What Ihor Kolomoiskyi hopes for in the last battle of Ukrainian oligarchs

A month ago, Ukrainian oligarch Ihor Kolomoiskyi seemed to have reached a dead end, having been deprived of his bank, falling under investigation in the US and UK with his companies finally forced to pay normal bills to Ukrainian state enterprises, and his assets frozen by a UK court. However, upon his return to Ukraine after Zelenskyy’s victory in the presidential elections, Kolomoiskyi dared to recommend to the Ukrainian government that the country default. He didn’t conceal his happiness with the results of the presidential elections. How powerful are the Ukrainian oligarchs, what schemes do they use to enrich themselves, and how is Ihor Kolomoiskyi trying to take revenge after being suppressed by Poroshenko?

What it takes to be a Ukrainian oligarch

Ukrainian oligarchs are not plutocrats of the billionaire George Soros kind, the type who have a strong influence in world politics via various funds and programs. The plutocrat influence over the global agenda is disputable, especially for those who criticize neoliberal economic policy. But Ukrainian oligarchs are not interested in such abstract global lobbies - they work rudely and directly, finely balanced on the margin between legal and illegal. There are three prerequisites to be a Ukrainian oligarch:

Most important is to own major enterprises, usually old state enterprises from the Soviet era. Not only is the profit itself valuable: an owner of important enterprises has a value for the state, for he creates jobs and pays taxes. Therefore, he has power to negotiate, and it becomes a matter of technique to protect national producers, establish required prices for electricity or create other favorable policies through the government.
Politicians are required to implement these schemes, with each oligarch therefore supporting certain political parties and promoting his people to political office. Each of the main Ukrainian parties has an oligarch behind it.
Finally, Ukrainian media, especially TV channels, are the third “must” for an oligarch in order to promote his policies and favored party before elections.

Such a political model was finally established during the presidency of the second Ukrainian president, Leonid Kuchma.

It is what Ukrainian journalists call “oligarchic consensus” - oligarchs influence politics through friends, relatives or just by money.

And ordinary citizens are allowed to do the same on their level: avoid army service by having a friend or relative in the military commission, or buying a university diploma. That was the balance which was maintained while the middle class was weak and there was no foreign threat. At least five of the most important players can be determined in that cynical postmodern game of Ukrainian oligarchs:

Rinat Akhmetov, the richest person in Ukraine. He started in the coal trade in the 1990s, then occupied the energy sector and currently controls 8 out of 12 thermal power stations in Ukraine. Altogether, he owns more than 100 enterprises in various sectors of the economy. His assets were badly damaged by the war in the Donbas where most of his coal enterprises are situated. However, since 2016, his business empire has steadily grown from $2.3 billion in 2016 to $6 billion today, according to Forbes, in particular due to the notorious Rotterdam+ scheme that established high prices for coal and electricity.
Dmytro Firtash created his business in the 1990s mainly in the retail sphere. He was accused of smuggling, but later won in court. He was the first monopolist in the import of Turkmenistan gas to Ukraine in 2003 and made large profits. Firtash is being prosecuted for corruption in the United States. Since March 2014, he has been living in Austria, where he was detained by the local police at the request of the United States and is now awaiting extradition. According to the American senator Roger Whisker, Ukrainian oligarch Dmytro Firtash has made "hundreds of millions in illegal income" on gas deals while waiting for his extradition.
Viktor Pinchuk, a son-in-law of the second Ukrainian president Leonid Kuchma, obtained a substantial part of his property during Kuchma’s presidency. In recent years, he has tried to be the most progressive Ukrainian oligarch, financing scholarships and conferences like the annual Yalta European Strategy conference, attended by many prominent politicians of the world including former British Prime Minister Tony Blair and former US President Bill Clinton.
Ihor Kolomoiskyi was an owner of the largest Ukrainian bank PrivatBank. He used it for money laundering. He also had large profits in the sphere of oil trading and refining in Ukraine. Kolomoiskyi comfortably shared his assets with the state company in the sector – Naftogaz, but after the reform of Naftogaz in 2015 he lost influence in the sector.
Petro Poroshenko started his business empire from the trade of cacao and chocolate and later expanded his influence to the sector of the bus industry and related machine building. There was an accusation, not proven by the court, that Poroshenko obtained his first chocolate enterprises illegally in the 1990s. His buses were usually bought by the state as public transport.

