The future of Ukrainian oligarchs

0
Protesting Ukrainian Oligarchs
Anti-government protests in Kyiv, Ukraine, November 2013. Image: Oxlaey.com (CC2.0)

With both presidential and parliamentary elections scheduled, 2019 is set to be a critical year for Ukraine. What follows is a brief summary of a report written by the Ukrainian Institute for the Future about Ukrainian oligarchs and their position in the country’s political system.

Ukrainian oligarchs are the richest, most powerful people in the country. Currently they control a huge part of the political elite, however they risk losing everything in the next 5-10 years. We ask if oligarchs are aware of these challenges, and what the scenarios for the future of the Ukrainian oligarchy could be.

Oligarchs are usually defined as businessmen having direct influence on both politics and the economy. During the 1990s, in the period of Ukraine’s transition to a market-based economy, the oligarchs emerged as a group of mutually connected entrepreneurs. They managed to make huge profits from their connections and ties with a corrupt, but democratically elected government. Later, numerous Ukrainian business people managed to take control of political parties to gain seats and influence in the Ukrainian Parliament (the Verkhovna Rada). More importantly, Ukrainian oligarchs regularly created their own “puppet” parties or bribed already-elected MPs. This gave them the support of Parliament for enacting many of their corrupt schemes.

In this way, the oligarch is a businessman seeking to use his political authority to gain profit from actions like unfair tenders, market monopolies and tax benefits. To keep their position, oligarchs must retain influence over the government and the political actors that help them maintain business success and gain “superprofits” without the necessity to compete with other market players.

In the 28 years since Ukrainian independence, oligarchs have managed to help retain their power by owning and exploiting powerful media resources. Today, oligarchs finance the vast majority of Ukrainian TV channels and other media. These broadcast narratives in the oligarchs’ favour by promoting their political parties and strengthening their political influence within the country.

All this has resulted in a corrupt, so-called “oligarchic consensus,” where any political decision is made through informal negotiations between the most influential oligarchs. It fosters the entrenchment of nepotism in power, and embezzlement of the state budget.

Since the Revolution of Dignity in 2014, with the resultant protests and civil disobedience, social demands in Ukraine have significantly changed. The killing of many activists by law enforcement agencies while forcibly suppressing peaceful actions has led to a situation where society demands a change in the political system. In particular, they want to “de-oligarch” it.

Another factor weakening the oligarchs has been the Russo-Ukrainian war. The military conflict broke out in the Donbas then one of the most important industrial regions in the country. Many Ukrainian oligarchs lost assets because of this.

This war and the ensuing instability of the political system had a disastrous effect on the economy of Ukraine, and the finances of oligarchs in particular. In early 2018 the Ukrainian business weekly magazine Focus wrote that the assets of the 100 richest people in Ukraine amounted to US$26.9 billion. During the presidency of Victor Yanukovych (2010-2014), this figure had ranged from $62 to $80 billion – the richest Ukrainians have lost two-thirds of their fortune. Since the 2008 crisis Oligarchs have lost more than 75% of their starting assets. The probable third wave of global crisis expected in 2019-2020 may affect Ukrainian oligarchs even more.

Even in the case of no new economic crises, there is another painful factor for the oligarchy: their decreasing ability to use the state budget. Our research on “The Future of the Oligarchs” explains the reducing opportunities for successful oligarch mining from the state budget.

  • Growing debt repayments: About 40% of the budget of Ukraine for 2019 is provided for the return payments on debts. The total budget amounts to 417 billion ($15.3 billion), of which 145 billion ($5.33 billion) is for debt service repayments.
  • The growing deficit in the state pension fund: Despite the recently launched reform of the pension fund the deficit of the fund for 2019 of 166 billion ($6.15 billion), increased by 30 billion ($1.1 billion) compared to 2018.
  • Growth of defense expenditures: Defense and security spending increased by 73 billion ($2.6 billion) during 2017-2019 to more than 200 billion ($7.3 billion) and will keep growing in the future.

This all means that the “budget pie,” which oligarchs have grown used to violating, is not the same as it was years before.

Considering the above-mentioned economic challenges and general changes in the Ukrainian political culture, we in the Ukrainian Institute for the Future see three scenarios for the future of the Ukrainian oligarchy.

The conservative scenario where everything remains as it was and will not bring any bright prospects either for Ukraine or for the oligarchs.

During the elections, the oligarchs will try to put their parliamentary groups into the parliament and will be negotiating with presidential candidates. After this, oligarchs will be converting their political influence into financial support for their own businesses interests. Access to politics for new representatives and activist will remain closed due to the control of the media space.

As resources decline the oligarchs will start a tough mutual struggle leading to gradual eradication of one another.

The situation in the country will begin to destabilise with shortages occurring in the financial resources needed to cover social spending. This will correspondingly bring a rise in populism and radicalism in the country. The state will react by printing money which will lead to further hyperinflation and default.

In many ways, everything could be similar to the beginning of the 90s when oligarchy appeared in Ukraine.

The second scenario – a revolutionary one. This means a radical abolition of the oligarchs from power and thus of their control over the economy and state budget. There is a low possibility of this scenario because of the absence of middle class groups ideologically close to Western values who could bring it to reality.

The third and final scenario – a moderate one which we also call “A Polish round table”. It is the most realistic scenario for Ukraine. In 1989, Lech Walesa the leader of the Solidarity Union, who then became the first President of independent Poland, brought the government led by the communist elite (The Polish People’s Republic) to the negotiating table. He offered them safety in exchange for their further non-interference in politics.

Like the Polish Communists at that time, the Ukrainian oligarchs are now interested in only one thing – their own security. They are interested in having escape routes and preservation of their freedom and prosperity during the current social turbulence of the Ukrainian society.

Their only choice in this scenario is turning their economic model to one that is independent (including not profiting from the state budget), competitive and economically profitable. One of the most powerful Ukrainian oligarchs Victor Pinchuk* started doing this and a few more players are choosing this path too.

There are other signs of openness to change. In 2015 a former oligarch Serhiy Taruta**, who went bankrupt when the war in the East affected a significant part of his enterprises, initiated the meeting of Ukrainian oligarchs. According to media reports the purpose of the meeting was to discuss the economic crisis and ways out of it.

But, despite this, the remaining challenge is the lack of trust between the oligarchs and society itself. This means having tough negotiations and reaching even ground between them. And for both society and the government this highlights the current absence of political maturity of any force capable of acting as a negotiating partner and guarantor of the implementation of agreements.

The main question nowadays is: Who will be the party on the other side of the negotiating table?

For more information about the Ukraine Institute of the Future or their in-depth reports please visit uifuture.org.

LEAVE A REPLY

Please enter your comment!
Please enter your name here