This article is the second of the series on the conflict in Ukraine and starts a review of the various domestic actors. It focuses on the oligarchic system, its dynamics and challenges.

On 15 May 2014, steelworkers working for oligarch Rinat Akhmetov took over the city of Mariupol in the Donetsk Oblast, Ukraine, as reported by Andrew Kramer for the New York Times, even if the People’s Republic of Donetsk seems to have kept power (e.g. Roza Kazan, 18 May 2014), after Akhmetov released a first statement video (see original 14 May, with subtitles). Meanwhile, Kim Sengupta for The Independent, writing on the 9 May attack on Mariupol mentions that “An assortment took part in the assault, including a private army supposedly bankrolled by an oligarch – the “men in black”. On 19 May, Rinat Akhmetov released another video (here with subtitles) titled: “Emergency statement of Rinat Akhmetov on the situation in Donbass”, in a way very similar to a statesman, taking a strong position against the Donetsk People’s Republic (see previous post, forthcoming for actor analysis), underlining not only the economic risks to the people and the region but also risks of “genocide”, and calling his workers and employees to protest and act peacefully against war. He then addressed the next day a rally and broadcast a message on his TV station  (see also – and contrast – accounts by The Economist, BBC News, The Independent). Women and men such as Rinat Akhmetov seem to wield a powerful influence. They are called the Ukrainian oligarchs.

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What are oligarchs? What is the system labelled “The oligarchic democracy” (2012) by Sławomir Matuszak in his excellent report and what does it imply for the country? Who exactly are those oligarchs? Which roles do they play or could play in the crisis? Those are crucial questions that need to be tackled if one wants to hope understanding what is happening in Ukraine, and to have as clear as possible a vision of the potential futures for the crisis. We shall address here the first two questions, as we need to have a broad understanding of the system, its consequences and the challenges even oligarchs have to face, before to turn to the other questions (forthcoming).

Oligarchy and Oligarchs

An oligarchy is a specific type of regime, i.e. the way the exercise of power within a state is organised, which includes the rules to access to power, the type of political institutions and their interactions (Goyard-Fabre, Elements de philosophie politique, 1997). It means that a few rich individuals concentrate power in their hands, as defined by Plato in The Republic (Book VIII, 360 B.C.E):

“And what manner of government do you term oligarchy? A government resting on a valuation of property, in which the rich have power and the poor man is deprived of it.”

As a result, “oligarchs” are very rich businesswomen and businessmen wielding strong power on the political system of a country for their own advantage, as was popularized in the 1990s in the case of Russia by sociologist Olga Kryshtanovskaya (Matuszak, ibid, fn 1, p.9).

The oligarchic system in Ukraine

Matuszak (2012) describes and explains the oligarchic system, which, starting from 1994, developed in Ukraine out of the spoils of the Soviet system, which had collapsed and led to the independence of Ukraine in 1991. The system sometimes leads to the state’s complete paralysis (Ibid: 25). Actually, progressively, the Ukrainian state has been weakened and fragilised.

In a nutshell, and using Matuszak’s work (ibid.), since 1994, oligarchs have formed loose clans very much defined according to the native region of each businessperson, also most of the time the seat of its industrial power. Those groups are relatively stable, yet always susceptible to see internal shifts for personal or business aims, as those will always come first.

Notably to sustain their business interests, oligarchs are enmeshed with political parties and politicians they support and promote.  Some also decide to become themselves involved in politics, as is the case, for example, with Tymoshenko and Poroshenko Nov 2009Petro Poroshenko (independent supported by UDAR), who was elected as President on 25 May 2014 (e.g. A. Macdonald & Y. Behrakis, “Battle at Donetsk airport; new Ukraine leader says no talks with ‘terrorists’“, Reuters, 26 May 2014), or with other candidates such as Iulia Tymoshenko (party Batkivshchyna) and Sergei Tihipko (independent) (links are to respective websites).

So far, once a group of oligarchs’ chosen candidate (as President or parliamentary) has been elected, “friends” are appointed to government and administrative positions (central and regional), including boards of national industries. Laws and decisions become or rather remain favourable to the oligarchs’ businesses. Meanwhile, those in state position also use their influence to consolidate their own fortunes or develop new ones (for the paragraph, Matuszak, Ibid; read also Sergii Leshchenko, “Ukraine’s puppet masters: A typology of oligarchs“, Eurozine, 15 May 2014; Oleksander Andreyev & Andrew Wilson, “A new (failing) state or more of the same?“, ODR, 2 May 2014). One should also note that, in 2005, a potential attempt at reforming the system by Tymoshenko stalled and in that “the negative stance taken by the West on taking away assets from businessmen was not insignificant” (Matuszak using another OSW study by Arkadiusz Sarna, fn33, 24).

