Ukraine 2021: The Crisis Continues
Seven years after Russia annexed Crimea and created an armed separatist movement in Donbas, the industrial eastern hub of eastern Ukraine, the Ukrainian government, and its entire business class, is mired in problems so deep it is a wonder they can ever dig themselves out of it.
The Russians don’t make it easy on them. Neither does President Biden. His administration has sidelined U.S. ties with Ukraine, where the president’s son Hunter was a board member in Burisma, an energy company being investigated for corrupt practices. This affair was the subject of a Senate investigation, a book, and numerous articles. The Ukrainian dossier hounded the Biden election campaign and presidency.
But the worst enemy of them all is the Ukrainians themselves.
Without question, President Volodymyr Zelensky was hired to change all that. Ukrainians fell in love with the man roughly three years ago. His TV show, Servant of the People, created a political movement. He looked like a Trump-character: a celebrity in a TV dramedy takes on the corrupt political establishment, runs for president, and wins.
His popularity led the creation of a new political party, named after the fictional TV show where Zelensky played an outspoken teacher, critical of his government, who becomes its elected leader. Life has become art. But for many Ukraine watchers and foreign investors – they want their money back. This Servant of the People real life movie version is not like the TV series. This is a flop.
The party’s approval rating is around 30%. Zelensky himself is not much better. The big question for Ukraine is who is on its team now?
The Biden Administration lifted sanctions this year on the Russia-to-Germany Nord Stream II pipeline, a total end-run around Ukrainian natural gas pipelines to Europe. Good for Russia, bad for Ukraine.
Who wants to do business there? A New York investment firm named VR Global Partners is suing a state owned rail transportation monopoly called Ukrzaliznytsia (UZ) in the latest example of companies fed up with the Ukrainians.
Who can believe their most powerful politicians and business leaders?
Zelensky’s name was on a recent list by the International Consortium of Investigative Journalists’ Pandora Papers.
According to the ICIJ’s findings published in The Guardian, Zelensky owned a stake in a British Virgin Islands firm described as holding shares in film-production and distribution companies. A month before he was elected president, Zelensky transferred his shares to Serhiy Shefir, a friend and business partner, ICIJ reported. I did not reach out to the president of Ukraine and could not find Shefir.
Last month, someone tried to murder him.
Shefir is believed to have created a network of offshore entities for Zelensky and others, such as Zelensky former business partner and employer, and a U.S. sanctioned Ukrainian banking and media tycoon named Ihor Kolomoisky. U.S. authorities allege that Kolomoisky “laundered $5.5 billion through a tangle of shell companies, purchasing factories and commercial properties across the U.S. heartland,” according to the ICIJ.
The Pandora Papers do not bode well for Ukraine, and is a bad look for Zelensky. As one Washington-based analyst who requested anonymity told me, “Ukraine is the Saudi Arabia of corruption.”
Zelensky promised foreign businessmen that Ukraine will be the “promised land” for foreign investment. It is not. Zelenksy is trying to save his popularity and presidency, to re-ignite Washington’s interest, and settle its disputes with Russia. He has little time to foster a benign investment climate.
To grow its economy, Ukraine is stuck with the same old characters. The same old characters like to beat each other up and destroy their enemies. That’s one thing when politicians do it. But in Ukraine, it’s also the business elite that do it. It becomes a tough place to do business. And so Ukraine struggles to change. Foreign businesses want to be there. It’s a big country with a thriving IT sector, a lot of natural resources, glorious agricultural potential, and a labor force with a decent education level, and skill set in the heavy industry and tech sectors. By dollar standards, it’s dirt cheap. But you might be better off investing in Dogecoin instead.
A Ukraine Business Climate Survey in September conducted by the American Chamber of Commerce and Citi Ukraine showed that 93% of businesses stated that judicial reform, rule of law, fair justice, and eradication of corruption are the No. 1 strategic step Ukraine's government needed to take to achieve economic growth, improve the business climate, and attract foreign direct investment.
VR Global Partners is a recent example of how survey respondents think.
