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Conclusions
The emergence of an oligarchy in Ukraine is the product of both the
degeneration of the political regime towards authoritarianism and the pace
and extension of the economic transition. While economic reforms were
slow and uncertain, political reforms brought about the consolidation of
the executive (the presidency and the presidential administration) to the
expenses of the legislative. Increased law-making powers in the hands of
the president were justified as an instrument to push through swift
economic changes and overcome parliamentary opposition. Yet,
extraordinary powers granted to President Kuchma since his term as prime
minister in 1994 failed to produce a course of coherent economic
transformations.90
Prolonged claims of exceptional difficulties in the economic field
and a persistent lack of visible economic results alienated the
president from civil society and the electorate at large, while a relentless
struggle for power with the parliament until 1996 deprived him of the
support of the legislature. In anticipation of the 1999 presidential
elections, Kuchma sought backing from a group of powerful economic
actors, by strategically placing them in parliament and granting in
exchange access to economic favours. Redistribution of resources,
promises of privileged access to the privatization of strategic assets and
management of profitable state enterprises were all used as currency to
reward loyal supporters and punish those who challenged the president’s
authority.
In a system in which power was largely concentrated in the hands of
the executive, elections were recognized as the most important occasion
to alter the nature of the political structure and the internal balance of
forces among political and economic actors. Because of their
‘revolutionary’ potential, elections became the crux of post-Soviet politics
and a unique opportunity for coalition building and strategic
realignment.91 The risk that the president and his administration could be
overturned, reverting all the privileges acquired by powerful economic
agents, generated a convergence of interests between the president and his
economic circle and gave rise to an extraordinary mobilization of
resources to preserve the status quo.
While the 1999 elections provided political observers with the first
significant opportunity to watch the internal dynamics of the oligarchic
regime, the private use of public assets and the redistribution of national
wealth among powerful business actors was a practice far from confined
to the ‘exceptional’ times of presidential elections. This regime of
systematic pillage of the country’s resources imposed over the years
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extraordinary costs upon Ukrainian society in both political and economic
terms.
In economic terms, the uncertainties of the business environment pushed
into the shade new forms of entrepreneurship, while strengthening lossmaking activities mainly connected to the political power or the criminal
underworld. Productive resources were diverted from potentially valueadding investment to personal accounts. According to recently published
data, annual capital flight in Ukraine is estimated at still well over $3 billion
a year, while large sums are consumed in bribes and illegal payments.92 In
political terms, the misuse of public revenues for private purposes depleted
Ukraine of vital resources that would otherwise be employed to strengthen
state capacity. Unable to collect taxes and use efficiently its economic
endowment, the Ukrainian state struggled to build a legal-rational
bureaucracy, formulate generally applicable laws and make sure that they
were implemented.
In its 2002 Human Development Report, the United Nations
Development Programme draws a direct connection between good
governance and progress, claiming ‘institutions, rules and political
processes play a big role in whether economies grow, whether children go
to school, whether human development moves forward or back’.93 In this
perspective, economic recovery and political stabilization in Ukraine cannot
be separated from the dismantling of the oligarchic regime, the unlocking of
the ‘partial reform equilibrium’, the establishment of more transparent
rules, the creation of more participative institutions and the strengthening of
the rule of law. Are the conditions there for a radical regime change in the
near future?
Bratton and van de Walle highlight two possible paths of transition from
neopatrimonial regimes. Endemic fiscal crises, generated by the misuse of
resources, and the discontent of those excluded from the process of
redistribution could give way to a wave of protest and social unrest,
ultimately leading to the delegitimization of the political regime, the
isolation of the leader and the loss of popular support. Alternatively, a
fragmentation of the patronage network could take place over the
redistribution of resources with the emergence of a new elite formed by the
outsiders.94 In both cases two crucial preconditions would facilitate the
change. First is the existence of a vibrant civil society that can keep the
political leader in check, mobilize the public opinion and exercise pressure
to change economic decisions. Second is the presence of independent (and
possibly pluralistic) media that can challenge the political leadership,
question key decisions and uncover abuses of power.
