Wednesday, April 04, 2007

Crisis in the Ukraine

Despite all the protest flags and mobilizations of party faithful the reality behind the political crisis in the Ukraine stripped of the rhetoric;
a privatization putsch.

Competing Oligarchs
and their political parties vying for the transformation of the Ukraine from State Capitalism to Monopoly Capitalism.

The death of the Orange Revolution and the continuation of the capitalist revolution in the Ukraine.

Although the two leaders are separated by such ideological differences as whether Ukraine should join NATO or more closely align with Russia, much of the wrangling has been widely viewed as efforts by their financial backers and power-brokers seeking to protect business interests. Several business groups are known to be vying for influence over lucrative enterprises — for example, ventures connected to the country`s natural gas transport system.

Yanukovich has signed up to a government programme that is broadly in favour of a market economy and a pro-western foreign policy. The government will try to complete talks on joining the WTO before the end of this year; it will allow private sales of agricultural land; and it will start to negotiate a free trade area with the EU. Those who have met Yanukovich recently report that he has made a big effort to spruce up his style and become a more "western" politician - perhaps his American PR advisers have helped.
Expensive Enemies
Even these expenses pale, however, in comparison with the real cost of the ongoing struggle for power. Viktor Yanukovych's return to power last year was not only his personal triumph and that of his Party of the Regions – it was also a victory for the many business interests associated with the prime minister, particularly the company System Capital Management (SCM), which belongs to Rinat Akhmetov, the richest man in Ukraine; the corporation Interpipe, headed by Leonid Kuchma's son-in-law Viktor Pinchuk; and the group UkrSib, which belongs to Alexander Yaroslavsky and Ernest Goliev.

Consequently, businessmen sympathetic to the prime minister's opponents, the Our Ukraine and Bloc of Yulia Tymoshenko parties, have been cut out of the loop. Incidentally, the last few months have seen privatization actively moving forward in Ukraine under the supervision of the government Property Fund (FGI), whose leader Valentina Semenyuk is a member of the Socialist Party, which is a partner in Viktor Yanukovych's "national unity coalition." Coincidentally or not, the decisions that the FGI has been making lately have been unfavorable for businessmen associated with Yulia Tymoshenko. The noisiest scandal involved the recent privatization of the holding company Luganskteplovoz: although Privat Group, which is owned by long-term Tymoshenko associate Igor Kolomoisky, wanted to bid on shares in the company, the FGI ruled that only two Russian companies, Demikhovsky Mashinostroitelny Zavod (Moscow Oblast) and the managing company of Bryansk Mashinostroitelny Zavod (both companies are controlled by the group Transmashkholding), would be allowed to participate in the auction. When Luganskteplovoz eventually went to Bryansk Mashinostroitelny Zavod for $58.5 million, the Bloc of Yulia Tymoshenko (BYuT) charged that the deal was illegal and initiated a parliamentary investigation lead by BYuT deputy Andrey Kozhemyakin, the head of the Committee for Privatization Issues.

The fiercest battles over privatization still lie ahead, however. This year the FGI is preparing to auction off shares in Ukrtelekom, and Mr. Akhmetov's SCM has already expressed interest. The Ukrainian government has also given its consent to a broad privatization campaign in the electrical energy sector. Shares will be offered for sale in numerous government-owned regional energy companies, including Prikarpatenergo, Lvovenergo, Sumyenergo, Chernigovenergo, and Poltavaoblenergo, and experts are already predicting that SCM, Interpipe, and Privat will fight tooth and nail over the spoils.

Such a state of affairs does not sit well with the rest of the heavyweights in the Ukrainian market, who are now determined to see a change in the current political landscape. In large measure, the actions of Yulia Tymoshenko and Our Ukraine are driven by the expectations of businessmen claiming offense at the hands of the government. "Yanukovych is lobbying not only for the interests of Akhmetov but also for those of Russian business, which the Luganskteplovoz affair shows," believes Vadim Karasev, the head of the Kiev Global Strategy Institute. "If BYuT and Our Ukraine succeed in getting early elections called and form a coalition that ends up holding the reins of power, the oligarchs standing behind them, i.e., Privat, will also win. That is the cost of dissolving the Rada – Ukraine as a business asset."

