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Opinion: State predation threatens to derail Ukraine’s war effort

September 11, 2024 10:20 AM 5 min read
A view of the Dnipro River and the skyline of the city's "Left Bank" in Kyiv, Ukraine, on June 27, 2022. (Andrew Kravchenko/Bloomberg via Getty Images)
September 11, 2024 10:20 AM 5 min read
Alan Riley
Alan Riley
Senior fellow at the Atlantic Council
This audio is created with AI assistance

Russia’s full-scale invasion of Ukraine in February 2022 has led to a resurgence in state predation against businesses, now approaching pre-EuroMaidan levels. This issue cannot be postponed until after the war. Politicized, predatory actions by law enforcement agencies against both domestic and foreign businesses pose a significant threat to Ukraine’s national security.

State predation is not new in Ukraine. Investigations targeting legitimate businesses – aimed at either extorting money or taking over companies at a fraction of their value – have been a feature of Ukrainian business life since independence. However, large-scale predatory activities by so-called law enforcement agencies were curbed after the Revolution of Dignity.

New reforms post-2014, including transparency rules requiring asset declarations, digitalization reducing rent-seeking, banking sector reforms, and the creation of the Prozorro online tendering platform, made life more difficult for predators. These reforms, coupled with stronger anti-corruption institutions, signaled to officials to leave legitimate businesses alone. The media and the parliament also became more vigilant about such behavior.

However, Russia’s full-scale invasion undermined much of this progress. While the influence of industrial oligarchs has diminished due to the war, and wartime anti-corruption successes have been recorded, the centralization of state power has provided an incentive for predatory law enforcement agencies to return.

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By mid-2023, Ukrainian business executives formed Manifesto 42 – named after Article 42 of Ukraine's constitution, which guarantees the right to conduct business – to protect their interests. As my paper for the Harvard Ukrainian Research Institute highlights, business leaders involved in Manifesto 42 have since been targeted by law enforcement.

By January 2024, Ukrainian Business Ombudsman Roman Waschuk lamented that “it is disturbing that we are returning to the practices not of 2015 but of 2013,” referencing the corporate raiding under former Ukrainian President Viktor Yanukovych.

These predatory practices target both high-tech and low-tech businesses alike, and foreign investors are not spared. Swedish pharmaceutical company Synevo, as well as Ferrexpo, which is listed on the London Stock Exchange, have also been subject to raids.

The issue of raiding gained public attention in January when Ihor Mazepa, a leading member of Manifesto 42, was arrested at the Ukrainian-Polish border. This led to an emergency meeting between business leaders and Ukrainian President Volodymyr Zelensky. While some steps were taken, including a temporary halt to certain raids and the creation of a business council, substantial change to stop state raiding remains elusive.

What has been overlooked in the discussion about state predation is the threat it poses to Ukraine’s national security, both in the short and long term. The issue cannot wait until the end of the war.

Customers approach a PrivatBank CJSC branch in Kyiv, Ukraine
People stand outside a PrivatBank location in Kyiv, Ukraine, on Feb. 24, 2022. (Ethan Swope/Bloomberg via Getty Images)

There are four key reasons why state predation is a national security threat.

First, approximately half of Ukraine's budget is funded by Western allies and international institutions; the rest comes from domestic resources. The government must foster economic growth and increase tax revenues to fund the war. Predation on legitimate businesses by law enforcement agencies threatens these revenue streams and the state’s ability to wage war.

Second, given that Western allies are funding nearly half the budget, failure to maximize Ukraine's own budget could jeopardize their support. Western outrage is likely if law enforcement both undermines tax revenues and profits from predatory actions, creating a double scandal in wartime.

Third, large-scale predation by Ukrainian law enforcement is a gift to Russian propagandists. Moscow could easily exploit and distort these actions to undermine Western support for Ukraine.

And fourth, if state predators are not stopped, no foreign or domestic investors will risk capital in Ukraine post-war. When peace is achieved, businesses will be quick to exit if predation continues. Additionally, Ukraine’s failure to address these rule-of-law issues during wartime raises concerns about its ability to meet EU accession standards.

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It was a positive step that Ukraine’s parliament adopted reforms to the Economic Security Bureau (ESB) over the summer. However, predatory activities by law enforcement agencies continue to pose a significant threat to Ukraine’s legitimate businesses. The ESB reforms must be quickly implemented, and additional measures taken to stop predatory actions.

Appointing a new head of the ESB would help build confidence. The appointment should be made rapidly by an independent commission that includes international representatives. The ESB was originally intended to take over all economic crime investigations, and this goal should be pursued immediately. Otherwise, a jumble of law enforcement agencies will still prey on businesses, even if the ESB itself is reformed and operates independently.

Another factor, noted in my HURI paper, is that older cases often give predatory officials their greatest leverage. One option for the ESB is to take over all cases more than five years old, assess them, and close those that lack evidence, prosecuting only those that warrant it.

There is also a case for establishing a G7-led team consisting of representatives from the G7, the European Union, and Ukrainian civil society to bolster Ukraine’s anti-corruption and rule-of-law efforts. This team could gather evidence in Ukraine, liaise with law enforcement agencies in allied countries to freeze assets of corrupt officials, and take steps to seize those assets and begin prosecutions. A dual law enforcement approach, inside and outside Ukraine, would create significant risk for those seeking to loot businesses and undermine the war effort.

Editor’s Note: The opinions expressed in the op-ed section are those of the authors and do not reflect the views of the Kyiv Independent.

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