A brief history of corruption in Ukraine: the Kravchuk era
Ukraine’s first president led the country away from communism, let the economy slip into the shadows. The first in a six-part series examining corruption in Ukraine under each post-Soviet president.
On August 24, 1991, just 48 hours after a coup attempt in Moscow had been defeated, Leonid Kravchuk, the speaker of Ukraine’s late-Soviet-era parliament, scolded fellow MPs for dithering over the sole item on that day’s legislative agenda: a declaration of independence.
“What else do you need to consult about?” Kravchuk stated. While every MP seemed to want to speak, Kravchuk wanted a vote, and soon got his wish: a near unanimous vote for independence. Wild street celebrations ensued: the red-and-blue flag of Soviet Ukraine was hauled down from atop parliament, replaced with the blue-and-yellow national flag.
As 1991 drew to a close, Kravchuk played an instrumental role in dissolving the Soviet Union. Ukraine’s decision to join the new Commonwealth of Independent States in early December 1991 helped put the final nail in communism’s coffin.
By that time, a nationwide referendum on December 1 had enshrined Ukraine’s independence and made Kravchuk the country’s first president. Kravchuk’s campaign promises had focused on promoting democratic institutions and economic prosperity. “We have to create all conditions for the formation of a real citizen of our country – free, prosperous and cultured,” he pledged.
Keeping those promises proved far more difficult than anyone could imagine in late 1991. Exuberance over the Soviet collapse blinded many to the economic and social realities. Officials responsible for guiding the country’s political and economic transition lacked the expertise to develop and implement effective policies. Ultimately, Kravchuk’s comparatively short tenure as president was marked by political dysfunction and economic collapse.
The inability of weak state institutions to manage the transition from communism to a free-market system fueled growing popular disappointment in independence and in democracy. It also was directly responsible for the rapid expansion of Ukraine’s shadow economy, which operated beyond the state’s taxation system. Corruption was the byproduct of the shadow economy. And, following a Hunger Games-like struggle for economic survival, the system abetted an unhealthy concentration of economic and political power in the hands of a small coterie of oligarchs.
As the Soviet Union entered its death spiral in the late 1980s, Ukraine found itself among the bottom half of its 15 constituent republics in terms of economic performance, with an estimated per capita GDP of $1,307.
In the initial years after independence in 1991, Ukraine’s economy just got worse.
Kravchuk by nature was always a cautious politician. His rise within the Communist Party bureaucracy had been facilitated by an ability to not give offense to colleagues, and a penchant for always aligning himself with the emerging consensus view. In short, he was never a risk-taker, nor one to make an unpopular decision, no matter how necessary.
His administration, then, attempted to achieve the impossible – undertake wrenching political, economic and social change without causing popular discomfort. The results were predictable. By 1994, in less than three years of Kravchuk’s presidency, the country’s GDP had shrunk by a head-spinning 40 percent.
There was trouble from the start. In 1992, the country introduced a transitional currency, called coupons, that looked and felt like Monopoly money. Authorities managed it like Monopoly money too, and at one point in 1993 the inflation rate hit 10,155 percent.
For most citizens, life after independence quickly became a daily battle for economic survival. At the height of the hyperinflation era, prices for basic goods, including bread and eggs, were changing several times a day, and wages were lagging far behind. With the distribution system having broken down, and public anxiety rising, corruption proliferated. Tax evasion and bending rules became a national sport, as both large- and small-scale economic activity moved into the shadows.
Growing vegetables became common even for city dwellers, who received plots for temporary use from the government in vast fields outside town. Meanwhile, many Ukrainians resorted to shuttle trading – traveling abroad, including across the Black Sea to Turkey – to buy goods for resale back in Ukraine.
Many shuttle traders and food growers used self-made small wheel carts to aid their activities. Those carts were dubbed “kravchuchka,” after the president. The word is still used in Ukraine and the phenomenon has its own Wikipedia page.
Fiscal woes inhibited normal economic activity, fostering a barter system for trade. Barter became ubiquitous as a result of a government decree in December 1992 that attempted to contain hyperinflation through the imposition of sweeping price controls, along with the introduction of a complex system of business licenses and setting quotas for export.
The decree was designed to “restrain the inflation processes in the economy and implement social protection of consumer rights,” but instead it resulted in a further decline in economic activity. It also spurred a spike in barter schemes, rent-seeking, and, ultimately, encouraged the emergence of the first cluster of oligarchs.
