Political Risks in Ukraine: The Biggest Problems Are Homemade

by Johannes Leitner and Hannes Meissner

Hotel Ukraine in Kiev

In the perception of managers of international companies in Ukraine, two political risks determine their decision behavior. First, the bilateral crisis with Russia is of significance, most of all the annexation of the Crimea and particularly the conflict in Eastern Ukraine. These two conflict zones have been impacting international companies on two levels: both conflicts resulted in immediate military action, which – apart from people’s tragic fates – was in turn accompanied by territorial, i.e. market losses for the companies. The international firms active in Eastern Ukraine and on the Crimea were forced to re-orientate themselves and restructure their sales and procurement markets, or also their supply chains. This immediate military effect was one that needed to be reacted to quickly but that was at the same time well calculable. For the companies, new scenarios and business models were developed in which the Crimea no longer plays a role for the Ukrainian business; Eastern Ukraine has been factored out as well.

Short Term versus long Term Effects

Apart from this short-term fallout, the crisis with Russia secondly also contributed to triggering an economic effect that is more extensive and protracted. Among other aspects, currency depreciation, the near-collapse of the finance sector and the cost of the military operation led to an economic recession that was harder to manage for international companies and that also had a more long-term impact. The companies also had to face this reverberation of political risk clearly more intensively and sustainably than the immediate consequences of the conflict itself, not least because the economic recession was not limited to a particular part of the territory of Ukraine but affected the entire country.

Nonetheless, the fact that despite all the problems caused by the conflict the homemade, internal political risks seem much more significant than the external ones has been rather surprising. State capture and resulting political risks such as systemic corruption, systematic (dis-)favoritism and institutional ambiguity continue to be relevant factors that international companies have to struggle with. The relative higher significance of these factors compared to external political risks is explained precisely through the permanence and presence of state capture. Whereas the territorial losses have been assimilated by the international companies’ strategic reorientation and also the economic recession has presumably bottomed out, state capture has not been eliminated as risk factor, thus continuing to receive high priority in international managers’ perception.

State Capture still Prevails

The persistence of state capture and related political risk factors is rooted in its deep involvement in the political and economic systems of the countries concerned. At the same time, state capture is a phenomenon that certainly does not only affect Ukraine, but most developing and threshold countries worldwide. In all these countries private elites, such as clans, family and friendship networks or business groups have succeeded in a historical period to occupy state positions and ensure their lasting predominance. Once the justice and security apparatus are under control, such a constellation can only be broken up by revolution or a coup, if at all. But even then there is the danger that all that ultimately happens is a shift in power relations. Ukraine is a good case in point. At the same time, the experiences with the EU acting as agent of reform demonstrate the limitations of potentially exerting external influence.

Without a doubt, the current constellation of external and internal political risk factors and severe economic crisis present an immense challenge for the activities of international companies in Ukraine. A competent analysis of the political risks and extrapolation of the best possible strategies to optimally manage these political risks will be decisive for business success.

This article is a result of the research project “NEMESIS”.

Project Title: “Memory and Securitization in the European Union and Neighbourhood” (NEMESIS)

Co-funded by: Erasmus+ Programme of the European Union

Project Number: 565149-EPP-1-2015-1-RU-EPPJMO-NETWORK

Disclaimer: The European Commission support for the production of this publication does not constitute endorsement of the contents which reflects the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein.

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