It is likely that the whole system lays upon a precarious balance where one oligarch and one faction must favour his or her clan more than the others, but without creating such a threat to the others and to the system as a whole that the answer from the other oligarchs and clans, or from other parts of society, would be strong enough to unseat them or endanger the system itself. Yanukovych Capitulation, oligarchic systemWe may, for example, interpret the 2014 ousting of President Yanukovych in such a way, although the existence of other forces must not be downplayed, all dynamics interacting. Although rich, Yanukovych was not rich enough to be part of the oligarchs (Ibid: 41). He was sponsored to become president – and thus continue the system – by oligarchs, all belonging to the Party of Region, some part of the group of oligarchs from Donetsk, others belonging to what Matuszak considers as part of a faction he names the RUE group, i.e. the group of oligarchs linked to RosUkrEnergo, which includes Dmytri Firtash, arrested in Vienna on FBI request on 12 March but bailed out (Ibid: 17-19, 32-34; Richard Galpin, “Dmytro Firtash, Ukraine oligarch, protests innocence“, BBC News, 1 May 2014; Angelika Gruber, Reuters, 21 March 2014). However, Yanukovych quickly favoured first his own wealth, and what came to be called the “Family” – his own men and women (Matuszak, Ibid. pp.40-50). Although other oligarchs also greatly benefited from Yanukovych’s rule, it is possible that he also came to upset too much the existing system and players (Ibid.). As a result, many of them supported the Euromaidan movement and through their support enhanced the popular protests’ chance to succeed (Leshchenko, Ibid.).

New players, be they businesses or political movements, are, as much as possible, prevented to enter the decision-making part of the oligarchic system as they could disrupt it. If their entrance cannot be prevented, everything will be done to co-opt or coerce them, by all means. For example, raids on small and medium-sized businesses, including violently, seemed to have become the rule (Matuszak, ibid: 58; Olha Holoyda, “Ukrainian Oligarchs and the “Family”, a New Generation of Czars—or Hope for the Middle Class?“, IREX U.S. Embassy Policy Specialist Program, 2013, 3,5).

As a result, following Matuszak, it is useful to see the occurrence of the 2004 Orange Revolution, which brought Yushchenko and Tymoshenko to power, as a revolt of the middle class and small and middle-sized businesses against the system (Ibid: 20, 23). Building upon this point, we may also wonder in which way the 2014 conflict did not allow other players, such as very small businesses, small traders, craftsmen and in general all Ukrainians up to – and including – the middle class to hope for the happenstance of a system that would allow them breaking out of the oligarchic one. Akhmetov, oligarchic systemA similar analysis, applied to all “ordinary Ukrainians”, is made by Oliver Bullough (“Stop forcing Ukraine into a narrative of Moscow versus Washington“, The Guardian, 19 May 2014). Tim Judah, in his excellent article “Looking for Ukraine” in the New York Time Review of Books (19 June 2014) also makes the same point, among many others. One indication that would point in this direction, although it would need to be corroborated, comes from Ruptly interviews following the participation of miners and steel workers to the policing of Mariupol, where people do not express subservience to oligarch Akhmetov (see transcript Video ID – 20140516-034Ukraine – RT/Ruptly, 16 May 2014). Other indications can be found in the figures of economic difficulties, decline and poverty detailed below.

Wealth and poverty

When, over centuries, the constitution of the modern rationalized state had entailed an increasingly clearer separation of the public and private spheres (Robert Taylor, The State in Burma, 1987, p. 66), here we are seeing at work a process Ukraine, oligarchs, oligarchic systemaccording to which what was or is public becomes privatized in the hands of a few very rich people, leading to an increase in their wealth. The next frontier, from an oligarchic point of view will most probably be agriculture and land (Matuszak: 61), even more so once the moratorium on agricultural land sales, extended until 1 January 2016 expires (U.S. State Department, 2013; CMS Cameron McKenna et al., “Moratorium on sale of agricultural land extended by three more years“, Lexology, 20 Dec 2012).

How does this transfer from the public to the private sphere play out for Ukraine and its people?