In March 1992, Ukraine adopted two laws on the privatization of state property. Over the next two years, roughly 12,000 companies underwent privatization, according to the World Bank. But experience showed it wasn’t a truly competitive process: Most of the “privatized” property ended up in the hands of insiders. These missed privatization opportunities, in turn, facilitated the rise of oligarch control over the economy.
Meanwhile, illicit arms trafficking thrived. Soviet military stockpiles left in Ukraine upon the union’s collapse included 7.1 million small arms and light weapons in 1992, as well as plenty of ammunition. By 2007, the number had dwindled to 6.2 million, according to one report. The rise of organized crime, along with the warfare that accompanied the Soviet Union’s collapse, helped stoke demand for weapons and ammunition.
By 1993, a news analysis by the New York Times said the following about Ukraine’s experience with independence: “The country is caught in a bizarre economic twilight zone, where central planning is foundering, subsidies and credits continue to be issued, but no market system is yet in place.”
This twilight zone was a place where a lucky few with the right political and economic connections were able to thrive. They could take advantage of gaps in the system, benefitting from ill-conceived government price regulation, various barter schemes in supply chains, shady agreements on gas deliveries from Russia and, for hand-picked recipients, cheap National Bank credits. They likewise were savvy enough to take advantage of currency exchange rate differences and other forms of questionable, organized activity.
One U.S. Department of Justice report described Ukraine at the time as a country where “politics, crime and corruption merged to form both a deeply criminalized political system and highly politicized criminal organizations.”
The chosen ones
Accounts of how money was made during the early years of independence could make crime writers green with envy. One court case study in the United States documents the example of Pavlo Lazarenko, who served as a governor of Dnipropetrovsk region under President Kravchuk and then became prime minister under his successor Leonid Kuchma. The case study concerns the U.S. government’s successful prosecution of Lazarenko on money laundering, fraud and extortion charges.
“During the 1990s Lazarenko was first a regional official in Ukraine, became first vice-minister in 1995 and from 1996 to 1997 was the country’s prime minister. While serving as a government official he required business owners to pay him 50 percent of their profits by threatening to use his power to harm their business if not paid,” said the case study, published by the UN Office on Drugs and Crime.
Yulia Mostova, editor of Zerkalo Nedeli, an independent newspaper, described Lazarenko as a pioneer in the dark arts of graft: “Before him, nobody knew that [schemes] can be on this scale and this systematic,” she said in 2018. Naturally, under the circumstances, lots of people sought to emulate Lazarenko’s methods.
Among Lazarenko’s connections in the mid-1990s was Yulia Tymoshenko, who would go on to become a fixture in Ukrainian politics in the 21st century – a three-time presidential candidate who served two stints as prime minister. Tymoshenko has been reticent when it comes to the origins of her business career and personal wealth.
Her family started off in the videotape-rental business in the late 1980s, but swiftly switched to the much more lucrative field of gas trading. By the mid-1990s, Tymoshenko, along with other family members, was running United Energy Systems of Ukraine (UESU). At the height of its operations, a period largely coinciding with Lazarenko’s tenure as prime minister, UESU was Ukraine’s largest gas trader, supplying gas from Russia’s Gazprom to seven of Ukraine’s large industrial and agricultural regions. The entity also served as an intermediary in payments for Russian gas transit to western Europe via Ukraine. By this time, Tymoshenko was reputedly one of Ukraine’s richest female entrepreneurs.
In late 1996, Tymoshenko began her political career by winning a seat in parliament and stepping away from a leadership role at UESU. Shortly thereafter, following Lazarenko’s resignation as prime minister in 1997, the company started running into trouble. Years of investigations eventually prompted UESU to cease operations in 2009.
It wasn’t until relatively late in Kravchuk’s tenure that he mounted a governmental effort to address burgeoning corruption. A presidential decree in late 1993 established a “coordinating committee” to combat graft and organized crime. By then, however, it was too little, too late.
The general lack of government oversight meant that anti-corruption measures were toothless. Money-making schemes of dubious legality kept mushrooming. At the same time, the judicial system proved unable to shed its Soviet legacy of “telephone justice” and establish its independence. As a result, the fight against corruption became politicized and Ukrainian courts were weaponized: those controlling political power tended to use the judicial system to try to reinforce their own positions and punish their competitors for economic and political influence.
Toward the end of Kravchuk’s tenure, energy trading and supply emerged as a particularly lucrative field for shadowy money-making. Among the largest gas importing/trading concerns in Ukraine at the time was a firm called Republic, set up by Ihor Bakai. His colleague and vice president of Republic in the 1990s, Ihor Sharov, described how this multi-faceted company was making money through barter and other schemes in the gas market, and by “exporting domestic TV sets at the price of $1,000 per piece” – a remarkable price for a bulky piece of gear produced by a former Soviet factory.
