The edge of darkness

By bne IntelliNews May 25, 2011

Graham Stack in Kyiv -

When on April 18 news came through that 46-year-old Mykola Lisin, a lawmaker from Ukraine's ruling Party of Regions, had died in a car crash while driving at over 100 miles an hour in his Lamborghini Diablo, even hardened Ukraine watchers were shocked at the wave of schadenfreude that swept through the blogosphere. Party colleagues suggested Lisin may have swerved to avoid a bunny; less generous spirits nodded to what they saw as the poetic justice of the millionaire oil trader-turned politician catapulting into a filling station price display - at a time when petrol prices are soaring across the country, piling more misery on already cash-strapped consumers.

The hardhearted reaction to Lisin's death points to the crisis of legitimacy that Ukraine's democracy finds itself facing, with officials and parliamentarians perceived as an elite caste rather than a political class. As the cost of living surges, the political elite, largely coterminous with the wealthy elite, seem to live extravagant lives outside the rule of law, while they call on the population to tighten their belts.

Lisin's spectacular accident hurt only himself, but there are other cases where national or regional deputies or officials' belief in their impunity has caused casualties among the public. An MP from Yulia Tymoshenko's BYuT faction, Viktor Lozinsky, was sentenced to 15 years in jail on April 20 for premeditated murder after shooting dead a villager in 2009 when out hunting with a local head of police. But that was a rare instance of parliamentary immunity being lifted due to the publicity the case attracted.

The sense of impunity is coupled with the neglect of public interest. Tellingly, after nine years in parliament, Lisin left behind not a single political speech, legislative initiative or even an interview. But this is par for the course: MPs in Ukraine are not actually required to have an interest in public politics. Ukraine's parliament operates a closed party list system, meaning most MPs never have to campaign publicly for office. Nor do MPs have to actually attend sessions. Parliament operates de facto bloc voting in the chamber. A well-tuned system of "piano playing" means a handful of MPs present can use the electronic voting cards of absent colleagues to vote for them: bizarrely, Lisin was registered as present to vote in the chamber on April 18, a day after he died.

This is not to say Lisin was an anonymous backbencher. Lisin was co-founder of Infoks fuel trading and refining holding, valued at $300m, according to its website, and was president of the holding from 1991 until entering parliament in 2002. This marks him out as one of many Ukrainian MPs and ministers who are multi-millionaires, in a country that has the fourth lowest per-capita income in Europe - only the frozen-conflict states of Bosnia-Herzegovina, Kosovo and Moldova are poorer, according to GDP per capita measured by purchasing power parity. The estimated assets of top officials, according to Focus magazine's top 200 rich-list in February, totals roughly 20% of the country's annual GDP. Ukraine is the third largest consumer of the luxury Maybach cars in Europe after Germany and Russia, and has four Maybach dealerships compared with three in Germany, according to Nico Lange head of Konrad Adenauer Stiftung.

For such multi-millionaires, deputy status provides mainly wide-reaching immunity against prosecution in a country with an uncertain legal environment and widespread dubious business practices. At the same time, the single-chamber Verkhovna Rada and its committees are a key platform for rent-seeking. "Formally, MPs are barred from having professional activities outside their parliamentary duties, but in reality taking care of their personal interests is what many mainly do," says Valentin Korolko, president of the PR agency Mainstream Communications.

And while off the radar screen in terms of public politics, Lisin was no political outsider. His business partner in Infoks, former college classmate and party colleague through changing affiliations, was none other than the current minister of environment and natural resources, Mykola Zlochevsky. Zlochevsky was vice-president of Infoks until, like Lisin, entering parliament in 2002. Zlochevsky drives a Rolls Royce Phantom, according to his statement of assets.

Fields of dreams

Zlochevsky illustrates further issues that dog Ukraine's development. He has been connected over a number of years in a scandal surrounding the license for Ukraine's largest gasfield. Now he is in charge of deciding who gets to access Ukraine's potentially strategically significant shale gas reserves.