Ukraine is naturally a very rich country, considering, first, that “Ukraine has 30% of the world’s black soil” and that it benefits from “an exceptionally fertile type of soil” (Chernozem) (UNECE, 2013: 4). Then, Ukraine is “among the richest countries in the world in terms of mineral resources” (Ibid: 3).

Yet, more than one-quarter of the decreasing 45.6 million Ukrainians is poor: in 2009 (newer data lack) “the national share poverty Ukraineof population below the relative national poverty line” was 27% (Ibid: 5, 100), compared, for example, with, in 2012, a rate of relative poverty reaching 16% in the U.S. (CBS/Census Nov 2012), 13% in Russia (Forbes, 4/12/2012), while 17% of the population in the EU28 was at risk of income poverty (Eurostat 5 Dec 2013).

Worse, still, in 2009, 4.5% of Ukrainians lived below $4.30 (5$PPP) per day (UNECE: 100). In 2012, poverty17.3% of the population is unemployed (CIA World fact book).
In a 2012 study, the middle class was estimated by a Market Research Ukrainian firm, GFK, using quantitative and qualitative criteria, to represent 23.6% (of the population?) in March 2012, down from 28.5% in 2008 and 29.1% in 2010.

In 2011, Ukraine’s GDP per capita, was 6374 US$ (prices and PPPs of 2005), compared, for example, with 14731 US$ for the Russian Federation (Ibid. p.10). GDPUkraine had to face a second recession in 2012-2013, the first one having taken place in 2009-2010 (World Bank, Ukraine snapshot, Feb 2014, see figure 1). According to The Voice of Russia (13 May 2014), “Ukraine happens to be one of only two former Soviet Union republics out of the entire 15 states that have yet to reach their 1991 level”. 

oligarchic systemMeanwhile, according to Holoyda, “100 individuals represented by the “oligarchs” and “family” – or 0.00003%- of the total population control 80% – 85% of Ukraine’s GDP/wealth.” Out of the 1645 billionaires followed by Forbes in 2014, nine are from Ukraine.

A poor, dependent and increasingly fragile state

Poverty and a small middle class (Matuszak, ibid: 77, see percentage above) mean, among other things that tax revenues are small, or smaller than what they could be. Furthermore, it would seem that the holding companies of the oligarchs are often incorporated outside Ukraine, in places such as Switzerland or Cyprus (Holoyda, ibid: 4). This let us imagine that corporate taxes paid to the state are far below what the wealth of the oligarchs and the profit of their businesses would allow, when commissions and financial advantages have been obtained from the state and national companies (Matuszak, Ibid). As a result, state income is low or lower than it could be, while expenses are higher than they should be. The system may perdure for a while but does not favour overall development of national wealth and, in times of difficulty as with the 2007 financial and economic crisis, proves to lack resilience.

national debt Ukraine
Source: Countryeconomy.com

This system may only have favoured the dire state of public finance. National debt has constantly risen since 2007, both in absolute and relative (% of GDP) terms, to reach in 2013 US$ 72.957 bn, i.e. 41% GDP (countryeconomy.com).

The debt to Russian Gazprom amounts, according to the latter, to “$3.51bn (2.55bn euros; £2.1bn)”, although the amount is disputed, as Ukraine cannot use anymore the bargaining power of the Russian bases in Crimea to obtain a lower price for gas (BBC News, “Russia tells Ukraine to pay gas debt or supplies may halt“, 12 May 2014).

Logically, as a consequence of this financial situation, public services are at risk (World Bank, Ibid), which both expresses and accelerates (notably when infrastructure and health are at stake) a further weakening of the state.

As a result of twenty years of this oligarchic regime, the fragility of the Ukrainian state is now plain to see. Beyond the lack of strength of the state generated by the financial situation, the political dependence upon oligarchs is also a major factor of weakness, 2014-04-06._Протесты_в_Донецке_168for example, evidenced by the police refusing to take side and risking lives in some of the Eastern oblasts, notably Donetsk and Luhansk (e.g. Simon Shuster, Ukrainian Policemen Stand By as Pro-Russian Separatists Seize Control“, Times, 29 April 2014). Reports of a “corrupt” police more interested in the black market in Odessa than in ensuring the rule of law (Oleksander and Miliukov, “Pro-Russians storm Odessa police station, PM slams local police“, Reuters, 4 May 2014) is another indication of a fragile state. Indeed, why would policemen risk lives, when this could then lead to their revocation if power changed hands and interests shifted? This dimension was most probably reinforced by the dissolution of the Berkut (see previous post). In general, Ukraine currently has “ill-resourced, undertrained and demoralised security services” as reported by foreign correspondent Paul McGeough, who underlined President Poroshenko’s promise according to which “the Ukrainian soldier should no longer be naked, barefoot and hungry” (“The curious Battle of Donetsk airport“, The Sydney Morning Herald, 27 May 2014).