OP-ED by Anders Aslund, International Herald Tribune (IHT)
Europe, Thursday, February 10, 2005

The economic programs of the two presidents are remarkably similar. Both

advocate a free but social market economy. Both countries have a flat
personal income tax of 13 percent. Ukraine needs to catch up with Russia
in market economic legislation, but with rising authoritarianism, the role
of the state is growing in Russian business.
The critical issue is the property rights of the oligarchs. Putin has given
up much of his initially good economic policies by ruthlessly going after
one oligarch, leaving the property rights of others in doubt. Yushchenko
must avoid repeating his mistake. Yet he campaigned for the re-privatization
of Kryvorizhstal, the last, biggest and most controversial privatization in
Ukraine. Having been bought by Ukraine's two wealthiest oligarchs (Rinat
Akhmetov and Viktor Pinchuk), it is a palatable political target. The
challenge to Yushchenko is to limit re-privatization to the politically
necessary and then sanctify property rights. For economic growth,
Ukraine needs more privatization rather than re-privatization.
Ukraine's "orange revolution" has made democracy look modern again.
Yushchenko's challenge now is to balance calls for social justice with the
need for secure property rights. -30-

Foreign Affairs - Ukraine's Orange Revolution - Adrian Karatnycky

Corruption accelerated after Kuchma's election as president in 1994. The former director of the Soviet Union's largest missile factory, Kuchma brought with him ambitious and greedy politicians from his home base, the eastern city of Dnipropetrovsk. The greediest of the crew was Pavlo Lazarenko, who, in June 2004, was convicted in U.S. District Court of fraud, conspiracy to launder money, money laundering, and transportation of stolen property. Lazarenko, currently free on $86 million bail, was accused of having stolen from the state and extorted from businesses hundreds of millions of dollars between 1995 and 1997, when he served for 12 months as first deputy prime minister and for 7 months as prime minister. When the scale of Lazarenko's corruption became known, some Ukrainian leaders were outraged. But Kuchma could not have been surprised. In 2000, his former bodyguard leaked hundreds of hours of transcripts of the president's private conversations. On the tapes, Kuchma is heard dispensing favors, paying massive kickbacks, and conspiring to suppress his opponents--making it clear that the president sat at the head of a vast criminal system.

Several factors facilitated Ukraine's massive corruption. High inflation meant that until the mid-1990s, many cross-border financial transactions were conducted using a barter system, which was easily falsified to understate the amount of goods traded; resources that were exported to Russia ostensibly for energy often brought huge kickbacks instead. Wide-ranging privatization also enabled government insiders and cronies to buy state enterprises at bargain-basement prices. Steel mills, today worth several billion dollars, were bought for a few million. Regional energy companies fell prey to the same forces. The tax inspectorate was another weakness in the system, as the government manipulated it to gain financial and political advantages: competitors could be harassed or forced out of business by inspections and fines, and oligarchs could easily evade paying taxes.

In general, the oligarchs were able to operate their businesses without fear of independent oversight. Under Ukraine's constitution, local government officials are not elected but appointed by the president, who allowed oligarchic groups to create local enclaves headed by their allies. In the Zakarpattya (Transcarpathia) region, local and central government officials enabled one oligarchic consortium to amass vast fortunes from the lumber industry by stripping the forests of their trees. Now, parts of this once richly forested mountain region have been dangerously depleted, compounding the problems caused by deforestation in the Soviet era.

Over time, several Ukrainian oligarchic clans became dominant in the young nation. Medvedchuk, who became presidential chief of staff in December 2002, represented the Kiev clan, which controlled regional energy and timber companies and invested in broadcast media. The Dnipropetrovsk clan, which invested in the energy pipeline industries, included Viktor Pinchuk, now Kuchma's son-in-law. A powerful group from the eastern coal-mining Donbass region included metallurgy baron Rinat Akhmetov, the postcommunist world's second-wealthiest man, with a net worth of $3.5 billion.

Each interest group established its own political party in parliament. The Kiev clan ran the Social Democratic Party of Ukraine (United). The Donetsk oligarchs created the Party of Regions, the ranks of which included a local governor who later became prime minister: Yanukovich. The Dnipropetrovsk group created and backed the Labor Party. And the influence did not stop there. The oligarchs owned or controlled their own national broadcast media and local and national newspapers. Each was capable of massively funding political campaigns in the emerging pseudodemocratic system.