A year after entering parliament, in 2003, Zlochevsky became head of the state committee for natural resources, at that time responsible for awarding mineral exploitation licenses. During his tenure, the committee transferred the license for Ukraine's biggest gasfield, the Sakhalinsk field in Kharkiv region, from a joint venture between Ukrainian state-owned companies and Poland's national gas company, to an unknown newly founded private company Ukrnaftoburennia. The move inevitably aroused suspicion that the company was linked to him, including public accusations from the Polish side to that effect. Zlochevsky has denied the allegations. The Sakhalinsk field has estimated reserves of 15bn cubic metres (cm) of gas, worth around $4bn at current international prices.

Following the change in presidential administration in January 2005, Zlochevsky was fired and the Sakhalinsk licence reverted to Ukraine's state-owned operator. But in July 2010, Zlochevsky returned to office as minister of environment and natural resources, and again became responsible for natural resource licensing. There was little surprise when in December one of his subordinates confirmed that Ukrnaftoburennia once again held the Sakhalinsk licence. There was considerably more surprise when on May 20 a lower-level court revoked the licence due to no tender having been held. Analysts connect the surprise decision to an April visit to Kyiv by Polish President Bronislaw Komorowski, who called for a renewal of the two countries' gas cooperation. Poland will assume the presidency of the European Council in the second half of the year, just as Ukraine is edging towards a landmark freetrade agreement with the EU.

Ukrnaftoburennia has said it will appeal the decision, and its chances are good given the company's connections. Ukrnaftoburennia's ownership is hidden by Cyprus offshore companies. But bne has been able to establish that there exists another company, Evrokompleks, registered at the same address in Kyiv as Ukrnaftoburennia, with the same office telephone number, founded the same week in 2004, with its financial officer listed also as contact person for Ukrnaftoburennia. Ukrnaftoburennia's twin, Evrokompleks, may have only seven employees, according to company filings, but it has a high-ranking supervisory board chairman: Party of Regions Deputy Oleksandr Kirichok. Kirichok entered parliament in June 2010 on the death of a sitting Party of Regions member.

According to his official biography, Kirichok, the man looking after Ukrnaftoburennia's twin, worked at major Donetsk-based metallurgical concern Ukrpodshipnik from 1997 through 2007, before becoming chairman of the board at Evrokompleks and parliamentary candidate for the Party of Regions, both in October 2007. Ukrpodshipnik is in turn the main industrial asset of Party of Regions magnates, the Klyuev brothers, Andriy and Sergiy. Andriy Klyuev is first deputy prime minister, with overall charge of the energy sector, and thus Zlochevsky's boss. Brother Serhiy is deputy head of the Party of Regions parliamentary faction. Both are close associates of President Viktor Yanukovych and at the heart of the "Donetsk group" in Ukraine's politics - those hailing from the large city in eastern Ukraine on the Kalmius river. Evrokompleks could not be reached for comment.

Ukrnaftoburennia's links to Party of Regions' upper echelons fits into a trend of companies linked to Donetsk figures who are apparently benefiting exorbitantly from government decisions. Partly state-owned grain trading company Hlib Investbud has come from nowhere to take a lion's share of export quotas, with journalistic investigations linking the company to Party of Regions deputy, Donetsk man Yury Ivanyushenko. He has denied the links.

With Ukraine's position as a significant player in global food security, such goings-on are prompting international concern. Similarly, the opaque awarding of contracts by the Ministry of Environment and Natural Resources casts a shadow over what could be Ukraine's brightest economic prospect outside of agriculture, and also a key to the international energy security issue: Ukraine's potential reserves of unconventional gas – hard-to-get-at deposits of tight and shale gas, as well as coal-bed methane.

Guesstimates from research centres put Ukraine's shale gas reserves at around 1 trillion cm, which would cover roughly 15 years of the country's gas needs. Zlochevsky himself has spoken of 30 trillion cm of shale and coal-bed methane gas combined. Either way, international energy giants are queuing up to sign contracts. But all eyes are on the responsible Ukrainian officials to see what slice of the action they may seek for themselves in the highly politicised energy sector.

Authoritarianism rising

The failure of the government to improve anyone's standard of living other than the deputies themselves is starting to count with the electorate, and the Party of Regions' honeymoon ratings of a year ago, following party leader Viktor Yanukovych's election as president, are almost all gone.

