Why Ukraine Must also Defeat Corruption.
While the shock at Russia’s invasion of Ukraine has abated since its troops crossed the borders last February, the entire world remains gripped by the battles still raging at the frontline.
The incessant bombing of civilians in places like Bakhmut – which has become symbolic of Ukraine’s dogged resistance and widespread international support – is familiar to all.
But beyond the frontlines, another, less bloody war is being fought, a war against corruption which Ukraine must also win.
In this fiscal and political conflict, the enemy is internal, but nevertheless, a foe which must also be defeated if this nation which has endured so much, is to secure international funds to rebuild the country after the war is over.
For many years, corruption has long been Ukraine’s overriding and most deep-seated issue. Now it is diplomatically sensitive, with critics wary of portraying Ukraine as endemically fraudulent.
Before the war, Ukraine was making gradual progress, rising slowly up Transparency International’s Corruption Perceptions Index from 142 in 2014 to 122 in 2021.
Dissenting voices believe that Ukraine’s anti-corruption investigations have yet to target the genuinely corrupt. Instead of injecting real reform, they say, the clampdown on corruption has been used by those with a vested interest to frame high-profile financiers who advocate for real reform, so that it can be safe for international investment.
They allege that the authorities were instead focused on businesspeople who joined the government to help revive Ukraine’s economy after the 2014 revolution.
Many of those same officials are said to have fled to Moscow when the tanks rolled in, and they continue to target the investors who sought to bring progress in their own country from afar.
The U.S., Europe, and the United Kingdom will one day hopefully be able to invest billions in the reconstruction of Ukraine, but for this vital investment to be forthcoming, these and other nations must have complete confidence in both the rule of law in Ukraine, through impartial courts, and uncorrupted public officials.
Sadly, for Ukraine, these pillars of a functioning democratic state have long been beset with public and private corruption. The recent arrest of the head of Ukraine’s Supreme Court in an anti-corruption probe highlights once again how deep-rooted the problem remains.
One example said to highlight these problems is the case of the founder of the Russian energy giant Lukoil, Tamaz Somkhishvili, a Georgian and Russian businessman, with a British passport through marriage. In 2007, after leaving Russia, Somkhishvili entered into a public-private partnership in Ukraine after his project company, Kyiv-Terminal LLC, won a tender under the local government in Kyiv to redevelop Kharkiv Square.
The development project included hotels, offices, shops, restaurants, and transport infrastructure. However, despite the company investing tens of millions of dollars in the project, the city council eventually decided to terminate the land lease agreement and the whole project in 2013 and withdrew the land parcels previously transferred to Kyiv-Terminal.
This decision led to the termination of the investment agreement, which meant compensation was due for costs and losses. However, the local government then failed to meet its contractual obligations and refused to pay compensation for the losses incurred by its decision to terminate the project. This was despite the fact that an independent international appraiser confirmed the amount of the losses.
Somkhishvili claims that Kyiv-Terminal negotiated with the local authorities and with the government of Ukraine for two years to settle the dispute, during which all the government agencies involved agreed that compensation was due. It was decided, however, that the final figure was to be determined by the courts.
In 2019, a local court in Kyiv handed down a decision that partially satisfied the company’s claim, awarding damages of $24.5 million. But the funds were never paid to Somkhishvili.
The public prosecutor, allegedly acting in the interests of the state, took the position that an investment project with a local authority is the investor’s risk. Perhaps surprisingly, the Court of Appeals agreed. It was, Somkhishvili insists, a decision which tramples on all business principles and international trade laws. Worse still, he claims, it violated the legal rights of foreign investors in Ukraine to fair compensation for losses protected by the UK-Ukraine Bilateral Investment Treaty.
As the result of Somkhishvili’s cassation appeal, that decision was itself dismissed by Ukraine’s Supreme Court, and the case was sent back to the Court of Appeals for reconsideration.
What followed was, according to Somkhishvili’s account, even worse than the court’s apparent efforts to protect the local authorities at the expense of foreign investors.
Due to Somkhishvili’s refusal to accept the alleged injustice meted out by the authorities, and even despite his proposal to end the dispute with a settlement agreement, he has subsequently found himself the subject of what he says is a vicious smear and defamation campaign.
The attacks, which began at a local level in Kyiv, have grown to become a cross-border effort, seemingly sponsored by corrupt Kyiv ex-officials who fled to Moscow, as well as current officials and politicians in Ukraine, including some lawmakers.
Somkhishvili – who refutes all the allegations raised against him – believes that these many officials have corruptly stolen his investment funds for their own commercial ends.
He says the reputation attacks appear designed to influence the courts in relation to his case and reveals the lengths to which his opponents will go to enrich themselves at the state’s expense.
Those behind the apparent defamation campaign, he claims, have also exerted pressure on media organisations which cast doubt on the veracity of the allegations.
This case feeds into a fiercely contested debate in Ukraine over whether the clampdown on corruption is being used to frame high-profile individuals advocating for reform.
Other prominent investors have raised similar allegations about the process, which in turn seeds doubt within the broader international community about Ukraine’s internal political trajectory.
Unsurprisingly given the high stakes, questions are being asked about the country’s ability to absorb billions in European and U.S. reconstruction funds once the war ends.
Businessmen like Somkhishvili have raised their concerns at the highest level, including to the U.S. Department of State and the UK Foreign Office. Ukrainian anti-corruption campaigners also share many of their worries.
Before the war, Somkhishvili wrote a letter to President Volodymyr Zelensky, bringing this situation to his attention and appealing for his assistance ahead of the Supreme Court review of his case. In the letter, he highlighted the potential damage to Ukraine’s standing among the investment community because of the way in which his company had been treated.
Zelensky stated in reply that Somkhishvili’s predicament was a consequence of the unreformed courts of Ukraine, explaining that the court system would change for the better in the future.
However, the onset of war subsequently hindered any efforts to reform the court system, and the situation failed to improve in the months that followed. Somkhishvili’s case is one of a number which has brought the motivations of those spearheading the powerful anti-corruption investigation into the foreground.
It embodies the many reasons why Ukraine could find itself significantly impaired when seeking to raise funds from investors in Britain, Europe, the United States, and other major centres of investment until it purges corruption from its business sector and court system.
These ongoing disputes shine a light on why it is so critical that, once the war finally ends, a victorious Ukraine is seen as a stable environment in which to invest, free from corruption, and a safe place for businesses to transact.
Undoubtedly, while attention is rightly trained on the military operations and the anticipated Ukrainian counterattack, this grinding bureaucratic war is one which will influence whether entrepreneurial individuals will want to risk working for the Ukrainian state again when peace is eventually achieved.
It is a fight which all acknowledge is less urgent than the one continuing daily in eastern and southern Ukraine, but one that Somkhishvili believes needs to start now.