KYIV BLOG: Has Zelenskiy broken with Kolomoisky?

KYIV BLOG: Has Zelenskiy broken with Kolomoisky?
Ukrainian President Volodymyr Zelenskiy was the great hope for real change in Ukraine, but he let oligarch Ihor Kolomoisky run amok. That seems to be changing now.
By Ben Aris in Berlin June 2, 2020

Ukrainian President Volodymyr Zelenskiy has been the great hope for real change in Ukraine after three decades of stagnation and deep rooted corruption. But hopes that Ukraine was going to “do a Poland” rapidly faded after oligarch Ihor Kolomoisky, who sponsored Zelenskiy's election campaign, returned from self-imposed exile in Israel and launched what the National Bank of Ukraine (NBU) branded a “terror” campaign on its staff that included arson and personal violence against former NBU governor Valeriya Gontareva, among other things.

The former banker has launched a blitzkrieg of legal suits against the NBU and now state-owned PrivatBank, which was his until the NBU found a $5.5bn hole in its balance sheet and nationalised it in 2016, in his efforts to try to regain control of the bank.

Gontareva threatened to bring criminal charges against Kolomoisky and forced him to sign a letter saying that he would return some of the depositors’ money looted from PrivatBank, but Kolomoisky successfully got a Ukrainian court to invalidate that promise. No investigation or charges have been brought against him in Ukraine, although the US recently revealed a Grand Jury investigation has been launched into him for money laundering on a massive scale in Cleveland. Likewise, the new management at PrivatBank has successfully had $2bn of his assets frozen in a London court ruling and has just launched another $5.5bn claim in Cyprus.

Kolomoisky also holds assets in media, banking, power, metallurgy and owns the country’s flagship carrier Ukraine International Air (UIA), most of which benefit from sweetheart deals with the state that boost their profitability.

Zelenskiy has just completed his first year in office, but throughout has held less than a handful of press conferences in that time and has said little about his relations with his backer and friend. But has that now changed?

Anti-Kolomoisky law

Zelenskiy was backed into a corner over the International Monetary Fund (IMF) insistence that the Verkhovna Rada pass the so-called anti-Kolomoisky banking law as a pre-condition to signing off on a new $5bn standby agreement (SBA). The law bans the government from returning a bank to its former owners if it has been nationalised.

Faced with an almost certain default and major economic meltdown if a new IMF deal had not been secured by the end of May, Zelenskiy was faced with a stark choice between his friend and the country. And he chose his country: the law was passed in its first reading at a dramatic midnight session on March 30.

However, Kolomoisky did not take the challenge lying down. Zelenskiy's parliamentary fraction Servant of the People (SOTP) has a majority in the Rada of 246 seats out of the total of 450. But after more than dozen of SOTP deputies rebelled the president was forced to enter into a temporary coalition with his nemesis and rival in last year’s election, former president Petro Poroshenko, to get the bill through.

And the fight didn't end there. As bne IntelliNews reported in detail, deputies loyal to Kolomoisky then introduced 16,000 amendments that would have tied up the second reading of the draft for at least five months in a bid to kill the bill. A new law was rushed through that allowed deputies to consider amendments in bulk to get past that obstacle and the bill was finally passed last month. The first tranche of $1.9bn of IMF money is due next week. But again, on the day of the vote for the second reading Zelenskiy went down to the parliament building to lobby lawmakers in person to make sure the vote was not derailed again.

The passage of the law is a serious blow to Kolomoisky. Sources close to the case have told bne IntelliNews that Kolomoisky is fighting so hard to regain PrivatBank now that it is not simply a question of regaining control of the biggest and most profitable bank in the country; he wants to kill the lawsuits, as he now faces the real prospect of losing all his money and even being jailed for crimes he committed during the asset-stripping of PrivatBank.

Centrenergo

Now in the last few days it seems that Zelenskiy has acted again for the sake of the country and against Kolomoisky’s interests.

In a surprise raid, dozens of armed police officers appeared at the offices of Centrenergo, one of Ukraine’s best power companies, to ensure the new temporary director of the utility could enter the building and take up his post.

The government, via the State Property Committee, owns 78% of the company, which is one of the most attractive assets on this autumn's privatisation list, and had previously tried to change the manager in February, but the candidate was simply locked out of the building and unable to take over. One theory as to why  Zelenskiy shook up the government with a major reshuffle on March 3 is the attempt to change management at Centrenergo was instigated by technocrat and reformist Prime Minister Oleksiy Honcharuk, who was then ousted at Kolomoisky's instigation in revenge.

"Today we returned Centrenergo to state control despite all the resistance: judicial trolling, repeated mining of the State Property Fund's building, pressure on the supervisory board," Head of the State Property Fund (SPF) of Ukraine Dmytro Sennychenko wrote on his Facebook page. The Fund has previously complained of bomb threats to its offices that were intended to stop it meddling in the company.

In a military strike-like corporate actions day the State Property Fund rushed through all the legal documents to get their man into his post.

"We conducted a one-day quick-fix operation: the court's decision, convening the supervisory board, amendments to the register and the introduction of the new head of Centrenergo. All this today, literally in 4-5 hours," Sennychenko said.

