The late 1990s brought a system of governance to Ukraine that sent the country tumbling into poverty
Reforms means changing the behavior, means of interaction and the mindset of people. They require systemic and persistent efforts and need forces that objectively see the point in changes. Without this, people only care about their own interests as they see them. This leads to a society with no purpose, triggering processes inherited by mankind, since the beginning of time. Society stratifies into a general mass, overwhelmed with daily survival and a handful of lucky ones who found a way to make all available resources serve them. At the same time, the lucky ones are not always the smartest. They are rather the ones quickest to make use of their benefits, arising from a society without a purpose, such as connections to the movers and shakers, the skill to grab anything within the arm’s reach, regardless of the interests of others and the ability to withstand a battle with the like.
Despite being part of human nature, the danger of this situation is that it leads to a distorted distribution of society’s resources while curbing its potential. Those who could have used such potential were deprived of the opportunity to do so.
Ukrainefaced this situation in the early years of independence as the government proved incapable of determining and implementing a comprehensive reform plan rather than fragmented measures. This was accompanied by the failure of the opposition, and particularly the democratic opposition, to follow the suit of reformers in Central European states in setting forth and implementing their plan. As a result, the situation was left adrift.
A FAVOURABLE ENVIRONMENT
In the early 1990s, it looked as if the country would end up with only two most powerful economic forces. On the one hand, were the “red directors”, i.e. the managers of big companies who had grabbed their enterprises and were using their business resources to exert pressure on politics. Leonid Kuchma, an offspring of this generation, first became Premier to be elected President later.
On the other hand, the nouveau riche, who gained their first millions and subsequently billions earned on scams that included the bagging of state-owned assets. One of them was a buzz word story of the Black Sea shipping company sale, which surfaced after it turned into a criminal case, while other such scandals were kept quiet. Others involved intermediary services in such deals or Ponzi schemes mushrooming after the special 1993 decree, of which the Moscow-based MMM became a trademark, followed by many similar Ukrainian companies, such as Ometa, which promised a 1,000% return on investment and lured nearly 12,000 participants, yet ceased to pay dividends in 1995.
Both groups were too numerous. They plunged into a tough internal struggle for access to resources and power, where the winner would be the strongest fighter that was best suited to live and act under such circumstances.
The roads to the status of an oligarch were diverse. They included influence on enterprises through control of critical resource supply, particularly gas or oil. Gas served as the foundation for Pavlo Lazarenklo’s business empire and brought smaller capital to less significant, yet no less cash-hungry, figures, such as Ihor Bakai in the early 1990s and subsequently after Mr. Lazarenko’s fall, or Dmytro Firtash almost a decade later. But they were far from Mr. Lazarenko’s scale of efforts or plans. Unlike most oligarchs, he was not simply building a business empire, but a system that allowed him to run industries and regions. This systemic approach was one of the tricks behind the quick progress and victory of his Hromada (Community) party in the 1998 election. And it was the ex-Premier’s systemic approach that most scared both the newborn oligarchs and President Kuchma’s circle. The fact that all these groups united to push Mr. Lazarenko out of the business and political arena was a precedent of sorts. After he fled, his opponents returned to their usual squabbles.
Another method of warfare was to entangle “victim” plant in contracts with firms and banks that would artificially turn it into a debtor. In the late 1990s, the media was rife with such stories that involved people and entities currently circling in the Privat Group’s. The businesses of Viktor Pinchuk and Kostiantyn Hryhoryshyn exploited their proximity to those in power and temporary unions with others. Eventually, Donbas ended up with a pact among the owners of companies and young businessmen of Donetsk origin who still avoid being asked about where they earned their first millions. They struggled to protect their monopoly in the region, keeping invaders, primarily from Dnipropetrovsk, away. Clashes between these groups were largely postponed until the beginning of the 21st century.
Some potential oligarchs, using government support, combined different methods to the dream status, including the provision of all kinds of financial and legal services (particularly access to offshore zones) for a fee, expanding their market presence and struggling to take over power supply monopolies. Read more on such deals including, for instance, K7, the Kyiv Seven of Viktor Medvedchuk, the Surkis brothers, Bohdan Hubsky and others.
This leverage, used with the support of the national leadership (Dnipropetrovsk-based groups started off protected by Pavlo Lazarenko who, in turn, enjoyed the trust of President Kuchma; K7 found ways to the offices of both President Kravchuk and President Kuchma; yet the Donetsk group preserved their power in the region) left no opportunities for those struggling to protect their businesses.
