KYIV BLOG: Zelenskiy government launches a major de-oligarchisation drive, but is it for real?

KYIV BLOG: Zelenskiy government launches a major de-oligarchisation drive, but is it for real?
Ukrainian President Volodymyr Zelenskiy seems to have launched an attack on Ukraine’s most powerful oligarch Ihor Kolomoisky. But it's still not clear what is actually going on. / wiki
By Ben Aris in Berlin March 8, 2021

President Volodymyr Zelenskiy spokesperson Iuliia Mendel posted a blog on the Atlantic Council’s website at the weekend claiming that Ukraine has launched a major de-oligarchisation campaign. But is the campaign for real, as there are conflicting signals coming out of Kyiv, and Zelenskiy’s relations with the oligarchs remain far from clear.

“The rise of Ukraine’s oligarch class dates back to the early 1990s, when a select few were able to acquire enormous wealth during the privatisations that followed the collapse of the USSR. This small group of billionaires then used their personal fortunes to build media empires and establish networks of influence extending deep into Ukraine’s political structures, judiciary and state organs. They have remained in this dominant position ever since,” Mendel said.

“Ukraine’s oligarchic system has proved highly resilient, outliving numerous governments and coming through the turbulence of two separate post-Soviet revolutions more or less intact. Each successive drive to change the system has resulted in innovative new ways to maintain the unfair advantages and artificial monopolies that form the foundation stones of the oligarchic economic system. The overwhelming might of the oligarchs has kept Ukraine trapped in an obsolete and dysfunctional past while preventing the country from reaching its true potential,” Mendel concluded.

As bne IntelliNews highlighted in a recent op-ed, “The Oligarch Problem” is probably the major issue facing not only Ukraine, but all of the countries of the Former Soviet Union (FSU). Only this weekend it was reported that Georgian oligarch Bidzina Ivanishvili’s son had “ordered” security forces to question people that had criticised him on social media, leading commentators to say the Georgian government has been completely captured by the Ivanishvili family. Russia has its own oligarch problem, but there, Russian President Vladimir Putin has pushed out the oligarchs that lorded it under former President Boris Yeltsin and replaced them with stoligarchs – state-sponsored oligarchs that are personally close to Putin.

In Ukraine one oligarch in particular has caused the most problems: Ihor Kolomoisky, who is credited with putting Zelenskiy into office in April 2019 by using his media empire to back him. However, the relationship between the oligarch and the comedian-turned-politician remains unclear. The two men knew each other well before the presidential elections and have done business together. Zelenskiy continues to earn royalties from the broadcasting of his comedy shows on Kolomoisky TV channels and also from rights sold to Russian TV stations.

Zelenskiy has also held controversial meetings with Kolomoisky where they discussed the development of Ukraine’s business, although few details were released. However, most controversially of all, Kolomoisky is accused of looting $5.5bn from his bank PrivatBank, which was nationalised in 2016 when former President Petro Poroshenko was in charge. Kolomoisky remained in exile in Israel for all of Poroshenko’s term in office, but returned as soon as Zelenskiy was elected. No charges have been brought against Kolomoisky, nor has any investigation been launched despite very strong evidence showing that the managers of PrivatBank emptied the deposits accounts of cash, as bne IntelliNews reported in a cover story in November 2016 “Privat investigations” that triggered the NBU’s investigation into PrivatBank’s books.

That seems to have changed now.

Zelenskiy’s flip-flops

“Ukrainian officials announced in late February that three former top managers at the country’s biggest bank, Privatbank, are now suspects in a $5.5bn fraud case at the heart of Ukraine’s oligarch politics. One of these suspects was detained while attempting to leave the country. The news generated considerable international attention and was widely seen as an indication that the high-profile investigation may finally be gaining momentum,” Mendel said. “The Privatbank case has long served as a symbol of oligarch impunity. Progress towards justice would be seen as a major breakthrough for Ukraine.”

She is not wrong about that. The PrivatBank case being brought against its former managers is a litmus test, but it raises the question: why now?

Kolomoisky has been operating with impunity inside Ukraine and clearly increasingly interfering in domestic politics, specifically trying to counter International Monetary Fund (IMF) efforts to prevent him from recapturing his bank and to set up effective anti-corruption mechanisms that Kolomoisky, and the other oligarchs, use to run their rent-seeking business empires.

The political novice Zelenskiy appears to swinging in the wind depending on who is offering to back him. He has put through many contradictory policy decisions that have both supported the oligarch and have acted against him.

Last summer Zelenskiy personally sacked the well-respected central bank governor, Yakiv Smolii, on June 2, who complained of “systemic political pressure” as the reason for his departure. Kolomoisky had been attacking the central bank as part of his efforts to regain control over PrivatBank and National Bank of Ukraine (NBU) staff were threatened and their houses and cars burnt in arson attacks. The NBU branded attacks on its staff and former NBU governor Valeriya Gontareva as a “terror” campaign, naming Kolomoisky as responsible.

More recently, the Rada adopted a draft law that allows the government to sack the head of the National Anti-Corruption Bureau of Ukraine (NABU) that is part of a triumvirate set up at the insistence of the IMF to fight corruption and is entirely outside the government’s control. The draft bill was submitted to the Rada by the president’s office, according to local reports.