In the late 1990s, the oligarchic clans largely remained under the control of Ukraine's powerful president. But in 2000-2001, Kuchma's power began to weaken as the wealth of the robber barons grew significantly and Kuchma's personal corruption and criminality started coming to light. Eventually, Kuchma even faced a vigorous opposition campaign to impeach him for his role in an abduction that ended with the murder of the investigative journalist Heorhiy Gongadze. But the campaign stalled as the president and his backers blocked efforts to institute the legal procedure needed to formally make the charges.


It was this turbulent period that saw the metamorphosis of Yushchenko from colorless central banker into charismatic opposition leader. In December 1999, pressure from Western donor countries seeking deeper economic reforms resulted in his appointment as prime minister. As chairman of the National Bank of Ukraine in the 1990s, Yushchenko had tamed rampant inflation and introduced responsible fiscal controls. In taking the reins of the government, he was determined to impose fiscal discipline and rigorously collect tax revenues and privatization receipts. To achieve these goals, Yushchenko needed to crack down on Ukraine's crony capitalism. He formed an alliance with one of the system's own--Yulia Tymoshenko, a former energy mogul who had run afoul of the Kuchma regime. With Tymoshenko's help, Yushchenko managed in just a year to recoup more than $1 billion in revenues that had been siphoned off by energy oligarchs.

Ukrainian society was also experiencing profound changes of its own, including the rise of a significant middle class in Kiev and other urban centers. In 2002, thanks in part to the ongoing effects of policies enacted by Yushchenko when he was prime minister, GDP grew by 5.2 percent; the next year, it increased 9.4 percent; and in 2004 it grew by 12.5 percent. From 1999 to 2004, Ukraine's GDP nearly doubled. Although this growth mostly benefited a narrow circle of oligarchs, it also spawned many new millionaires and a new middle class. These new economic forces resented the latticework of corruption that constantly ensnared them--from politically motivated multiple tax audits to shakedowns by local officials connected to business clans.

For Richer and For Poorer

The FSU's troubled relations with its wealthy

To Ukrainians, the wealthy are like thieves who stole all the money they had in the bank, along with the titles to their homes, then drive up in luxury cars and threaten to beat up their families if they don't pay the rent.

Take Renat Akhmetov, Ukraine's richest man with $2.3bn, now under investigation in a murder case going back a decade. Rather than face questioning, he skipped town. Now the authorities have raided his company in search of evidence. Of course we all hope that if Akhmetov does go to court, it will be for legitimate reasons, the court proceedings will be fair, and the outcome will be just. Yushchenko said rule of law would be a priority, but the strange lack of closure on the case against Borys Kolyesnykov, Akhmetov's fellow Donetsk tycoon, makes it seem as though the Ukrainian justice system is still not up to doing its job.

What goes on in the court may or may not be just, but what the average voters see is the following: in the course of a decade or so, while ordinary Ukrainians lost all their savings, this man made $2.4bn. Did he create any companies? No, he bought them or cobbled them together from other companies. Did he rebuild the crumbling businesses of Eastern Europe? No, they're still crumbling. Did he create new processes, invent new machines, formulate effective new management strategies? No, no, and no. Akhmetov did not make his money on innovation. He and the people like him are not like capitalists as I know them from Silicon Valley, they are like the Marxist ideal of capitalists: people who make money without adding anything. Like robber barons without Rockefeller Center, or the Carnegie Endowment, or new railroads, for that matter. [update: Reader dlm has rightly reminded me how deeply connected the philanthropic work of, for example, Carnegie was connected to his belief in Christian charity. Of course this is also something that is not yet a strong positive influence in Eastern Europe after decades of state opposition to Christianity.]