Translating this framework to Ukraine, the signs are not encouraging.
Despite the massive campaign following the scandal that allegedly involved
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Kuchma in the kidnapping and murder of the journalist Heorhiy Gongadze
in the autumn of 2000, the oligarchic regime stayed in power. Challenged
by the then Prime Minister Viktor Yushchenko, who pledged to reform the
energy monopolies and overturn their privileges, the oligarchs teamed up
with the most unlikely of allies, the communist faction of the Verkhovna
Rada, and forced Yushchenko out of office. With the next presidential
elections approaching in 2004, rumours circulate that the oligarchs will
group around Viktor Medvedchuk (head of the presidential administration)
and Prime Minister Viktor Yanukovich as Leonid Kuchma’s most likely
successors.
Consolidating its position within the state apparatus, the Ukrainian
oligarchy appears unlikely to disappear rapidly. Nonetheless, presidential
elections may provide a surprise. In 2000, the rise of Vladimir Putin as the
unexpected successor to Yel’tsin dispersed the Russian oligarchs,
challenged their influence over the state institutions and pushed into the
shade the most prominent members of the economic elite. It must be hoped
that the 2004 presidential elections in Ukraine could present a similar
opportunity to cut back the power of private interests over the Ukrainian
institutions.
ACKNOW LEDGE ME N T S
An earlier version of this article was presented at the 52nd Annual Conference of the Political
Studies Association of the United Kingdom, in Aberdeen, 5–7 April 2002. The author wishes to
thank Gwendoline Sasse and Neil Melvin and the journal’s anonymous referees for useful
comments at different stages of this work. This article was researched, written and accepted for
publication before the author took up her position at the EU Commission Delegation in Kyiv. The
views express herein are purely those of the author and may not in any circumstances be regarded
as stating an official position of the Kyiv Delegation or the European Commission.
NOTES
1. V. Shlapentokh, C. Vanderpool and B. Doktorov, The New Elite in Post-Communist Eastern
Europe (College Station, TX: Texas A&M University Press, 1999), p.16.
2. For an overview of the Russian oligarchic system, S. Hedlund, Russia’s ‘Market’ Economy.
A Bad Case of Predatory Capitalism (London: UCL Press, 1999) and H. Schrode, ‘El’tsin
and the Oligarchs: the Role of Financial Groups in Russian Politics between 1993 and July
1998’, Europe–Asia Studies, Vol.51, No.6 (1999), pp.957–88.
3. J. Hellman,‘Winners Take All: The Politics of Partial Reforms in Postcommunist
Transitions’, World Politics, Vol.50, No.2 (1998), pp.203–34.
4. Hans van Zon identifies a path-dependency in Ukraine’s current state of affairs as
the result of imbedded state-centric traditions and Soviet era corruption. See his The
Political Economy of Independent Ukraine (New York: St Martin’s Press, 2000) and
especially ‘Neo-Patrimonialism and an Impediment to Economic Development: the Case of
Ukraine’, Journal of Communist Studies & Transition Politics, Vol.17, No.3 (2001),
pp.71–95.
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5. N. Mouzelis, Politics in the Semi-Periphery: Early Parliamentarism and Late
Industrialisation in the Balkans and Latin America (London: Macmillan, 1986), p.xvi.
6. H. Singh, ‘Democratization or Oligarchic Restructuring? The Politics of Reform in
Malaysia’, Government and Opposition,Vol.35, No.4 (2000), pp.520–46.
7. J.M. Ramseyer and F.M. Rosenbluth, The Politics of Oligarchy: Institutional Choice in
Imperial Japan (Cambridge: Cambridge University Press, 1995).
8. Quoted in L.D. Nelson and I.Y. Kuzes, ‘Russian Economic Reform and the Restructuring of
Interests’, Demokratisatsiya, Vol.6, No.3 (1998), pp.480–503.
9. J.J. Linz and A. Stepan, Problems of Democratic Transition and Consolidation (Baltimore,
MD and London: The Johns Hopkins University Press, 1996), pp.436–7.