“We sure know how to trade, if Turkmenistan, with a population of four million people, bought from us 12 million pairs of rubber galoshes!” he bragged in an interview to Fakty newspaper in 2000. In return, Turkmenistan sold gas to Republic.
This type of trading enriched those connected to the company, as well as its protectors in government, while leaving consumers to foot the bill. By 1994, Ukraine had accumulated roughly $7 billion in state debt, mostly from unregulated, state-guaranteed arrears for energy deliveries from Russia and Turkmenistan, according to Anders Aslund, a Swedish-American economist who specializes in the transition from communism in Eastern Europe. Debt also quickly accumulated from short-term Russian loans to cash-poor Ukraine.
Another lucrative area for insiders was taking advantage of currency fluctuations. One of the more notorious cases during the early years of independence involved Yukhym Zvyahilsky, a top official who served as acting prime minister in 1993-94. After Kravchuk lost power, Zvyahilsky was accused by law enforcement officials of embezzling at least $20 million worth of public money, including earnings for currency transactions. The names of Kravchuk and his successor, Leonid Kuchma, also featured in the investigation, which ultimately hit a dead end. Zvyahilsky, however, spent roughly three years in exile in Israel to avoid potential prosecution. He returned in 1997 and secured a seat in parliament, which provided him with immunity from prosecution. He served as an MP until 2019.
Many of the larger-than-life power brokers in present-day Ukraine got their starts in the early ‘90s by successfully navigating the primordial soup of ill-designed, poorly enforced regulation. One such power broker whose career roots go back to the time is Rinat Akhmetov.
A native of Donetsk, Akhmetov is reputed to be Ukraine’s richest citizen. Despite suffering major economic losses due to the separatist conflict in his native region, his fortune is currently estimated at $2.8 billion.
He controls a holding company System Capital Management that has stakes in a variety of industries. He also has interests in the telecom, engineering, finance, real estate, transportation and retail sectors. Among his other big holdings are; Metinvest Group, a steel concern that is one of the largest private companies in Ukraine; and DTEK, a firm that operates coal mines, thermal power stations and Ukraine's largest wind and solar farms.
Very little is known about his start in the early 1990s. And now that his native city is controlled by Russia-backed separatists, new insight into Akhmetov’s early days is unlikely to surface in the foreseeable future. What is known is after those obscure early days, Akhmetov’s vast business empire has generated solid profits for himself and, on occasion, controversy.
Kravchuk’s political legacy
Among the most significant developments in Ukraine during Kravchuk’s tenure was denuclearization. At the time of the Soviet Union’s collapse, Ukraine found itself possessing the world’s third-largest nuclear arsenal, including roughly 1,900 strategic nuclear warheads. By 1994, Kravchuk had negotiated a series of agreements governing the removal of nuclear weapons from Ukraine to Russia, and Ukraine’s accession to arms control and non-proliferation treaties. In exchange for de-nuclearization, Ukraine received security guarantees from the United States and European allies enshrined in the Budapest Memorandum, signed in late 1994.
Denuclearization, as well as the Budapest Memorandum, became tremendously important for Ukraine’s future. The Memorandum ostensibly gave the nation assurances from three nuclear powers, Russia, the United States and the United Kingdom, against any use of force against its sovereignty and territorial integrity. Russia violated this treaty in 2014, when it annexed Ukraine’s Crimean peninsula and stoked separatism and warfare in eastern parts of the country, without any significant consequences from its international partners.
Ukraine’s economic woes caused a decline in Kravchuk’s political popularity, sparking governmental infighting. Political tension reached a point in the fall of 1993 that the then-prime minister, Leonid Kuchma, resigned. The denuclearization process further aggravated political divisions, prompting Kravchuk to agree to an early presidential election in a bid to resolve the deadlock. Kuchma proved the strongest challenger in the 1994 presidential election, eventually prevailing over Kravchuk in the second round. Despite deepening economic dysfunction, the 1994 presidential vote was a milestone in the post-Soviet era, as it marked the first peaceful transfer of executive power in any formerly Soviet state outside of the Baltics.
After losing the presidential election, Kravchuk remained active in politics, serving several terms as a member of parliament. He continues to be a welcome commentator of politics and current affairs on TV, and he occasionally throws his support behind a political project or idea. He is generally remembered in Ukraine as the first president, not a great president.