The use of steelworkers in Mariupol as a defense and police force mentioned above, as well as “rumors” of “shadowy pro-Kiev militias sponsored by business and other interests” sent to fight in Donetsk and Luhansk Dnepr Battalion(e.g. McGeough, Ibid; Andreyev & Wilson, Ibid.; Andrew Santarovich, “Where is the money to Avakov ‘volunteer units’“, Insider, 17 April 2014) are both an indication of the fragility and even break down of the state, on the one hand, and, on the other, of the strength and power of oligarchs, although apparently not yet completely able or not fully interested in becoming rulers.

ВРП_Украины_2012
Gross Regional Product per inhabitant – 2012 – 12 May 2014 by Artemka, CC-BY-SA-3.0, via Wikimedia Commons using Ukrstat.org
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Ukraine Regional Domestic Product 2008-2012 using Ukrstat data, 9 April 2014 by Tovel, CC-BY-SA-3.0, via Wikimedia Commons
Ukraine conflict, Ukraine recession
Ukraine Regional Domestic Product 2012 change using Ukrstat data, 9 April 2014 by Tovel, CC-BY-SA-3.0, via Wikimedia Commons

Ukraine is now under IMF economic reform program, which will demand changes (see Interview with Reza Moghadam, “Ukraine Unveils Reform Program with IMF Support“, IMF Survey, April 30, 2014). However, the country, already challenged by a weak state to say nothing of a war potentially involving the breaking away of rich albeit also knowing recession territories (see maps), may not be able to implement those reforms, while the small middle class and those Ukrainian just above relative poverty level may not be able to support such changes without either falling into poverty or rebelling. The location of the economic relative recession, especially if it lasted beyond 2012, may contribute to explain partly the fact that rebellion in the East was possible (be it stirred or not by Russia, which, as explained, in the first post, is difficult to assess with certainty and confidence, notably as long as archives are not declassified). Indeed, we know since the war in Yugoslavia that what prompts revolt is not poverty but a feeling of relative deprivation (Nicholas Sambanis, “Using Case Studies to Expand the Theory of Civil War,” World Bank, CPR Working Papers, Paper No. 5, May 2003 ). However, this economic recession is only a contributing element (see first post and forthcoming ones for other factors) because other hit regions, such as Zaporizhia, Dnipropetrovsk (west of Donetsk) or Odessa, despite the 2 May tragedy, and Mykolaiv, did not rebel so far.

Matuszak noted that, in the recent past, the paralysis of the state and crises (p.32) were detrimental to business and forced oligarchs to try finding remedies. Similarly the rising fragility and breaking down of the state, as well as war, are also likely to be unfavourable to corporate interests. As a result, oligarchs may increasingly have to face these problems and be pushed into making hard choices that will influence the possible futures of Ukraine. Which oligarchs make which choices and how successful she or he is in implementing a response will need to be assessed and anticipated.

Now we have a broad understanding of the system, its dynamics and challenges, we shall turn next to the individual oligarchs, who they are, the groups to which they belong, and the political parties they support.

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Featured image: Mosaic with a torch, a crown and a whip, 2nd century AD. Mitreo di Felicissimus, Ostia Antica, Latium, Italy. By Marie-Lan Nguyen (User:Jastrow) (Own work) [CC BY 2.5 (http://creativecommons.org/licenses/by/2.5)], via Wikimedia Commons

3 thoughts on “Conflict in Ukraine – State of Play – The Oligarchic System”

  1. There are steelworkers in Mariupol, but there are no miners there. It is about 100 km from the nearest Donbass mine. Also, Mariupol is not in Donetsk, but rather in Donetsk area (region or oblast). Mairupol and Donetsk are two separate cities.

    1. Thank you Oleg, I shall rectify regarding the miners and Mariupol. it is so hard getting proper information, your contribution is very much appreciated. Regarding Mariupol, it was a shortcut, both Mariupol and Donetsk being cities, the word region or oblast was implicit, but you are right it may have been clearer to add it each time.

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