11. UKRAINE’S DANCE OF THE OLIGARCHS

By Judy Dempsey, International Herald Tribune (IHT)
Published by The New York Times,
Neuilly Cedex, France, Friday, December 23, 2005

KIEV – If anyone wants to make any sense of what is happening to Ukraine
one year after the Orange Revolution, then a walk past the Parliament
building on Hrushevskoho Street in Kiev could explain a lot.

When in session, the area resembles an open-air luxury car exhibition. All
the latest four-wheel-drive models from BMW, Mercedes, Porsche and
Lexus are parked on the sidewalks and in the streets. Most of the vehicles
are black, with bulletproof materials installed beneath their sleek skins.

Their tinted windows are so thick and dark that no one can look inside to
see the state-of-the-art GPS navigation consoles, the elaborate
communications systems mounted on the dashboards and the plush leather
upholstery. All have drivers, most of them dressed in black leather jackets.
When asked who owned the cars, the drivers either refuse to answer or
simply say, “A parliamentary deputy.”

That may be surprising, in a country where salaries for members of
Parliament range from 4,700 to 5,000 hryvnia, or $935 to $995, a month.

But then, this is Ukraine. Since the country won its independence in the
collapse of the Soviet Union in 1991, Parliament has become dominated by
the oligarchs – enormously wealthy industrial managers who have interests in
steel, iron, coal, the media and soccer clubs.

They have used Parliament as a forum to protect their interests. These
include campaigning for tax breaks, retaining customs fees to protect their
companies against imports and ensuring a weak, poorly paid judiciary that
has allowed sales of state-owned enterprises at well below market prices.

“Parliament operates under the political umbrella of the oligarchs,” said
Igor Burakovsky, director of the independent Institute for Economic
Research and Policy Consulting. “The Parliament consists of many
personal interests – particularly how the oligarchs can influence the
appointment of the cabinet.”

Yet only a year ago, tens of thousands of people stood in freezing
temperatures outside Parliament, demanding not only free elections but an
end to corruption and the power of the oligarchs over political life. They
blamed the oligarchs, many of whom own television stations, for muzzling
the media and not allowing objective reporting of the presidential
elections.

The demonstrators held banners bearing pictures of Viktor Yushchenko and
Yulia Timoshenko, leaders of the Orange Revolution, who they believed
would sweep away the old guard and usher in a political system based on
transparency and accountability.

Yushchenko eventually won in a democratic and free vote. He defeated

Viktor Yanukovich, who was backed by Russia and hailed from the
Donetsk region in eastern Ukraine, home to some very powerful oligarchs.

But a year after the Orange Revolution, the oligarchs remain in good humor.

They have started to put their energy and money into next March’s
parliamentary elections as they gauge which camp they will support. “Until
the elections, all reforms are on hold,” said Vasily Astrov, Ukraine expert
at the Vienna Institute for International Economic Studies.

The March elections are crucial because the stakes this time are higher than
ever. For the first time, the president’s powers will be curbed while those
of Parliament will be strengthened as Ukraine moves from a presidential
system to a full-fledged parliamentary democracy. This change was agreed to
a year ago, with support from Yushchenko, who said it would put Ukraine
firmly on the path to democracy.

But the move places Yushchenko in a tricky position. As president, he will
lose the power to appoint a cabinet. So the oligarchs are jostling to
influence the outcome of the election, since the largest political groupings
will have the biggest say over cabinet posts.

Under the new rules, the party with a majority in Parliament will nominate a
candidate for prime minister. The president, who will remain commander in
chief of the armed forces and will nominate the foreign and defense
ministers, will no longer have the power to dismiss Parliament without its
consent.

“It will be very difficult to predict the outcome of the elections,” said
Elisabetta Falcetti, Ukraine analyst at the European Bank for Reconstruction
and Development. “The existence of the oligarchs introduces a completely
new dimension to economic analysis.”

Yushchenko is lining up his allies in the hope that he will have a prime
minister with whom he can work.