An April 28 poll by the Kyiv International Sociology Institute showed support for the Party of Regions crashing from 38.0% to 13.9% over 12 months. The main opposition party of Bloc Yulia Tymoshenko (BYuT), which should have been the main beneficiary of Party of Regions' fall from grace, has also failed to improve its standing - BYuT's ratings have also crashed to 10.6%. Another poll conducted by the Razumkov Center in April found that 63.8% of respondents believe the situation in the country is heading in the wrong direction. 49.0% said they did not support Yanukovych, with only 10.6% saying they fully supported the president.

These results speak of a deep-seated disillusionment amongst the Ukrainian people. The irony is that the citizens of a country that could once boast to be the only true democracy in Eastern Europe now don't trust any of their politicians, with the opposition seen just as corrupt as those who hold the reigns of power.

The international community may be partly to blame. Analysts put much of the sharp drop in support for the Party of Regions on utility price hikes required by the International Monetary Fund (IMF) and the global surge in food and fuel prices unleashed by the second round of US quantitative easing. Media have calculated a 30% real increase in the basic cost of living over one year. Like wind chill, this "felt inflation" is not reflected in official inflation statistics, which are in fact lower than they've been since Ukrainian independence. But the spike in prices affects a few key consumer staples - monthly utility bills, food and fuel - with prices at the petrol pump approaching the UAH10 per litre, and fruit and vegetables at an all-time high. These prices have a direct knock-on effect on poll ratings, and also for consumer confidence.

Some jiggery-pokery with numbers may also be going on, analysts surmise, since Ukraine also has inflation targets to meet for the IMF. Ukraine is no stranger to cooking the books; when Yulia Tymoshenko was prime minister in 2008 and negotiating with the IMF for a bailout loan, the government was caught lying about the size of the deficit on a massive scale: Tymoshenko promised the fund a zero budget deficit and ended the year with a deficit on the order of 13% of GDP.

Wrong target

Discontent is refocusing the broader public's attention on issues of corruption and legitimacy of the elite, just as elections start to loom in October 2012.

The government is claiming it has introduced key reforms such as a much-needed new tax code. But among the population the tax code is associated with a higher tax take from "entrepreneurs," meaning Ukraine's vast army of shopkeepers and market sellers, and a drop in corporate profit tax helping the oligarchs. At the same time, pledges to change double tax treaties with Cyprus that leak the country's wealth to the West have quietly died.

Instead of taking on vested interests such as the oligarchs, the government has spent most of its time harassing the opposition. Criminal charges have been brought against former prime minister Tymoshenko and former interior minister Yury Lutsenko, the two most outspoken and charismatic opposition figures, on charges of exceeding their powers while in office. Even without a jail sentence, a conviction could bar them from political office and running for parliament next year. Government representatives point out that a far more serious case has in the meantime been bought against former president Leonid Kuchma, Yanukovych's mentor, in connection with the cause célèbre murder of critical journalist Georgiy Gongadze in 2000. But analysts remain sceptical about the Kuchma case, regarding it as a flanking manoeuvre against international criticism of the crackdown on the opposition. Meanwhile, Lutsenko, who has been detained, was by mid-May in the third week of a hunger strike.

The tightening screws in Ukraine have been well documented by international watchdogs. Freedom House downgraded Ukraine from "free" to "partly free" in January, and followed up with a report in April that warned of a "move towards greater centralisation and consolidation of power." Reporters Without Borders, the Index of Economic Freedoms and Transparency International have all also downgraded Ukraine in recent months, harming the country's image abroad and reducing its international clout.

Criminal charges against leading opposition figures is something not seen even in Russia, indicating that the Kremlin's "managed democracy" may be unattainable in Ukraine, due to the heavy-handedness of Donetsk gangland traditions and the commitment of the national opposition. A bne source from the last KGB generation of the USSR, now a Party of Regions member in Kyiv, is highly critical of what he calls "the Donetsk idiots' attempts to kill off or frighten opposition through physical contact". "You can't go after people physically, after all it's the 21st century. You have to do it like we did in the KGB, where only in one case out of 50,000 did we use physical contact. You have to know how to work with people without resorting to contact: pressure them over work, at the border, or over debts," the source says.

However, despite opinion polls showing an increase in members of the public prepared to take to the streets, the source sees little immediate prospect of protests among the wider public. "The people have already been settled down into 'regime-ness' well, and as an ex-KGB man I'm happy that's it's been possible to settle them down without using physical contact."

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