Volodymyr LANOVY: “Paradoxically, only the discontent of oligarchs will foster competition in this country”

This interview is rare by its frankness. It is almost customary now to speak in hackneyed phrases. But here is what can be called an “offbeat conversation.” By far the most valuable thing in this is an unbiased account on the part of an eyewitness of historic and dramatic reorganizations in the government.

Ex-president Leonid Kuchma said in a recent interview: “I gave a start in life to practically all the current politicians.” But some can deny this. Our interviewee, Volodymyr Lanovy, is one of them. He is among those who were a noticeable figure in Ukrainian politics, when nobody had heard of Kuchma.

Lanovy was minister of economics in the Vitold Fokin Cabinet from March 5 until July 11, 1992. The then president Leonid Kravchuk dismissed him from office and appointed Viktor Pynzenyk in his place as late as October 27. In other words, this country was without a minister of economics for a little more than three months after Lanovy’s dismissal.

In May 1994 Lanovy was elected to the 2nd-convocation Verkhovna Rada. He was reelected to the 5th-convocation parliament 12 years later, in May 2006, on the Narodny Rukh ticket.

Volodymyr Lanovy is out of active politics today. He chairs the Market Reforms Center and is a professor at the International Institute of Business’ Department of Social Disciplines.

Last year Lanovy was again going to be an MP. He had supported the UDAR party for a year before the elections. But, due to “mysterious” circumstances, Lanovy was not on the list of the party’s 225 candidates.

“The moment of adequate conclusions has come. The world is dynamically developing, but we are still reflecting on whether to reform this way or that way… We must draw conclusions, including those about debts.

“The Naftohaz company has in fact entered today the phase of unmanageability. Or do you think Putin wants to ‘present’ us with 750 million dollars for three months just to be with it? No, the president of Russia is interested in supporting Naftohaz Ukrainy. Gazprom is not at all the only creditor of the company. This means that when Ukraine announces Naftohaz bankruptcy, it will set into motion the process of company liquidation in favor of all the creditors. In this case, the Ukrainian gas transportation system (GTS) will end up unmanageable, much to the Russians’ delight. Nobody can raise the gas transit price in today’s conditions. But once a new owner has taken over the Ukrainian GTS, he will automatically raise the price, and Gazprom profits will be called into question.”

“THE NATIONAL BANK AND NAFTOHAZ ARE WALLETS FOR PRESIDENTS”

What is – in a nutshell – the essence of the Naftohaz problem?

“Any state-run corporation is the best source for withdrawing budget money in favor of private individuals. So the fact that Naftohaz, which was a profitable company until 1999, when its net annual income reached 9 billon hryvnias, then gradually slid to 20-billion losses, is a signal. This process lasted for 14 years. Have you ever seen a private company that is nose-diving year by year but its owner won’t lift a finger to change the situation?

VOLODYMYR LANOVY HELD THE OFFICE OF UKRAINE’S MINISTER OF ECONOMICS FOR FOUR MONTHS ONLY. ALTHOUGH IT WAS IN 1992, THERE IS SO MUCH VALUABLE IN HIS EXCURSUS INTO THAT PERIOD! / Photo by Artem SLIPACHUK, The Day

“I have read this year’s report of a US expert in the US Senate on Ukraine’s energy system. He says it is the best model for corruption. But I will say in still broader terms: in the Ukrainian conditions, the National Bank and Naftohaz are wallets for all presidents. They begin to live better thanks to these companies. Can you explain it in terms other than business interest when they talk about cheap gas for social needs but give it to the chemical and steelmaking industries? This is why Naftohaz turns out to be making losses in the final analysis, for the profit lies hidden in someone’s pockets.

“I was present at Cabinet sessions in 1999-2000, when they did not know what to do with state-run corporations. Yushchenko was the prime minister, and I suggested introducing financial planning for state-run corporations. We must be able to see what their profits and losses are… If the situation does not suit the owner, i.e., the government, they should change the management, reorganize and privatize the company, and attract investors. Financial planning was introduced, and the Cabinet began to discuss next years’ budgets. But the preparation of these reports still remains opaque today. There is no internal or external audit. And, in the absence of audit, they will tell you whatever they please. Things are being juggled all the way. For example, they say it is necessary to raise the price of household gas because Russian gas is expensive. But you are saying at the same time that household gas is not from Russia…”

What is your vision of further developments around Naftohaz?

“It seems to me that Putin is putting up with Yanukovych’s ‘shenanigans’ because he always promises him that the gas pipeline will remain under control. In all probability, it is not about ownership. What Gazprom is interested in today is a certain degree of participation in management and a moratorium on transit price hikes. The main Russian monopolist is afloat today at the expense of the Ukrainian GTS, for they are selling their own household gas at a price lower than the self-cost. They only derive benefit by selling gas abroad. Should Ukraine raise the transit price, Gazprom’s profits will plummet.”

