Why can’t Ukraine just get rid of its oligarchs?

Collage: Hanna Naronina/euromaidanpress 

Ukraine

Article by: Olena Makarenko

Editor’s Note

Ukraine is often referred to as a state that is run by oligarchs. Indeed, much of the political chaos that bewilders observers of the country is caused precisely by oligarchic control over Ukraine’s economic and political life. In order for Ukraine to progress as a democracy, this has to change. And so many people ask, “why can’t Ukraine just get rid of the oligarchs?” We investigate precisely this question.

Whence came the oligarchs?

To answer why the oligarchs are so omnipresent in Ukrainian life, one has to understand how they emerged in the first place. Ukraine did not turn into an oligarchic state in one day; rather, this was a consequence of small and big decisions that Ukraine made after gaining independence in 1991. Then, the window of opportunity was open for Ukraine to find its own path and set its own agenda for the future.

However, the majority of those who came to power in 1991 decided to follow another strategy. The leadership’s goal was not to bring Ukraine out of the Soviet system, but preserve it under the conditions of a market economy. Culture was neglected, and therefore no common agenda nor direction for the country was developed. The Ukrainian language was not supported, which led to Ukraine becoming an easier target for Russian aggression.

Turning privatization into enrichment for just a few

In the Soviet planned economy, material resources were distributed centrally through the state. After the Soviet Union collapsed, Ukraine inherited large enterprises, institutions, organizations and lands that the country was not able to maintain. Moreover, with the time passing, this Soviet legacy rusted over.

Questions appeared about who should own and manage it. This is how the process of privatization started. In 1992, the first legislation regarding privatization was passed. The actual process started the following year. In general, privatization was divided into three stages, small privatization, mass privatization and the privatization of big enterprises of the strategic production which included infrastructure and large technological complexes. The final process was launched in 1999.

The goal of privatization was to find who could manage the impressive legacy Ukraine inherited from the USSR, create a competitive business environment, and fill the state coffers. It was not reached: the proto-oligarchs saw it simply as an opportunity to earn money.

Thousands of enterprises crucial to the Soviet economy were sold for next to nothing with the help of deals with corrupt state officials. Money flowed into the pockets of said proto-oligarchs and officials, but not the state coffers.

Attempts to regulate privatization were in vain and failed in spectacular fashion. The chaotic and illicit process of the accumulation of private capital led to the creation of large financial-industrial groups which were closely related to government structures.

Privatization did not lead to the emergence of an influential layer of small and medium-sized enterprises; it did not become a source of income for the state budget. And during the process, former Soviet Communist party elites managed to return to power being integrated in the new government.

The collaboration between state and oligarchs during this period became the foundation for Ukraine’s modern oligarchy.

Financial-industrial groups (clans): a new structure in the state’s life

The emergent financial-industrial groups reproduced the Soviet model of a monopolized economy. They started existing de facto, but not de jure.

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These groups have another name, clans. They formed on a regional basis. The most powerful of them were related to the ex-Communist party nomenclature and to criminal groups in Donetsk, Kyiv, Dnipro, and Kharkiv.

The financial-industrial groups functioned and prospered with the help of corrupt schemes. Among them were:

  • the raider seizure of enterprises;
  • a production monopoly;
  • holding state tenders for purchases at inflated prices;
  • using administrative restrictions to fight competition;
  • the introduction of custom duties on certain types of imported goods;
  • VAT refund fraud;
  • subsidies from the budget for selected industries controlled by oligarchs.

The oligarchs born from the financial-industrial were only interested in financial gain from the schemes and did not care about the actual development of the business.

Ukraine’s second President turns into father of the oligarchs

Leonid Kuchma. Photo: Serhii Nuzhnenko, RadioSvoboda.org (RFE/RL).

Leonid Kuchma was the second president of Ukraine. Nowadays, he appears in the news mostly as a member of the Minsk Trilateral Contact Group on settling the situation in Donbas.

However, in the 1990s and the beginning of the 2000s, he created an image of being the father of the Ukrainian oligarchy as the majority of them appeared to be under his rule.

Kuchma’s background can tell a lot about his way of thinking and way of management. During the Soviet times, he was a secretary of a Communist Party committee at an enterprise – from 1986 to 1992 he headed the Pivdenne Machine-Building Plant named after A.M. Makarov, the main state-owned aerospace manufacturer.

He was elected president in 1994, and maintained power till the beginning of 2005.

There was a chance that the country’s direction could change in 1999, with another presidential candidate Viacheslav Chornovil. However, this leader of the People’s Movement of Ukraine (Narodniy Ruh Ukrayiny), a pro-Ukrainian and pro-democracy political force, died in a car accident.

Kuchma won because he was perceived as the only candidate capable of winning over the resurging communists. His time in office received a special term – kuchmizm. In it, the old Soviet political elite merged with the criminal world – state positions were sold and people with shady reputations appointed to them.

Pavlo Lazarenko and Viktor Pinchuk: two sides of the same coin

Pavlo Lazarenko. Photo: screenshot from the Inter TV channel.

Pavlo Lazarenko was believed to be one of the first oligarchs in Ukraine. He represented the Dnipropetrovsk oblast clan and was called the owner of the oblast. In 1996, he was appointed as the prime minister of Ukraine, and was subsequently dismissed the next year. However, he remained one of the richest and most influential politicians in Ukraine. He was even considered as a possible competitor for then-President Kuchma.

