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In Foreign Affairs

Billionaire Kolomoysky’s plan derails Western agenda in Ukraine

27th May 2019

Billionaire Kolomoysky’s plan derails Western agenda in Ukraine Pin It

Past elections left Ukrainian state mechanics in a complete disarray. The Ukrainian ‘revolution of dignity’ of 2014 has yielded an unexpected result. The state is headed by the overwhelmingly popular Vladimir Zelensky. He is an actor, director and producer of entertainment shows, not associated with any party. ‘A comedian’, as his foes have mocked him during the elections. Without going deep into the political discussion he managed to get highest approval rating ever achieved during presidential campaigns in Ukraine.
 
It is uneasy to pick up the single point of his success. Maybe the key for the victory had been passed by the former president himself as Zelensky once told the media. Years after 2014 uprising were not exactly a success in economical terms. Populist agenda and criticizing the dependence of the political system of Western support definitely played the role. 
 
True to the nature of his campaign Vladimir Zelensky has begun his presidency in a bold if not autocratic way. At the Day Zero, literary in his inauguration speech, he dissolved both parliament and government. Snap elections are necessary for him to get the majority in Rada, the Ukrainian parliament. Newly elected MPs would form a pro-presidential majority which will elect the desired government thus cementing presidential dominance.
 
The current Rada MPs majority bet on the Poroshenko’s second term. Demoralized by the loss parliamentarians showed next to nothing to resist the Zelensky plans.
 
Although Zelensky as a politician was drawn from thin air his general sponsor is well established. A major oligarch and billionaire Ihor Kolomoyskyi stood behind the campaign both with funds and ideas.

In his recent interview to Financial Times Mr. Kolomoyskyi, who recently returned to Ukraine, advices president Zelensky not to pay debts to IMF and declare a default in Ukraine following the example of Greece.

“In my opinion, we should treat our creditors like Greece,” said the oligarch.

This scenario is beneficial for Kolomoyskyi. His companies are export-oriented. Ferrous alloys, mining and metal is exported and paid in euro, pounds and dollars.  Wages, taxes and electric bills will be paid in devalued national currency while the profit will be conserved in stable reserves. Kolomoyskyi does not conceal that such a scenario is viable and beneficial.
 
Ukraine is not exactly the investment magnet. The western-oriented government which was established after the 2014 revolution hit the hard ground of war, corruption and civil unrest. Ukraine was unable to present itself as an investment destination. It will fall even lower as inflation, joblessness and even bigger scale of migration will take the central stage as a result of new political leadership.
 
It sounds as a very bad scenario for the country and Ukrainian citizens. However it can be lucky strike for Mr. Kolomoyskyi. Default, devaluation and all other form of crisis is sending remaining national assets down. It is an excellent time to buy assets and strangle the competitors. The total control of the ferrous alloys market, chemical industry, retail and energy is quite a reachable goal in such circumstances.

The loyal men of the former fugitive are appointed to the key points of the new administration. His own lawyer Andrei Bogdan is now the head of the president’s administration. It is crucially important appointment for successful coordination of the Kolomoysky’s vast agenda. 
 
Ihor Kolomoyskyi poster child ‘Privatbank’, the biggest bank of the country, was nationalized in 2016. The bank was nearly bankrupt but fell under the category of ‘too big to fail’ and was saved by the government. The government and the National Bank of Ukraine poured 155 billion UAH (4,630,366,383 British pounds to the date) to prevent the collapse. Ex-president Poroshenko said on that occasion:

It’s obvious that the only way to save the bank and ensure the safety of its clients’ funds is to bring it into state ownership.

It was not an easy decision for the struggling Ukrainian economy. It took the toll twice. To fulfil the salvation state bonds were issued and sold at the financial market. 155 billions UAH were borrowed from the investors. Thus the national debt has been increased accordingly. Additionally the bonds attributed to the highest inflation spike since 2014.
 
After Zelensky victory had become inevitable the entire politics of the Ukraine was sent into free fall. Mr. Kolomoyskyi took advantage of it and filed the appeal against the 2016 Privatbank nationalization. The chronically corrupt court system is well suited for exactly such cases. Court cancelled the nationalization and it led to immediate wave of protests from the EU and US embassies. International Monetary Fund suspended its mission and left only some clerks to finish the report.