10. N. Robinson, Russia: A State of Uncertainty (London: Routledge, 2002), p.3.
11. Linz and Stepan. In this perspective, Ukraine fits Robert Jackson’s category of a ‘quasistate’, which ‘are often deficient in the political will, institutional authority and organized
power to protect human rights or provide socio-economic welfare’. Because of these
characteristics, quasi-states’ ‘empirical statehood in large measure still remains to be built’.
R.H. Jackson, Quasi-States: Sovereignty, International Relations, and the Third World
(Cambridge: Cambridge University Press, 1990), p.21.
12. For a critical review of this literature, R. Bhattacharya, ‘Pace, Sequencing and Credibility of
Structural Reforms’, World Development, Vol.25, No.7 (1997), pp.1045–61.
13. A. Przerworski, ‘Economic Reforms, Public Opinion and Political Institutions: Poland in the
Eastern European Perspective’, in L.C. Bresser Pereira, J.M. Maravall and A. Przerworski
(eds), Economic Reforms in New Democracies (Cambridge: Cambridge University Press,
1993), pp.132–98.
14. J. Winiecki, Resistance to Change in the Soviet Economic System (London: Routledge,
1991).
15. C. Martinelli and M. Tommasi, ‘Sequencing of Economic Reforms in the Presence of
Political Constraints’, Economics and Politics, Vol.9, No.2 (1997), pp.115–31.
16. A. Aslund, Building Capitalism: Lessons of the Postcommunist Experience, Carnegie
Endowment for International Peace Policy Brief, No.10 (Washingtonm, DC: Carnegie
Endowment for International Peace, 2001), p.5.
17. Hellman.
18. Clapham describes political patronage as developed in Mediterranean peasant societies as a
system in which ‘the client offered services, whether economic or military, to the patron, in
exchange for which the patron offered some security or protection to the client against the
uncertainties of peasant life’, C. Clapham,’Clientelism and the State’, in idem (ed.), Private
Patronage and Public Power (London: Frances Pinter Publishers, 1982), p.2.
19. H. Crouch, ‘Patrimonialism and Military rule in Indonesia’, World Politics, Vol.31, No.4
(1979), pp 571–87.
20. M. Bratton and N. van de Walle, ‘Neopatrimonial Regimes and Transitions in Africa’, World
Politics, Vol.46, No.4 (1994), pp.453–89.
21. On personal rulership, G. Roth, ‘Personal Rulership, Patrimonialisma nd Empire-Building in
the New States’, World Politics, Vol.20, No.1 (1968), pp.194–206; on the effects of
patrimonialism on fragmented societies, G. Heeger, The Politics of Underdevelopment
(London: Macmillan, 1974).
22. Hellman.
23. A. J. Moty, ‘Structural Constraints and Starting Points. The Logic of Systemic Change in
Ukraine and Russia’, Comparative Politics, Vol.29, No.4 (1997), pp.433–47.
24. A. Aslund, ‘Problems with Economic Transformation in Ukraine’, paper presented at the
Fifth Dubrovnik Conference on Transition Economies, 23–25 June 1999, in
<http://wwwceip.org/files/Publications/webnote10.asp?from=pubproject>. C.f. on the
emergence of the Russian economic elite, idem, ‘Russia’s Collapse’, Foreign Affairs, Vol.78,
No.5 (1999), pp.64–77.
25. Hans van Zon talks about a de-developmental, de-modernizing state, which having been
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26.
27.
28.
29.
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30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
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captured by short-sighted kleptocratic clans, has become a ‘predator for society and the
economy’. van Zon, Political Economy, esp. ch.10.
O. Kryshtanovskaya and S. White, ‘From Soviet Nomenklatura to Russian Elite’,
Europe–Asia Studies, Vol.48, No.5 (1996), pp.711–33.
High official of the Ukrainian Union of Industrialists and Entrepreneurs, confidential
interview with the author, Kyiv, 1 December 1998.
Aslund, ‘Problems with Economic Transformation’.
P. D’Anieri, R. Kravchuk and T. Kuzio, Politics and Society in Ukraine (Boulder, CO:
Westview, 1999), p.184.