From interviews with his advisers, it appears that Yushchenko is still
undecided about forming an alliance with Timoshenko, his former prime
minister and the leader of the Motherland Party. Yushchenko dismissed her
last September, partly over economic policy but also because they simply
could not work together. Since then, he has had a better relationship with
Yuri Yekhanurov, a leading member of Yushchenko’s Our Ukraine Party.

Yushchenko’s main supporter among the oligarchs is Petro Poroshenko,
chairman of a large financial group called Ukrpromivest that includes
shipbuilding, car assembly and confectionery businesses.

Yushchenko retains Poroshenko’s support even though he fired him as
secretary of the National Security and Defense Council last September after
the two men clashed with each other and Timoshenko.

Two other oligarchs, David Zhvania and Yevgeny Chervonenko, are standing
behind Yushchenko as well, although they were also ousted from the cabinet
in September, as Yushchenko struggled to achieve a balance among the 14
political parties with seats in Parliament.

Yanukovich, who was personally endorsed by President Vladimir Putin of
Russia in last year’s presidential election, has started to reorganize his
Party of the Regions in a bid to become prime minister after the
parliamentary elections, or at least play a big role in the next government.

Yanukovich has the support of Rinat Akhmetov, the most powerful oligarch
in the eastern industrial center of Donetsk, who owns System Capital
Management, a diversified industrial and financial services group.

Timoshenko, a former business tycoon who made her money in the energy
field, is wooing some powerful oligarchs as well, despite her promise in a
recent interview to curb their powers.

“In the economic sense, some oligarchs, corrupt civil servants and business
interests basically built a coalition of forces to extract money from the
state,” she said in an interview this month. “The less state, the better,”
she said, “because more state encourages corruption. It leads to an alliance
between the bureaucrats and the oligarchs.”

Yet Timoshenko herself depends heavily on oligarchs, including Alexander
Volkov, a legislator from Donetsk. She is also negotiating an alliance with
Igor Kolomoyski, a former board member of Ukraine’s central bank and now
head of the Dnipropetrovsk Private Group, which specializes in ferrous
metals and coke. Yet only last year, Kolomoyski had supported Yanukovich.

So what made Kolomoyski switch sides? Ukraine is awash with rumors and
speculation. Astrov says Kolomoyski has become Timoshenko’s main financial
supporter. Though her advisers become defensive when the issue of oligarchs
is raised, Ukraine experts say that when Timoshenko was prime minister and
pursued a relentless program of expropriating and reselling businesses, she
often acted from political motives.

Timoshenko has said “some of the resales had been necessary” in trying to
break the oligarchs’ political power. But according to Astrov, Timoshenko,
as prime minister, campaigned hard to transfer the ownership of Nikopol
Ferroalloys Plant, a lucrative steel business, to assist Kolomoyski.

Nikopol’s owner was Viktor Pinchuk, son-in-law of the former president,
Leonid Kuchma. Pinchuk also owned the Kryvorizhstal metallurgical
enterprise, which he had bought at well below market price in 2004.

Yushchenko had Kryvorizhstal taken from Pinchuk and the business was
resold last October for $4.8 billion, six times the original price. Astrov
said Kolomoyski wants control of Nikopol, and it is scheduled to be resold
in 2006.

Whichever oligarchs side with whichever political party in the coming weeks,
Hyhoriy Nemyria, director of the Center for European and International
Studies, said a Parliament with real powers was “creating a new reality.”

“The real centers of power – the president and the National Security and
Defense Council and cabinet – have been eliminated as a result of the
constitutional reforms that will create a parliamentary democracy,” said
Nemyria, who is an adviser to Timoshenko.

“All the main political leaders, including Yushchenko, have yet to decide
with which parties they will ally themselves before the elections and
afterward in Parliament,” Nemyria said, “because none of them will have an
outright victory. What we are seeing now is a situation where everyone is
out to make strategic compromises in order to gain power, but so far, little
is being said about reforms.” -30-

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