Last month, a British Court awarded Ukrzaliznytsia (UZ) an appeal against VR Global Partners, declaring invalid the contract for the assignment of UZs debt between Prominvestbank and VR.
VR cried foul. Their complaint should sound familiar.
"This was a kangaroo court. Its actions were riddled with…violations," said Richard Deitz, President of VR Capital Group Ltd. “We’re not surprised. In July, I was invited to a meeting in Kiev at (Zelensky’s office) to discuss our dispute with Ukrzaliznytsia. I was explicitly warned by the Deputy Head of the Presidential Office, Andriy Smyrnov, that, while our case was legally sound, I should understand that ‘judges in Ukraine can be fired’. Since that meeting, we have seen enormous administrative pressure on the judicial system. Multiple judges have been replaced. This is not the way a judicial system is supposed to operate. It will not help Ukraine attract investment."
VR Capital appealed that court decision on October 11.
Without getting too deep into the weeds on the VR vs UZ story, it is clear that something is still very wrong in Ukraine. It’s the leadership in Kiev. And it’s bad moves by the U.S. that have done it no favors. Coupled with a form of geopolitical chess board “check” (not quite “check mate”) by the Russians, and Ukraine looks as lost as ever today.
A recent report published September 23 by the European Court of Auditors on corruption in Ukraine said that between 2016 and 2020, the three main obstacles to economic growth were the same as they were pre-Maidan movement, when people were protesting in favor of a push towards EU integration. The perception was that corruption, no trust in the courts, and market monopolies (state capture by a few private business owners) were major obstacles to modernizing Ukraine.
At the beginning of the period for that study, President Barak Obama was still sending overtures to Ukraine that we were on its side. Europe was bailing out its economy. The International Monetary Fund was ready for action, making Ukraine the second biggest financial aid program after basket-case nation Argentina.
It is easy to see that Zelensky simply became president because of his TV series, and the campaign investments made by Kolomoisky, an enemy of previous president Petro Poroshenko. (Keep in mind they all hate each other over there. It is like Elon Musk and Jeff Bezos at each other’s throats over who will go to Mars first, only Bezos buys judges in his lawsuits to destroy Tesla, and Musk hires people to take pictures of Bezos in a bedroom to send them to his media friends. We are not there yet.)
Zelensky managed to strengthen his political power over the years, using standard Ukrainian tactics. First, he prosecuted an opposition politician named Viktor Medvedchuck saying he is too close to Russia. Medvechuk children’s godfathers are Vladimir Putin and Dmitry Medvedev, but this is not a prosecutable offense, even in Ukraine. So Zelensky slapped sanctions on Medvedchuck’s TV channels and some of his businesses.
Russian newswire RIA Novosti recently wrote that Medvechuck was accused of treason for allegedly working to supply coal to separatist regions in Eastern Ukraine. This was a no-no, as Kiev considered those separatists an enemy of the state.
Zelensky’s targeting of players like that also used to sell his “de-oligarchization” policy, a policy criticized by the Venice Commission, an advisory body of the Council of Europe, because it would allow for political hits and vendettas through individual sanctions without court, legislative or police approvals. It sounds good, because almost everyone who isn’t a corporate titan in Ukraine agrees with the de-oligarchization of their country. But it’s too easy to wield as a political weapon, which is why the Europeans consider it crude.
Headaches brought about by this policy are clashing headlong with the energy sector crisis in Ukraine. While Russia would hold back natural gas supplies, Ukrainian authorities have failed to create coal reserves for the upcoming winter. Today, coal reserves are roughly 800 thousand tons. They should be closer to 2.5 million tons.
Russia probably won’t help. This could lead to more political strife for the Servant of the People party, and further upend trust in Zelensky by the locals.
It’s not 100% Ukraine’s fault, though. They’ve been thrown to the wolves, in a sense. Their allies are not all that close. Russia was their closest. That’s over, it seems.
Ukraine appears to ensnare foreigners, not just locals, in its toxic maze of corruption and foreign intrigue.
