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A Pact with the Oligarchs

This is a shortened version of an essay originally appearing in New Eastern Europe Issue 2(VII)/2013 “Painful Past, Fragile Future”. For the full article please see the print edition here.

July 14, 2013 - Paweł Kowal - Articles and Commentary

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The fate of Ukraine lies in the hands of a group of the richest families, and any sensible policy towards Ukraine must take this into account. Vladimir Putin understands this fact, although the European Union has a problem accepting it.

The sources of the financial elite’s wealth in all states of the former Soviet Union can be found in the same period: the final phase of perestroika and the 1990s. Today’s “magnates’ estates” were founded on huge transfers of various kinds of goods. State property went into private pockets. People well placed within the communist system had privileged access to these opportunities. However, connections with the regime were not sufficient. To establish a fortune you also needed ruthlessness, propensity for risk-taking and, as always, talent. It helped even more if you could, for example speak multiple languages and move freely on the international scene. Children of the communist elites and Komsomol members were usually the winners. Many oligarchs and rich politicians were previously active in the Soviet Union’s communist youth organisation, including Mikhail Khodorkovsky and Yulia Tymoshenko.

After 1991, businessmen (and women) needed good relations with the new (only usually to some extent) regimes established in these freshly founded states. Political change created space for building wealth without ideological constraints. People were dependent on the regime for loans, contracts and commissions, while the authorities defined the position of large sectors of the economy dominated by the oligarchs such as metallurgy, energy and construction. Only the regime, especially in the initial developmental stage of the post-communist oligarchy system, had the possibility of guaranteeing security to this emergent group.

Sense of mission

The shape of the future oligarchy was hugely influenced by politics and the social situation. At this junction the ways of the oligarchs from particular countries parted, as did the direction of development in their home states. The Baltic states chose the path towards liberal democracy. Under this system, the political ambitions of the oligarchs can be pursued mostly by supporting this or that political party, and then reaping the benefits should their party win. Joining the European Union, which brought with it the introduction of anti-monopoly and anti-corruption laws and regulations separating political parties from business, constrained the impact of the oligarchs even more, but they did not eliminate it altogether.

For an oligarch is not simply a rich man or a rich man with shady origins of his fortune. An oligarch craves power; his ambitions are not limited to accumulating wealth. Even if at some stage his political aspirations are driven by a desire for profit, they are usually supplemented by a need to influence the regime or be a part of it, to draw satisfaction from it, to reinforce his conviction that he is motivated by a public mission transcending merely acquiring goods. It is difficult to say when the public involvement of a businessman is thus ennobled with the aspect of political responsibility for the people of his country, but such a moment certainly exists.

Over time the government starts to transfer some of its duties to the oligarchs, or rather tacitly accepts that it is relieved by them in its obligations. And they in turn display a propensity to take over these responsibilities, motivated by a sense of mission. And this in a way dignifies the circumstances in which their fortunes were established. But while the ascent of Vladimir Putin to the Kremlin meant subordinating the oligarchs to the regime, Leonid Kuchma, in a state more poorly organised and internally divided, built a system of balance between the state and its structures on the one hand, and the oligarchs and their “princedoms”, on the other.

The division based on particular industries in Ukraine is particularly important (Oligarch A controls the natural gas market; Oligarch B controls the airlines, etc). If the rules governing the spheres of influence are threatened, attempts at revising them become a source of tension and an opportunity for political change. Sometimes we can even see a demand to settle the matter indirectly at the polling booth, as particular parties are influenced by specific oligarchs in specific areas. Tensions between the oligarchs were one of the reasons for the success of the Orange Revolution in 2004, which resulted in a new political and economic deal for the oligarchs.

