Ukraine’s Catch 22 over its oligarch class
(Business New Europe – bne.eu – Mark Adomanis in Philadelphia – March 25, 2015)
As the Soviet Union collapsed in both Russia and Ukraine, small groups of extremely clever and even more ruthless men “privatized” (or if you prefer less exalted language “stole”) all of the prize industrial assets. Virtually overnight, these formerly mid-ranking bureaucrats and functionaries became billionaires, some of the very wealthiest people in the entire world. They owned giant steel mills, oil refineries, nickel smelters and other vestiges of the Soviet Union’s hard-won prowess in heavy industry. And having won wealth and the political power that it brought, they set out to defend their turf, to hold on to what they had won.
In Russia this “family” of oligarchs, comprised of people like Mikhail Khodorkovsky, Vladimir Gusinsky, and Boris Berezovsky, largely ran the show during the Yeltsin years, particularly as old Boris’ health deteriorated and left him increasingly bed-ridden. They were the people who chose Vladimir Putin as Yeltin’s successor, believing that he would be a compliant yes-man who wouldn’t do anything to shake up the previously established rules of the game. They made a disastrous choice. With the lack of sentimentality and clear-eyed ruthlessness that they had employed in creating their business empires, President Putin set about bringing them to heel.
Putin imposed a new deal: the oligarchs would be allowed to keep their money – ever the realist, Putin recognized their value as managers and business leaders – provided that they stayed out of politics. Stay out of politics and their wealth would remain safe. Indeed, they would be given every chance to prosper. Many like Oleg Deripaska and Mikhail Prokhorov did exactly this, and rode Russia’s decade-long boom to ever-higher positions on the Forbes list of the world’s wealthiest people. Those who blanched at the deal, however, were crushed. By the early 2000’s Russia’s political system (while still possessing a very long list of faults) was no longer “captured” by the oligarchs: they were an important political constituency, but they weren’t calling the shots.
In Ukraine this reassertion of state control never took place. The government remained effectively captured by varying groups of oligarchs. Accordingly, the Ukrainian government was not as repressive or heavy-handed as Russia’s, and this was reflected in all of the varying democracy indices, but it was also a lot less effective at governing: its economic practices remained appalling, as did its tax collection, fiscal policy and service delivery.
In Ukraine, then, one can say that the most important political fight was not between the state and the oligarchs, as was the case in Russia during Putin’s early years, but rather between different groups of oligarchs. Much of Ukrainian politics was, in fact, a struggle between politicians who, rather than representing grass-roots constituencies, represented the interests of rival oligarch groups. Ousted president Viktor Yanukovych was the creation of one these oligarchic clans, as were the Orange Revolution leaders Yulia Tymoshenko and Viktor Yushchenko.
To a significant extent the Maidan uprising reflected popular exasperation with oligarchic misrule. Yes, the varying groups on the Maidan had different values and different goals, but there was genuine outrage among the educated middle and upper middle classes at the fact that Ukrainian politics had so consistently been dominated by a small group of unelected oligarchs. One of the main demands of the pro-European parties was thus the overthrow of the oligarchy and its replacement by a “civilized” version of European social democracy. Precisely how this was going to work was never made clear (the Maidan movement has never been particularly concerned with the practical implementation of its agenda), but there was agreement on its general necessity.
The problem, however, is that this confrontation of the oligarchs had never happened. In fact, the Ukrainian government, which is now led by Petro Poroshenko, widely regarded one of the wiliest and most capable of the lot, was forced to come to an early accommodation with the oligarchs due to the rapidly escalating military standoff with Russia. In the aftermath of the annexation of Crimea, against which a demoralized Ukrainian government was able to offer no effective resistance, Russian Special Forces began infiltrating into East Ukraine and doing their best to sow chaos there. There was a risk that the entire eastern half of the country could collapse.
The Ukrainian government was left scrambling to find an adequate solution to this infiltration. Knowing that its armed forces were in no condition to be used in such a “hybrid war”, it decided to use the only people with the organizational expertise and financial heft capable of mounting an effective defence: the oligarchs. Kyiv thus installed several oligarchs, like Igor Kolomoiksy, as governors of the eastern oblasts and essentially gave them carte blanche to get the situation under control. Soon there were all kinds of privately funded militias doing battle against pro-Russian forces, and they were able to keep the “separatists” from making any gains outside of Donetsk and Lugansk oblasts.
While this was an understandable decision given the horrible financial and military constraints facing the Ukrainian government, allowing the oligarchs to run their own private armies was always going to end in disaster. It’s easy to give someone a gun; it’s a lot harder to take it away.
Chickens coming home
Recently, the tensions that have previously been buried in a cloud of nationalist enthusiasm and determination to confront Russian aggression have exploded to the surface.
Since mid-March, the Ukrainian government has faced off against one its putatively biggest supporters, the aforementioned Igor Kolomoisky. The details of the dispute can be a bit baroque, but essentially Kolomoisky is angry that the government tried to replace people whom he had installed within the upper management of a state-owned pipeline operator. When “his” people were fired, Kolomoisky responded by sending a bunch of his hired guns to the company’s office in Kiev. Men in masks and camouflage raiding a corporate office: it was a scene shockingly reminiscent of Russia during the late 1990s or early 2000s.
As of now, it’s not clear how the situation will be resolved. Poroshenko fired Kolomoisky in the early hours of March 25, five minutes after signing into law a bill effectively depriving Kolomoisky of backdoor control over the state oil company Ukrnafta. Two days before, he warned that no governors would be allowed to keep a “pocket army” and, in another formulation that reeks of early 2000’s Russia, he pledged that all armed formations would be subordinated to a “clear-cut military vertical”.
But even if the current standoff is resolved peacefully, and there are a million ways it could turn violent, the Kolomoisky-Poroshenko fiasco highlights the awkward fact that a revolution that was aimed at weakening oligarchic control of the government has succeeded in further empowering the oligarchs. Ukraine desperately needs to find a way to subordinate these powerful financiers and businessmen to the state, to deny them the effective control over the government that they have wielded for the past two decades.
I have no idea how this will happen. Due to the Maidan movement’s emphasis on grass roots democracy and “European values”, a Putin-style crackdown on the oligarchs is off limits: even if Poroshenko could somehow marshal the requisite force needed for such a step, it wouldn’t pass muster with Ukraine’s Western creditors. Some kind of more peaceful, law-based approach is thus necessary. However, the oligarchs (who are obviously not very keen on the prospect of being deprived of power!) have countless levers at their disposal to thwart, water-down, delay and otherwise undermine any such attempt.
Maybe some politician of unique foresight, brilliance and skill will appear to engineer such a compromise, one that would deprive the oligarchs of their political power while allowing them to keep their business empires. But so far it seems that Ukraine faces a Catch 22: the options available to it won’t work, and the options that will work aren’t available to it.