Lower Your Expectations! How an Anti-Corruption Witch Hunt Buried Ukraine’s Hopes of Modernization for Years.

Criminal cases against successful reformers are nothing but a natural consequence of the creation of new punitive bodies in Ukraine instead of systemic changes in governance.

“Keep your head down, smart***!” is the message that the people who drive reforms are getting from corrupt officials. Such messages discourage those who are willing to break the mold to change the system and throw the entire country years back. The cases against Andriy Kobolyev and Yevhen Dykhne are model examples of such signals.

Here is the story in a nutshell: the National Anti-Corruption Bureau of Ukraine (NABU) and the Specialized Anti-Corruption Prosecutor’s Office of Ukraine (SAPO) are charging Andriy Kobolyev, the former Chairman of Naftogaz with awarding himself an illegal bonus of UAH 261 million (1% of the money collected after winning the case against Russia's Gazprom). It was UAH 229 million over the legal limitation for such bonuses in state-owned companies. The excess also equaled the amount of bail that the Appeals Chamber of the High Anti-Corruption Court (HAAC) set in Kobolev’s case.

The High Anti-Corruption Court had found Yevhen Dykhne, former director general of Boryspil airport guilty of abuse of office and had sentenced him to 5 years in prison.

The creation of an anti-corruption infrastructure generated a great deal of discussion in Ukraine. Such discussions were often used for political gain.

Initially, the members of TEXTY editorial board supported the endeavor (see the project promoting the introduction of electronic declaration framework and our detailed vision of that infrastructure). However, as time went on, we realized that the anti-corruption agenda promoted by the Anti-Corruption Action Center is not entirely viable while the focus on setting up new enforcement agencies may not be the solution.

In a society that emerged from the shackles of a totalitarian past, all punitive bodies always represent a threat to the new values — first and foremost, to democracy and human rights. Hence, we did not hold back our criticism.

Here are some translated materials and our own articles on the topic published on TEXTY (in Ukrainian):

Why Western anti-corruption policies in their current form are doing more bad than good to Ukraine

How transparency as part of anti-corruption policy can be counter-productive: the outcomes of the experiment.

Ukraine must focus on preventing rather than punishing corruption: a comprehensive anti-corruption study

An irresponsible anti-corruption campaign cripples Brazil's economy and brings a fascist to power

Building an effective state: declaring a war on corruption is not enough to kick-start the state agencies.

Most of the criticism was focused on the creation of the National Anti-Corruption Bureau (NABU) and the associated agencies, the introduction of overinclusive declaration requirements for public servants etc.

Wrong priorities

There were a number of reasons for our criticism.

Firstly, it was the definition of the main threat. Anti-corruption crusaders (full-time employees of the NGO) who specialized in combating corruption, investigative journalists and a large part of the establishment back in the day who had joined the executive branch to implement changes and modernize the country believed that Ukraine’s biggest problem was corruption. Therefore, combating it was the number one issue on the agenda.

However, we begged to disagree. In our opinion, it was Russia that was in fact the biggest threat to Ukraine which is why all the efforts and the public attention had to be focused on enhancing Ukraine's defense capabilities.

Furthermore, our studies of Russian disinformation since 2016 led us to believe that most of the claims of Ukraine being a thoroughly corrupt state and its members of parliament and the president, both former and current, being obsessed with stealing in fact had a Made in Russia stamp.

In all fairness, corruption has always existed in Ukraine.

The contribution of combating corruption to enhancing defense capabilities became the subject of fierce arguments on social media. Does it really help? Yes, it does. However, the biggest question is how you should combat it to avoid irreparable damage.

According to one of the members of Zelenskyy team in the early months of his presidency Director General of Ukroboronprom Aivaras Abromavicius, more than 500 cases were opened against the company effectively blocking its operations (we are still curious about their outcomes). An investigation in a case normally involves searching offices, seizing documents, and subpoenaing employees for questioning.

A similar approach was used in July 2020 by the investigators of the State Bureau of Investigation which had also been established as part of the anti-corruption reform. The officers suspected corruption in the acquisition of klystrons for Ukraine's air defense and ordered their removal from the systems on combat duty. Technically speaking, the deal did hinge on corruption as Russian military were bribed to sell the vital equipment which was later smuggled into the country. But did the investigation benefit Ukraine?

The burden of Soviet legislative legacy

This brings us to our second grudge against the anti-corruption policies of the post-Maidan years.

