Ukraine’s real problem: crony capitalism

The protests in Ukraine’s capital, Kiev, had reached their apogee when Rep. Eliot L. Engel (D-N.Y.) introduced a bipartisan resolution aimed at “supporting the democratic and European aspirations of the people of Ukraine.” The resolution, already largely forgotten, spares little ink in criticizing Ukraine’s police force and the country’s general leadership, denouncing perceived affronts to the Ukrainian people’s “constitutional rights to freely assemble and express their opposition to President Yanukovych’s decision.”

The real threat to democracy, however, stems less from the country’s security apparatus than from the country’s elite class of untouchable oligarchs, who act as a corrupting force at every level of society.

{mosads}Yanukovych’s decision was to back out of negotiations with the European Union on a free-trade agreement aimed at strengthening ties between Kiev and Brussels, at the expense of Moscow. The ‘Association Agreement’, which was due to be signed at a summit in Vilnius, Lithuania last November, was widely perceived as an attempt to extend EU influence in Putin’s backyard. In response, Russia, which accounts for a quarter of Ukrainian exports, used economic sanctions to send a message to Kiev’s political elites: sign the Association Agreement and we will make sure your economy collapses. With little financial help pledged from the EU (there is a crisis, after all), Yanukovych pulled out.

While tens of thousands of demonstrators stormed Kiev’s central square in protest of Ukraine’s decision to not sign the agreement with the EU, it quickly became clear that most were not declaring their attachment to the EU per se, but rather their attachment to the idea of Europe. In Ukraine, Europe is seen as the diametric opposite of all that is Russian. Where Russia stands for elite corruption, dysfunctional democracy, and an overall lack of transparency, Europe is seen as a beacon of liberal democratic values and economic prosperity.

In polarized Ukraine, where the country is split between a Russian-speaking East and a Ukrainian-speaking West, one thing on which all citizens could most likely agree is that corruption is impeding the country’s economic potential. For this, Ukraine’s oligarchs, who often escape criticism, must answer.

Ukraine’s oligarchs are a force to be reckoned with. Though less notorious than their Russian counterparts, Ukraine’s billionaires together command a greater share of their country’s wealth than their Russian counterparts. The wealth of only a dozen Ukrainian oligarchs makes up roughly one-fifth of the country’s GDP. Having, for the most part, made their fortunes in the lawless transition period between Soviet and capitalist economies, these oligarchs thrive in the shadows, far away from the rule of law.

Indeed, in the rough and tumble Ukrainian business world, the term ‘violent takeover’ takes on a much more literal meaning. Controversial billionaires like Igor Kolomoisky and Gennady Bogolyubov of the Privat Group, known colloquially in the Ukrainian business world as ‘The Raiders’, have perfected their own brand hostile takeovers. A minimum stake in a company is acquired by one of the many companies Kolomoisky and Bogolyubov control and then a mix of phony court orders (often involving corrupt judges and/or registrars) and strong-arm tactics are deployed to replace the existing members of the board of directors with men loyal to Privat. In the takeover of the Kremenchuk steel factory in 2006, Privat’s raid was literal, with Kolomoisky and Bogolyubov hiring an army of thugs to descend upon the plant with baseball bats, gas and rubber pistols, iron bars and chainsaws. Needless to say, Kremenchuk’s steel production was soon under Privat’s control.

In countries with credible courts and general respect for the rule of law in economic affairs, Kolomoisky and Bogolyubov’s takeover attempts have been much less successful. Active in the Australian manganese ore industry, Bogolyubov sought to oust two directors of the company OM Holdings in 2011 yet failed when other shareholders recognized the coup and rallied to the board’s defense. In London, Kolomoisky and Bogolyubov launched a full-scale attack against Paul Davies, the chief executive of JKX Oil & Gas, in which they and their allies retain a 39% stake. The coup failed and went to trial in London’s High Court. In pronouncing her verdict, Judge Cynthia Dubin stated that there were “strong grounds for doubting the honesty of Mr. Kolomoisky and Mr. Bogolyubov”.

A fair trial and a judge free from the corrupting influence of billionaires is what many Ukrainians want and what the country desperately needs. And though the necessary judicial changes are more likely to come through Brussels than Moscow, it is curtailing the seeming omnipotence of the country’s oligarchs rather than signing an agreement that will truly secure Ukraine’s economic future.

Nadeau is a writer and consultant on European affairs based in Brussels.


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