In 1998, he was prosecuted by the Ukrainian government for the large scale embezzlement of state property. Lazarenko believed that the only reason he was being prosecuted was due to the wishes of Kuchma. That is how he explained his need to escape the country together with his relatives. Nevertheless, the US government convicted and sentenced Lazarenko to prison for extortion, fraud, and money laundering. He spent five years under house arrest, and also was imprisoned for two and a half years. Lazarenko was released in 2012.

Leonid Kuchma (left), Viktor Pinchuk (right). Photo: RadioSvoboda.org (RFE/RL).

Lazarenko was considered Kuchma’s opponent and potential enemy. Viktor Pinchuk, on the contrary, was an oligarch loyal to Kuchma. In 1990, Pinchuk created the Interpipe Investment and Research Group. At the end of the 1990s, he started to be considered as a major industrialist and media tycoon. Before working with metal, pipes, and railway wheels, Interpipe was a dealer for the Itera gas company, as part of the specially created Sodruzhestvo corporation, and was importing Turkmen and Russian gas.

In that time, Pinchuk became Kuchma’s unofficial son-in-law, and in 2002, he officially married Kuchma’s daughter. His assets increased dramatically in 1997. Pinchuk also became an MP twice, in 1998 and 2002.

During and after the Orange Revolution, when Viktor Yushchenko came to power, Pinchuk was his main opponent. He was one of oligarchs who experienced the greatest losses under Yuschenko’s rein. Nevertheless, he remained on the list of the richest Ukrainians and remains one of the most influential Ukrainians, making appearances alongside figures such as Bill Clinton and Tony Blair.

The oligarch is also known as the major maecenas in Ukraine. He owns Victor Pinchuk Foundation, which supports youth, and donates large sums to counteract the HIV/AIDS epidemic in Ukraine, etc.

If there were no Ukrainian oligarchs, Russian ones would have came instead

Some experts believe that among the Ukrainian presidents, only Kuchma managed to control all the oligarchs.

Viktor Andrusiv, Executive Director of the Ukrainian Institute for the Future, believes that the emergence of the oligarchs was unavoidable in the 1990s. He quotes Kuchma, who in his book said that he had no other choice at that time. Andrusiv explains that if Kuchma did not create Ukrainian oligarchs at that time, Russia’s oligarchs would have replaced them instead. A middle class at that time would not have helped, Andrusiv says – even today, most Ukrainians are reluctant to enter business; 20 years ago, they would not have had the capacity to stand up to the oligarchate-to-be.

Oligarchs go rogue

However, the emergence of the Ukrainian oligarchs ended up being a tragedy for the country.

“They became oligarchs when they understood that they can play their own game. They became independent from Kuchma. Started to buy media and political parties,” Andrusiv says.

The expert explains that oligarchs are not the same as businessmen: they can’t exist in normal competitive business conditions. Instead, oligarchs create monopolies dependent on state money.

The oligarchic system proliferates

Andrusiv divides oligarchs into three groups. First, those who remained in the positions of the top-20 richest persons in Ukraine no matter what political forces came into power. Their names are familiar: Rinat Akhmetov, Viktor Pinchuk, Kostiantyn Zhevago, Henadiy Boholiubov, and Petro Poroshenko.

The second group includes those who appeared due to particular political conjunctions. They had significant influences on domestic politics. However, their influence was temporary. Serhiy Kurchenko, a young oligarch from Kharkiv, is a prominent example. He became an oligarch during Viktor Yanukovch’s presidency. However, when Yanukovych became a fugitive, Kurchenko lost his influence as well. Andrusiv also considers Kononenko, the right hand of ex-president Poroshenko, the Minister of Internal Affairs Arsen Avakov, as those who belong to the second group of oligarchs.

The third group are the so-called neo-feudal lords. They are local oligarchs who act in terms of a particular territory, city or district.

The primary instruments that the oligarchs use to maintain power and influence is control over the media and politicians that serve their interests. All the nationwide TV-channels in Ukraine, except for the channel of the National Public Broadcasting Company of Ukraine, belong to oligarchs. In the air, they promote their candidates. During elections, allocation of forces takes place.

In Ukraine’s 2019 elections, oligarchs Ihor Kolomoyskyy, Petro Poroshenko (within his own party), Dmytro Firtash, Viktor Medvedchuk, Rinat Akhmetov, and Viktor Pinchuk all got their candidates in parliament.

So why can’t Ukraine just get rid of its oligarchs?

Both then President Petro Poroshenko in 2014, and then Volodymyr Zelenskyy in 2019 announced a fight against oligarchs. Despite this, whenever Ukraine makes a decision for the country’s future, it has no option but to remain conscious of oligarchic interests. Ukraine did not turn into an oligarchic state overnight; therefore, the removal of oligarchs from power will occur gradually, as they influence nearly every area of life. However, if any given oligarch will fall out of business, the system would work anyway without him.

Summing up: there exists no silver bullet to get rid of the oligarchs. Ukraine has no other choice but to continue to persistently build institutions, implement transparent management, and develop democratic society – steps that Ukraine’s international partners consistently recommend and which Ukraine has started implementing with varying degrees of success.

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Edited by: David Kirichenko, Alya Shandra

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