The “evolving oligarch”

Business oligarchs like Fridman continue to power the Russian economy — and to hold the fate of minority shareholders in their hands. According to a December 2001 study by Brunswick UBS Warburg, a Moscow-based investment bank, eight financial-industrial groups control the 64 largest private companies in Russia. Among the prominent oligarchs cited in the study alongside Fridman and Khodorkovsky were Roman Abramovich (Russia's second-richest man, who is merging his oil operations with Khodorkovsky's), Oleg Deripaska (who owns the largest aluminum producer in the country) and Vladimir Potanin (who used part of his oil proceeds to corner Russia's nickel output). Critics contend that this concentration of wealth creates barriers to competition, makes it more difficult for new businesses to get started and offers portfolio investors very limited choices on the local equity markets. The big financial-industrial groups “aren't acting very differently from monopolies anywhere else,” says Christof Ruehl, chief economist at the World Bank's Moscow office.“

Defenders of the Russian capitalist model argue not only that it isn't broken but that it doesn't need fixing. Only China's economy is expanding faster, they note. Besides, say the optimists, oligarchs have moderated their hard-boiled approach to business. But skeptics remain. “With Russia's kind of growth, it's hard to convince people that business and banking reforms are urgent,” says Stephen Jennings, chief executive officer of Renaissance Capital, a leading Moscow-based investment bank.

Fridman is often cited as a paragon of the evolving oligarch. “He played some rough games earlier in his career,” says Marshall Goldman, a Harvard University economics professor whose recent book, The Piratization of Russia: Russian Reform Goes Awry, offers a scathing vision of buccaneer capitalism. “But nowadays he looks like one of the more enlightened entrepreneurs.”
Nothing better illustrates Fridman's progress from notoriety to celebrity than his dealings with his new partner, U.K. oil giant BP. Even though BP once sued Fridman for seizing valuable petroleum fields for which the British company had paid close to a half-billion dollars, this past June BP signed a deal to pay $6.15 billion — the largest foreign investment in post-Communist Russia's history — for half of Fridman's TNK, which controls the same oil fields. Between these two bookends is a rough-and-tumble saga about “learning to do business in Russia — the hard way,” says Robert Dudley, the BP vice president who has been named chief executive officer of the joint venture, TNK-BP.

Speech before the Los Angeles World Affairs Council on March 12, 1999:

Dimitri K. Simes
President, The Nixon Center
Author, After the Collapse: Russia Seeks Its Place as a Great Power

Russian robber barons were not builders. Russian robber barons were manipulators who knew how to build connections which would allow them to privatize on the cheap without paying almost anything, and then they would immediately open bank accounts in Switzerland. Thus, they were taking money from the country, and because of that they were very afraid to have any one as Russian president who was not one of them. From that standpoint, Yeltsin was a deal. He had presided over the privatization; he could be counted upon to protect their interests. These same people who were Yeltsin’s official advisors were in charge of major networks. You’d have the money going from Russian central bank, to private banks, and the private banks would immediately give the money to Yeltsin’s campaign. There was really no difference between the Russian state treasury and Yeltsin’s personal campaign chest. That’s how those elections were conducted.

The Decision to restructure to a Market Economy was made by Soviet Intellectuals

Soviet intellectuals studied both their economy and that of the West closely and made a conscious decision for change. Once the decision to change to a market economy was made, these same intellectuals had little to say about the actual restructuring:

When I [Fred Weir] came here seven years ago at the outset of perestroika, there was very little belief in socialism among the generation dubbed the golden children. These sons and daughters of the Communist party elite had received excellent educations, had the best that the society could give them, and only aspired to live like their Western counterparts. Many had high positions in the Communist Party, but were absolutely exuberant Westernizes, pro-capitalists, and from very early in the perestroika period, this was their agenda.... People who thought they were going to be the governing strata in a new society are [now] losing their jobs, being impoverished and becoming bitter. The intellectuals, for instance—whose themes during the Cold War were intellectual freedom, human rights, and so on—had a very idealized view of Western capitalism. They have been among the groups to suffer the most from the early stages of marketization as their huge network of institutes and universities are defunded.53

Those golden children of the communist elite are undoubtedly quite silent as they gaze at their once proud country lying prostrate at the feet of imperial capital. The population of Russia has been falling at the astounding rate of 800,000 a year, birth rates have plummeted to the lowest in the world, and only 1-in-4 children are born healthy. There are dramatic increases in the number of children born with physical and mental impairment, disease is rampant, and the average lifespan of Russian men has fallen from 65 years to 58, below that of Ghana.54

Sale of the Century by Chrystia Freeland is a highly recommended masterly study on the collapse of Russia after the breakup of the Soviet Union.55 However, as a correspondent for the Financial Times when doing her research, the author focuses only on finance and politics and ignores other crucial factors. Ignored were: basic economics, Russia’s highly motivated labor ready to make the transition to capitalism as addressed above by Fred Weir, the National Endowment for Democracy’s funding and management of Yeltsin’s election, the American election specialists orchestrating of that election,r the Harvard Institute for International Development’s advising Russia’s “young reformers” throughout that collapse, and how the massive imports of consumer products both collapsed the economic multiplier and sucked the wealth out of Russia.