However, Zelenskiy has also worked against Kolomoisky. When the so-called anti-Kolomoisky banking law was presented to the Rada last May that was a prerequisite to get the next desperately needed $2.1bn IMF tranche, Zelenskiy personally went down to the parliament buildings to lobby deputies to vote for the law, which was narrowly passed.

The pressure on Kolomoisky is growing. The now state-owned PrivatBank has brought a number of cases against Kolomoisky in London and Cyprus, which are making good progress. The courts in London have already frozen $2bn of Kolomoisky's assets. And the US government has also launched a Grand Jury money-laundering investigation into Kolomoisky, who used companies based in Cleveland and other US locations to launder hundreds of millions of dollars.

Then last week the new Biden administration dropped a bombshell, by sanctioning Kolomoisky, including asset freezes and travel bans for him and his family.

It has taken a long time. bne IntelliNews called for international sanctions to be imposed on Kolomoisky during his very blatant efforts to scupper the anti-Kolomoisky banking bill, which was not even on the agenda a year ago. Clearly something has changed.

One interpretations of these recent events is that the Biden administration has decided to do something about Ukraine and in addition to identifying Russia as the major problem, it has now decided that The Oligarch Problem is equally urgent and will do something about that too.

And Ukraine is in trouble. Kolomoisky’s machinations have led to the suspension of the IMF programme. Amongst the many issues, it appears that he organised a decision by the Constitutional Court of Ukraine to strike down the main anti-corruption laws last November, which was anathema to the IMF. Without the next two tranches of $700mn, left over from last year, and the $2.2bn due this year, Ukraine will struggle to pay off some $16bn of debt redemptions due later this year. Zelenskiy doesn't really have a choice. He has to restart the IMF programme by the summer at the latest.

Confusion reigns

But confusion still reigns.

Despite Mendel’s strong comment, Zelenskiy himself has yet to criticise Kolomoisky in public.

After Mendel posted a link to her blog on twitter, famous Urkainian commentator, Swedish economist and a Senior Fellow at the Atlantic Council Anders Aslund challenged her, saying that Zelenskiy has yet to condemn Kolomoisky in public.

“Really? Can he name Kolomoisky? To challenge the oligarchs in general means nothing. That is the reason why everybody says so, but Kolomoisky is the main problem. Can @ZelenskyyUa says so? Or is he still tied to him? Why are all these Kolomoisky stooges still his MPs?” Aslund said in a tweet, which led to a testy exchange.

“Mr.Aslund, I am pretty disappointed you’re so much influenced by too old disinformation narratives. Hope you’re speaking for high-quality analytics, not just because of an offence of being fired,” Mendel fired back.

“What "old disinformation narratives"?! I read all of @ZelenskyyUa statements. Has he ever said ONE NEGATIVE WORD in public about Kolomoisky? (We all know what a crook he is.) No. Please give me one piece of contrary evidence or withdraw your inappropriate tweet!” Aslund replied.

This exchange was made doubly curious by Mendel’s choice to post her comment on the Atlantic Council’s website. While the Washington-based think-tank, which offers foreign policy advice to those inside the Beltway, is famously rabidly anti-Russia and pro-Ukraine, it is also part funded by two of Ukraine’s biggest oligarchs, Rinat Akhmetov and Viktor Pinchuk, as bne IntelliNews described in The Oligarch Problem.

While Mendel mentions several other oligarchs, including gas-scammer Dmytro Firtash and Viktor Medvedchuk, the head of the Political Council of the Opposition Platform, For Life Party – the first is in Vienna fighting an extradition to the US where he faces corruption charges and the latter was recently sanctioned by Zelenskiy – neither Akhmetov or Pinchuk have been mentioned by the Zelenskiy or included in any way in the new “de-oligarchisation” of Ukraine. Kolomoisky reportedly controls over 70 deputies in the Rada, but Akhmetov reportedly controls over 100 out of the 425-man body.

That opens up the possibility that the attack on Kolomoisky is not only due to the need to restart the IMF programme, but also a black ops sting organised by the other oligarchs against their rivals. A similar thing happened in Russia at the end of the 1990s when a “Bankers war” broke out and Russia’s leading oligarchs started taking swipes at each other in the press they controlled.

At this stage it is impossible to say what is actually going on, but what remains is that Zelenskiy continues to flip-flop. His main problem is as a novice in power he has no power base of his own. He relied on Kolomoisky to put him into office. Then he relied on the overwhelming majority of his Servant of the People (SOTP) party in the Rada. But now the party is fragmented and Zelenskiy can no long ram laws through without the co-operation of the opposition parties, including his nemesis former President Petro Poroshenko, he is turning to the US for support.

With his popularity in the polls plummeting and two thirds of the population saying the country is going in the wrong direction, Zelenskiy badly needs to score some reform victories if he is not going to become a lame duck president.

Kolomoisky is clearly in trouble as the pressure mounts, but perhaps it is only temporary, as observers say that the government in Kyiv only ever make radical reforms when it is faced with a crisis. And Ukraine is facing a crisis in September when $11bn of debt comes due. But as soon as the IMF pays out its crisis-averting tranches the government goes back to ignoring the reform agenda.

As Russia’s former Prime Minister and ambassador to Ukraine Viktor Chernomyrdin famously said: “We hope for the best, but things turn out like they always do.”