The West Has Lost Confidence in Ukraine's Kleptocracy

Blaming Russia for it all is just not working anymore

Mon, Oct 17, 2016
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One month ago, one of Ukraine’s most important companies – Naftogaz – saw a prized asset stripped and handed over to government authorities inside the Economic Ministry. The move was against the Petro Poroshenko’s administration’s policy to eventually open Naftogaz assets up to the private sector. It threatened nearly a billion dollars in loans from the World Bank and European Bank for Reconstruction and Development. And until they stepped in and threatened to pull the plug on Naftogaz financing, Poroshenko’s cabinet members backed off. But the damage may have been done. To a large extent, the attempted takeover of Ukrtransgaz is a reminder of how business gets done in Ukraine. If there ever was a country where the 1% rule everything from the coal to the courts, it’s this one.

During the 2010-2013 period just prior to the revolt against Russia friendly Viktor Yanukovych, some $3 billion was ransacked from Ukrtransgaz, sources say. Part of that scheme was to give his oligarch friends below-market rates for natural gas by the way of subsidizing production. If you weren’t a political ally, or breaking bread with the right oligarchs on the weekends, then you paid more for fuel than your competition. This is just one simple example of how wealthy oligarchs and the political class, nearly interchangeable parts, manipulate their home markets.

Poroshenko opted out of the Ukrtransgaz handover because he was caught opening the door to similar graft and doesn’t want his government to look like the old Ukraine. But if polls are right, many on the ground fear that the new Ukraine is too much like the old one.

Corruption perception there is worse than it is in Russia, according to Transparency International. Poroshenko’s public approval rating, after winning the presidency with 55% of the vote in 2014, is now 6.4% according to pollsters at Rating. If presidential elections took place today, former Prime Minister and opposition leader Yulia Timoshenko would have led in the first round.

Poroshenko’s political bloc, known as Solidarity, or “Solidarnist,” would receive just 9% of votes if parliamentary elections were held today. Timoshenko’s opposition party “Fatherland” is in first place with double the voter support.

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The Kiev Post, an independent English language newspaper that supported the 2014 Euro Maidan revolution against pro-Russian president Viktor Yanukovych, is getting worried. A recent investigative series shows the paper’s concern about Ukraine’s inability to break from “croynism, kleptocracy and nepotism” – their words — three years later.

Yanukovych and Poroshenko have a symmetrical, mirror-like image of one another, Igor Lutsenko, a Euro Maidan activist and opposition party member, was quoted saying in the Kyiv Post on Oct. 7. “The difference is that Poroshenko is more sensitive to Western demands and Western support. But in all other things, he is just the same.”

Corruption undermines Ukraine’s security, and security is needed before investors put real money to work. For now, a lot of the money is coming from EBRD and the IMF.

“I’m not so interested in Ukraine,” says Amsterdam based money manager Arent Thijsen from T&E Inmaxxa. “Civil war, corruption and a disturbing relationship with Russia is killing it.”

New Ukraine: Will Slow & Steady Win The Race?

There are signs of improvement, but only on the margins.

Ukraine is 130th out of 168 countries ranked by Transparency International’s Corruption Perception Index 2015. It is worse than Russia (119) in terms of corruption. In the former Soviet Union only Tajikistan (136) and Uzbekistan (153) are worse.

As of Sept. 26, TI’s home page had pictures of protesters in Ukraine. One was wearing a Petro Poroshenko mask.

Under Yanukovych, however, Ukraine was ranked 144 out of 177 countries. It went from the 33rd most corrupt state in the world to the 38th most corrupt state in the world.

“During Yanukovych’s period no anti-corruption investigations were conducted and corrupt officials were unpunished,” says Transparency International’s executive director in Ukraine, Yaroslav Yurchyshyn. “The government created a corrupt regime in the country and was itself corrupt by using anti-corruption tools against political opponents only.”

