Twi­light of the oli­garchs

Ukraine’s oli­garchs are slowly but surely los­ing their eco­nomic clout

The Ukrainian Week - - CONTENTS - Li­ubomyr Shaval­iuk

Ukraine's oli­garchs are slowly but surely los­ing their eco­nomic clout

“Are you sat­is­fied with your life?” If you ask Ukraini­ans this ques­tion to­day, most of them will an­swer in the neg­a­tive. At least that’s what opin­ion polls would have us be­lieve. And if you dig a lit­tle deeper to find out why Ukraini­ans are not liv­ing bet­ter, a slew of fac­tors will be named, some of which are very wide­spread. One of these is “the oli­garchs.” Plenty of Ukraini­ans be­lieve that they are the root of all evil in Ukraine. There are good rea­sons for this be­cause the coun­try’s ty­coons have cul­ti­vated cor­rup­tion, cur­tailed com­pe­ti­tion, pre­served a tech­no­log­i­cally ob­so­lete econ­omy, es­tab­lished feu­dal rules of play, zomb­i­fied vot­ers through their me­dia, and so on. Over the course of many years, they had con­sid­er­able in­flu­ence in Ukraine and used this not for the com­mon good, to put it mildly. Or­di­nary Ukraini­ans are so fed up with their do­ings that the oli­garchs are vir­tu­ally the man­i­fes­ta­tion of evil on earth in the pub­lic con­scious­ness.

This kind of per­cep­tion has led to pub­lic de­mand for “de-oli­garch­ing,” some­thing that was very ev­i­dently man­i­fested dur­ing the Revo­lu­tion of Dig­nity. At that time, many Ukraini­ans un­am­bigu­ously un­der­stood and made clear that they wanted to see their coun­try rid of its oli­garchs. But no one had a clear plan for do­ing this. And so this de­sire would have re­mained frus­trated if not for a se­ries of events, whether ac­ci­den­tal or de­lib­er­ate, that brought Ukraini­ans closer to this goal. Sure enough, the oli­garchs be­gan to lose their in­flu­ence.


The ex­tent of oli­garchic in­flu­ence in Ukraine can be mea­sured in a va­ri­ety of ways — and all as­sess­ments will be sub­jec­tive as there are no clearly-de­fined quan­ti­ta­tive in­di­ca­tors on which to base them. The only area where num­bers are avail­able is the wealth of the coun­try’s ty­coons, and these have shrunk con­sid­er­ably in the last few years.

Fo­cus, a busi­ness weekly, writes that at the be­gin­ning of 2018, the 100 wealth­i­est peo­ple in Ukraine were worth US $26.9 bil­lion. In late 2017, Novoye Vremia, an­other busi­ness weekly, as­sessed the as­sets of the coun­try’s 100 rich­est peo­ple pretty much the same: US $26.7bn. Com­pared to in­di­ca­tors from the Yanukovych era, which ranged from US $62bn to US $80bn de­pend­ing on the year and the val­u­a­tion, to­day the coun­try’s rich­est peo­ple have lost two thirds of their pre­vi­ous value. If their cur­rent worth is com­pared to what they had prior to the global fi­nan­cial cri­sis of 2008-2009 (US $101-113bn), then it is down to about a quar­ter. More im­por­tantly, where ear­lier the value of Ukraine’s rich­est peo­ple re­mained a steady 40-50% of GDP, to­day, they are barely 20% (see Fad­ing Force). The same is true of the top 10 rich­est Ukraini­ans. Their worth in ab­so­lute terms and their share of GDP have shrunk rad­i­cally. What’s more, this trend sug­gests that as the coun­try’s econ­omy re­cov­ers, their fi­nan­cial weight is not re­cov­er­ing along with it.

Given that the wealth of oli­garchs gen­er­ally de­ter­mines their in­flu­ence in a so­ci­ety, the gov­ern­ment and var­i­ous pro­cesses in the coun­try, it can be as­sumed that the de­cline in their net worth is a good rea­son to feel op­ti­mistic. Cer­tainly some­thing is chang­ing in Ukraine, the process of “de-oli­garch­ing” seems to be hap­pen­ing and their so­cio-eco­nomic weight is slowly fad­ing. Could it be too soon to draw such con­clu­sions? Is this change ir­re­versible? How sus­tain­able are the fac­tors that have led to this de­cline?


