For a country like Ukraine, the appeal of federalism, which divides authority between the central government and its constituent regions, is undeniable. Located in Europe's borderlands, Ukraine has been contested by its neighbors for centuries, a competition that has left it internally divided along linguistic, cultural and religious lines. Some 70 percent of the country's population considers itself Ukrainian, but more than 40 percent primarily speak Russian. Broadly speaking, Ukraine is divided between the east and the west, with eastern Ukraine favoring Russia and western Ukraine favoring Europe.
Unsurprisingly, these divisions are seen in the political system. In fact, the country has been polarized since it gained independence in 1991. Nationalist parties rely on their support base in western Ukraine, and communist and socialist parties rely on support in the country's eastern regions. Since the early 2000s, the Party of Regions has been the dominant political party, largely representing the interests of eastern Ukrainians. Many eastern voters regard the EuroMaidan protests as a Western-sponsored attempt to meddle in Ukrainian domestic politics. Ukrainians in the west value closer ties to the European Union and tend to look at Russian involvement in Ukraine with suspicion.
Ukraine's regions are also distinct economically. The country's industrial base is located in the east. The east's close proximity to Russia creates strong cross-border trade that enriches regional economies. According to Ukraine's government statistics service, manufacturing contributes at least three times more than agriculture to the country's gross domestic product. Thus, eastern regions generally have higher per capita GDP rates. In 2011, the per capita GDP in the eastern region of Dnipropetrovsk, the country's most important industrial center, was 42,068 Ukrainian hryvnia ($4,748), while it was only 20,490 hryvnia ($2,312) in Lviv region, which is one of western Ukraine's industrial centers.
Seven of Ukraine's 10 largest private companies by revenue are either headquartered or maintain the majority of their operations in eastern Ukraine. These firms are owned by some of Ukraine's wealthiest and most influential individuals. Three of these 10 corporations — mining and steel company Metinvest, energy firm DTEK and its subsidiary Donetskstal — are based in the eastern industrial city of Donetsk and are owned by Ukraine's wealthiest man, Rinat Akhmetov. Interpipe, the company that controls 10 percent of the world market share of railway wheels and more than 11 percent of the world market share of manganese ferroalloys, is based in Dnipropetrovsk and belongs to businessman and politician Victor Pinchuk. In addition to the east's role as the center of Ukraine's industry, Kernel, the country's largest agribusiness firm, holds the majority of its assets and operations in central and eastern Ukraine.
Thus, the country's most important businessmen are embedded in the east, where their businesses make disproportionately high contributions to the Ukrainian economy and national budget. Local politicians and businessmen naturally advocate for greater powers for their regions so that the regions can control revenues more directly.
The Disparity of Federalism
The concept of decentralizing the government is not controversial. The 1996 constitution envisioned a decentralization process whereby power would shift to regions gradually. However, the constitution did not set a specific time frame for it to happen in, so the country is still a unitary state. (Notably, regional governments have the right to settle regional issues.) The central government collects taxes and distributes funding to local and regional bodies. Local taxes constitute only about 3 percent of total taxes, thus ensuring that local governments remain largely dependent on Kiev for turning their policy agendas into reality.
Indeed, most Ukrainians consider decentralization a step in the right direction. But federalism is more taboo. Westerners staunchly oppose it because they believe it would threaten their economic and security interests. Others believe it could dissolve Ukraine as a country, leaving the west weak and defenseless against the Russia-backed east. Whether or not these concerns are misplaced, federalism would in fact benefit eastern regions disproportionately by giving them more control over state revenue, aggravating the socioeconomic tensions between the regions.
Hence all the recent support for federalization from the east. At a round table organized by the newly created Ukrainian Front, Kharkiv Gov. Mikhail Dobkin, one of the group's main political backers, said that federalization is "the most acceptable variant of decentralization." Federalization would prevent Kiev from redistributing the east's taxes. Under a federal system, regions would have more autonomy to seek closer integration with Russia and its Customs Union membership, something that is not realistic under the Russia-led Customs Union's current framework.
Notably, not all eastern officials support federalism. Neither does the ruling Party of Regions' leadership. The party's leaders, including President Yanukovich, oppose federalization because giving more power to the regions would weaken their own positions as members of the central government. However, the Party of Regions is wholly dependent on its eastern constituencies, so it cannot oppose federalism outright.
A Long-Term Challenge
Russian officials have been quite vocal in promoting the idea of a federalized Ukraine. The Russian Embassy in Kiev has been talking to Kharkiv Gov. Dobkin, and a high-ranking diplomat, Russian Minister Counselor Andrei Vorobyov, has publicly declared his admiration for Dobkin's statements regarding federalization. By openly discussing federalism and supporting local members of the Party of Regions, Russia is reminding Kiev that is has the ability to upset the country's internal political balances, thus increasing its influence over Ukraine's ongoing political negotiations.
Were Ukraine federalized, Russia could build stronger political and economic ties to eastern regions. Instead of working to maneuver through the gridlock of Kiev's central government, the Kremlin would be able to cooperate on some issues with newly empowered regional governors and the local elite. Russia would be able to pursue integration and wield significant influence over the eastern regions while western Ukraine would be both politically and economically weakened. Russia may also believe that if western Ukraine were weakened, it would be more beholden to Russian influence in the east.
Though Moscow sees federalization as a short-term resolution for the problem a divided Ukraine poses, it could create challenges in the long term. Federalization could give the West, particularly the European Union, the opportunity to support and influence western Ukraine rather than the entire country. So even as Russia could wield greater influence in the east, the Western powers could encroach closer to Russia's borders via western Ukraine.
Even if Russia continues to advocate for federalization, opposition from Kiev could prevent Russia from being the arbiter of Ukrainian power, as could Ukraine's unstable and divided political landscape. But for now, the Kremlin has strong levers at its disposal, including loans, energy agreements and Crimea, all of which influence the government in Kiev and incentivize all Ukrainian politicians to cooperate with Russia.