Satiation, power, legitimacy

Money gives the oligarchs self-confidence but legitimacy of power is only produced by electoral mechanisms. A genuine oligarchy creates competition, at least between the oligarchs, and needs this competition to develop. The oligarchic system cannot exist without democracy, or at least without democratic procedures, which can become a playing field for it, a platform where particular groups compete against each other; some get stronger and some get weaker. Democratic procedures become one of the forms of the struggle for influence. This can be observed even in oligarchic systems with a clear domination of one party – then the struggle is between factions under the forms of “internal democracy”, for example through elections to the party’s governing bodies. When democracy gets weaker, the playing field shrinks, public opinion has a smaller impact on the decision-making process, and the media ceases to be spokesmen for the regime. The concentration of decisions in the hands of a democracy-destroying regime in Russia is an indication that you should leave for London or prepare your pyjamas before being taken to jail; while in the Ukraine it is the first signs of a coming revolution.

For the generation of post-Soviet oligarchs, satiation with material goods came relatively quickly. They did not wait for a generational change with channelling some part of their resources for “higher causes”; this stage of their development arrived rather early. Charities named after the oligarchs were established, large sports facilities were built. Rinat Akhmetov, owner of Shakhtar (a Ukrainian football club from the city of Donetsk), built a stadium for EURO 2012 in his native Donetsk.

Another oligarchic area of interest is culture, especially museums and art. Kolomoyskyi and Gennady Timchenko are establishing a Jewish centre called the Holocaust Museum in Dnipropetrovsk. Victor Pinchuk established the PinchukArtCentre – a private museum promoting contemporary art which employs western experts. Vadim Rabinovich is the main sponsor of the rebuilding of the Lazarus Brodsky Synagogue in Kyiv and the gilding of the domes of the St. Volodymyr’s Cathedral in the Ukrainian capital. Henadiy Boholyubov, one of the richest Ukrainian oligarchs but also one of the least known in the West, has done a lot for the Jewish community in Ukraine and abroad – a few years ago he spent one million dollars on prayer books for people praying at the Wailing Wall in Jerusalem. Akhmetov, a Muslim, financed the construction of the Ahat Jami in Donetsk. And Dmytro Firtash is rebuilding Orthodox churches and monasteries all over the country.

Another aspect of oligarch life is their socialising with the stars of show-business. Victor Pinchuk counts such celebrities as Elton John among his friends, and celebrated his 50th birthday in the famous Alpine resort of Courchevel with the whole town excitedly following the event. Travelling to the West showed the oligarchs how important it is to create ideas, to participate in the exchange of ideas, and to emphasise the importance of certain social and political solutions. They realised that in order to achieve that goal, it is not enough to have “their own” candidates on particular party lists to parliament. They must become interested in the soft forms of making an impact on reality. And this gave rise to another field of their activity: establishing think-tanks and organising conferences promoting specific ideas and solutions which are important for Ukraine (and of course for the sponsor himself). One example is the Yalta European Strategy Forum sponsored by Victor Pinchuk. A similar conference takes place in Batumi, although in Georgia it is financed by the government. The meetings in Crimea, which in fact are private events, host the most important American and European politicians (Javier Solana, Condoleezza Rice, Štefan Füle). Yalta is perhaps the only place where one can see at one time the whole gamut of Ukrainian politicians from Arseniy Yatsenyuk and Vitali Klitschko, to Viktor Yanukovych and Mykola Azarov. Pinchuk has such a strong position that they wouldn’t reject his invitation.

Today’s Ukrainian oligarchs personally engage in politics, and from the point of view of the West they are normal politicians. They have often shown themselves to be capable negotiators, political players nimbly moving in the international power rooms. If they work as government officials or parliamentarians, they finance their activities from their own pockets. Having their own resource base, the salary paid by the government doesn’t play any role in their overall budget. Their benefit from having a government job is that it protects their private interests.

Family instead of oligarchy

In the recent history of Ukraine, there has been no regime that has made an attempt at overpowering the oligarchs, removing them from co-deciding the situation in the country. But there were two major attempts at redrawing the map of spheres of influence in the oligarchic world. The first was connected to the elections in 2002 and consequently with the revolutionary events of 2004, and those behind them were oligarchs dissatisfied with the distribution of spheres of influence chartered by President Leonid Kuchma. But the results of this “shift” in the oligarchic hierarchies were limited: key players stayed in the game, although they had to make some room for the younger generation of influential figures in Ukrainian business.