We strongly believe that corruption has economic nature and occurs when people cannot resolve their issues legally. Such cases also include excessively complex bureaucracy, unnecessary permits etc.

Corruption dwindles naturally if the legal procedures are made simple whereas the costs and the risks of using illegal alternatives become prohibitively high.

Bolstering capabilities for punishing violations of law is the pinnacle of combating corruption. In case of Ukraine, punitive bodies have become the focus of attention and organizational efforts.

Still, the environment that was supposed to be changed has largely remained the same.

“The law of nation is a nose of wax”. This common saying is extremely true about Ukraine’s regulatory framework. There are lots of documents and regulations, each step is prescribed, but the definitions are vague and the norms are contradictory. The bureaucrat has the power to twist the nose of wax into any form. As a result, the laptop which was used to draft an anti-corruption law or the business center where an anti-corruption round table was held may just as well have been imported and built in violation of the numerous regulations.

Kindergartens break rules, schools break rules, companies break rules. You just have to break rules to make progress. This problem has existed since Soviet times and is Ukraine's birth injury. Ukrainian legislators made new laws and regulations, but in doing so they followed Soviet templates since none of them had completed crash courses on Western bureaucracy. They belonged to the Soviet school of governance as it was the only school they had had.

In this kind of system, a person who is eager to bring changes faces a plethora of pitfalls. If you follow all the existing laws and regulations to the letter, you cannot change anything and are likely to become a subject of an investigation. This leaves you with a tough choice to either accept the unwritten rules and thrive on them or break such rules and bend laws to implement the changes for the good of the country.

Therefore, the best anti-corruption policy is to adopt clear regulations which make it difficult to make biased or illegal decisions, promote on merit, and appoint professionals to key positions on a competitive basis.

Of course, this is easier said than done: creating such regulations and enshrining them in government practices is no small feat. Still, certain progress was made step by step. State companies which used to be bottomless pits of corruption were transformed into joint-stock companies with independent supervisory boards, and this did work for a while. The public procurement system which had been used to steal ungodly amounts of money before the Revolution of Dignity also became history.

Even the tax administration saw gradual changes which led to restoring timely VAT refunds. The former head of State Tax Administration of Ukraine Serhii Verlanov shared some insights on changing the corporate culture of a government agency and how to achieve it in an interview here.

Many changes were also introduced in the healthcare system which helped to reduce corruption drastically.

However, overarching changes in the entire structure of governance needed more time. For example, the authors of the healthcare reform said that it would take 10 years to complete the process.

Sadly, these crucial changes were ignored in the mainstream anti-corruption policy of 2014-2019 which took a course that pleased many: more punitive bodies were created instead of addressing the causes of corruption.

Again, it should be stressed that in a society where nothing could be done by the book since Soviet times everybody had to break rules.

Orwell saw it coming

It surprised many, but the fact remains: the new generation of Ukrainian activists rushed to build new repressive structures. The idea of income declaration for top-tier public servants which looked sound on paper resulted in something quite dystopian: as at 2018, 1.3 million people (according to our study – see details here) were mandated to disclose detailed personal information to the state authorities and faced charges for errors or omissions. Sometimes even drivers employed in government structures were supposed to submit such declarations.

How would anyone approve of such things? Many people in Ukraine have shared the belief that control and prosecution are the main pillars of successful anti-corruption policy. Such beliefs did not appear out of thin air.

Anti-corruption investigations have always been quite newsworthy, and anti-corruption knights in shiny armor who would talk about how the remnants of the old system are interfering with their work have always been television darlings. Ukrainians watched and worried about corruption which was said to be a grave problem for Ukraine.

The anti-corruption system was finally created and the “kingpin of corruption” was denied one more presidential term.

Different vectors

One should keep in mind that the mainstream political trends of 2014-2019 were quite different from those of 2019-2021.

After the Revolution of Dignity, modernization of Ukraine became the core narrative. Hundreds if not thousands of people would give up successful careers in the private sector and fill government offices to make the country more Westernized and human-oriented. This demand was forged in the fire of the Maidan. However, people without specialized background found it difficult to understand what changes and why they should support.

Still, the demand for modernization resulted in significant progress across the board (some of the changes were detailed in our 2015 article: “16 reforms and 10 failures. Ukraine is indeed changing, but we need to go faster, bigger and bolder”).

