Ukrainian Oligarchs Stay Above The Fray And Let The Crisis Play Out

Over the past two weeks, the world has been transfixed by the drama of the uprising in Ukraine, from the medieval energy of bloody street battles in Kiev to the threat of a return to Cold War hostilities. But few of us understand the long-held grievances of the country’s citizens that fueled the protests, aside from knowing that they were angry that the country’s autocratic leader wanted to tie its economy closer to Russia than to Europe.

Underlying much of the rage was a frustration with former president Viktor Yanukovych’s corrupt legacy, in which some of the country’s wealthiest tycoons profited from their friendship with the longtime leader. Essentially, before January, Ukraine was a country where the 1 percent had their way.

As in many former Soviet republics, tycoons -- generally referred to in the region as oligarchs – have grown stunningly wealthy in the post-Communist era, and they did so by forging close associations. From Russia to Ukraine, the Caucasus and the Central Asia republics, oligarchs have colluded with the established political order to benefit from privatization of government concessions in ways that verged on corruption. In Ukraine, much of that appears to have been enabled by Yanukovych and his political allies.

The crisis was triggered by a dispute over Yanukovych’s decision to ally the country with Russia in a customs union, overriding the preferences of a majority of the population, who desired a pact with the European Union. True to form, Ukrainian oligarchs stayed on the sidelines as the political crisis unfolded, keeping as low a profile as possible. That required a particular set of skills, as politics and big business are deeply intertwined in Ukraine -- to a much higher degree than in Russia, where magnates steer clear of politics, especially under Vladimir Putin’s reign.

Rinat Akhmetov, the richest Ukrainian, with an estimated net worth of $12.5 billion, controlled a bloc of 50 lawmakers of the then-ruling Party of Regions at the 442-seat Verkhovna Rada, or parliament, according to experts including Orysia Lutsevych, a Ukraine expert at Chatham House in London. Another 30 MPs were controlled by Dmytro Firtash, who made his fortune in the chemicals and natural gas trade.

Their influence was not restricted to parliament. According to Anders Aslund, senior fellow at the Peterson Institute for International Economics and one of the foremost experts on Eastern Europe and the former Soviet Union, when now-deposed Yanukovych took office in February 2010, his first cabinet of ministers included representatives from nine different corporate groups.

By Aslund’s count, following several reshuffles, by December 2013 that number had fallen to just two businesses, as Yanukovych’s own men -- known collectively as “the Family,” including his son Oleksandr, who quickly ascended through the ranks of the richest men in the country -- started squeezing other competitors out through corporate raids and other buyouts that appear to have been forced by government pressure.

Political office is key to the patronage system. Companies belonging to Akhmetov were awarded 31 percent of all state concessions in January, according to the Ukrainian edition of Fortune magazine. In other words, he was still profiting right until the very end of the Yanukovych regime. It’s worth noting that Fortune Ukraine belongs to yet another billionaire, Serhiy Kurchenko, a 28-year-old who owns many of the country’s media companies and has interests in gas operations. Kurchenko surged into the ranks of billionaires quite suddenly, which may be linked to his close ties to Yanukovych.

Two billionaires, Hennadiy Boholyubov and Ihor Kolomoysky, owners of Privat Group -- with media, energy and banking operations -- may have lately switched sides and supported Yanukovych’s opposition. Firtash also apparently sided with the anti-Yanukovych camp when the tide turned against the former president. Akhmetov, much like another mogul, Viktor Pinchuk, sat out the crisis, issuing statements condemning the violence -- thus distancing himself from the disgraced president but avoiding further commitments. Only Vadim Novinsky, who owns shipping operations and big stakes in Russia, appears to have stuck with Yanukovych.

A balancing act

The only billionaire who openly sided with the opposition was Petro Poroshenko, an MP and a former economic minister, who made his money in confectionary. He is the owner of the Roshen Group, the largest chocolate maker in Ukraine. In one sense he is an archetypal example of the symbiotic relationship of Ukrainian politics and business, though he has displayed an independent streak. As Aslund explains, “the King of Chocolate” -- as Poroshenko is known -- can afford it, with food being the basis of his fortune, unlike billionaires whose wealth depends on Eastern Ukraine’s heavy industries and mining as well as close Russian relations.

None of the magnates, however, would forsake closer ties with Europe as the price of a special relationship with Russia. The money they make in Eastern Ukraine and in their Russian deals goes to Western Europe, with London being a major hub for Ukrainian businessmen. That’s why, on this front too, they need to do a balancing act.

According to Timothy Ash, head of Emerging Markets at Standard Bank in London, Ukrainian oligarchs initially preferred the European deal but became concerned in response to Russian threats including a possible cutoff of gas, which was why they had cooled off on the agreement with the EU. “They are worried about the Russian reaction,” Ash said.