The task now will be "to find out everyone who has switched to the dark side of the force," Sennychenko said, since the Fund, which controls the majority stake in the company, today does not have information about the state of affairs at the enterprise, and the previous management of Centrenergo hid the audit data.

While Kolomoisky does not formally own Centrenergo, the former director was reportedly close to the oligarch and the state lost an estimated UAH100bn ($3.4bn) in revenue after Centrenergo underpriced power sales to metallurgical companies controlled by Kolomoisky over the last five years, in a classic rent-seeking scheme favoured by oligarchs in Ukraine.

"We are doing all this so that Centrenergo turns from a black hole of the Ukrainian budget, where about UAH100bn has disappeared since 2004, to the door to economic development and investment. From transparency and order at the enterprise to successful and reasonable privatisation, the road is direct and short. And the first step has already been taken," Sennychenko wrote.

Again Zelenskiy has found himself in between a rock and hard place. Even with the new IMF SBA, plus the access the deal gives Ukraine to other IFI loans, the country still needs to raise a total of some $17bn this year to cover its debt obligations. Thanks to the popularity of Ukraine’s domestic debt market among foreign investors the Ministry of Finance should be able to manage, but as bne IntelliNews reported, inflows into the bond market have slowed in the last month. At the same time, Ukraine received $15bn as remittances from workers overseas in 2019, but that sum is anticipated to fall to $10bn this year.

The bottom line is money will be tight this year and Zelenskiy’s administration is targeting major privatisations as a way of raising revenue and reforming companies long seen as beholden to vested interests that drain on the state budget. The sale of Centrenergo is amongst the most attractive of all the state-owned companies the state has to sell.

Other assets

But despite these two examples, Kolomoisky has his tentacles everywhere. Former Economics Minister Aivaras Abromavicius told bne IntelliNews that when he was reforming the state auctions for oil supplies one of the issues was Kolomoisky had captured an intermediary company in the process that was effectively getting a 15% discount on all fuel that it then sold on to the state companies, pocketing the difference. It was a scam that was generating hundreds of millions of dollars a year.

UIA has also been lobbying the state for some $200mn in compensation after the government banned overflights of Russian airspace. The company complained that it had to fly around Russia to get to Asian destinations, adding hours to the flight times, whereas the company’s Asian competitors had no such restriction and were undercutting UIA on ticket prices as a result.

And most famously, Kolomoisky has interests in Odessa Port Plant (OPP), a major and valuable chemical plant on the country’s Black Sea coast. The government has already tried to privatise this plant several times, dropping the price repeatedly to entice buyers.

Several oligarchs are interested in acquiring the asset for themselves. Kolomoisky is one of them and has laden the company with debt. The plant is a now a legal time bomb, as any new owner would be immediately hit with bankruptcy writs and unlikely to be able to hold on to its ownership given the venal state of Ukraine’s legal system.

The shell game

Zelenskiy's stand against some of Kolomoisky interests doesn't not mark the start of an anti-oligarch campaign in the fashion that defined Russian President Vladimir Putin’s first year in office, when he made it clear that any oligarch that didn't toe the Kremlin line would end up in jail.

Zelenskiy's stands seem more like gambits to raise money in specific cases, but Kolomoisky is still not under investigation and he continues to interfere in politics with impunity.

Just this week Kolomoisky, in a statement addressed to Prosecutor General Iryna Venediktova, asked that the new General Prosecutor start a pre-trial criminal investigation targeting Poroshenko, Gontareva and her deputy Kateryna Rozhkova. He is pressing charges of misappropriation of the assets, money laundering, illegal collection and use of confidential banking information, and abuse of power, based on revelations in the “Derkach tapes.”

There have several of these leaks recently. Former PM Honcharuk was also caught up in a scandal after a tape caught him deriding Zelenskiy's understanding of economics during an official meeting at the NBU on macro policy.

For his part, Zelenskiy seems to be distancing himself from Kolomoisky but at the same time wooing the other oligarchs to act as a counterbalance to Kolomoisky’s influence. Men associated with Rinat Akhmetov, Ukraine’s richest man, have been promoted to government posts recently.

“I suspect that Zelenskiy and his crew have been bought. I don't know by whom, but his crew is too poor, and the rich in Ukraine are too rich. I think the government change on March 4 and the sacking of [the] Prosecutor General on March 5 were acts of corruption,” says one well-informed Ukraine-watcher.

No one is actually sure what is going on or what Zelenskiy's plans are. But Zelenskiy has continued to fire liberal reformers in the government associated with the independent law enforcement agencies, some of them set up at the IMF’s insistence.

Zelenskiy sacked Ruslan Riaboshapka on March 5, who was dubbed “Ukraine’s first honest General Prosecutor”, and replaced him with Venediktova to the displeasure of Ukraine’s donors. This week he also sacked the widely respected head of the Anti-Corruption Action Center’s executive board Vitaly Shabunin from his position on National Council for Anti-Corruption Policy, adding Venediktova and scandal-ridden Interior Minister Arsen Avakov.

There are not pretty appointments but they are loyalists. It looks very much like Zelenskiy is digging in for a big and long fight, as he has found himself in the middle of a nest of oligarchic vipers that would have no compunction about biting him if he gets in their way.

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