The second attempt at changing the balance of power, this time by the government rather than by revolution, can be seen unfolding live. It consists of creating a “family”, that is a group of even younger oligarchs owing their loyalty to the president of the country. The crucial factor here is not the potential benefits from the new distribution of influence, but the political experience of Yanukovych, who has concluded that some oligarchs easily switch loyalties. For it is clear that in some oligarchic circles, the support for the government of the Party of the Regions is weakening. So it is a mostly political undertaking aimed at preserving the electorate of the Party of the Regions for Viktor Yanukovych.

The president’s son Oleksandr is active in the construction business, and for the second year running found himself on the list of one of Ukraine’s richest. In 2011 he ranked 70th with his fortune estimated at 130 million dollars. His wealth today is believed to be 133 million, which gave him 61st place on the list published by the weekly Korespondent. As journalists from the Ukrainian edition of Forbes havereported, the All-Ukrainian Development Bank belonging to Oleksandr increased its turnover thirteen-fold, and in the next couple of years it may join the group of the largest financial institutions in the country.

Another business activity of Oleksandr Yanukovych is coal-mining in Donbas. Besides the obvious political and economic aspect, the interest in coal has one more dimension, namely a strategic one. Coal could replace expensive Russian natural gas in the Ukrainian economy. In this sense the “family” could also provide a guarantee of expanding independence from Russia, should it want to use energy to exert pressure through other Ukrainian oligarchs. The country could be aided in this project by Chinese banks loaning money for investment in the coal industry. It is believed that President Yanukovych’s son will also try to take control over the Ukrainian oil sector and, in this way, influence relations with Belarus.

As we can see, political pressure may lead to a remodelling of the balance of power between the oligarchs, but it is difficult to imagine its collapse. This is one more reason to treat it as a permanent piece of the political puzzle in Ukraine.

How to live with an oligarchy

Western rhetoric, where the oligarchs function as the principal target of criticism of the Ukrainian system, is based on a misunderstanding of the role of the oligarchs. For the question is not “if”, but “how” the oligarchs will function in this system. The fact that the oligarchs support the Ukrainian state in many functions is particularly important. So the argument concerns the future shape of Ukrainian society and the direction in which fortunes will develop, as well as the attitude of their owners to Ukrainian statehood and rules of the democratic game.

But one thing is certain. Any effective constraining of the supremacy of the oligarchs could today (perhaps in the future the situation will change) occur not as a result of empowering the “people”, as the outcome of the Orange Revolution has shown, but through a more authoritarian regime, as the Russian experience proves. Do the unreflective critics of the oligarchy take this factor into consideration? Does the West know any mechanism which would rid Eastern political life of oligarchy other than revolution connected with “de-oligarchisation”?

From this point of view the oligarchs emerge as a guarantee for maintaining democratic procedures in Ukraine, and in this sense they are to some extent allies of the West. They do not guarantee the quality of democracy, but they can ensure that some of its mechanisms function.

The call to completely eliminate the problem of the presence of the oligarchs in the economic and public life in the East is utopian. A more rational project is to accept the status quoand unblock the Ukrainian system rather than try to remove the oligarchs. Before EURO 2012, when Carl Bildt and Radosław Sikorski visited Rinat Akhmetov, “the Lord of Donetsk”, to talk about the situation of Yulia Tymoshenko and the European aspirations of Ukraine, elites both in Brussels and Kyiv were full of indignation. Although the meeting didn’t have any major effect, the question remained whether such meetings should be looked at as one of the methods of seeking real partners for the political dance in Ukraine: not instead of talking to the government in Kyiv, but as an additional political activity.

It is high time to start treating the word oligarch as a descriptive category rather than a term of abuse, to accept the presence of the new magnates in the East, and try to reach an understanding with them.

Translated by Tomasz Bieroń

Paweł Kowal is a Polish politician and member of the European Parliament. He is Chairman of the EU-Ukraine Parliamentary Cooperation Committee in the European Parliament.

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