Ukraine’s wealth and productive assets are divided between oligarchs who support Poroshenko and those who do not. Poroshenko is similar to other presidents insofar as those who don’t support him get investigated or prosecuted, and often see their businesses victims of hostile takeovers, some people claim.

One Ukrainian oligarch who garnered recent international attention was FORBES-listed billionaire Ihor Kolomoisky. Kolomoisky is the usual wealthy businessmen-politician hybrid. He was a Poroshenko ally. He financially backed private militias and Ukrainian Army soldiers in their fight against ethnic Russian separatists in east Ukraine.

But Kolomoisky didn’t like an oil and gas rule that hurt his business and he went rogue: reportedly sending in private security forces to take over a state owned oil company in Kiev. Kolomoisky reportedly said that the show of force was to stop Poroshenko from taking control of Ukrnafta, in which the tycoon had a 42% stake.

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Viktor Pinchuk is the co-owner of Krivorozhstal, the nation’s largest steel mill whose privatization was ruled as unlawful years ago under one government administration unfriendly to him.

The last two months have been riddled with news of exploding cars in Kiev killing investigative reporters, including the famous Pavel Sheremet, who survived persecution in Alexander Lukashenko’s Belarus and was a friend of Boris Nemtsov, the Russian opposition politician murdered outside Red Square on February 27, 2015.

Alexander Onyshchenko, a parliamentary leader and wealthy business man saw his oil and gas assets seized by government law enforcement recently, allegedly on the send from Poroshenko’s oligarch friends.

Cops also seized 10 apartments, 9 houses, 10 parcels of land, 39 bank accounts, and 11 cars owned by Onyshchenko and his partners, at a total value of 315 million hryvnia ($12.2 million).

“When the government saw that I supported a few political figures they didn’t like, I got a warning at first. Then they arrested 10 people close to me including my lawyers,” said Onyshchenko. He fled the country this summer to avoid prosecution he claims is stacked against him. “Seriously, what we have here is the opposite of the rule of law in Ukraine,” he said, repeating what Deputy Prosecutor General Vitaliy Kasko wrote in a February resignation letter.

The European Union, Poroshenko’s trusty sidekick, if not sole mediator in the ongoing battle with Russian separatists, will spend upwards of 16 million euros next year in a last ditch effort to fight official corruption.

In most ex-Soviet states, political in-fighting and rivalries among the rich make it hard to tell the good guys from the bad. There is a close connection between land owning, big business oligarchs and politicians.Some have called them Siamese twins.

Ukraine has been in perpetual crisis mode since the fall of the Soviet Union and independence 25 years ago. Since then, the country has rifled through 24 prime ministers. In an informal survey of a dozen fund managers from Des Moines to London, Volodymyr Groysman, isn’t much better than Arseniy “Yats” Yatsenyuk, Washington’s favorite, who took over Ukraine after Yanukovych’s ouster in February 2014.

Groysman said last week that he was confident that within three years time,Ukraine would be better than where it is today. That’s better than what Yats was famous for saying when he first took over the country. Yats said he would be the worst Prime Minister in Ukrainian history, owning to the austerity he had on offer for the economy.

Ukraine’s Parliament has made steps to combat the very system they are a part of. These include the creation of the National Anti-Corruption Bureau; the adoption of anti-corruption legislation; state funding for political campaigns designed to thwart the oligarchs; and open source, transparent, public procurement reform.

Some argue that Ukraine’s progress on this front has been hampered by its ongoing war with Russian-backed separatists in eastern Ukraine, and by the loss of the Crimea, a Black Sea peninsula, through Russian annexation . A large portion of Ukraine’s industrial activity occurs in areas that today look like a war zone.

“The war is not a serious reason not to fight corruption,” says Transparency’s Yurchyshyn.

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Dmytro Firtash, one of Ukraine’s most influential oligarchs attends a trial on April 30, 2015 in Vienna where he lives in exile.