“YANUKOVYCH IS TRYING TO MAKE NEW OLIGARCHS OUT OF HIMSELF AND HIS INNER CIRCLE, BUT…”

The results of the latest Ukrainian-Russian negotiations, when the presidents talked for five hours but no information was released, are everybody’s guess. It looks as if the personal relations of Putin and Yanukovych have deteriorated. Will the ruling team withstand this pressure of Russia and what course may the events take now?

“Oligarchs are manipulating Yanukovych. He is trying to make new oligarchs out of himself and his inner circle, but… Some of our businessmen are so powerful – it’s no problem for them to flip over 100 million dollars by a ‘fag-pack deal’ – that they can keep the president blindfolded.”

In other words, you are sure that Yanukovych has become a “Europe integrator” under the pressure of oligarchs?

“I absolutely am. They are hiding from Russia and its secret services, hiding their money in Europe…”

We are switching now to a London court case. What could seemingly be easily realized in Europe has ended in a high-profile scandalous trial. What do you think about this case? Was Pinchuk perhaps wide off the mark to file this lawsuit?

“Pinchuk is sure that he is still deciding everything in this country and nobody will oppose him. He was convinced in this.”

Convinced that Kolomoisky will keep silent?

“This, too, but he is still more convinced that the other side will do even unwritten things in his favor. But the situation changed, and Kolomoisky said to him: I will not do what you are forcing me to do.”

In my view, the impression that Pinchuk is the boss in this country is to symbolize that Kuchma is still at the wheel.

“We can all see what the oligarchs who own such TV channels as ICTV are doing today. They set up Yanukovych from time to time, showing him from an unattractive side. I think it is being done on purpose – to show that the leadership must reckon with their interests.

“So, taking into account that he controls the media, a part of the MP corps, and some government members, Pinchuk was sure that the respondent’s side would opt for an amicable settlement. It is the algorithm by which president Kuchma’s oligarchs were going to adapt here: we will make a deal. But these guys, who have just come, are a bit different – they believe their people only.”

“THE DONETSK CLAN HAS ALWAYS BEEN TAKING A VERY CYNICAL VIEW OF KUCHMA: THEY THOUGHT THEY COULD BUY HIM”

They grew up when the Dnipropetrovsk team held sway. Yanukovych is not Kuchma’s heir apparent. He is a side branch of this process. The impression is that the current opposition is Kuchma’s heir…

“Leonid Kuchma knew what kind of a team it was, what morals and culture were inside these Donetsk businessmen and politicians. And the Melnychenko tapes show that Mr. Kuchma was not averse to gorgeous gifts. His relations with the Donetsk clan were so close that when the latter promised and made possible Kuchma’s victory in the 1999 elections over the Communist leader Symonenko in the Donbas, the grateful president handed them over the control of all the region’s businesses, including their privatization under the cover of local vested interests.

“The Donetsk clan was taking a very cynical view of the president: in my view, they thought they could buy him. But they just wanted to grab more. And they went on like a road roller.”

The question is whether this inner oligarchic conflict will give at least some chance for this country’s development.

“It is sure to influence in a constructive vein. There are no other financial and entrepreneurial forces left. They were either destroyed or declassed. Paradoxically, only the discontent of oligarchs will foster competition in this country.

“In any case, elections were held here thanks to the oligarchs. The forces that stood behind the concrete parties and candidates were playing a game of their own. But today the intention is to ward off the elections. They can be held formally but not really – some are behind bars; in the case of some other ones, the ‘sponsor’ will be pressured into asking his protege to withdraw his ‘candidature,’ etc.”

Actually, the Kolomoisky case is calling up precisely these associations in some people – “they cooked up the case to caution the oligarch against poking his nose into politics.”

“He is too strong. He is stronger than the others. Kolomoisky has not rushed into politics before. He has spent all this time lining his pockets with money and assets. He has established an oligopoly in the banking sector. The concentration of Kolomoisky’s property rights is so deep that he is to be reckoned with. He cannot be just pushed aside.

“And it is not only about concentration of the banking resources run by an entity under Kolomoisky’s control – he also enjoys considerable external support.

“We have approached the moment when so many things in this country depend on the oligarchs and the process that unfold in their milieu. At least now. Maybe, this will change soon.”

“THE WEST IS CONVINCED THAT THE IMF WILL NOT MANAGE TO PULL UKRAINE FROM THE ABYSS”

Many people are expecting these changes. And the public finances situation is signaling the need in them. And who can offer a political alternative?

“I’ve read in the Western press that, in spite of a now constructive dialogue between the IMF and the Ukrainian government, the West is not inclined to think that this will pull Ukraine from a financial abyss. They say Ukraine needs wide-scale reforms. We fail in all the sectors: public debts, hard currency shortage, sagging budget revenues, and unsecured payments for such critical commodities as gas…

“The West concludes that it should not give Ukraine large loans. Fifteen billion dollars is only a dream because there are no concrete projects or balance requirements here. You can’t possibly throw or swallow money. And what about tomorrow? A new loan again?