“There’s noth­ing bad but some good comes of it.” This adage ap­plies very well to the role of Rus­sia’s war against Ukraine in the process of cut­ting oli­garchs down to size. With the an­nex­a­tion of Crimea and the con­flict in Don­bas, the oli­garchs — and the gov­ern­ment and for­eign in­vestors, of course — lost a lot of as­sets. Some of these have been lost for­ever, be­cause they were phys­i­cally de­stroyed, and they can only be for­got­ten, re­gard­less of how or when the war ends and Crimea re­turns to Ukraine. This cut down the eco­nomic clout of the oli­garchs and that por­tion will never re­turn.

More im­por­tantly, it’s hard to say that as­sets in Don­bas or Crimea were es­pe­cially at­trac­tive. Most of them were ob­so­lete plants pro­duc­ing re­sources and were dis­tin­guished by nei­ther ef­fi­ciency nor prof­itabil­ity. Their main ba­sis for earn­ings was a cheap la­bor force that was in turn based on the fact that most res­i­dents of Don­bas never went be­yond its bound­aries dur­ing their life­times. This meant that there was al­ways a sur­plus of work­ers that was ar­ti­fi­cially main­tained through poor trans­port links, and weak so­cioe­co­nomic and cul­tural ties to the rest of the coun­try. Its oli­garchs were happy to keep things that way and cer­tainly played a role in mak­ing sure they did. From the out­side it looked strange: a sup­pos­edly wealthy re­gion where most of the res­i­dents were un­be­liev­able poor and back­ward.

The war changed ev­ery­thing. More than a mil­lion res­i­dents of the re­gion were forced to mi­grate else­where, and by leav­ing dis­cov­ered a dif­fer­ent world. Trans­port links be­came much bet­ter, with reg­u­lar buses go­ing from Kram­a­torsk and Bakhmut to War­saw, in­creas­ing the op­por­tu­ni­ties for peo­ple to leave the war-torn front­line area. Cul­tural and other ties grew stronger. The re­sult is that the peo­ple of Don­bas will never again al­low them­selves to be in­evitably herded as cheap la­bor, that is, as a re­source that al­lowed oli­garchs to eas­ily grow wealth­ier and gain eco­nomic clout. One in­di­ca­tor of this is re­ports of a short­age of la­bor in Mar­i­upol. This forces the own­ers of plants in the area to in­crease wages and gain less of the kind of profit that once seemed to flow into their pock­ets with­out ef­fort.

In some sense, the war in Don­bas is like a dis­ease that the doc­tors pre­scribed to a pa­tient in or­der to get rid of other dis­eases. De­spite all the hor­rors of this war, it be­came a ma­jor fac­tor in cut­ting Ukraine’s oli­garchs down to size. Sooner or later, the war will end, but the changes that it brought about will likely re­main for­ever.


There’s a lot of talk in Ukraine about la­bor mi­gra­tion, which has be­come a na­tional is­sue, about the mil­lions of Ukraini­ans who have left for bet­ter jobs, es­pe­cially to Poland. Yes, the prob­lem is se­ri­ous and could turn into a na­tional se­cu­rity threat even­tu­ally. But in terms of “de-oli­garch­ing” Ukrainian so­ci­ety, this emi­gra­tion has had a pos­i­tive im­pact as it gen­er­ates greater com­pe­ti­tion among do­mes­tic em­ploy­ers for those who have re­mained. Just as com­pe­ti­tion on the mar­kets of goods and ser­vices tends to drive prices down and qual­ity up, com­pe­ti­tion for la­bor tends to drive both salaries and pro­duc­tiv­ity up. The more work­ers earn, the less goes into the pock­ets of the oli­garchs, fur­ther re­duc­ing their eco­nomic in­flu­ence.

