Yanukovych family tightens the screws on Ukraine's finances

By bne IntelliNews June 25, 2012

Graham Stack in Kyiv -

The Ukrainian president's family influence is growing as they take a tighter grip on the state's finances, which is having a positive effect on revenues but raising questions about transparency.

The 33-year-old Sergei Arbuzov's appointment to the post of head of the National Bank of Ukraine in December 2010 left many scratching their heads - Arbuzov was a complete unknown in Ukraine's banking world, except for a six-month "internship" in 2010 as chairman of the board of state-owned bank Ukreksimank, followed by a three-month "internship" as deputy head of the central bank, which apparently qualified him for the top role in Ukrainian banking. Arbuzov's one redeeming virtue, it seemed, was that his mother was the CEO of a small Donetsk bank owned by his friend, President Viktor Yanuovych's son Aleksandr. Yanuovych Jr is a regional businessman with banking and real estate interests.

Arbuzov's appointment opened the floodgates for further appointments of Aleksandr Yanukovych's and Sergei Arbuzov's friends from Donetsk to key state finance posts in 2011 and 2012.

Most noticeably, on February 28, Yury Kolobov completed a meteoric rise in the footsteps of Arbuzov by becoming finance minister - Kolobov had previously served as deputy to Arbuzov at Ukreksimbank and then at the National Bank of Ukraine. Like both mother and son Arbuzov, Kolobov's career started in the 1990s in a regional section of Privatbank, Ukraine's largest private bank - although they are in no sense linked to the owners of Privatbank.

Yanukovych appointed another unknown young Donetsk friend of his son as head of the state tax administration in November 2011: 31-year-old Aleksandr Klimenko. A low-level tax official, following Viktor Yanukovych's victory in presidential elections in February 2010, Klimenko shot up to become deputy head of the Donetsk regional tax administration, where he worked for less than a year, before being named head of the Ukrainian national tax service. In an interview in Zerkalo Nedeli, Klimenko refused to comment on his friendship with Arbuzov and Yanukovych Jr, saying it had been "politicized" by the media. Instead, he simply called the two "wise men", "who feel the state's pain (at corruption) as their own."

A particular cluster of appointments relate to former employees of the Donetsk office of Privatbank - which according to press reports was headed for several years in the 1990s by Valentina Arbuzova, mother of Sergei and CEO of Aleksandr Yanukovych's bank, and where Sergei Arbuzov himself started out. The new head of the Kyiv city tax administration, where the lion's share of the country's tax is paid, is 40-year-old Irina Nosacheva, who worked alongside the Arbuzovs at Privatbank in Donetsk, then in 2004-2008 she worked at Ukrbiznesbank, a small Donetsk bank of which Sergei Arbuzov was CEO.

Another former employee of the Donetsk Privatbank office, 40-year-old Viktoria Kononykhina, succeeded now Finance Minister Koloba as first deputy head of Ukreximbank - Ukraine's largest bank by capital and key buyer of government bonds and lender to state companies such as gas monopoly Naftogaz Ukrainy. Kononykhina is regarded as the one pulling the strings at the bank.

And finally in April, another former manager at the Privatbank Donetsk office, Roman Maguta, became head of Ukraine's state audit chamber - and promptly launched a campaign to expand the remit of the chamber to cover not only state expenditure, even aiming for changes to the constitution.

Revenue boost

The tightening of presidential family control over state finances that the new appointments represent appear to have paid off. State revenues in the first three months of 2012 leapt 16% on the year, helped by GDP growth in 2011 of 4.5%. As a result, the government amended the budget in late April, raising revenues forecast for the year by a whopping 10%, and promptly boosting expenditure by roughly the same amount.

Critics says that the government is using the revenue boost to fuel extra social spending going into what are set to be tough elections in October 2011, and to stay clear of International Monetary Fund (IMF) funding, which comes with strings attached such as painful hikes to the price of energy supplied to the population. But the government claims boosting state spending is necessary to ward off any slowdown in GDP growth triggered by the Eurozone crisis.

Meanwhile, Ukrainian news is full of reports of companies reportedly "raided" by tax authorities as a prelude to a hostile takeover as claimed by the owners, but few such hostile takeovers have as yet been made public, making it difficult to distinguish truth from rumour. Many of the affected businesses are importers of household goods and electronics, loved by the public for delivering cheap boosts to living standards and so can count on a public vote of sympathy when the tax police come, but also often regarded to be persistent tax infringers through use of transfer pricing in their import operations.

But there is obvious danger from the financial tightening under the control of Yanukovych Jr, taking into account his considerable, but by no means sufficient, business interests. Forbes Ukraine lists him in 2012 for the first time among Ukraine's richest persons, at 98th spot, with a fortune of $99m concentrated in his Mako real estate holding and a rapidly expanding bank All-Ukrainian Bank of Development, headed by Valentina Arbuzova.

Valentina's son, central bank boss Sergei, also has some question marks in his past - he has publicly acknowledged in an interview with Zerkalo Nedeli in February 2011 that in his early career as banker he went to court to avoid being assigned a state tax ID number. He claims his aversion to having a tax ID was due to strongly held Russian Orthodox beliefs: ironically for someone associated with a drive towards fiscal tightening, he shares some Orthodox believers' conviction that the tax ID number is a sign of the devil.

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