As I have written here before, prior to Zelenksy’s trip to the White House last month, the imbroglio surrounding President Biden’s now infamous son Hunter and his relationship with Burisma, a Ukrainian energy company which had some run ins with the law, have scarred relations – both politically and economically, with the Biden administration.
The Republican Senate’s report titled “Hunter Biden, Burisma and Corruption: the Impact on U.S. Government Policy and Related Concerns” concluded that the Hunter relationship with Ukraine was highly problematic and real.
“Hunter Biden’s role on Burisma’s board negatively impacted the efforts of dedicated career-service individuals who were fighting to push for anti-corruption measures in Ukraine. Because the vice president’s son had a direct link to a corrupt company and its owner, State Department officials were required to maintain situational awareness of Hunter Biden’s association with Burisma. Unfortunately, U.S. officials had no other choice but to endure the “awkward[ness]” of continuing to push an anti-corruption agenda in Ukraine while the vice president’s son sat on the board of a Ukrainian company with a corrupt owner,” that report stated in its conclusion.
Glenn Greenwald (fun fact: we wrote for Salon at the same time back in its heyday) has been all over this story, summarizing the timeline on his Substack page. On September 22 he highlighted the beginnings of it all: “On October 14 and then October 15, 2020, The New York Post, the nation's oldest newspaper, published two news reports on Joe Biden's activities in Ukraine and China that raised serious questions about his integrity and ethics: specifically whether he and his family were trading on his name and influence to generate profit for themselves. The Post said that the documents were obtained from a laptop left by Joe Biden's son Hunter at a repair shop.”
It’s consensus now that Hunter’s foreign relations have hurt American foreign policy in Ukraine.
Ukraine is now apparently angry with the U.S. over a Russian mercenary group known as The Wagner Group. CNN reported on this in early September – saying Ukraine intel set up a trap for Russian mercenaries involved in the separatist war in the Donbas. But Kiev dismissed the story, saying it wasn’t them that went after the Russians and that it was “some other country” – likely meaning the U.S.
Ukraine plays an important role in Washington’s Russia policy. But now that Washington has thrown a huge bone to Russia via Nord Stream II, Ukraine is on the back burner. The two sides are lukewarm towards each other. Ukraine is unlikely to be a new growth market for emerging market investors anytime soon.
Biden’s lifting of sanctions on Nord Stream II really irked Ukraine. Nord Stream I, plus Nord Stream II, plus Turkish Stream, means Russia doesn’t need those pipelines in Ukraine to get natural gas into Europe anymore. Let the Ukrainians get their own gas and sell it to the Europeans. Then again, that doesn’t seem to be happening either.
A disgruntled foreign investor in Ukraine wrote a letter to Zelensky and got it published in the Kyiv Post on September 17. He sounded like the people from the New York investment fund.
“I am one of those foreign investors in Ukraine that you personally make active, consistent efforts to attract to your country. I currently have investments in manufacturing, construction and international trade,” wrote Tamaz Somkhishvili. He is partial owner of Kyiv-Terminal LLC. They are in dispute with the government, too. “Over the many years I’ve been doing business in Ukraine, my investments, and the taxes paid, have amounted to tens of millions of dollars. The situation I find myself in is a prime example of (what) worries many foreign investors in Ukraine and jeopardizes your ongoing efforts to attract international investment.”
In a country where the banking system is plagued by non-performing loans, political risk and financial transparency are issues the International Monetary Fund and the European Bank for Reconstruction and Development care about. Ukraine relies on these two for funding.
The Zelensky presidency could sink deeper in the polls because of the Pandora Papers reveal, continued corruption woes, the rise of energy prices, and the never-ending fight with Russia.
Western aid and foreign investment are unlikely to come to Ukraine’s rescue. As the Biden Administration encounters unprecedented difficulties at home: a messy, chaotic Afghanistan exit; rising inflation; supply chain failures; another debt ceiling breach, and deadlock over the appropriations bill, the White House has no time for Ukraine’s dramas at the moment. This is bad for the Servant of the People – and foreign business prospects in Ukraine that were hoping it would be the biggest and the best, ex-Soviet state to invest in.