“Ukraine’s rating continues to drop. Standard & Poor’s has put us on the level of Greece, Jamaica, and Pakistan, and advised us to dismantle the budget system – even though we are poor. Our pensioners are not paid 1,000 euros a months, as the Greeks are.”

“JOINING THE CUSTOMS UNION, WE WILL COME UNDER COMPLETE MATERIAL SUPPORT OF RUSSIA, BUT IT IS… VERY STINGY”

Then Russia will help us by drawing into the Customs Union? Is this a real danger?

“From the economic angle, the Russian Federation developed on a basis entirely different from that of Ukraine. An enormous territory, a ruined economy, poverty in the provinces, and greed of the Moscow elite… A telling example: when they raised a duty on imported cars, the whole Russian Far East was up in arms, even threatening to secede for the center, because all the local male population lived off the import of Japanese automobiles and did not care about the problem of jobs in European Russia. To retain a huge and variegated federal conglomerate, the state had to rally the populace inside the country and fence itself off from foreign influences. They built a foreign economic relations model that radically differed from the Ukrainian one – isolation from the world, high import and export barriers. Since 2000, Russia has imposed high duties on the export of not only oil, gas, and gold, but also another 100 commodities. In other words, Russia has stemmed the tide of the exported goods.

“And Ukraine? We are export-oriented. Under the current law, Ukraine only restricts the export of livestock and scrap metal. We still have powerful, albeit obsolete, production capacities. We cannot lock ourselves within our borders.

“For Ukraine, to join the Customs Union means to isolate itself from the Western world and switch to consuming the imported Russian-made items. This means we will come under complete material support and control of Russia and turn our back on the rest of the world. Is this what we’ve struggled for?

“And, as we will impose high export duties, we will be unable to sell anything. Entering the Customs Union, we will turn our back on the entire world.”

It is logical then that if the team has plans to integrate into Europe, it must also change its economic policy.

“It is an immense challenge for Ukraine, including the current leadership, because the EU agreement calls for wide-scale reforms which the current government is simply unable to carry out.”

This may be so, but Europe will force the government to do so.

“Maybe, we are witnessing a certain political fraud. They will say: ‘Yes, we are signing,’ and then they will not be fulfilling this.”

And sanctions?

“There will be no sanctions at all. We are not EU members, and we do not receive budgetary allocations from them.”

ASSOCIATION IS A SANITARY ZONE FOR “THE UNSHAVEN” AND “THE UNKEMPT” IN… BRIONI

But we are asking for loans in Europe…

“The EU has special funds to support underdeveloped countries. New members of the European family get budgetary allocations from these funds for infrastructural development, medicine, environmental protection, the public utilities, reforms, etc. Owing to this, the countries can coexist on the same level. An associate member, which Ukraine intends to become, will have nothing of this. We are in fact making a commitment to change the country’s laws, government organization, economy, and institutions. It is our ‘sanitary zone’ in which we must improve ourselves. ‘We are all good and nice down here, and you will come unshaven and unkempt,’ Europe is saying to us.”

…but in Brioni.

“They are sure to give us money for ‘sanitary’ treatment – and no more. The Agreement on Association with Ukraine is a system of challenges. We have already talked about the first one. The second challenge is competition. The European Union was established to ensure a higher level of competition. The demands to demonopolize and curb those who abuse their capabilities, sell ‘tainted meat,’ and overprice are one of the main tasks for Ukraine as an associate member. The third is financial openness. Foreign financial institutions, such as banks, insurance and private pension funds, are to be freely opened in Ukraine. They must not be constrained with additional permissions, licenses, etc. These changes will guarantee the arrival of loans and, hence, the money accessible to the populace. Another crucial point is small- and medium-scale business. Europe is banking on it. In 1953, Ludwig Erhard’s reforms in Germany focused on the support of all economic activities of small- and medium-scale business by contrast with the Third Reich’s economy in which big capital dominated. Today, small- and medium-scale businesses account for about 65 percent of the economic output. Although we know nothing about them, they form the backbone of the strong German economy.”

Speaking of the demonopolization challenge, the key monopolists in today’s Ukraine are the same oligarchs whom you in fact called lobbyists of the Yanukovych-supported integration with Europe. Are they aware of this challenge? Can this be viewed as a signal that big Ukrainian business is prepared to evolve?

“The oligarchs are looking for ways to enrich themselves. The monopolization of markets is only one aspect of the accumulation of wealth. They earn no less by receiving budgetary subsidies.

“As this type of businesspeople has tens and hundreds of enterprises in various sectors, it is a class of bogus owners. They do not know the realities of business in any sector which comprises the facility they own. The matter of their primary concern is not the use of an axiomatic monopolistic situation but financial results, including resale of facilities and liquidation of the enterprises that have absolutely exhausted themselves from the political, financial, and technological angle. For this reason, the key principle of present-day oligarchs is to grab as many assets as possible, ‘squeeze’ the juices out of them, then liquidate or fob them off on somebody else, and transfer the profits and the remaining funds abroad.”