 

It’s an easy guess that this report will be profoundly negative. IMF has supported the government’s decision to bail out the bank. Back in 2016 the Fund stated:

Today’s decision of Ukrainian authorities to nationalize PrivatBank is an important step in their efforts to safeguard financial stability. This decision was taken to ensure the smooth operations of the bank given its systemic role in Ukraine’s financial system, and in view of insufficient efforts to strengthen its capital adequacy in recent months.

 
In April 2019 IMF confirmed the 2016 decision. Goesta Ljungman, the International Monetary Fund (IMF) Resident Representative in Ukraine, made a special statement on the topic. Speaking about nationalization he pointed out that

…while this required the injection of about UAH 160 billion in Ukrainian taxpayer funds to restore the bank’s solvency, it secured PrivatBank’s long-term viability, safeguarded the money of millions of Ukrainian citizens, and strengthened the country’s economic health.

 
The statement was further reinforced by the following warning:

It is important that the authorities continue their efforts to recover losses from former owners and related parties of failed banks. Ukraine’s international partners will be closely monitoring developments in this area.

If Ihor Kolomoyskyi will set control to the Privatbank it might lead to the catastrophic consequences. The economy of state is entirely in dependence on IMF injections. 2019 is the peak year of debt payouts on foreign obligations. The default will follow almost immediately.
 
Kolomoyskyi plans is not limited to the Privatbank. Being an owner of the biggest ferrous alloys plant in Europe he is interested in control of the electrical power market. Ferrous alloys plants consume huge amounts of the electric energy. Ihor Kolomoyskyi is interested in the lowest rates for his plants. It contradicts the liberalization of the energy market scheduled for July 1, 2019. The liberalization is of critical importance for Ukraine’s international obligations as it is one of the regulations of the Third Energy Package.
 
Liberal market model does not allows any exceptions from the rule. Therefore Ihor Kolomoyskyi is doing everything to postpone or cancel the implementation of the European Third Energy Package. He sent his men to lobby the abolishment the adoption of the reform. With the pro-presidential majority in the upcoming parliament he could easily afford that.
 
Ihor Kolomoyskyi has been smart enough to outwit the representatives of the EU and other international organizations in charge. The postponing will came under the disguise of need for some ‘minor corrections’ and ‘slight revisions’. The true intent of Kolomoyskyi to torpedo the entire reform for liberal market model remains under cover.
 
Return to the practice of state regulation of energy will untie Kolomoysky’s hands for implementing his far-reaching business interests. By selective setting of lower prices for energy-hungry companies he will get a tool for corporate blackmail and extortion. As for now his team stated that they intent to gain control over the independent energy regulator – NKREKU.
 
For the same purposes, it is planned the announced change in the Anti-monopoly Committee (AMCU) leadership. AMCU approval is required by law to perform large scale reconfiguration of energy and industrial markets.
 
The adopted way of actions is incompatible with the European practice. It will lead to shrinking of cooperation with important financial and political partners of Ukraine. European Union, Unites States, IMF, World Bank and European Bank of Reconstruction and Development will cut the ties with country. As foreign debt will be impossible to service it will lead to default and devaluation of the hryvnia.
 
IMF will for sure abstain from providing new aid to Ukraine. Ihor Kolomoyskyi domination in both politics and economy will be unacceptable for the international authorities. With no new loans from IMF Ukraine will not get the subsequent credits from the WB and EU.
 
As for the EU it will pose a new kind of troubles. Desperate for the new loans the country’s leadership may be forced to turn to the Russian Federation. It will not come without strings attached. There will be a polar change in the foreign policy of Ukraine. European integration efforts will be rendered futile. It might lead to deep consequences in the EU as a whole.

Long story short, energy market launch could be a real marker of keeping Ukraine on its European course and maturity of new government. Today Ukraine is overwhelmed with emotional rhetoric. It is extremely important that international institutions and politicians support Ukraine’s citizens, who have made their pro-Europe choice five years ago.

Helen Rush, Talk Finance

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