We usually picture institutional reform as a problem of text. Pass the right law, rewrite the regulation, fix the procedure, and behavior will follow. But anyone who has watched a society in transition knows how wide the gap can be between the rule on the page and the rule in practice. An institution is never only a norm. It is also the extent to which people are willing to treat that norm as binding — and the methods they reach for when they are not.
That distinction sits at the heart of my research on relations between business and the state in Ukraine — a case that poses a puzzle the “just fix the laws” view cannot explain.
Between 2021 and 2025 — in the middle of a full-scale war — several formal markers of Ukraine’s business environment improved sharply. Yet over the very same period, the weight of personal connections and the measures of “corruption perception” rose too. Formal and informal did not move against each other so much as side by side. To understand why, we must stop asking only what the rules say and start asking how businesses live with them, especially when they do so under shelling and alongside a state operating in conditions of super-emergency.
What the Numbers Show
My evidence comes from long-running surveys of Ukrainian firms by the Institute for Economic Research and Policy Consulting, conducted from 1998 to the present and including a monthly panel of some 500 enterprises across 21 regions — industry, agriculture, and retail. From these, I build an integrated index of how “problematic” the business environment is, combining five elements: property rights, state interference, the predictability of legislation, the “time tax” firms pay dealing with officials, and corruption.
The good news is real. The share of firms that believe the legal system can protect their property rights nearly doubled, from 24.5% in 2021 to 45% in 2025. Confidence that courts can enforce a commercial contract roughly doubled, too. Direct state interference in day-to-day operations fell by half, from 70.7% in 2021 to 32.6% in 2025. The time managers spend dealing with officials has dropped. By these measures, Ukrainian business increasingly sees the state as capable of providing the basic rules of the game — a quiet but remarkable shift to register during wartime.
The Twist
And yet, over the same years, the corruption component of the index climbed from 38.9% in 2021 to 52.6% in 2025. Most strikingly, the importance firms attach to informal relationships with state bodies jumped from 24.5% in 2021 to 43% in 2025. As formal institutions strengthened, informal ones did not retreat. They advanced in parallel.
Here lies a tension that is easy to miss behind the triumphant reform headlines: pressure from the state eased, but the predictability of the rules did not keep pace. Firms still struggle to anticipate how legislation will be applied to them; less interference did not automatically mean more trust.
Then comes the most intriguing observation. Even as corruption rose, its unpredictability fell: firms reported less uncertainty about the size of unofficial payments and about the consequences of such dealings. Informal interaction is becoming more structured and predictable. It is less like chaos and more like a system with its own, if unwritten, rules.
The Social Fuel of Order
Put these pieces together, and a different picture emerges. This is not the slow death of informal practice under better laws, but the rise of an alternative order — built not on universal formal rules but on personal networks, informal understandings, and mutual expectations. When firms do not fully trust formal institutions, they do not stop coordinating; they coordinate through other means.
And here it is worth pausing. In our imagination, informal orders fuse almost automatically with corruption — with the bribe, the “right people,” the workaround. But that is only one of their faces. The same “informal connection” that is a channel for a bribe in one case is, in another, a call to a partner you trust; a deal sealed by reputation rather than a signature; a willingness to ship goods without prepayment because you have known each other for years. Especially in wartime, when formal mechanisms keep failing, it is often these horizontal networks of trust that keep the economy afloat. What we measure as a “rising weight of informal relations” may not only be a symptom of disease but also a sign of resilience.
This is close to what classical institutional theory would predict. Douglass North insisted that formal and informal institutions interact, and that the character of an economy is decided by their combination, not by laws alone. Piotr Sztompka treats trust as the basic mechanism of social order: where trust in formal institutions is thin, actors substitute personalized ties. And the framework of limited- versus open-access orders (North, John Wallis, Barry Weingast) describes exactly a world in which privileged connections, rather than impersonal rules, govern access to resources and decisions.
Ukraine, on this reading, is not a country failing to reform. It is running two institutional orders at once — a formal one that is genuinely improving, and an informal one consolidating to supply the assurance that the formal one cannot yet fully provide. It is the interplay between them, not the text of the laws alone, that shapes how business behaves.
Why It Matters
The practical lesson is uncomfortable for those inside the “box of reforms”, but very important for Ukraine’s European path. You can write excellent laws and still not arrive at an open-access society, because an institutional order is not delivered by legislation alone. It is sustained (or undermined) by social mechanisms: trust, norms, expectations, and the everyday willingness to treat rules as obligatory. The improvements are also uneven: small firms remain far less confident than large ones that the state will protect them, for obvious reasons, a reminder that “the rule of law” is experienced very differently depending on where you stand.
None of this is an argument against reform. It is an argument against a narrow idea of it. If institutions lived only in statute books, fixing them would be an exercise in drafting. Because they live, as they really do, in people’s habits and expectations, building the rule of law in Ukraine means earning people’s willingness to comply — not merely legislating a duty to comply.
An institution, in the end, is only as strong as the readiness to obey it — and Ukraine’s quiet achievement is that, even at war, that readiness is growing. The informal networks we so often conflate with “corruption” deserve a closer reading: sometimes they are rent and privilege; sometimes they are the social capital that holds a country together when its formal supports shake. The task is not to root out the informal as such, but to make the formal order trustworthy and fair enough that trust between people works alongside the rules — not instead of them.