Pre­vi­ously, the la­bor mar­ket was a buyer’s mar­ket, and so man­u­fac­tur­ers and busi­ness own­ers were able to dic­tate the terms of em­ploy­ment. Oli­garchs felt very se­cure in this kind of sit­u­a­tion be­cause they earned su­per prof­its thanks to cheap la­bor and put all their ef­forts into main­tain­ing this state of af­fairs. To­day, it’s a seller’s mar­ket, so work­ers get to set the rules. For oli­garchs, this mainly means that the days of easy money are over. More im­por­tantly, this means that, to sur­vive, they have to now fo­cus on in­creas­ing ef­fi­ciency — or die. With this kind of “law” com­ing into play, oli­garchs will have to dis­tract them­selves from med­dling in gov­ern­ment pro­cesses, the rules of play, and so on, and con­cen­trate on in­creas­ing the pro­duc­tiv­ity of their busi­nesses and re-in­vest­ing se­ri­ous money in their de­vel­op­ment if they want to stay afloat. In such a sit­u­a­tion, there will no longer be the re­source ba­sis for clas­sic oli­garchs to op­er­ate with. It’s easy enough to project that many of those in the top 100 will be un­able to adapt to the new con­di­tions and will ei­ther go broke or will sell their busi­nesses and live on in­ter­est. Thus, la­bor mi­gra­tion has been a ma­jor fac­tor in re­duc­ing the in­flu­ence of the ty­coon class and its ef­fect will last for a long time to come.


An­other im­por­tant fac­tor in the de­cline of the eco­nomic weight of Ukraine’s oli­garchs was the purge of the bank­ing sys­tem. It had two con­se­quences. First, bank as­sets left the hands of many oli­garchs, started with Vadym Novyn­skiy, Dmytro Fir­tash, Kos­tiantyn Zhe­vago, Oleh Bakhmatiuk and many oth­ers, all the way up to Ihor Kolo­moyskiy and Ghen­nadiy Bo­holi­ubov when the gov­ern­ment took over Pri­vatBank. This di­rectly re­duced their worth. Se­condly, the model un­der which the bank­ing sec­tor op­er­ated was rad­i­cally changed. Be­fore, its main func­tion was to pump money abroad, right into the off­shore ac­counts of these same oli­garchs — and not only theirs. From there, the money would pass through Cyprus, the Nether­lands and the Vir­gin Is­lands or other pop­u­lar “quiet har­bors,” and re­turn to Ukraine as for­eign di­rect in­vest­ment at the rate of sev­eral bil­lion dol­lars a year.

To­day, this money leaves the coun­try in dra­mat­i­cally smaller vol­umes, as it is far harder to do so through do­mes­tic banks now. This means, of course, that more cap­i­tal re­mains within the coun­try and the oli­garchs have to ei­ther work trans­par­ently, pay­ing their proper taxes, which also hits their pock­ets like never be­fore, or put con­sid­er­ably more ef­fort to re­main in the shad­ows. It’s much eas­ier now to take them to court for any “grey” prof­its. And al­though the law en­force­ment sys­tem still leaves a lot to be de­sired in terms of op­er­at­ing ef­fec­tively, the very threat is enough to de­mo­ti­vate would-be money-laun­der­ers and to force oli­garchs to move away from the il­le­gal meth­ods of en­rich­ment from the past.

Still, the key ef­fect of clean­ing out the bank­ing sys­tem is not even this. The bal­ance be­tween the oli­garchs and the state has changed com­pletely. Un­der Leonid Kuchma, oli­garchs were able to get things their way, buy­ing of­fi­cials. Un­der Vik­tor Yushchenko, the gov­ern­ment was too dis­tracted by in-fight­ing and other use­less pro­cesses to get in the way of the oli­garchs. Un­der Vik­tor Yanukovych, the oli­garchs sim­ply paid their fee for the right to do what­ever they felt like do­ing, in­clud­ing usurp­ing power. The shake­down of the bank­ing sys­tem showed that the state, per­son­i­fied in this in­stance by the Na­tional Bank of Ukraine, could be a player and not just a re­source in some­one else’s game. The NBU set it­self the goal of mak­ing things work so that ev­ery­one fi­nally had to work ac­cord­ing to trans­par­ent, fair and un­der­stand­able rules.