Euro Maidan activists have taken to social media backstopping the government, saying that the Russians are at it again. For those in the anti-Russia camp, oligarchs with Russian money, or oligarchs with close ties to Vladimir Putin’s inner circle are causing havoc on Poroshenko. The Russian menace is to blame, therefore, for Poroshenko’s lousy approval rating.

However, most of the main oligarchs in Ukraine, from Poroshenko to Donald Trump’s friend Victor Pinchuk, and Kolomoysky have been firmly in the pro-government camp ever since Russia took over Crimea.

Others, like another FORBES billionaire, steel magnate Rinat Akhmetovwas initially ambivalent about the anti-Poroshenko protests in the Donbass, and later helped stabilize cities such as Mariupol on the Sea of Azov, when it became clear Russia was using local discontent to build a separatist movement against a Westward-ho Kiev.

One pro-Russia oligarch Vadim Novinsky continues to promote the Russian Orthodox Church and Moscow. Dmytro Firtash another once-powerful oligarch dependent on Russian capital, was arrested in Viennain 2014 on a U.S. warrant for alleged bribery in India. His empire — mainly dependent on natural gas arbitrage — has been upended by Poroshenko’s energy market reforms. His main asset is partial ownership over Inter, Ukraine’s largest TV station.

“There is some evidence of oligarch support for destabilizing the Ukrainian government, but it is the effort of a distinct minority of big business interests,” said Adrian Karatnycky, former president of Freedom House who runs his own government consultancy in New  York.

A recent report by Freedom House placed corruption high on the listed of Ukraine’s biggest problem with Western lenders. It is also its biggest obstacle in the quest to become the next Poland.

Last December, Vice President Joseph Biden bemoaned Ukraine’s slow progress on curtailing the marriage between super rich businessmen and politicians.

“If the people resign themselves to exploitation and corruption for fear of losing whatever little they have left, that would be the death knell for Ukrainian democracy,” Biden told them. “Not enough has been done yet.”

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Vice President Joe Biden shakes hands with Ukraine President Petro Poroshenko at a bilateral meeting during the 2016 Nuclear Security Summit in Washington, DC, March 31, 2016.

The IMF recently approved another $1 billion for Ukraine, meaning the U.S. taxpayer has money vested in Ukraine’s future.

Until Ukraine takes systemic measures to fight corruption, diminish the powers of corrupt oligarchs, gets read of judges, prosecutors and senior police officials who are on the take, self-destruction will continue to haunt this country.  With Europe and the U.S. now firmly in the caretaker role, Ukraine can become a flashpoint in already tense relation with Russia. This is especially true if Ukraine fails to make any progress in its decades old battle with kleptomania.

Poroshenko, too, like every Ukrainian leader, is part of the business elite that has acquired tons of assets since the fall of the Soviet Union.

One of the reasons large-scale privatization is so difficult in Ukraine is because its state-owned assets are often necessary to cover the losses and inefficiencies of the private sector. If companies like Naftogaz were privatized, or if the corporate governance is fixed, most of the inefficient private businesses can go bust. They will no longer have subsidized energy prices and tariffs to ransack for their other enterprises.

This is the crux of Ukraine’s problems today.

“Ukraine’s fight against corruption is not being fought with any overwhelming force. There is a lot of business interests that trump Ukrainian authorities, including Poroshenko,” Aleksashenko says.

Ukraine may be moving in the right direction, but at a glacial pace, which may be not fast enough to save its economy from a meltdown.

“The scourge of corruption remains deeply rooted. Rent seeking remains a big problem. As does the corruption of the judicial system, from police to the courts,” says Karatnycky. Corruption is more endemic than communism. Only 10 percent of the adult population were die-hard members of the Communist Party, he says.

But a far higher percentage of government employees, officials, and ordinary citizens were and still are a part of the system of graft, illegal payments, and corruption that took place under that regime. The fall of the Soviet Union impacted Ukraine the same way it impacted Russia, with a form of ‘gangster capitalism’ that hijacked companies and stole land. This didn’t happen that long ago.

“It will take a decades’ long effort to fully root out corruption,” Karatnycky says.

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