Oleksandr Goncharenko, Chief Department of National and International Security, National
Security and Defence Council of Ukraine, interview with the author, Kyiv, 10 November
1998.
D’Anieri, Kravchuk and Kuzio, pp.184–6.
For an overview of the privatization programme see I. Filatotchev et al., ‘Privatisation and
Industrial Restructuring in Ukraine’, Communist Economies and Economic Transformation,
Vol.8, No.2 (1996), pp.185–203.
In the autumn of 1994, for example, the Kuchma administration abolished export
quotas and licences, replacing them with a registration and certification scheme, requiring
traded goods to comply with Ukrainian standards. Economist Intelligence Unit (1995),
Ukraine Country Profile, Second Quarter 1995. See also Aslund, ‘Problems with Economic
Transformation’.
A. Potokov, ‘Bolshaya ten’ na bankovskii pleten’, Biznes, No.6, 16 February 1998,
pp.15–16; and M. Yanevich, ‘Inostrannye banki i butylki’, Kompanyon, No.4 (1997),
pp.14–15.
Ivan Lozowy, director of the Institute of Statehood and Democracy, interview with the
author, Kyiv, 12 November 1998.
Anatoli Grytsenko, head of the Analytical Centre, National Security and Defence Council of
Ukraine, interview with the author, Kyiv, 17 November 1998.
Ibid.
D’Anieri, Kravchuk and Kuzio, p.175.
Lozowy.
T. Ivzhenko, ‘President USPP Anatoliy Kinakh: ekonomicheskie problemy Ukrainy mozhet
reshit’ tol’ko komanda professionalov u vlasti’, Kompanyon No.4 (1999), pp.18–20.
G. Anderson and Company/The PBN/USAID, ‘Ukrainian Medium and Large Enterprises
Manager Survey’, mimmeeo, Kyiv, 1998; and Ukrainian Market Reform Education
Programmr, ‘A National Survey of 441 Managers of Privatised Enterprises in Ukraine’,
mimeo, Kyiv, 1998.
Biznes, No.47 (1998), p.25.
R. Vysitskiy, ‘When Small is Big’, Eastern Economist, Vol.5, No.44 (1998), p.14.
A Ukrainian magazine states that the registration of an enterprise costs ‘unofficially’ $176
dollars, the visit of the health or fire security inspection $42, a visit of the tax inspector $87.
To have a telephone connection an enterprise pays $894, $123 to obtain an export licence,
$278 for an import licence. O. El’tsov, ‘Nomenklatura kak vetv’ vlasti’, Kompanyon, No.33
(1998), pp.10–12.
Lyudmila Yakovleva, Director of the Agency for Development of Business Enterprises,
interview with the author, Kyiv, 24 November 1998.
O. Turchynov, ‘The Shadow Economy and Shadow Politics’, Politichna Dumka, No.3–4
(1996), pp.75–87.
P. Kubicek, ‘Post-Soviet Ukraine: In Search of a Constituency for Reform’, Journal of
Communist Studies and Transition Politics, Vol.13, No.3 (1997), p.112.
P. Kubicek, Unbroken Ties. The State, Interest Associations and Corporatism in Post-Soviet
Ukraine (Ann Arbor, MI: University of Michigan Press, 2000), p.91.
Also, Oleksandr Volkov was involved with the Union of Industrialists, being one of the
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50.
51.
52.
53.
54.
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55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
121
deputy presidents in the mid-1990s. G. Andrushchak et al., Khto e khto v Ukraini (Kyiv: KIS,
1997). For details on Volkov’s business activities see note 77 below.
High officer of the Ukrainian Union of Industrialists and Entrepreneurs.
Ukrainian Market Reform Education Programme, p.10.
High officer of the Ukrainian Union of Industrialists and Entrepreneurs.
Andrushchak et al., various entries.
S. Birch, ‘Nomenklatura Democratization: Electoral Clientelism in Post-Soviet Ukraine’,
Democratization, Vol.4, No.4 (1997), pp.40–62.