And the NBU reached this goal, al­though it cost the bank­ing sec­tor dearly. More than likely, that’s the main rea­son there was so much noise made about Va­len­tyna Hontareva: she made sure, not with­out con­sid­er­able help, that the gov­ern­ment started to es­tab­lish the rules of the game for the first time. It was un­prece­dented and Ukraine’s oli­garchs were clearly stunned by the bold­ness, as their nearly iden­ti­cal re­ac­tion to the purg­ing of the bank­ing sys­tem tes­ti­fied. Of course, there were some ex­cep­tions. For in­stance, in the four years since the Revo­lu­tion of Dig­nity, the as­sets of the In­ter­na­tional In­vest­ment Bank, fi­nanced by Ihor Kononenko and Petro Poroshenko, grew 391%, nearly five­fold on pa­per — but 130% if the change in the hryv­nia ex­change rate is counted. This in con­trast to the en­tire sec­tor, which grew all of 1.6%. It’s pos­si­ble that IIB is play­ing by the rules es­tab­lished by the NBU, but un­likely that it was with­out us­ing oli­garchic in­flu­ence, given the pace of growth. Still, this ex­cep­tion con­firms the rule. We’re talk­ing about as­sets worth more than $350 mil­lion. Com­pared to what the oli­garchs lost when they were given the choice to play by the rules or get lost—the dif­fer­ence is heaven and earth. And if this is placed along­side the tens of bil­lions that the gang­sters in the pre­vi­ous ad­min­is­tra­tion made off with, the cur­rent state of af­fairs looks al­most ideal.


Oli­garchs wouldn’t be oli­garchs if they did not try to take ad­van­tage of their in­flu­ence to bite off a big­ger chunk of the pub­lic purse. In Ukraine, the pub­lic pie is very big, over 40% of GDP and for many years it was sub­ject to con­stant en­croach­ments by fat cats. Un­der Yanukovych, the flow of pub­lic money into their pock­ets turned into a tor­rent.

To­day, things have changed, in many ways thanks to the in­tro­duc­tion of the ProZorro elec­tronic pro­cure­ments sys­tem. Some skep­tics main­tain that pub­lic money was be­ing stolen, is be­ing stolen and will con­tinue to be stolen. To per­suade them oth­er­wise, ar­ti­cles like this aren’t enough, but it’s still worth tak­ing a more com­pre­hen­sive look at the sit­u­a­tion. In the last two years of the Yanukovych ad­min­is­tra­tion, Ukraine’s GDP in dol­lar terms was 50% larger than what is pro­jected for 2018. The ex­pen­di­ture side of the bud­get was also about that much larger, counted in hard cur­rency. Yet on to­day’s much smaller sum Ukraine is re­build­ing roads, re­build­ing a pro­fes­sional army, mak­ing world-class movies, car­ry­ing out ex­tremely ex­pen­sive, large-scale re­forms, re­viv­ing the re­gions through de­cen­tral­iza­tion, and do­ing much more that once could only have been dreamt of. Does this not in­di­cate that oli­garchs are get­ting a far smaller chunk of the state than be­fore? Of course. If they are still steal­ing, it’s on a com­pletely dif­fer­ent scale. And this means that the bud­get is no longer the shap­ing fac­tor of eco­nomic clout for the coun­try’s ty­coons.


There’s also the as­sis­tance Ukraine is get­ting from its west­ern part­ners and in­ter­na­tional fi­nan­cial in­sti­tu­tions (IFIs). Here the fi­nan­cial as­pect is not the only one, and is ac­com­pa­nied by tech­ni­cal, diplo­matic and other ac­tiv­ity. There’s am­ple ev­i­dence that

the prop­erly cal­i­brated and di­rected pres­sure of the IMF, US and EU was a key fac­tor that as­sured the na­tion­al­iza­tion of Pri­vatBank would go through. And even if it had hap­pened any­way, what chances would there be that Kolo­moyskiy would re­turn the bil­lions that he si­phoned out of his com­pany? Since the High Court in Lon­don seized Pri­vat Group as­sets worth US $2.5bn, the chances are very high, in­deed. Ukraine alone could never have achieved that.