Oligarchs of Ukraine. Source: screenshot from video, translated

From the consensus of equal players to Poroshenko against Kolomoiskyi

After 2000, Ukrainian oligarchs were quite loyal to all presidents and prime ministers, trying to establish cooperation. Some were leading in certain periods, like Akhmetov backing the Party of the Regions in 2008-2012 which was in power at that time. However, the general consensus was that no one was too radical to throw somebody out of the business entirely as in Russia in 2000, when Putin took control over all the oligarchs in the country.

Things changed after the Revolution of Dignity when Petro Poroshenko, one of the Ukrainian oligarchs, was elected president. For Ukraine, it was an unprecedented concentration of power in the hands of one rich person.

Poroshenko's role was ambivalent. Regarding Rinat Akhmetov and Viktor Pinchuk, he was quite loyal. Although the president did not directly introduce the Rotterdam+ scheme for coal prices, he also did not oppose it. The scheme allowed Rinat Akhmetov to raise prices for energy and heal his industry which was partially destroyed by the war in Donbas in 2014.

That scheme, on the other hand, was particularly bad for Kolomoiskyi, whose oil refining and metal alloy enterprises consumed a lot of energy.

That was quite logical taking into account Poroshenko's direct conflict with Ihor Kolomoiskyi, which shoke up the status quo of the Ukrainian oligarchy. Both Kolomoiskyi and Poroshenko were the most pro-Ukrainian oligarchs in 2014 when the conflict with Russia started. On March 2014, Ihor Kolomoiskyi was appointed by acting president Oleksandr Turchynov as governor of Dnipro Oblast in eastern Ukraine to “hold” the region in the face of Russian aggression at the moment when there was still no real army. Kolomoiskyi indeed performed his task well, even if not for the sake of Ukraine but for the safety of his businesses. Kolomoyskyi’s oblast administration actively managed the creation and enrollment to the voluntary battalion “Dnipro” that defended Dnipro Oblast and parts of Donetsk Oblast. Officially, the battalion was under the Ministry of Internal affairs, but was also supported by funds related to Kolomoyskyi. "They are covered with weapons like cosmonauts," said the commander of another voluntary battalion, "Donbas", about the "Dnipro" fighters. The salary in “Dnipro” ranged from $1000 to $5000, according to Hennadiy Korban, the “right hand” of Kolomoyskyi. This was a very high salary in 2014, matched by the Ukrainian army only in 2018. Notable was Kolomoyskyi’s proposal to pay $10,000 to everybody who would detain and bring a pro-Russian separatist. At least $80,000 was paid for eight separatists detained in Dnipro.

A visualization of Kolomoiskyi’s prices for a liberated building, detained separatist and his gun, spread in social media after his announcement. Source: KP

However, Kolomoiskyi had a clear financial interest in Ukraine, and such generous donations for security were actually a reasonable investment that appeared to have been unjustified after reforms that started in 2015 hit hard on the oligarch's assets. Kolomoiskyi's key enterprise was Ukrnafta, 42% of whose stock he held. The rest belonged to the state company Naftogaz and small investors.

By de-facto controlling Naftogaz through the agreements with the government, Kolomoiskyi pocketed large profits in the sector.

However, the elimination of corruption schemes in the Ukrainian energy sector was an important prerequisite for the financial assistance from the IMF and the EU in 2014-2015. This meant that the authorities had to stop money being pumped from Ukrnafta and Naftogaz to oligarchs. Parliament passed amendments to the legislation, reducing the quorum for shareholders to make decisions, making Kolomoiskyi's further indirect control of Ukrnafta impossible. Naftogaz was previously consuming up to 5% of Ukraine's GDP in the form of state subsidies (de-facto paid to oligarchs’ enterprises). Today, Naftogaz is the largest independent taxpayer in Ukraine. Of course, that was not favorable for Kolomoiskyi. When Kolomoiskyi openly opposed Poroshenko in 2015, he was removed from the post of Dnipro Oblast governor. However, that was not the end of the confrontation. In December 2016, the National Bank of Ukraine nationalized PrivatBank, which was the largest private creditor in Ukraine. Kolomoiskyi was accused of money laundering through the bank – he issued credits to offshore firms in Cyprus and then withdrew capital to the US, investing there in real estate. The scheme was leading the bank towards collapse, and was consequently recognized as insolvent and nationalized.