Although the former president did not lead the process or drive the changes, he did not get in the way either as was evident from his rhetoric and the support of reformist bills by the president-led majority in the Verkhovna Rada (the corruption of the old new elites during the period is beyond the scope of this article which only focuses on the general sentiment).

The spring of 2019 marked a radical change in the mainstream political trends. Following the textbook counter-system pattern, the “green wave” of politicians brought all the earlier progress into question. Those who were part of the government before 2019 were labeled as enemies in disregard of any personal achievements – changes for the sake of changes. This trend continued until the Russian invasion.

The witch hunt deflated the reformist passion of both activists and professionals. The search for enemies who faced corruption charges and the attempts of negotiating peace with Russia became mainstream.

As a results, reforms were largely brought to a halt including those which did reduce corruption: the healthcare reform and the transformation of the tax administration and the customs service. The Covid-19 pandemic was used as a pretext to eliminate competitive selection for key public offices while the war was used as an excuse to forgo the Prozorro system of public procurement. The minister of education wants to cancel the external independent assessment to that rectors could set the admission bar as low as they want. The trend appears to be systemic.

Who are the investigators?

The reputation of Ukraine’s anti-corruption agencies (SAPO and NABU) is far from impeccable. Their employees got into numerous scandals and vied to expose abuse of office in fellow structures for political benefits. This isn't any wonder since former prosecutors such as the first head of the NABU Artem Sytnyk (see his biography here) are the backbone of their teams.

Following the Maidan events, the prosecutor's office was reformed (albeit not entirely) and deprived of many former functions. The Soviet prosecutor and their pre-Maidan successors were members of a code-bound caste who could influence judges and twist the nose of wax for profit. Hostile takeovers, extortion by opening criminal cases or calling favors to get criminals off the hook were the order of the day.

Now the most progressive and talented representatives of this subculture have joined the NABU, have got a salary bump and have been told something like this: “Consider yourself untouchable. Here are your access credentials for the registries. Happy hunting!” Such approach did bring an important change. Certain categories of officials used to receive preferential treatment, but the new NABU investigators were not bound by the old rules. This was a necessary prerequisite for the the system to work as intended.

We all followed the recent competitive selection of the new head of the NABU with applicants from various backgrounds including the NABU. It appears that they, too, have not been spared by the curse of luxury cars, real estate properties and large houses paid with shady money — just like their corrupt predecessors from Soviet and later Ukrainian prosecutor’s office.

Ukraine is a vivid example of a clan-based society riddled with client and criminal networks (see the comprehensive analysis in the study here). If you belong to a respected clan, the chance are you can get away with just about anything. You can pay your way out of trouble or the clan will use political leverage to keep you safe. Such structures have been feeding off the public sector by placing their people in the key positions. Each new government have always started with a declaration of war on corruption, but soon realized that the benefits of cooperating with the shadow clans commonly called “the oligarchs” far outweigh the trouble of cleansing government offices and law-enforcement agencies from their agents of influence (for further details, read our article “Dismantling the system”. An insight into the mechanics of Ukrainian government and why the state machinery and political agreements can(not) be trusted.)

The anti-corruption infrastructure was intended as a battering ram to crush corruption and pave way for reformers. Unfortunately, all punitive bodies eventually develop their own internal logic which defines the agenda. The environment which gave birth to the people trusted with implementing the ideas of anti-corruption dreamers has always been guided by the notorious phrase coined by Joseph Stalin: “As long as their is an article in the criminal code, there will always be a criminal”.

This is why the results are far from our expectations: real achievements in modernizing the country are punished with prison sentences.

The epic battle against corruption has weakened the state and slowed down its modernization.

The people who filled various positions in the executive branch to drive reforms had no clan affiliations. Idealists or careerists, they all believed that changes were possible and did their best to make them happen. They trusted the state that had promised competitive salaries that could be earned legally.

Sadly, just as sociologists warned, the rules of behavior tend to rebound even from the biggest of shocks.

The subculture of dirty cops and prosecutors started to take its toll. The reformers were the obvious choice for prey. They no longer have political protection, they do not serve the oligarchs, they do not have a history with dirty cops nor are they on the payroll of regional kingpins — in other words, they do belong to any of the informal centers of influence. And, finally, the people on the receiving end of a TV screen do not care who did what exactly: all they want is to see a bureaucrat punished.

Vitaliy Shabunin wrote in NABU's defense that the NABU/SAPO had handed 1,212 notices of suspicion of which only three raised criticism claiming that the error margin was minimal. But what good did the 1,212 notices of suspicion do to Ukraine? There could be three times as many, but how would that help? Mothers-in-law of the MPs keep getting richer while the police keep finding millions in cash in the couches of government officials.

