Ukraine’s heroic struggle for freedom and self-determination since Russia launched its all-out invasion last year has earned it tremendous respect and support among Western partners.
Its battle to recover lost territories may still be raging in its eastern and southern provinces, but there are already discussions, including a high-level conference in London on June 21-22, on the steps required to rebuild the country and prepare it for European Union (EU) membership.
While Ukrainians recently surveyed by Transparency International agree that the country’s main problem remains the war, they also see corruption as a major issue, which could affect its ability to recover once the guns fall silent.
Their fears will be echoed in a policy paper prepared by the Center for European Policy Analysis (CEPA) and due to be published later this year, highlighting concerns about the ability of state-owned enterprises (SOEs) in the energy sector to absorb funds and attract investments.
Ukraine’s energy sector has suffered some of the most extensive damage from Russian attacks, with half of the electricity transmission and generation capacity systematically targeted by Russian missiles since the start of war.
As a result, it is likely to require a large share of future funding to address the formidable challenges ahead.
The most immediate task is to repair the infrastructure, but the government must also be mindful of long-term objectives such as phasing out a long-standing addiction to coal, and building cleaner forms of generation.
Equally important is to rethink the role of its gas sector after its contract for the transit of Russian gas to European buyers ends in December 2024, which will deprive the country of an important source of revenue.
Addressing these challenges will require strong leadership and determination to carry out radical reform.
However, a survey of the largest state-owned enterprises (SOEs) for the upcoming CEPA report has found that corporate governance safeguards are in fact being eroded.
The sector is witnessing a concentration of political power even as the influence of some oligarchic interests may be receding.
There is no doubt that Russia’s all-out invasion in February 2022 and the subsequent introduction of martial law have created new priorities and may, to a large extent, justify tighter political control amid considerable security risks.
However, even under these circumstances, some of the steps taken have raised concerns that Ukrainian energy SOEs may not be well-equipped to resist corruption and political interference.
Each of the major SOEs — the oil and gas incumbent Naftogaz, the gas grid operator GTSOU and the electricity transmission system operator Ukrenergo — have been subject to political influence despite the fact that their credibility as major international companies hinges on their independence.
Ukraine introduced corporate governance practices in SOEs after the Revolution of Dignity in 2014, primarily in response to conditions set by international donors but also to protect continuing structural reform.
Nevertheless, almost from the outset, newly installed supervisory boards came under political attack, with successive governments seeking to remove non-compliant board members or CEOs in disregard of corporate governance principles.
As the CEPA report will show, the practice continues even now.
The only difference is that if, prior to the start of the war, political interference aligned with vested oligarchic influence, the latter may now be receding, giving way to a consolidation of political power.
A recent Ukrainian media investigation has shown how the energy sector has come under the influence of a network of connected individuals in top positions, including the president’s office, the Ministry of Energy, the energy regulator NEURC, as well as Naftogaz and GTSOU.
Ukrainian and Western stakeholders interviewed for the report agreed that corporate governance has always been Ukraine’s Achilles’ heel, despite its key importance in fighting corruption.
Some suggested the concept and the related practices as they were developed by the Organisation for Economic Cooperation and Development (OECD) were never properly understood, being seen instead as a foreign innovation.
Others noted that it could not take root because of Ukraine’s traditionally hierarchical society, where decisions have been taken by leaders based on seniority rather than as part of an objectively set policy process.
Most, however, agreed that irrespective of the barriers, there has never been a more pressing need to emphasize the importance of implementing and consolidating corporate governance in SOEs as a means to fight corruption and ensure Ukraine’s successful reconstruction.
Despite some pessimism, there are also hopes that pressure from civil society and international institutions will provide much-needed safeguards and transparency.
One project, developed by Ukrainian IT specialists and supported by the government, as well as international donors, including the UK, aims to establish a comprehensive digital platform where all reconstruction projects can be tracked.
DREAM (Digital Restoration Ecosystem for Accountable Management) is a state digital network that will allow everyone, from civil society and government representatives to members of the international community, to monitor investments and project developments.
By bringing greater transparency and accountability, such a project would limit the risk that a new ruling elite, including at SOEs, could take advantage of the funds that will likely pour in.
However, in addition to supporting and expanding such a project, there is also a pressing need for international institutions to condition the disbursement of cash on better corporate governance, including strict penalties for those found in breach.
As Edward Lucas wrote in a recent article, Ukraine’s battles need to be fought not only in wartime but also when peace finally arrives.
Dr. Aura Sabadus is a senior energy journalist who writes about Eastern Europe, Turkey, and Ukraine for Independent Commodity Intelligence Services (ICIS), a London-based global energy and petrochemicals news and market data provider.
The views expressed are her own.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.
