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13 December, 2012  ▪  Volodymyr Lanovyi

Ukraine’s Robber Barons: Where They Come From?

Oligarch clans today have the financial, economic and political tools to dominate society.They are based on production assets gained through the privatization of state-owned enterprises in various forms and other social benefits.

These included the open, yet government-controlled sale of stock in tenders at knockdown prices; the shadow expropriation of state-owned facilities by means of setting up joint ventures with the government or simply buying them; the fake bankruptcy of state-owned companies accompanied by illegitimate court verdicts to transfer ownership to private companies that covered commitments to pay their debts which, for the most part, were significantly lower than the cost of the respective assets – this one was particularly popular in the Donbas; the granting of exclusive licenses to exploit mineral deposits and radio frequencies to the nouveau riche, essentially for free; assistance from officials in winning big and profitable public tenders and construction contracts, and so on.

The soon-to-be-rich also took over the trade of imported gas, oil, nuclear fuel, coal and grain; and the servicing of tax, customs, pension, police, budget, social and other contributions and benefits. Windfall profits and endless assets were mostly appropriated under Leonid Kuchma’s presidency, yet oligarchs continue to mushroom today.

The newly enriched “masters of life” did not stop with their economic accomplishments and entered the political domain, to further guarantee their corrupt profits. Top officials encouraged them to do so as they themselves looked for partners for corruption deals. Without their support and that of the police, oligarchs would not exist. In turn, the latter encourage corrupt officials to produce laws that suit business owners. One could not exist without the others. Together, they have constructed a new type of business, where enrichment comes from political rather than economic arrangements that are often illegal.    

Oligarch-controlled capitalism is at its peak today, as power is almost entirely distributed among oligarchs. Before the parliamentary election, Ukraine had no money to pay basic social benefits to pensioners, invalids and other underprivileged categories, while pouring money into “independent” parties and some “self-nominated candidates”.

TYCOON EMPIRES: GHETTOES FOR THE NATION

A characteristic of the oligarchic system is that it cannot co-exist with either domestic or foreign, small or big business. Tycoons are the first enemies of innovation, competition, market self-regulation and equal rights. They prefer manual control of the economy, bureaucratic market regulation, the centralized distribution of resources and pricing. At the same time, they fear small producers, which are more flexible and dynamic in following market trends, hence more competitive than oligarch-owned dinosaur conglomerates. As a result, pro-government clans attempt to crush small and medium businesses by restricting their access to loans and investment, and causing them problems, via the rules of the game that they have established and law enforcement agencies.

They are also antipodes and the mortal enemies of big private one-branch corporations, oriented towards business profits and upgrade. Unable to compete with them, oligarchs use both legitimate (overpriced raw materials, artificial tax claims and so on) and illegitimate (raider attacks) means to remove them from the scene. Ultimately, they try to swallow them up. Numerous examples include the Stirol chemical plant in Horlivka, the Nikopol Ferroalloy Plant, the MMK Illich in Mariupol and so on.

Today, oligarchs partially or fully control all the facilities that look as if they could generate vast short-term profits in Ukraine.

In addition, tycoons make every effort to prevent the owners of competitive businesses from going into politics, where they could create competition in corruption and political fields – for instance, by funding alternative parliamentary or presidential candidates .

They are also afraid of transnational companies that are more powerful, financially sound and technologically modernized. Since Viktor Yanukovych became president, entrepreneurial transnational companies have essentially suspended the opening of their subsidiaries in Ukraine. Instead, international giants, such as oil and gas companies, have been offered the opportunity to operate in Ukraine with the aid of monopoly abuses, rent privileges and the support of their own governments.  The fact that these relations are exclusive, is confirmed by the deals signed this year on the allocation of the energy resources to be extracted in Ukraine at a rate of 70:30 in favour of foreign companies. Such concessions are rare in international practice as the maximum usually granted by governments to foreign companies is 50%.

WHAT DOES IT TAKE TO RU(I)N A BUSINESS?

Unlike Western countries, but just like in Latin America and Asia, Ukrainian oligarch business structures are multilayered and highly diversified holding corporations with a limited number of major stakeholders – generally less than 10. Very often, the interests of oligarchs do not correspond with those of top managers whose interest do not extend further than their own salary increases. Meanwhile, business owners do not effectively control their managers’ activities. These discrepancies, as well as the owners’ inability to control all fields of the corporation, result in a burdensome bureaucracy, swelled administrative costs of running the business and make it impossible to make the right strategic decisions regarding business development and raising capital on the highest level. One example was the recent scandal with Roshen, a well-known Ukrainian chocolate empire owned by Petro Poroshenko. Its managers decided to make all packaging in Russian. After a massive protest campaign on the web, Petro Poroshenko said that he had been unaware of the decisions of his executives and would do everything to cancel them.