For a more general analysis of the 1998 elections, see A. Wilson and S. Birch, ‘Voting
Stability, Political Gridlock: Ukraine’s 1998 Parliamentary Elections’, Europe–Asia Studies,
Vol.51, No.6 (1999), pp.1039–68; for an overview of the 1998 and 1999 elections, see P.
Kubicek, ‘The Limits of Electoral Democracy in Ukraine’, Democratization, Vol.8, No.2
(2001), pp.117–39.
A. Kovtun, ‘Banki uzhe vzyali’, Zerkalo Nedelii, No.7 (14–21 February 1998), p.1.
Inna Pidluska, director of the Ukrainian Centre for Independent Political Research, Kyiv,
interview with the author, Kyiv, 31 October 1998.
‘They cannot establish rules only for themselves, and if they push on legislation that cuts
down taxes everybody will benefit, if they adopt more liberal economic rules everybody will
benefit, even though they are mainly guided by their own interests’. Ibid.
‘Business promotion’ had prompted candidates to pay as much as $1 million in a single
mandate district to obtain a parliamentary seat. M. Tomenk, ‘Returns of the Recent
Parliamentary Elections in Ukraine’, Politichna Dumka, No.2 (1998), pp.113–26.
‘Pochemu predpriminatelei idut v politicu?’, Kompanyon, No.47 (1998), pp.8–9.
On the establishment of a presidential system in Ukraine see A. Wilson, ‘Ukraine: Two
Presidents and Their Powers’, in R. Taras (ed.), Postcommunist Presidents (Cambridge:
Cambridge University Press, 1997), pp.67–106.
In December 1996 the parliament amended the existing legislation and made the fund
accountable to the parliament. Kuchma vetoed the amended law and made the fund
responsible to the president through the Cabinet of Ministers. The final law approved by the
parliament placed the fund ‘under operative subordination’ of the Cabinet and made it
accountable to the parliament. Charles R. Wise and Trevor L. Brown, ‘The Separation of
Powers in Ukraine’, Communist and Post-Communist Studies, Vol.32, No.1 (1999), p.40 and
idem, ‘The Consolidation of Democracy in Ukraine’, Democratization, Vol.5, No.1 (1998),
pp.116–37.
I. Maskalevich, ‘Privatizatsiya energetiki: Iskusstvo petch bliny’, Zerkalo Nedelii, No.6 (7
February 1998), p.9.
Kompanyon No.47 (1998).
Turchynov.
L.I. Shelley, ‘Organised Crime and Corruption in Ukraine: Impediments to the Development
of a Free Market Economy’, Demokratisatsiya (Fall 1998), pp.648–63. A short version of
this article is available on <http://www.worldbank.org/transitionnewsletter/janfeb99/pgs67.htm>.
S. Belashko, ‘Osnovnymi pretendentami na vlast’ ostayutsya “Partii Vlasti”’, Kompanyon,
No.1–2 (1998), pp.6–7.
Turchynov.
High officer of the Ukrainian Union of Industrialists and Entrepreneurs.
D. Voloshin, ‘Legendy i byli Dnepropetrovskogo klana’, Delovaya Nedelya, No.5 (1997),
p.9.
Ukrainian Centre for Independent Political Research, The Dinipropetrovsk Family (Kyiv:
UCIPR, 1997), p.21.
The ‘father’ of the Dnipropetrovsk family was Leonid Brezhnev. He was politically brought
up in Dnipropetrovsk and graduated from the Dnipropetrovsk Metallurgical Institute, which,
for the large number of cadres it provided to the Soviet Union, has been ironically compared
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73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
91.
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to America’s Yale, Harvard and Princeton. With Brezhnev the structure of the regional clan
acquired a double significance. For regional elites, it became an instrument to press for
participation in the management of the country, while for the general secretary it was a means
to consolidate his power base. In his 18 years at the top of the Soviet state, Brezhnev used
his native region as a ‘private patronage reserve’. By pooling in the capital cadres from
Dnipropetrovsk he ensured himself support for his policy initiatives within the bureaucracies
responsible for implementing them, and at the same time counterbalanced the influence of
his political opponents. Evidence of his strategy lies in the fact that the number of Central
Committee members coming from the region increased from two in 1956 to 13 in 1976.