With­out west­ern as­sis­tance, Fir­tash would not be sit­ting in jail and would not be taken out of the geopo­lit­i­cal game as a very pow­er­ful fifth-col­umn agent of Rus­sia’s in Ukraine. With­out pres­sure from the US and EC, Mykola Mar­ty­nenko would not be be­hind bars to­day, and Olek­sandr Onyshchenko would not have fled abroad but would prob­a­bly still be leech­ing off Ukraine. All this was be­cause “that SOB” Ser­hiy Shokin re­mained as Prose­cu­tor Gen­eral and sab­o­taged any at­tempts to serve jus­tice. With­out west­ern as­sis­tance, an en­tire se­ries of anti-cor­rup­tion agen­cies might never have been formed. They might not be pro­duc­ing re­sults as well as wished, but they have al­ready shifted the bal­ance of power and have con­sid­er­ably im­proved the odds that some­day thieves re­ally will go to prison in Ukraine.

Un­for­tu­nately, pub­lic dis­course to­day keeps fo­cus­ing on the ques­tion of what right the IMF has to set con­di­tions while politi­cians keep mak­ing hay over the rel­a­tively mi­nor—com­pared to the task of re­build­ing a vi­able state — is­sue of house­hold gas rates. Why do they not ad­mit that the West has done some­thing huge for Ukraine, some­thing Ukraini­ans would never have achieved on their own. If we look at the big pic­ture, the di­rect and in­di­rect im­pact of the steps our west­ern part­ners have taken, it’s pos­si­bly the sin­gle most im­por­tant fac­tor in cut­ting the eco­nomic clout of the coun­try’s thieves-in-law, i.e., oli­garchs, down to size. Even the im­pact of the war was not as large-scale and sys­tem­atic as the ac­tions of the West. The only con­clu­sion that can be drawn is Ukraini­ans have been given a chance to be­come nor­mal, to build a hu­mane coun­try that is fo­cused on its cit­i­zens and has ex­cel­lent po­ten­tial for growth. But no, many Ukraini­ans seem de­ter­mined to turn up their noses and fo­cus on triv­i­al­i­ties. Con­sid­er­ing the prospects for fu­ture gen­er­a­tions to­day, this is a cry­ing shame.

Here, the dif­fer­ence be­tween the West and Rus­sia is par­tic­u­larly ob­vi­ous. Rus­sia not only co­op­er­ated with Ukraine’s oli­garchs — it ac­tu­ally nur­tured them, trained them and fed them with petrodol­lars. In short, Moscow did ev­ery­thing pos­si­ble to keep this ob­so­lete, de­gen­er­ate neo-feu­dal sys­tem in place, where a clow­der of fat cats stood against a na­tion of beg­gars. It’s as though the Krem­lin suf­fers from a chronic need to sur­round it­self with a belt of sur­re­al­ism: ter­ri­to­ries with un­rec­og­nized re­publics, frozen and not-so-frozen con­flicts, mil­i­tary bases, be­fogged res­i­dents who are busy strug­gling to sur­vive while all kinds of de­gen­er­ates run the show. It’s as though these ter­ri­to­ries are in­tended to serve as a dis­torted mir­ror for Rus­sians, that doesn’t re­flect their own flaws at all.

The West, by con­trast, aims at stim­u­lat­ing de­vel­op­ment in part­ner coun­tries. With­out much ado, it strikes at the roots of the oli­garchies and other sources of stag­na­tion. In this way gives the coun­try a chance to reach the max­i­mum heights, which can be seen in Poland’s suc­cess. The re­sult in the last few years has been that the eco­nomic in­flu­ence of Ukraine’s oli­garchs has in­ex­orably gone down as they lost as­sets, shad­owy sources, and prof­its based on le­gal loop­holes. The re­sult, as well as a sec­ondary in­di­ca­tor, has been a dras­tic de­cline in the qual­ity of the coun­try’s team sports. All of them, but es­pe­cially foot­ball, have long been com­pletely in the hands of oli­garchs. They owned the clubs and had enor­mous in­flu­ence over the na­tional fed­er­a­tion. Ev­ery­thing was blow out of pro­por­tion and out of touch with re­al­ity: clubs boasted of multi-mil­lion dol­lar bud­gets, of buy­ing ex­pen­sive play­ers, of pay­ing Ukrainian play­ers sky-high salaries that did not al­ways re­flect their ac­tual skills on the field. In fact, enor­mous sums of money were be­ing laun­dered through sports. No longer. Over the last few years, a num­ber of high-pro­file clubs have sim­ply dis­ap­peared for lack of fi­nanc­ing — nor has this process stopped. Those that have sur­vived are now pay­ing play­ers less, sell­ing their top guns, have no way to in­vite new, ex­pen­sive play­ers, and are forced to give up truly ta­lented Ukraini­ans to play abroad. This sit­u­a­tion, of course, re­flects the re­al­ity on the ground in Ukraine far more ac­cu­rately.