THE THREAT OF OLIGARCHIZATION
The word oligarch has been a swearword ever since journalists borrowed it from their Russian colleagues to denote winners of the distorted competitions mentioned above. However, the protagonists of all these stories prefer to describe themselves as big national business. They sponsor and donate to projects and pay good salaries, at least to the top managers, who are often hired abroad, while regular workers do not count. After all, taking over companies on the verge (or over the verge) of collapse and swallowing them into their empires was not a Ukrainian invention.
Still, unfair privatization tenders, legal manipulations and the exploitation of connections in the government to take over highly profitable producers make the owners treat the prize they won as pirates. Instead of investing in development and making manufacturing more efficient, the new owners largely exploit them to their benefit. This practice is encouraged by the understanding that someone else can sooner or later use the illegal swallowing of the asset as an excuse to take it away. Therefore, oligarchs prefer to squeeze everything they possibly can from the company right here and then, rather than wait for a return on investment into modernization.
Moreover, this logic leads to motives for exerting selfish pressure on the government. For instance, growing fuel prices push plant owners to demanding the government to cut fuel prices no matter what, rather than investing in increased energy efficiency. The oligarch-dependent government cannot resist this strong pressure. Hence, the Kharkiv deals.
Oligarchs distort the economic structure, stifle initiatives and leave small ghettos for the middle class, especially small and medium business that generates up to 60% of GDP in other countries and, most importantly, provides new jobs and ideas for economic growth. Meanwhile oligarchs largely channel resources, both of their own and accessible public resources, to take over and maintain enterprises that generate quick profits, such as steelworks, chemical plants and so on. Yet, they keep others from accessing other industries on a fair basis. As they affect tender terms and determine playing rules in the economy, oligarchs make competition a lost cause. The small privatization of 1995 was one such example. During the course of one year, 90% of small and medium-sized enterprises switched from being state or community owned to privately owned, while more than 75% increased sales, gained new clients and created new jobs. Still, they got under the press of the tax machine, designed as a mechanism to use entrepreneurs to cover budget gaps that emerged as a result of inefficient management and the government’s failure to channel oligarchs’ money into the state budget.
According to many international institutions, Ukraine still has one of the worst business environments in Europe. This affects respectively the creation of new jobs, the development of the economy and the increased prosperity. Even the simplified taxation, accounting and reporting systems introduced in 1998 failed to make things much better. They improved the standing of small entrepreneurs, yet the whole economic system, including the structure of demand, access to loans and the behavior of supervisory authorities, distorted by oligarchs, was no longer able to use the potential and the energy of free business.
KUCHMISM AND THE SWAMP
Political events during 1994-1998 were largely shaped by the established oligarch system. They are most often linked to the passing of the Basic Law and the establishment of Kuchma’s dominance. All these things are interrelated.
Experts were most concerned about the “excessive concentration of power in the president’s hands” in the 1996 Constitution of Ukraine. In fact, the president was authorized to unilaterally appoint and dismiss not only the prime minister, but also ministers and heads of local administrations. Enforcement ministers also had to report to him. Parliament was supposed to approve the prime minister and could pass a motion of no confidence in the government. Yet, politically fragmented, polarized and close to various oligarchs, all parliaments elected in Ukraine before 2006, failed to use their powers to the full extent.
Fragmented parliamentary factions result in inconsistent and unstable legislation that was typical of Ukrainian politics. This caused problems in creating a legislative background for necessary reforms and an advantageous argument in favour of the further consolidation of power in the president’s hands. Kuchma’s decrees acted as laws, thus encouraging oligarchization or providing privileges to some of the mighty of this world.
Mr. Kuchma used the disparities among oligarchs in his “divide and conquer” strategy that kept the players close enough to the president to fuel their interest in the game and the benefits it could give without considering the possibility of changing the rules or even the referee, and far enough away to keep them from the obvious competitive benefits that could spur the ambition to become referees themselves.
Journalists labeled this system “Kuchmism”. The word was later widely used to denote the moderate authoritarianism in Ukraine in the late 1990s and early 2000s. It was not state enforcement and all respective agencies reporting to the president alone that kept Kuchmism alive. Virtually all oligarchs and other major political players, wittingly or unwittingly, co-authored the regime.
Anti-Communist and national movements failed to offer a counter-elite. Some of its members moved to serve the government and some struggled to be a constructive opposition, hoping to get their piece of the pie, but no-one offered the public a realistic alternative scenario.
The hopes for such alternative scenario arrived much later. But they were wasted, too.