In Ukraine, the unusually high concentration of capital allows a small number of businesses to exercise undue influence on public policy. The so-called “oligarchs” dominate key sectors of the Ukrainian economy through their ownership of businesses in banking, steel manufacturing and trade in agricultural commodities. Dominant businesses are usually politically connected. They are able to exert influence on public policy through their representation in political parties, in the legislature and in government. As a result, decisions that impact the allocation of public resources are not made in the public interest.

This paper estimates the economic cost of crony capitalism in Ukraine. The paper seeks to answer three questions. First, the paper seeks to assess the extent to which economic interests are politically connected, which sectors are prone to crony capitalism and how crony capitalism has evolved over time. Second, it explores how the benefits of crony capitalism are realized based on two case studies. Third, it assesses the economic impact of crony capitalism by comparing the economic outcomes of politically connected vs non-connected firms.

# <mark>MEASURING CRONY CAPITALISM: IDENTIFYING POLITICAL CONNECTIONS</mark>

If we are to assess the impact of crony capitalism in Ukraine, we must first define political connection and distinguish politically-connected firms from non-connected firms. Political connectedness of firms is not easy to establish. Oligarchs and large business groups typically use complex ownership structures involving multiple and various corporate vehicles, sometimes with minority interests, to exert de-facto control of firms. Similarly, oligarchs and large business groups use a variety of channels to exert influence on the policy process. We use two approaches to identify politically connected firms.

The first approach is based on publicly available information on the ownership and control of businesses by politically exposed persons. A firm is considered connected if it has at least one politically exposed person (PEP) among its owners, shareholders or managers. A PEP is a person 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 corporations. The Ruslana database of Bureau van Dijk comprises firm-level data on ultimate ownership, shareholders, management and financial data of companies. Using this approach politically connected firms are established by matching these databases and cleaning for “false positives” - owners whose name coincides with PEP but who are not PEPs themselves. Details of the definition of politically connected companies are presented in Annex 2.

The second approach is not as broad, as it does not include all the PEPs, but it allows to include companies that are not formally controlled by PEPs, but enjoy a political connection through an oligarch or a business group they belong to. We use the Ruslana database and journalist investigations from open sources to identify business groups and firms that belong to these groups. We also draw on investigative reporting to identify links between the owners of business groups and officials in key state institutions: the Verkhovna Rada (Parliament), Presidential Administration, Cabinet of Ministers, Ministries and other bodies. Investigative journalism can also be used to track political connections of business groups over time. Use of the second approach results in focus on firms which belong to large business groups, i.e. firms under control of oligarchs. Details of the definition of politically connected companies under the second approach are presented in Annex 2.

We construct range estimates for politically connected firms using both approaches. While the first approach is easily verifiable and identified more politically connected firms, the second approach 3