Oligarchs continue to imitate business in Ukraine: they redistribute old Soviet industrial assets without creating any new ones and get windfall profits at taxpayers’ expense
The Cabinet of Ministers’ meeting on June 5 churned out a fresh and hardly the last example of how oligarchs are practicing the parasitism of state budget financing and avoid taxes. It considered a draft Memorandum of Understanding between the Cabinet of Ministers and the mining and steel industry, approving necessary actions to rescue it from crisis. The purpose of the Memorandum is to “create conditions to stabilize the operation of the mining and steel industry, make domestic steel products more competitive, and preserve jobs”. For this, the government is supposed to provide mining and steel companies with a wide range of unlimited tax, customs, tariff and railway transportation privileges. Under the draft Memorandum, the Cabinet ensures that rates for the use of mineral resources, land and environmental tax will remain unchanged (this privilege will cost the taxpayers UAH 0.7bn); prevents the increase of railway transportation costs for mining and steel companies by more than 5% of 2012 rates (as a result, Ukrainian Railways will end up with decreased revenues and will fill the gap with more expensive train tickets for passengers); and prevents the increase of electricity prices for mining and steel companies by more than 5% of the April 1, 2013 rate (which means that they will be subsidized at the expense of state-owned nuclear power stations and state-subsidized coal for power plants) for the term of the Memorandum.
The interests of 300,000 workers are used as the government’s official explanation for this lobbying of mining and steel companies. In fact, however, this is a blatant attempt to finance the windfall profits of a narrow circle of oligarchs from the meager budget that can barely cover benefits to the most socially vulnerable categories, let alone others. The narrow circle includes Rinat Akhmetov’s and Vadym Novynskyi’s MetInvest; Ihor Kolomoyskyi’s and Hennadiy Boholiubov’s Private-InterTrading; Viktor Pinchuk’s Interpipe; the Industrial Union of Donbas controlled by the Russian Evraz, and the like. The draft Memorandum does not specify signatories from the mining and steel industry, which means that this state support could be very selective. Perhaps, only those most loyal to the government will get their piece of the pie.
This support for oligarchs is a telling example of top-level corruption, which is likely to deprive the most vulnerable categories of the population, dependant on billions of hryvnias in public funding and a surge of tax pressure on non-oligarch business that will finance privileges for a handful of oligarchic groups. Similarly, the state is supporting the coal industry. It costs taxpayers over UAH 14bn but brings more and more profits to entities linked to the Family, Rinat Akhmetov’s DTEK and smaller coal business owners.
The steel industry is indeed going through hard times. Steel exports and output have been shrinking for two years in a row now. In Q1’2013, exports dropped by 9.2% compared to Q1’2012, while output dropped by 7.8% (14.5% and 4.1% in 2012 compared to 2011 respectively). Officially reported losses amounted to UAH 4.5bn in Q1’2013 and over UAH 15bn in 2012. But the industry crisis is largely caused by the lack of necessary investment into modernization when the markets were on the rise, sending the oligarchs’ profits soaring. On civilized markets with real business rules and competition, more effective business owners quickly replace unprofitable and uncompetitive enterprises. This is not the case in Ukraine, where business really is imitated.
Government support of the mining and steel industry will cause budget losses, while privileges to just one industry at the expense of the rest of the economy will push Ukraine farther behind developed countries. However, this support will not lead to any positive changes in the steelworks sector. Steel oligarchs already evade taxes and report fake losses by re-selling their products to their own offshore companies at knockdown prices, which is where their profits remain. Meanwhile, they view the domestic steel industry as a milk cow that helps them generate billions in offshore zones, with which they later buy assets in Ukraine for peanuts. For instance, Rinat Akhmetov just bought 93% of UkrTelecom’s shares from the Austrian company EPIC (many experts actually believed that Akhmetov’s entities stood behind this company back in 2011 when it bought the state-owned fixed line telephone monopoly for UAH 10.5bn). The current Chairman of the State Property Fund said that the latest deal may again be worth UAH 10bn. In other words, oligarchs can afford to amass assets, but have no money to upgrade their loss-generating steelworks, from which they apparently laundered the money for the new assets in the first place.
The deal with UkrTelecom proves once again that oligarchs have been pretending to do business for the past two decades. In fact, they have merely been redistributing the assets that Ukraine inherited from the USSR without creating anything new or investing into innovations. It looks like the next battle will be for Kryvorizhstal. The PR campaign started with Shuster Live, the most popular political talk show in Ukraine, which covered mass lay-offs at the plant as its top story, thus leading to the conclusion that it is time to take Kryvorizhstal from a bad owner and give it to a good one. The name of the potential good owner surfaced recently, although his trace was visible from the very beginning. The Commercial Court of Kyiv resumed the case to deem the privatization of 93% of Kryvorizhstal illegal, based on the claim of IMC (Investment-Metallurgy Union) established by Rinat Akhmetov’s SCM and Viktor Pinchuk’s Interpipe. In 2005, Tymoshenko’s Cabinet took the plant away from them. That same year, the repeated privatization of Kryvorizhstal through a public tender turned out to be the most successful one since Ukraine regained independence: Mittal Steel acquired it for USD 4.8bn, a record-breaking sum for the Ukrainian budget. The tender was held after the court ruled that the first privatization of Kryvorizhstal was illegal: in 2004, it was sold to the IMC for USD 0.8bn.
Overall, Ukraine’s GDP per capita confirms that Ukrainian oligarchs only pretend to do business: it has barely changed over the past 20 years here, while multiplying in countries, such as Poland that have implemented structural reforms.