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Communist and Post-Communist Studies | xxx (2017) 1e12 | Taras Kuzio

Ukrainian kleptocrats and America's real-life House of Cards:
Corruption, lobbyism and the rule of law

a b s t r a c t

Washington DC is not only a center for democracy promotion programs by government- funded and private foundations and think tanks. Washington DC has also attracted hundreds of millions of dollars for lobbyists, political consultants and think tanks from authoritarian political forces and kleptocrats who have little in common with American and European values. Both Republicans and Democrats have been recipients of these illicit funds from state officials and oligarchs who are seeking to ingratiate themselves with American public opinion. Political consultants, lobbyists, lawyers and think tanks which receive funds from such sources are part of a bigger problem of reverse corruption and cynicism and the export of authoritarian practices from Ukraine and post-Soviet states to the West. This was clearly seen in the hiring of Paul Manafort, Viktor Yanukovych's long-time political consultant by US presidential candidate Donald Trump. Trump's promise to ‘drain the (Washington) swamp’ rings hollow after it was revealed he accepted funds from a Ukrainian oligarch who had earlier donated funds to the Clintons (Reader 2016).

1. Western values, dirty money, and financial crises

In the West there are two main centers of power and influence, Washington DC and Brussels, which have been targeted by Ukrainian and Eurasian oligarchs and their governments for lobbying, elections, legal cases, and think tank publications. The hiring of lawyers, consultants, and think tank experts has been taking place since the mid-1990s and in the majority of cases has been by authoritarian leaders and oligarchs, not by the democratic opposition. This has created two conflicts of interest.

Firstly, authoritarian leaders and oligarchs' attempts to buy influence are inherently in conflict with the values that Western governments and government funded democracy promotion foundations, such as the National Endowment for Democracy (NED), purportedly stand for. Many programs funded by the NED, Freedom House, USAID and their Canadian and European equivalents are focused on combatting corruption and promoting the rule of law.

Secondly, the EU, IMF and Western governments pursue a long held policy of supporting the fight against corruption and building and consolidating the rule of law. Western leaders and Ambassadors to Ukraine have routinely harangued Ukrainian leaders for their failure to fight corruption in a country which is ranked by the anti-corruption watchdog Transparency
International as fourth from the bottom of fifteen former Soviet republics. All five members of the Eurasian Economic Union have lower levels of corruption than Ukraine. At the same time as the West pursues a policy of fighting corruption in Ukraine many Western governments, like Cyprus, Austria, France (Sage, 2015), UK, Monaco, Lichtenstein, Switzerland, Latvia; and offshore tax havens: Panama, British Virgin Islands, Belize accept without due diligence billions of dollars from Ukraine and Eurasian countries. One estimate calculated that over 11 billion dollars has been exported each year over the last decade from Ukraine in ‘illicit financial flows’ (Kar and Spanjers, 2015). The release of the Panama papers in 2015 revealed that Ukrainian President Petro Poroshenko had deposited funds there in summer 2014 during the fiercest clashes of Ukraine's war with Russia. Further investigations by Ukrainian journalists found that Poroshenko, similar to other Ukrainian oligarchs, had used Panama to evade paying Ukrainian taxes since the late 1990s (Skhemy, 2016).

The US is not immune from this flow of corrupt capital and the Tax Justice Network, a lobby group, calls the United States one of the world's top three ‘secrecy jurisdictions’ behind Switzerland and Hong Kong (The Economist, 2016a). Ukrainian politicians and oligarchs have paid millions of dollars to US consultants, lobbyists and lawyers, invested in prestigious think tanks and have used favorable tax regimes to register companies in the US states of Delaware and Oregon.

International Organizations and Western governments cannot have their cake and eat it, on the one hand condemning high level corruption and oligarch control of Ukraine's economy and at the same time accept billions of dollars from a kleptocracy for the hiring of lobbyists, lawyers and consultants or as deposits in offshore tax havens. This conflict of interest has five important ramifications.

The first is that it deepens existing cynicism among Ukrainian, Russian and post-Soviet political leaders and oligarchs that the values the West seeks to promote in their countries are merely empty rhetoric. Cynicism, which grew among Soviet and Communist Party leaders during the Leonid Brezhnev ‘era of stagnation’ imbues the political culture of most political leaders in Ukraine and the former USSR (the exceptions being Lithuania and Estonia). Paul Manafort's cynicism enabled him to work for a wide range of autocrats and kleptocrats, including Yanukovych who bankrupted Ukraine during his presidency, turned the country into a mafia state (Naim, 2012) and fled from office just after he had ordered the shooting of over 100 unarmed protestors.

The perception of the ability to buy influential people in the West in turn deepens the widely held view among corrupt Eurasian leaders that everybody has a price and it is just a question of negotiating the amount. Ukrainian and Eurasian corrupt leaders use the existence of the tolerance of corruption in the West as evidence they are therefore ‘no different to us’ and that they have no right to morally condemn us for corruption when permitting it to take place in their own backyard.

The second is that the ability to export billions of dollars from corrupt countries undermines the fight against corruption because corrupt state officials, kleptocrats and oligarchs have no incentive to abide by rules and regulations when the West is willing to assist in them being flouted. The availability of banks, real estate and other purchases in the West provides avenues for the laundering of funds received from illicit means.

