Ukraine morphs into plutocracy

By bne IntelliNews November 17, 2010

Graham Stack in Kyiv -

Of all the different constellations of power and property across the former Soviet Union, Ukraine is the country where the rich rule most directly: top tycoons occupy key government posts and at least one out of seven deputies are big businessmen.

In most other post-Soviet states, Valery Khoroshkovsky would be a breakthrough appointment as head of the country's secret service, the SBU. Aged 41, with a career in business, international experience, no Soviet security service background, a vegetarian with metrosexual good looks that have earned him the nickname "Ken" (as in Barbie's beau), this could be the man to bring the KGB successor agency into the 21st century.

The problem is that Khoroshkovsky does not just run the country's secret service, he also owns the country's largest and most politically influential (and pro-government) TV station, Inter. In fact, he is one of Ukraine's wealthiest tycoons, with total assets estimated at $804m, according to a rating conducted by the Kyiv-based brokerage Dragon Capital and published by weekly magazine Korrespondent in June. This makes him Ukraine's 14th richest person, although other ratings put his wealth lower. With characteristic suaveness, he dismisses all talk of conflict of interest by saying he no longer runs his business - his wife does.

Three rich men

Khoroshkovsky is not the only top state official to exhibit a major conflict of interest. Of Ukraine's four deputy prime ministers - the people who are responsible for taking cross-sectorial strategic and political decisions - three rank among Ukraine's top-50 wealthiest tycoons.

The wealthiest deputy prime minister is former banker Sergei Tigipko, who clocks in as Ukraine's 21st richest man with a fortune of $566m. In contrast to Khoroshkovsky, however, Tigipko's assets are mostly cash, having sold off his TAS bank to Swedbank in 2007. The second-richest deputy PM is Boris Kolesnikov, who Dragon Capital reckons is worth an estimated $231m. Kolesnikov founded and owns Ukraine's second largest confectionary concern, (the largest confectionary concern is owned by former foreign minister and National Bank head, Petro Poroschenko). The third-wealthiest deputy PM is Andrei Klyuev, who together with his brother Sergei is worth $384m, thanks to the ownership of metallurgical company Ukrpodshipnik. Younger brother Sergei is deputy head of the governing Party of Regions' parliamentary fraction, and heads the parliamentary sub-committee for the banking sector.

But Khoroshkovsky and the golden trio of deputy PMs are only the tip of the iceberg when it comes to the direct role that businessmen's money plays in Ukrainian politics. Of Ukraine's richest 100 people, 27 sit as deputies in Ukraine's unicameral parliament, the Verkhovna Rada, according to Dragon Capital, despite laws prohibiting deputies from pursuing alternative activities. This means that not only are they directly involved in the legislative process, but that they also enjoy almost unchallengeable immunity from prosecution.

In fact, according to analysts, around 65 deputies of the 450, or one in seven, are company owners - ie. businessmen using deputy status for lobbying and personal protection purposes. The assets of deputies counted among Ukraine's richest 200 business people by Focus magazine totals $14.3bn. Billionaire metallurgists Rinat Akhmetov and Konstantin Zhevago account for $8bn of this sum. Adding wealthy regional bosses such as Kyiv mayor Leonid Chernovetsky ($700m) gives a round total of $15bn assets owned by top politicians. (And this ignores officials and deputies who are oligarchs' placemen, such as the head of presidential administration, Sergei Levochkin, and Energy Minister Yury Boiko, both widely seen as stooges for gas trader and Party of Regions sponsor Dmitryi Firtash.)

With nominal GDP at $117bn in 2009, according to the International Monetary Fund (IMF), $15bn worth of assets means that Ukraine's top politicians have personal assets equal to a whopping 13% of the country's economic output.

A closed shop

Like can deal with like, so is the commercial mindset of Ukraine's politicians good news for investors? Only if the interests of the outsiders coincide with those of the plutocracy.

For instance, the government's readiness to comply with demands from the IMF showed the strength of business and personal interests. To secure IMF support that's essential for macroeconomic stability, the government was ready to prolong the lease of the Russian Black Sea fleet in the Crimea to gain a 20% reduction in the price of gas imported from Russia, and to hike gas prices for utilities and customers by 50%.

The government has also shown eagerness, even excessive zeal, in proposed slashing of corporate taxes, also pointing to its big business backers and participants. The government was originally planning to slash corporate profit tax from 25% to 19% immediately in 2011. Only after IMF representatives lambasted the plan as dangerous for the budget did Prime Minister Mykola Azarov shelve the idea. He now proposes to stagger the reduction over three years.

On the other hand, tax and customs authorities, largely loyal to local oligarchs, are using existing foreign investors in metallurgy and grain trading as cash cows, taking up as much as three years of profit tax in advance, and still not reimbursing VAT paid on exports. And with the export lobby dominant in government, the National Bank of Ukraine is stemming appreciation of the hryvnia, hurting the mostly foreign-owned banks that doled out dollar credits before the crisis and are now swamped by bad loans post-devaluation.

The government and its backers are also clearly reluctant to open up to foreign investors, even Russian ones, preferring that assets stay in local hands. The privatisation of locomotive builder Luganskteplovoz to Russia's Transmash holding was reversed by a court, the terms of the upcoming privatisation of fixed-line monopolist Ukrtelekom restrict most potential foreign bidders, and Firtash bought up the second-largest chemical plant Stirol from Party of Regions deputy Nikolai Yanovsky, although Russian-owned Sibur initially seemed the more likely purchaser. And although there has been much noise about Russian-Ukrainian intergovernmental deals in energy and aviation, they seem to be slow in coming.

Among foreign corporations, only Russia's Evraz metals and mining concern, whose largest shareholder is Roman Abramovich, is making inroads in Ukraine. Businessmen linked to the company snapped up Ukrainian steel plants in the first half of the year. But Evraz's apparent success may simply be the exception that proves the rule: Ukrainian top-five oligarch Ihor Kolomoisky holds a 10% stake in Evraz. And Valery "Ken" Khoroshkovsky, as unlikely a steelmaker as he is head spook, was himself president of Evraz from 2004 through 2006.

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