Thanks to the strength of its military–industrial complex, the region’s position was also
amplified in the internal balance of power in Ukraine. As was revealed in a 1990 report of
the Communist Party of the Soviet Union Central Committee, 53 per cent of the Ukrainian
executive officials were originally from Dnipropetrovsk. J.C. Moses, ‘Regional Cohorts and
Political Mobility in the USSR: The Case of Dnepropetrovsk’, Soviet Union/Union
Sovietique, Vol.3, No.1 (1976), pp.63–89, and Ukrainian Centre for Independent Political
Research., p.3.
Ibid., pp.212–14.
T. Ivzhenko, ‘Ne Nashe ‘Delo’, Kompanyon, No.24 (1997), pp.11–12.
Voloshin.
Lazarenko was convicted on charges of money laundering by a Swiss court, which
confiscated $6.6 million from his Swiss bank accounts. He was also given an 18-month
suspended prison term by a US court for the laundering of $114 million stolen while in
office. Reuters, 30 June 2000.
Goncharenko.
S. Belashko, Partya, Vlast’ i Biznes, Kompanyon, No.48 (1998), pp.8–11.
I. Pidluska and S. Kononchuk, Dilova elita Ukrainy, Part 1, Parliament (Kyiv: UNTsPD,
2000), pp.264–6.
Both Volkov and Baikai rank among the most powerful oligarchs. Very close to President
Kuchma, they were both involved in large financial scandals. Volkov, for example, had $3
million in assets frozen by the Belgian police, he was head of a Fund for Social Defence
through which government subsidies were channelled to loss-making banks, like Ukrayina.
Volkov and Bakai’s names were included in a list of people that the US authorities presented
to President Kuchma urging that they were barred from policy making. Financial Times, 11
February 2000. In January 2002 the Ukrainian prosecutor-general opened an investigation
against Volkov and Baikai. They who were suspended from their parliamentary mandates for
opening illegal bank accounts in Switzerland. RFE/RL, 12 January 2002.
For a detailed account of SDP activities, S. Rakhmanin and Yu. Mostovaya, ‘Ukrainian
Political Parties. Part IV. The Social Democratic Party (United)’, Zerkalo Nedeli, No.10,
16–22 March 2002, available on the internet at <http://www.mirrorweekly.com/ie/show/385/34166>.
T. Ivzhenko, ‘Klubok Interesov’, Kompanyon, No.48 (1998), pp.14–16
Zerkalo Nedelii, No.43 (24 October 1998), p.4.
T. Ivzhenko, ‘Nasha Marka’, Kompanyon, No.44 (1998), pp.10–12.
Kyiv Post, 30 October 1998, pp.1–2; T. Ivzhenko, ‘Ne Nashe ‘Delo’.
S. Belashko, Partya.
Rakhmanin and Mostovaya.
T. Ivzhenko, ‘Ne Nashe ‘Delo’.
N. Kononenko and V. Denisenko, ‘Vliyaem, kak mozhem’, Kompanyon, No.51–52 (1998),
pp.10–11.
S. Holovaty,‘Ukraine at the Crossroad: Perspectives on Independence, Democracy, and
Reform’, speech given at the annual meeting of the Trilateral Commission in Washington,
DC, 1999.
For a similar consideration on the role of the elections in Russian politics, see N. Robinson,
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123
‘The Economy and the Prospects for Anti-democratic Development in Russia’, Europe–Asia
Studies, Vol.52, No.8 (2000), pp.1391–1416.
92. Kyiv Post, 23 August 2001, available on the web at <http://www.kpnews.com/main/9539/>.
93. United Nations Development Programme, 2002 Human Development Report: Deepening
Democracy in a Fragmented World, available on the web at <http://www.undp.org/
hdr2002/>, p.51.
94. Bratton and van de Walle.
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Manuscript accepted for publication August 2002.