Yet an­other con­se­quence of the de­cline in oli­garchic power in the so­cio-po­lit­i­cal realm has been the re­lease of mass en­ergy, es­pe­cially en­tre­pre­neur­ial. The pres­sure of oli­garchs on the state, both di­rect and in­di­rect through reg­u­la­tory and en­force­ment means, made it hard for peo­ple to de­velop them­selves, to en­gage in busi­ness, and to use their heads to make money. Things were es­pe­cially de­press­ing un­der Yanukovych. Now the pres­sure has gone way down. So if we look at GDP growth over 2014-2018, pos­i­tive growth can be seen in the least oli­garchic sec­tors: ho­tels and restau­rants, in­for­ma­tion and tele­coms, ad­min­is­tra­tive and sup­port ser­vices, real es­tate. The core oli­garchic in­dus­tries in ex­trac­tion, pro­cess­ing, power gen­er­a­tion, gas sup­ply and so on have de­clined by the dou­ble dig­its.

Ukraini­ans have gained a mea­sure of free­dom and have taken the ini­tia­tive into their own hands. This has led to rad­i­cal changes in the shape of Ukraine’s econ­omy. Yes, pres­sure on busi­nesses re­mains very high and is a se­ri­ous bar­rier to growth. Ob­vi­ous ex­am­ples are plenty: the games be­ing played at Nova Poshta or at IT com­pa­nies, mas­sive cor­po­rate raid­ing in the farm sec­tor, and so on. But all of this is al­ready frag­mented: it is no longer con­cen­trated in the hands of oli­garchs or thiev­ing gov­ern­ment of­fi­cials but is ev­i­dence of the left­over oli­garchic-of­fi­cial struc­tures that con­tinue to hold on to some power, refuse to rec­og­nize change, and con­tinue to do “busi­ness as usual.” Their pres­sure is no longer sys­temic. It’s far eas­ier to avoid it to­day than it was five years ago. But to elim­i­nate it once and for all, the sys­tem it­self needs to be changed: weak­en­ing the oli­garchs is not enough.

The oli­garchs are eco­nom­i­cally bro­ken, but this is only the first step to­wards get­ting rid of their sys­tem. The point of no re­turn has not yet been reached. All it would take is for high-pro­file, un­sink­able “friends of oli­garchs” to come to power, plenty of whom have de­clared them­selves in the 2019 elec­tions and some of whom have some of the top rat­ings to­day, and the sit­u­a­tion will be un­done, with new Kononenkos, Iva­nenkos and their ilk crawl­ing out of the wood­work. To en­shrine to­day’s suc­cess in the con­fronta­tion with the oli­garchy, the prac­tice of the NBU needs to be scaled up and in­sti­tu­tion­al­ized, that is, ev­ery­thing must be done so that the max­i­mum num­ber of gov­ern­ment agen­cies — and even­tu­ally the en­tire gov­ern­ment at all lev­els — will be ca­pa­ble of es­tab­lish­ing a level play­ing field for all and en­sure that they are ad­hered to equally, across the board. This means hav­ing a pro­fes­sional, well-paid civil ser­vice with a suit­able world­view, po­lice and judges who are not on the take, gov­ern­ment agen­cies pre­pared to work for the peo­ple and not the pa­per. In short, much more re­mains to be changed and mil­lions of ef­fec­tive, di­rected per­son-hours need to be spent do­ing it.


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