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22 September, 2012  ▪  Oles Oleksiyenko

Dismantling the Oligarchs' Foundation

In order to achieve its potential, Ukraine must put an end to the monopolies which are the current social and economic foundation of the oligarch-and-lumpen society model.

The public was the driving force behind the origins of antimonopoly policies in developed countries all over the world. In these countries, industrialization was conducted with the majority of assets accumulated by a single owner and eventually the public demanded the protection of consumers from monopolists’ abuses and sought to impose limits on their activity.

Antimonopoly legislation was born in the USA at the end of the 19th century; later Canada and Australia followed the American model. After that, antimonopoly policies were also established in Latin America (in Argentina for instance) and Asia (first in Japan). The European model of antimonopoly legislation differed from the American model and was formed after World War II. In the beginning, highly competitive economies like in Britain and France, had a comparatively low level of monopolization, while imperial and Nazi Germany had close interaction between big business and the state.

The American model is based on the principle that all monopolies are harmful. It applies various levers of influence, in particular profit reduction at the expense of high taxes, control over prices, state management within principal monopolies, as well as constant so-called antitrust policies conducted by ad-hoc state bodies, namely the Antitrust Division of the Justice Department (authorized to initiate legal cases against violators) and the Federal Trade Commission. Besides fight with horizontal mergers, there are also numerous appeals against vertical mergers (for instance merging a machine tooling company and tyre casing concern).

The legislation and the above-mentioned bodies are very severe with regard to mergers of companies producing similar goods and of those which have been recently proven to conspire among different groups of entrepreneurs to monopolize markets and pricing. Horizontal mergers of various similar enterprises are treated more severely than vertical integration within a single working cycle. At the same time, it is easier to accumulate assets in modern branches, linked with the introduction of expensive innovations stimulating qualitative development of the country’s economics, as monopolies in areas of this sort often result from the youth of a certain branch.

European antimonopoly legislation is more liberal and considers a monopoly to be only a potential tool for action contradicting the public interest. Consequently, European legislation envisions more regulation of monopoly activity in order to avoid such a situation. It is usually not applied to nationalized enterprises or companies dealing with agriculture and forestry, coal production, communications, insurance, and so on.

For instance, British legislation considers it to be a case of monopoly when a company or a group of companies covers 25% of market procurements or purchases. According to the Competition Act, action is deemed to be anticompetitive, if it is aimed and/or may result in limiting, distorting or hindering competition. Still, some markets may consider certain action to be admissible with regard to competition, while others treat the same actions as unacceptable.

Monopolies established via mergers and/or takeovers have been very restricted in recent decades in Europe. Meanwhile, in cases of individual growth of monopolistic capital, increasing antimonopoly regulation was a priority based on the principle that it is not accumulation, but abuse to be penalized.

SOVIET TRAUMA

European states have never had such an acute problem of monopoly, besides an oligarchic one, as was the case in the post-Soviet Ukraine and other countries of former USSR with Russian oligarch-and-lumpen model.

The Russian Empire was a state of belated modernization a century ago, with a high concentration of capital in key branches of economics and lack of antimonopoly regulation. But the USSR made the idea of monopolization (often artificial and even forceful to the point of absurdity) practically an official policy aimed at the final extermination of remnants of private property and individual initiative. This policy was also to create a lumpenized mass of people ready to meekly fulfil the orders of authorities without question and which was de facto represented by an all-state monopolistic corporation appointing its managers on different levels.

The relevant Russian model envisaged pre-capitalistic Asian despotic traditions with all the property (and even human life) belonging to the Tsar entitled to take it or “grant” it to any of his serfs (irrespective of status). The Tsar could overstep any limits with the only explanation being that doing so was his will. Meanwhile, Ukrainians, who never had such a tradition and who remembered private property and an election system, the monopolistic oligarch-and-lumpen model was forcefully imposed. Peasant-owners protested against it in the 1918-1920s and in the 1930-1933, but this opposition was suppressed with the help of arms and artificial famine.

Consequently, Ukraine gained its independence with a total monopolization of all the branches of the economy by the Soviet state. The instinct of ownership (natural for the Ukrainian people) had atrophied or was hidden deep inside Ukrainian citizens who now had behavioural complexes regarding private initiative. It was impossible for Ukrainians to get rid of the notion that monopolies are normal.

But the soon-established Ukrainian oligarchic monopolies were never private in Western (European and American) sense. They were the assets of those who had got (or bought) the consent of certain authorities for their business. Thus Ukrainians suffer from an economic lag caused by the natural unwillingness of monopolists to increase the effectiveness of their assets, as permanent power redistribution always threatens them with the loss of these assets. Furthermore, Ukrainians cannot influence the authorities, as there are no social and economic conditions, namely a competitive business environment, for establishing a competitive democracy.

GUIDELINES FOR UKRAINE

The demonopolization of the Ukrainian economy and thus depriving the oligarchy of its foundation can only be induced by applying a wide range of measures, as well as political will and public support for their implementation. The Ukrainian Week offers an action plan, aimed at the demonopolization of the economy and the liquidation of the basis for constantly re-establishing the oligarchic-and-lumpen model of public relations.

During the first year antimonopoly legislation should be added with the regulation of compulsory identification of the final owner as an individual and/or individuals in all branches. This will keep assets from being accumulated with the help of offshore companies.

The next year will be a time for market analysis (involving foreign companies if needed) aimed at determining the real level of monopolization in individual markets on the national, regional and local scale.

In the third year all of the monopolies (except for natural ones) should be partitioned, including those composed of several formally independent companies registered abroad. Companies that do not fulfil the relevant legislative regulations within the third year of the demonopolization programme should be nationalized (with further compensation) and then sold to different owners. The crucial point is adhering to the norm of competition in privatization which prohibits the accumulation of newly established enterprises by a single owner.

All the basic assets, including gas and water conduits, transmission facilities, telecommunications companies, etc., should be owned by the state, and stock floated among minority resident investors. The relevant proceeds should be directed to modernizing those enterprises.

All the national operators should be provided with equal access to the use of the above-mentioned natural monopolies’ assets with terms and scale of use to be of no harm to stable supplies and envisioning no discrimination for other market participants. Rights distribution and their use should be implemented based on transparent and competitive procedures.

Meanwhile, some branches of Ukrainian industry suffer from specific problems inherited from the Soviet Union. Some of them, established as a sole plant or technological complex, are impossible to be partitioned and dividing them into separate parts will only destroy them. That is why the partition of monopolies should be combined with establishing new enterprises in the relevant branches and regions. These companies are to compete with the monopolists, and so the state might even finance their establishment with further floatation/offer of shares for private investors not linked to monopolists in the relevant market.

It is also necessary to increase foreign companies’ access to currently monopolized branches, except for natural monopolies. These companies must be interested in developing competition in the relevant markets, as capitalization ratios and the limited resources of Ukrainian medium-sized businesses (let alone of small businesses) erect an essential barrier to entering the market in some sectors.

For this purpose it is also necessary to facilitate redundant procedures for businesses, guarantee security for entrepreneurship, get rid of corruption and provide a really independent arbiter, namely effective law enforcement and judicial systems.


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