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Ukraine’s EU deal: good or bad for the oligarchs?

Public Service Europe | 20 August 2013

Ukraine’s EU deal: good or bad for the oligarchs?

by Piotr Kościński and Ievgen Vorobiov

They continue to wield economic and political influence, but how will Ukraine’s oligarchs be affected by the Association Agreement the country is close to signing with the EU?

With three months to go before the European Union’s Eastern Partnership summit in Vilnius, the major obstacle standing in the way of the signing of an Association Agreement with Ukraine is the country’s non-compliance with three criteria. The authorities in Kiev are expected to complete judicial reform, to amend electoral laws and to solve the problem of selective justice applied to leaders of the political opposition – but they are dragging their feet in meeting these demands. Besides, oligarchs there face risks arising from the implementation of the Deep and Comprehensive Free Trade Agreement, which is one part of the overall deal.

The ’old oligarchs’ have maintained influence on Ukraine’s political and economic development for years. Rinat Akhmetov’s wealth has been the backbone of the ruling Party of Regions. Meanwhile, as well as stakes in metallurgy, Viktor Pinchuk and Ihor Kolomoyskiy own influential television channels. However, the past three years have seen the emergence of a new group of oligarchs nicknamed the ’family’ by Ukrainian journalists, because it centres on Oleksandr, the oldest son of President Viktor Yanukovych.

It is the ’family’ that has gained the most visible control over the financial and law-enforcing blocs of the government, as representatives of the ’old oligarchs’ were gradually ousted from the cabinet. Vitaly Zakharchenko, internal affairs minister since 2011, and justice minister Olena Lukash, as of July 2013, are both close confidants of President Yanukovych. Leonid Kozhara, a loyal protégé of the ’family’, was appointed the new foreign minister after the 2012 parliamentary elections, to replace Kostyantyn Gryshchenko, a career diplomat linked to Dmytro Firtash, a chemical magnate. These changes herald the diminishing role of the ’old oligarchs’.

According to the free trade agreement’s provisions, Ukrainian oligarchs are likely to gain economic benefits from the elimination of import tariff duties, which might have otherwise impeded their access to the EU market. Food producers stand to gain the most. A decrease in duties would be useful to the likes of confectionary giant Roshen, owned by Petro Poroshenko, given that these products are levied import tariffs of about 35-40 per cent in the EU. Lifting import duties for agricultural goods would be beneficial to the Kernel group, owned by Andriy Verevskiy. However, these businessmen have little if any influence on the government’s policy.

Meanwhile, the influential oligarchs who dominate the parliamentary faction of the Party of Regions are not likely to gain much in the short run. The Metinvest Group, co-owned by Akhmetov, exports steel to the EU free of import duty. Firtash’s Group DF exports half of its nitrogen fertilisers to the EU, where a duty of 6.5 per cent is levied. Finally, trading companies controlled by the ’family’ currently face few obstacles in exporting subsidised coal to the EU, as import tariffs are not imposed on this raw material.

The Association Agreement provides for a gradual approximation of Ukrainian legislation to EU regulations, which would require substantial market liberalisation. Such a roadmap might, however, spur resistance from the oligarchs linked to the government. The first point of contention is the overhaul of the public procurement procedures. In 2012, the Ukrainian parliament passed amendments to the law on public procurement, which excluded a number of sectors controlled by major oligarchs from competitive tenders. The outcome of the amendments soon became apparent: 40 per cent of all tenders for purchasing fuels, equipment and services for public enterprises were won by private companies belonging to Akhmetov, Oleksandr Yanukovych and Firtash. Their vested interest is likely to impede the approximation of public procurement law.

Secondly, the free trade agreement provisions on approximation of competition rules require the strengthening of anti-monopoly regulators in Ukraine. However, the Anti-Monopoly Committee of Ukraine tends to be lenient on Ukrainian oligarchs. For example, it failed to block overpriced purchases of natural gas by local authorities from companies owned by Firtash, or to prevent Akhmetov from acquiring big energy-generating enterprises.

What is in it for the EU? Member states and institutions have to account for the consequences of the free trade agreement’s entry into force for Ukrainian businessmen in their policy towards Ukraine after Vilnius. The oligarchs will retain crucial parliamentary leverage not only over the reforms necessary for signing the agreement, but also over the implementation of the signed document. Hence, the European Parliament should reinforce inter-parliamentary links with the Ukrainian Rada.

Diplomatic channels should also be used. For instance, EU officials could persuade oligarchs of the potential benefits that their businesses – and voters – might extract from the agreement beyond access to the EU market, such as EU assistance in regulatory matters and badly-needed investments in infrastructure. It is therefore important to prove to Ukrainian businessmen that the structural changes triggered by the Association Agreement will be conducive to their own interests, despite the short-term risks.

Piotr Kościński is a programme coordinator and Ievgen Vorobiov is an analyst, both at PISM, the Polish Institute of International Affairs think-tank

 source: Public Service Europe