Ukraine's Old, Internal Enemy

External threats to Ukraine from Russia have dominated the news for months, but as that situation starts to stabilize the country will need to confront an old, internal enemy: corruption. Transparency International ranks Ukraine 144 out of 177 countries on its corruption-perception index. Corruption was at the heart of popular discontent with the deposed regime of Viktor Yanukovych, and widespread graft helps explain why the economy stalled in 2012 and 2013. Kiev must tackle this problem urgently, even as its leaders confront Russia's territorial ambitions.

The scale of the graft under the previous administration, if the allegations turn out to be true, is breathtaking. Prime Minister Arseniy Yatsenyuk has accused the Yanukovych regime of stealing $37 billion from the state—equal to one-fifth of Ukraine's GDP in 2013—during its four years in power.

This corruption is said to have taken several forms. The Yanukovych administration was allegedly able to buy natural gas at low, state-controlled prices and then resell it at market prices that could be as much as eight times higher. Volodymyr Groysman, Ukraine's current deputy prime minister, has said that gas worth $2.5 billion was sold this way.

Infrastructure projects have also come under suspicion. In August 2008, for example, the city of Lviv was accepting tenders for a football stadium to host the 2012 European championships. Alpine, an Austrian company, placed a bid at $191 million, according to company records, but it was rejected since the request was for proposals of up to $116 million. In the end, the construction of the stadium was awarded to Donetsk-based Altkom, according to the Ukrainska Pravda. The total cost came in at $370 million, according to government documents. The European Investment Bank, which had intended to contribute to the financing of the stadium, withdrew in protest.

Several criminal charges have been brought against Mr. Yanukovych by the new Ukrainian government, accusing him, among other things, of unlawful enrichment, money laundering and, most recently, abuse of office, according to the Russian news agency RIA Novosti. Mr. Yanukovych has denied these allegations repeatedly.

Still, the former leader's ouster in February has created an opportunity to confront corruption in Ukraine. But the country's problem is much bigger than any single politician or administration. It is potentially significant, for instance, that the new parliament in Ukraine remains a club of millionaires in a country where the per capita GDP is less than $4,000.

Oleh Rybachuk, the chief of staff to former president Viktor Yushchenko, runs a nongovernmental organization that has examined the apparent expenditures and legally declared incomes of the 450 members of parliament who sat from 2007 to 2012. Mr. Rybachuk's NGO found that only a handful of these members could have plausibly claimed to live solely off their official incomes.

And there is ample anecdotal evidence that the Ukrainian public service is pervasively corrupt, as many people who have tried to secure a business license, or even been pulled over for speeding, could attest.

Cleansing Ukraine of its corruption will require several interrelated measures. In this regard, Estonia and Georgia have shown the way. To begin with, the state needs to limit its regulatory role by abolishing or merging many state agencies. Minimizing state interference in the economy—whether by privatizing state-owned assets or cutting regulations—reduces opportunities for corruption in the first place.

The government should also cut public expenditures, and corrupted subsidies must be eliminated. The deregulation of gas and electricity prices in this case must be seen as a matter of combating corruption, not as a social issue. The poor can be given targeted cash compensation instead. The tax system also needs to be simplified and the tax police abolished, to shield taxpayers from lawless persecution. Ukraine has recently adopted a law on public procurement requiring open public tenders, and voters should demand their leaders follow that law to the letter.

Officials also must focus on delivering reliable rule of law. This should entail the creation of an independent commission scrutinizing all the top judges and prosecutors in Ukraine and dismissing those found to have engaged in graft.

By signing the Association Agreement with the European Union, Ukraine has committed itself to adopting hundreds of reform laws, while the European Union has committed itself to providing substantial technical assistance in drawing up new laws and reorganizing state agencies. That deal is on hold for now, but Brussels and Kiev can still find ways to move forward. Those parts of the agreement that target corruption, for example, should be a priority, as should building a strong and independent judicial system.

The Ukrainian people have made a choice for Europe. If they stick with it and pursue reform with determination, they will have their best chance to clean out the Augean stables of a long-corrupt system.