Kolomoiskyi's current and his possibilities for revenge

Popularly, Kolomoiskyi is perceived as a “raider” who dares to attack business rivals or state very decisively, either through the courts or through direct influence in politics. That was why he was strong enough to “hold” Dnipro Oblast in 2014. But the case of Privatbank illustrated a special insolence. Although the state has invested $4.5bn to capitalize the bank after its nationalization, Kolomoiskyi claimed that the bank should be returned to him. The nationalization has already cost more than $120 paid by each Ukrainian through taxes. Now the oligarch is daring to deceive people for the second time by the same bank. The Ukrainian court decision is the most important for Kolomoiskyi. If he wins in the Ukrainian court, he will be able to use that decision in the UK and perhaps in the US courts to be fully absolved of guilt.

Read also: Court decision on Privatbank proves Ukraine’s judicial reform has failed. Here’s how to fix it

The journalist investigative project SKHEM Y has analyzed the oligarch’s first steps since returning to Ukraine from Geneva and Tel-Aviv, where he lived for the last two years. He has already met with the minister of internal affairs Arsen Avakov, three times his car was noticed near the house of Yulia Tymoshenko, leader of one of the main Ukrainian political parties, Batkivshchyna. Also, his former lawyer Andriy Bohdan, who lobbied on behalf of Kolomoyskyi in the Constitution Court, was appointed head of new Ukrainian president Volodymyr Zelenskyy’s administration.

A building near Lake Geneva where Kolomoiskyi has his apartment. Source: Radio Svoboda

Yet, according to SKHEMY, not only Privatbank is important for Kolomoyskyi to return. UIA (Ukrainian international airlines) is the largest airline in Ukraine and owned by Ihor Kolomoiskyi and his business partner Aron Maiberg. In 2018, the company transported 8 million passengers. Yet the same year it reported financial losses of 2.7 billion UAH. Demonstrating that it has no money, the company ceased paying the state enterprise Ukraerorukh that provides navigation service and is responsible for the work of dispatchers. In court, UIA claimed that the tariffs requested by the state are too high and unfair, although all other companies pay the same amount. What is more, UIA requested compensation from the state for the previous years (2016-2017) when it paid “inflated” tariffs. UIA already owes the state of 500 million UAH, but the first court decisions lean towards the company’s interest and oblige the state to provide navigation service further. Also, UIA does not pay the aviation fee that amounts to $2 per passenger.

Ukrainian airports are usually full of UIA planes. Source: economichna pravda

Ivan Omelian, minister of Infrastructure, said that the state would not accept a compromise in this case. Yet he also admitted that

"we appreciate the role of UIA in establishing the domestic air transportation market and understand that Ukraine... needs its own airlines."

Indeed, the enterprise is too important to simply let it go bankrupt. Ukrtatnafta holds the largest oil refinery in Ukraine and is owned by Ihor Kolomoiskyi. In 2018, the company already initiated its request to the Cabinet to establish import quotes on the refined oil “in order to protect domestic production.” In fact, that domestic production includes only one Ukrtatnafta enterprise and cannot cover all consumer needs. Instead, any import limitations will lead to inflated prices for oil on the domestic market. And that is the real goal of Kolomoiskyi. The government did not accept this proposal. However, Kolomoiskyi hopes that the next government will have another view. The Zaporizhzhia Ferrum alloy factory is yet another one of Kolomoiskyi's interests. Founded in 1933, the factory is one of the largest in Europe in the metal alloys sphere. A large part of its shares belongs to Kolomoiskyi.

Zaporizhzhia Ferrum alloy factory. Source: zaporizhzhia city

The factory has filed a lawsuit to the Constitutional Court of Ukraine with a request to limit the power of the National Anti-Corruption Bureau. The issue is that NABU can terminate contracts with state companies if corruption risks are detected. Zaporizhzhia factory has caused damage to the state energy company through such contracts. However, the particular case of this single company is not so important, yet the Constitutional Court’s decision definitely is. If Kolomoiskyi’s company wins the lawsuit, then all contracts terminated by NABU will be renewed and the state will not get back the 7 billion UAH that should be paid as compensation on those contracts.

With Kolomoiskyi’s return to Ukraine, the decisive time for the country’s economy has come. If the policies introduced by the previous government are continued and equally implied to all oligarchs, Ukraine may finally get rid of oligarchic influence, currently at its weakest point.

Ukrainian president Volodymyr Zelenskyy stressed at a meeting with Valdis Dombrovskis, the Vice-President of the European Commission, that

“as for Privatbank, I will defend only the state, only citizens. I do not care about these games of former owners in the courts. I am not going to be on their side."

However, much depends not only on him but on the new government, to be formed after parliamentary elections scheduled for July.