All these events could as well be ignored since people just enjoy watching corrupt officials go to jail or a sneak peek into Kolomoyskiy’s residence where the investigators are kind enough to take their shoes off before entering on official business.

However, the three recent cases have already done more damage to the country’s reputation than all the previous years of anti-corruption sleuthing.

These cases are in stark contrast to the misappropriation of funds in “Velyke Budivnytstvo” road-building project which has always received a blind-eye treatment or the drunk member of the “Servant of the People” party who walked free after offering an enormous bribe to police officers.

Yevhen Dykhne who had transformed Borispol into a customer-oriented business, got 5 years in prison — not on corruption charges, but for causing financial loss to the state. Such charges could be used to put any official or politician behind bars since every decision has its pros and cons while generating budget revenues is not the primary goal of public administration.

Such verdict spells disaster for the country since it is likely to cause talented people to avoid public sector like plague for decades. It doesn't matter how clean you are or how much good you do: as long as there is an article in the criminal code, you can be the next criminal.

Like ancient Chinese said, the state that talented people avoid to serve, is doomed. While we are not jumping to such pessimistic conclusions, it is fair to say that the reformist passion that drove the 2014-2019 changes in Ukraine will be hard to restore. It appears that the latest anti-corruption efforts have stolen the future of Ukraine's modernization.

Which reformers came under the suspicion of the latest breed of anti-corruption sleuths

Andriy Kobolyev took over as CEO of NAK “Naftogaz of Ukraine” in 2014. He spearheaded the gas market reform which propelled Naftogaz from the 485th place in the registry of the largest contributors to the state budget in 2013 to the 1st place in 2018.

During Kobolyev’s tenure, Naftogaz stopped buying gas from Russia in 2015. The move contributed to Ukraine's political independence from Russia since Kremlin had used gas supplies to exert political pressure.

In 2014, Naftogaz filed a lawsuit against Russia's Gazprom with Stockholm arbitration tribunal which was met with Gazprom’s counterclaim. In 2018, Stockholm arbitration tribunal ruled in favor of Naftogaz. The Ukrainian company was awarded USD 4.6 billion in compensation.

The Supervisory Council of Naftogaz assigned 1% of the award or USD 46.3 million to be paid as bonuses to the company employees of which Kobolyev received UAH 261 million.

On 19 January 2023, the NABU and the SAPO handed a notice of suspicion to Kobolyev. According to the prosecution, his bonus was far in excess of the statutory limit for such payments being UAH 37.48 million. The former head of Naftogaz is being accused of embezzling over UAH 229 million.

Yevhen Dykhne was acting director of Boryspil airport from 2014 to 2017. Right off the start, Dykhne got busy reforming the state enterprise which had been a losing business.

He and his team settled conflicts with air carriers which stemmed from disagreements with the previous management and raised the bar for customer services. The new airport management improved the transparency of public procurement and streamlined costs.

Boryspil airport opened many new restaurants, and set up areas for passengers with children and phone charging stations. The bus and taxi operations were re-organized while the passengers were offered new services.

Those reforms put Boryspil in the black in 2015 generating UAH 696.5 million of profit and boosting passenger traffic. Productivity improvements enabled salary raises across the company.

On 7 September 2020, the NABU handed a notice of suspicion to Yevhen Dykhne. The prosecution claimed that Boryspil officials had leased premises illegally at below-market prices in 2014-2019 thereby causing over UAH 15.7 million in lost profit. The premises were leased in violation due to the long wait in the resolution of formalities by State Property Fund of Ukraine that prevented the airport from developing. On 1 March 2023, the HAAC found Dykhne guilty of causing financial loss to the state and sentenced him to 5 years in prison. No corruption charges were made.

Andriy Pyvovarsky was the Minister of Infrastructure of Ukraine in 2014-2016. He started the reform of Ukrainian Railways (Ukrzaliznytsia). The minister transformed it into a joint-stock company with the Board and the Supervisory Board. Under Andriy Pyvovarsky, the Ministry of Infrastructure lost direct control over Ukrainian Railways.

The former minister also tried to change the system of funding the road sector. He suggested creating a dedicated road fund to accumulate resources for the construction and maintenance of road. The fund was indeed set up, but that happened after Pyvovarsky had resigned.