Without the economic multiplier as money from wages circulates, a country essentially has no economy. Yet, while intending to document the full history of the attempt to restructure the Russian economy, the author fails to notice that the “young reformers” paid no attention to primary production in Russia. These neophytes were so immersed in classical Western philosophy that they thought all there was to establishing capitalism was to create rich capitalists by giving title of valuable resource industries and banks to a few “oligarchs,” who, without a doubt, pulled off one of the greatest thefts of social wealth in history.

In the West, preventing the rise to political power of labor is a primary consideration. Thus the highly motivated “golden children” (the latest generation of leaders) who were ready to restructure Russia’s economy were never given the opportunity. Instead, the neophyte agents of capitalism (the “Young Reformers”) were intent on the obviously impossible job of telescoping the 70 years of the age of American robber barons into less than 10 years. The “golden children” running Russia’s economy wanted to restructure to capitalism and would have understood how to do so. But labor in charge of any part of an economy is anathema to theorists of Western philosophy. So the only people offered a serious opportunity to buy Russia’s productive industries for a fraction of its true value were the new “oligarchs” with no experience in running any part of the Russian economy. Without any background on running industries or much of anything else, these oligarchs were expected to become the leading capitalists of Russia.

No country has ever developed under the principles imposed upon post Soviet Russia. In fact, economic protections for the developed world are all in place and functioning and no wealthy nation would consider subjecting their economies to such harsh economic medicine as was imposed on Russia. To double, triple, and quadruple prices while shutting down industry right and left and destroying consumer savings would be taught as a recipe for disaster in any economics class.

The easiest way to understand the failure of the restructuring of the Russian economy is by outlining a sensible restructuring plan:

(1) The massive savings of Russian citizens should have been protected;

(2) Industry and media shares should have been distributed to all citizens;s

(3) modern consumer product industries should have been built, the bonds to be repaid from profits (the workers being owners would help insure those profits);

(4) until those industries were established and the economy competitive, import restrictions should have stayed in force;

(5) as fast as those modern industries came on stream, Russia’s obsolete huge factories would have reduced production and shut down in stages;

(6) an inescapable society monthly collection of landrent, as per Chapter 24, should have been placed into law, including royalties on natural resources such as oil, minerals, timber, and communications spectrums;

(7) citizens should have received title to their homes through paying landrent taxes in monthly payments (they had massive savings with which to do that);

(8) farmers, businesses and industry should also have been given title to their land with the legal responsibility of paying landrent to society;

(9) locally owned banks (better yet credit unions) should have been put in place to fund consumers, farmers, and producers;

(10) and, with those massive consumer savings and financing available, retailers would spring up automatically and this would be the ideal moment to establish an efficient distribution system as per Chapters 27 and 28.

There are many other factors to consider but the above would have been the foundation of a workable restructure plan. Subtle monopolization of technology is the biggest barrier. Virtually any successful restructure plan must provide access to technology, resources and markets and Russia’s massive resources could have been bartered for that technology as opposed to its current hemorrhaging to the West. Patent licensing could have been imposed by law. This is accepted as legal in international law, was being tested in court with AIDS drugs in South Africa, and the major drug companies capitulated rather than go to trial.

The reason these suggestions were not followed is obvious, labor would have ended up with enormous wealth and political power. If they had been given the chance, those egalitarian trained and idealistic “golden children” could have established democratic-cooperative-(superefficient)-capitalism as opposed to today’s dependency on the periphery of imperial-centers-of-capital. If that had happened, the secret that no power-structure in the imperial centers had yet given their citizens full rights would have been exposed.


Back in the USSR


Tymoshenko 'Evita'of the Ukraine

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