The third factor is that Western facilitation of corruption and lobbying by authoritarian regimes to paint a positive image over their illicit activities contributes to the low levels of public trust in state institutions and deepens the gulf between the public and ruling elites. While kleptocratic elites send capital offshore to bank deposits and to pay for services, the Ukrainian public lower down the social ladder have no interest in moving out of the shadow economy where they don't pay taxes.

Ukraine's shadow economy has accounted for a stable half of Ukraine's GDP since the 1990s and within the former USSR, Azerbaijan and Ukraine have the largest underground economies. These two processes at the top and bottom of Ukrainian society generate periodic financial crises leading to requests for financial bailouts from the IMF with whom Ukraine has had nine programs since 1991.

The fourth factor is that Ukraine's oligarchs can shape and control the political process and win elections because of large financial resources at their disposal. Billions of dollars deposited in European countries and offshore tax havens provide state officials and oligarchs with the means to shape and control the political process, win elections and stack parliament with allies. Ukraine, similar to most post-Soviet states, has weak political parties and often these are created as election projects by oligarchs in collusion with state officials (Kuzio, 2014a). Four of the six political forces that won seats in the October 2014 Ukrainian parliamentary elections (Opposition Bloc, People's Front, Poroshenko bloc and Radical Party) were oligarchic election projects. Supporting the development of political parties in Ukraine has been the goal of Western government-funded foundations in the US (well-known International Republican Institute, National Democratic Institute), Canada, UK, Germany and Sweden. This policy is in turn undermined by permitting billions of dollars to flow out of Ukraine that can be drawn upon during election campaigns by oligarchs whose projects prevent the emergence and electoral success of bona fide political parties (Kuzio, 2014a).

The fifth factor is reverse corruption; that is, the export of corruption and authoritarian practices in Ukraine, and other post-Soviet states, to Western democracies. The huge cash payments to Paul Manafort while he was working for Yanukovych in Ukraine were used for the purchase of real estate in the US for himself and possibly on behalf of Ukrainian and Russian oligarchs (Silverstein and Weinstein, 2016).

Manafort was accused by then opposition leader Yulia Tymoshenko of having facilitated the parking of ‘millions of dollars in offshore real estate investments, according to documents released as part of a federal racketeering suit’ (Markay, 2016). The documents submitted to court ‘offer a glimpse of Manafort's financial ties to Firtash, who is currently wanted by the Federal Bureau of Investigation over bribery allegations' and ‘show how Manafort set up investment vehicles at Firtash's behest in order to funnel his considerable fortune into real estate ventures in the United States and elsewhere’ (United States District Court for the Southern District of New York, 2011).

Manafort met with Firtash in Kyiv in December 2008 to discuss the arrangement where they agreed that Group DF 1 would invest $100 million in a global real estate fund, pay an initial fee of $1.5 million to CMZ Ventures 2 to manage the fund, and set up offices for the firm in Kyiv. ‘By inviting Firtash to utilize the various U.S. based companies to facilitate Firtash's money laundering and political corruption activities, Manafort gave Firtash the opportunity to expand the scope of his money laundering activities into the United States,’ Tymoshenko's lawsuit alleged (Markay, 2016).

Reverse corruption could also be seen in the buying of CNN senior interviewer Larry King who was paid $225,000 to interview Prime Minister Nikolai Azarov (Harding, 2016b), then going on to work at the propaganda channel Russia Today. Manafort's activities in Ukraine were closely coordinated with Russian intelligence agent Konstantin Kilimnik which raised national security concerns after presidential candidate Trump began receiving national security briefings (Vogel, 2016). US law firms received contracts without these going out to tender competitions in Ukraine to prepare reports on Tymoshenko's imprisonment that would spin the government's line of her ‘guilt.’ Serhiy Kudelia said: ‘The entire tender process has for years been probably only second to the energy sector in the scale of rampant corruption that exists in this sector of the Ukrainian economy. Tenders remained corrupt during the Yushchenko presidency and corruption dramatically increased during the preparations of the Euro 2012 football championship when contracts were given without tenders (primarily to Donetsk-based companies). The February 2012 change in the tender law has institutionalized this corrupt process by not requiring the need for tenders and contracts to be awarded, as in the case of two contracts given to Skadden law firm, at the whim of the government and without any transparent process’ (Kuzio, 2013a).

The Akin Gump Strauss Hauer & Feld law firm worked on behalf of Donetsk oligarch Rinat Akhmetov who was a close associate of Yanukovych since the 1990s (Kuzio, 2014b). The Akin Gump Strauss Hauer & Feld specialized in the task of threatening academics and journalists with libel cases because of their investigations and writing about Akhmetov's opaque past when he was tied to organized crime groups in the Donbas. The University of Toronto Press tore up a book contract with this author in 2014 after being threatened by Akin Gump Strauss Hauer & Feld who had demanded to read the manuscript before it went to print (Kuzio, 2015b). Britain's Cambridge University Press tore up a book publishing contract with Karen Dawisha (2015) for a book exposing corruption in Putin's Russia (The Economist, 2014). In such a manner Ukrainian oligarchs were spreading censorship of the media and scholarship, policies that they had practiced in Ukraine, to Western democracies.

[... To be continued ...]