The Revolution of Dignity sparked by the then Government’s decision to suspend the signing of the association agreement with the EU reflected widespread discontent over deep-seated corruption. From its independence over two decades ago, Ukraine has struggled with corruption and state capture. Oligarchs dominate large sectors of the Ukrainian economy, extracting rents and exerting their influence on the state through representation in the Parliament.
This has allowed oligarchs to tap into rich sources of corruption, including in energy, public procurement, privatization of state assets and tax administration. These governance failures have created an economy largely built around redistribution of rents (excess returns above the normal levels that are generated in competitive markets). The model of economic governance in which policy decisions are subject to undue influence of a small number of businesses is called “crony capitalism”.
This is not news for Ukrainians. Mass media and civil society organizations frequently investigate cases of corruption and political connections. Rather than looking at specific cases of state capture, recent World Bank research has focused on identifying the impact of crony capitalism on Ukraine’s economic performance. Our team has asked: What is the extent of political connections among Ukrainian firms? Are these political connections associated with different outcomes for the connected firms? The research produced some striking results.
First, politically connected firms are prominent in Ukraine’s economy. A firm is considered connected if it has at least one politically exposed person among its owners, shareholders or managers. A politically exposed person is someone who has been entrusted with prominent public functions, including senior politicians and party officials, senior government, judicial or military officials, and senior executives of state-owned enterprises. In Ukraine 2 percent of firms are politically connected, but they control over 20 percent of the total turnover and over a quarter of the assets of all Ukrainian companies.