In 2015, Andriy Pyvovarsky signed the order which enabled private companies to use the revenues from port charges exclusively for port infrastructure development. The provision, which was included in the 2013 “law on sea ports”, read that private companies were entitled to a part to the revenues from port charges if they had built seaport piers with their own money.

It was that very order that was referred to in the notice of suspicion of causing losses of over USD 30 million to the state which was handed to the former minister by the NABU and SAPO. The prosecutors are convinced that the order resulted in the collection of port charges at the seaport of Pivdenny by SE USPA and private companies split equally between the two. According to the law, the collection of such charges remains the prerogative of the state enterprise as the user of the state-owned port waters.

Volodymyr Omelyan was Pyvovarsky’s deputy and then succeeded him as the Minister of Infrastructure in 2016-2019. It was during his tenure that the State Road Fund was created.

Omelyan continued reforming Ukrainian Railways: following the completion of the company's corporatization, the ministry refurbished more than 600 carriages.

The Ministry of Infrastructure also implemented the EU standards for road repair and maintenance. In particular, Ukravtodor adopted the norms on mandatory guaranteed maintenance of roads by the contractor which built them.

Omelyan's efforts also focused on air transport. The number of international air itineraries from Ukraine grew substantially, and Ryanair's entry in 2018 sent a clear signal to the entire industry.

However, also in 2018, the NABU handed a notice of suspicion of illicit enrichment and declaring false information to Omelyan. The SAPO took the case to court a few months later.

In June 2020, the State Bureau of Investigation conducted a search at Omelyan's residence on the basis of a court decision regarding the former owners. That same month, the NABU handed another notice of suspicion to the former minister — this time of illegal actions causing a loss of revenue of UAH 30.5 million to the state budget. In October 2021, the court acquitted Omelyan on those charges.

Serhiy Verlanov was appointed the Head of the State Tax Service of Ukraine after an open competitive selection which has been effectively emasculated as of today.

During his tenure, the STSU introduced the system for electronic administration of sales of fuel and ethyl alcohol to provide effective control over their circulation and make excise tax payments unavoidable. The STSU also introduced more stringent control over the alcoholic beverages market as part of an anti-counterfeit campaign.

In addition to that, the service launched free access to the pRROsto point-of-sale (POS) software system which can be used instead of tills.

On 24 April 2020, Verlanov was hurriedly removed from office. The former minister issued a statement calling the decision politically motivated. A few days later, the SSU searched his house.

In October 2020, the General Prosecutor’s Office of Ukraine handed him a notice of suspicion of abuse of office. The prosecution accused the former head of the state service of illegally canceling a tax notice — a decision for the amount of UAH 2.246 billion for PJSC “ArcelorMittal Kryvyi Rih” causing a shortfall of tax revenue to Ukraine’s budget.

Dmytro Marchenko has been the Head of Development and Materiel Support Center of the Armed Forces of Ukraine since September 2015. Tasked with the transition of the AFU to NATO standards of food supply and materiel support, he has earned the reputation of one of the biggest drivers of reforms in this area.

Marchenko’s center has been busy reforming the army food service since 2015. The reform brought an expanded nomenclature of food products approved for cooking meals for the military (from 40 to 400) and improved the control over the storage of food and cooking processes. The army also received upgraded canteens and food storage facilities as well as new kitchen equipment. A new standard of rations was introduced in the Armed Forces of Ukraine.

During Marchenko’s tenure, the army also received the new uniforms based on NATO experience and best practices.

In 2019, the State Bureau of Investigation launched an investigation into Marchenko's center on the suspicion of purchasing overpriced bullet-proof vests of inadequate quality. The Bureau seized 11,000 bullet-proof vests which allegedly failed to meet the ballistic requirements. However, subsequent tests by the AFU representatives confirmed that the quality of bullet-proof vests was consistent. The court arrested Marchenko and put him into a preliminary detention center, but he was subsequently released on bail. Marchenko claimed that this case caused the Ministry of Defense to suspend mass purchases of bullet-proof vests. Following the Russian invasion, the vests were finally issued to the Ukrainian troops.

While this article was being prepared, the new head of NABU was appointed.

“The Cabinet of Ministers appointed a person with zero experience of investigating corruption-related crimes who has known connections to Yermak's deputy”, wrote Vitaliy Shabunin. In fact, things are much worse. This appointment and the resulting protest only go to show that the last eight years have been wasted.

Ukraine eng NABU anti-corruption

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