Moreover, multilayered and diverse structures prevent the timely reaction of their owners to market changes in every field. Weak administrative and financial control over production facilities undermines internal financial discipline. Late reaction to market changes results in difficulties or the failure to meet external financial liabilities. Thus, the domination of oligarch clans in the economy makes it uncompetitive, financially vulnerable, unstable and weak.       

 CAPITAL DRAIN  

Striving to increase the overall profits of their corporations, in addition to searching for extra privileges and benefits from the government, tycoons focus on upgrading the structure of their assets. However, the efforts are not innovation or business-oriented, and do not involve any special technological or marketing solutions. 

Instead, Ukrainian oligarchs have focused on the grabbing of additional energy facilities, land, loans and professional managers – mostly foreign. The goal of their new business projects is also to conquer markets and cut production costs in conglomerates.

Optimizing business by means of moving capital abroad is another downside of oligarch-style business management. Ukrainian tycoons buying companies in European and other Western states has become the latest trend, and is part of their strategy to take capital out of the country on a massive scale. Firstly, their huge facilities based on obsolete Soviet plants are uncompetitive. Secondly, some oligarchs convert Ukrainian assets into foreign ones in an effort to monopolize international raw material markets. Privat Group is one of them, trying to take over the ferroalloy market. Although unlikely to succeed, its aspiration to use non-business methods on an international level are obvious. This export of capital is sooner an irreversible drain of assets, bringing no future profits to Ukraine.

For this reason, the most valuable sub-divisions of the biggest Ukrainian financial and industrial groups (FIG) are banks and lending institutions. Oligarchs use them as channels with all the necessary instruments and legitimate opportunities to transfer their assets abroad. Also, they work as mechanisms to get newly-printed cash from the National Bank intended for all citizens, including the entrepreneurial segment of the economy.  In addition, they service the debts of the oligarchs’ entities, saving them from bankruptcy and real responsibility under their liabilities. In this case, powerful banks that are part of the biggest FIGs take over the actual financial accruals of the economy to cover the needs of their loss-generating enterprises.

CARTHAGE MUST FALL

Highly diversified corporations owned by one or several people are unnatural and harmful for the economy. The goal of economic and political change should be to deprive owners of huge business empires of the opportunity to shape the government, dictate its decisions and employ corrupt financial deals to grab national wealth. Necessary reforms include:

• Criminal liability for corruption in parliament, such as bribes for votes and the appointment of parliamentary committee heads, ministers and judges.

• Restrictions on contributions to election campaigns from one person, the violation of which should result in significant punishment.  

• Criminal liability should extend to party functionaries and individual candidates for the illegal funding of election campaigns.

• A ban on the appointment of powerful capitalists to government or other top positions, or a restriction on the amount of property owned by potential candidates.

•The modernization of public governance, including a ban on official interference with business processes and operations; the decentralization of financial, investment, fiscal and budget flows; the cancellation of the police methods currently used by tax authorities; ensuring equal rights for taxpayers and customs duty collectors; consumer protection and so on.

• Increased criminal liability for civil servants, law enforcement officers, SBU (the security service of Ukraine) employees, prosecutors, judges, tax inspectors and customs officers for corruption.

•A ban on the ownership of more than one national TV channel or media group by one person.

• Direct public control over the actions of officials.  

Corrupt tycoon-controlled business should be deprived of its material basis. Measures for this include:  

• The drafting of government programmes and plans based on interests in the development of the national economy rather than individual lobbyist groups and their projects.

• The reintroduction of transparency in privatization tenders.

• Restriction of the share packages one person may acquire through the privatization of state-owned companies to no more than 10-15%.

• Keeping intermediary private firms out of trade and financial transactions involving state-owned companies and institutions.  

• Criminal liability for raider attacks on companies and court support of raiders.

• The introduction of competitive licensing for the extraction of minerals, radio frequencies, subcontractors in public tenders, construction contracts, and so on.  

• A ban on private companies purchasing enterprises in order to cover their debts, resulting from the deliberate overpricing of raw materials and services by their suppliers.

• The introduction of a system of market – non-targeted and non-exclusive - monetary refinancing of the economy by the NBU. 

Accomplishing all this is a great challenge. The “masters of life” are able to quickly concentrate significant funding on certain political projects, stonewall bills and regulations aimed against them  and unite against common threats, no matter how fiercely competitive they are in the struggle for resources and production facilities. Moreover, the parties currently in parliament do not see the oligarch-controlled government and economy as one of the biggest dangers for Ukraine. Therefore, efforts should be taken to unite society around political forces that will fight for Ukraine’s transition to an egalitarian system that acts in the interests of most citizens, free markets and a pluralistic political model that is free of tycoon influence. 


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