A larger question is whether what is happening in Ukraine is the politics of pillaging. How the Ukrainian economy -- the 51^st largest in the world with a $175 billion GDP (according to 2012 World Bank figures, two notches below Peru and just after the Czech Republic) -- with at least 15 billionaires, can be on the verge of bankruptcy?

According to Chatham House’s Lutsevych, “it is fair” to describe the Ukrainian crisis as a result of the politics of pillaging. “Yanukovych and the rich would use public office to build monopolies and benefit from them,” she said. “Corruption in the Ukraine skyrocketed and corporate raiding increased.”

According to Olena Zakharova, director of the foreign policy department at the International Centre for Policy Studies in Kiev, “The Ukrainian economy has been pillaged by the oligarchs during all the years after independence, and this process reached its highest point during Yanukovych’s presidency.” She added that “all the money flows were oriented to the ‘Family’ oligarchs, first of all Yanukovych’s son Oleksandr, young Family representative Serhiy Kurchenko, Yanukovych’s right-hand man Andriy Kliuyev, and others. The other oligarchs had to share their businesses and assets with the Family in order to survive and have the possibility to profit from the state budget, which has put the country on the edge of bankruptcy.”

Oleksandr Yanukovych, a former dentist, “made it to the list of the 100 richest in just two years,” said Chatham House’s Lutsevych.

Keeping a low profile

So far, the oligarchs have escaped the ire of the public, carefully hedging their bets and keeping their profile low. And the new government shaping up in Ukraine is unlikely to openly antagonize them -- for now.

“I am not sure they will escape public anger,” said Andrew Gardner, an editor with European Voice in Brussels and an Eastern Europe expert. “The Maidan shows a huge constituency for deep change. One lesson that the oligarchs will hopefully take away from the Maidan is that they tested the public’s patience too much. If they test it again, they -- rather than Yanukovych -- could become targets.”

Political expediency may have helped the oligarchs too. “The democrats are too smart to alienate the oligarchs, who control some 80 to 85 percent of GDP,” said Alexander Motyl, a political science professor at Rutgers University and a Ukraine expert. “Several oligarchs, and especially Yanukovych's key backer, Rinat Akhmetov, spoke out for peaceful solutions. They were obviously signaling to both Yanukovych and the democratic opposition that they did not approve of violence.”

However, Motyl added, except for Poroshenko, no one actually sided with the opposition. “When, several weeks ago, some 80 deputies aligned with Akhmetov and Firtash threatened to rebel, Yanukovych cowed them and they stepped back.”

The oligarchs can claim little credit for Yanukovych's downfall. “On the other hand, by not supporting violence they have also managed to escape the wrath of the people, who want the regime members who ordered or condoned the killings brought to justice,” Motyl said.

Good relations with the government are good for business, so the new order in Kiev has little to fear from the tycoons in terms of resistance. “They will, I suspect, continue to make nice so as to escape whatever sanctions might be applied to them in the future,” Motyl said.

East and West

Much the same can be said about the tycoons’ vision for Ukraine’s place in the international polity. Being on good terms with the East and the West has paid off for the oligarchs and nothing indicates that will change in the future. While the EU and the U.S. were quick to provide moral support for the opposition in Ukraine, European solidarity seems to be cooling off now that the interim government has requested $35 billion in emergency aid at a time when the EU has still not emerged from its own financial difficulties.

Ukraine’s future may still lie in the East, where the billionaires have their mines and factories, and their biggest markets.

“The oligarchs really make their money primarily at industrial enterprises in Eastern Ukraine that were built in Soviet times,” CPS’ Zakharova said. “Due to the low and outdated standards of their output, exports from such enterprises are largely oriented to Russia and CIS countries… from this point of view, one can consider that oligarchs are not interested in the EU association.”

But the tycoons will be careful not to frustrate their neighbors to the West. “The Family has transferred to Europe a number of assets pillaged in the Ukraine,” Zakharova said.

What’s next

The future, as always, charts its own, unpredictable course. “I don't think anyone can predict how the oligarchs will react,” European Voice’s Gardner said. But we know some things, he added.

“First, over the past couple of years, a whole set of laws demanded by the EU have gotten through a parliament packed with rich men and women, many of them grouped around a small set of oligarchs. The overall direction, therefore, has been toward the EU; secondly, many of them were unwilling to support the Maidan; thirdly, in the end they were not willing to go alone with the ostensible Russian or Yanukovych scenarios -- a truly bloody crackdown.”

What does this mean for the oligarchs? “They may not be in the opposition camp, but that does not mean they are in Russia's camp. They have shown an interest in EU-styled laws. But whether they will be willing to accept far deeper reforms is open to question,” Gardner says.

Even staunchly pro-Russian oligarchs appear to have more faith in European values. “Some of the oligarchs prefer to file lawsuits in British courts on Ukrainian issues, seeking fair justice. No one has ever sought it at the Basmanny court in Moscow,” CPS’ Zakharova said. “And even the most blatant supporters of Russia prefer to spend their vacations at Courchevel, not at the Altai.”