Ukraine after the Orange Revolution

Ljubljana, November 2006

Dear Friends and Family,

It is very difficult to write to you about Ukraine, the final leg of my last trip. The trip was problematic and I came away with an unsettled feeling. Perhaps this note will give you enough information to explain why. I wrote part of this email two weeks ago on a United Airlines flight between Washington and San Diego, listening to New Age music. Tonight I find myself in Ljubljana, Slovenia, about to start another adventure and wanting to send you something before I delve into Slovenian issues.

To me, Ukraine is a place of ongoing corruption and deception. Two years ago, thousands marched in orange clothing and camped out in the snow for days on end to try to force Leonid Kuchma from the Presidency, They were fighting for a cleaner government—one that did not hire assassins to murder journalists investigating cases of government corruption. The protesters were not just students but also middle-aged professionals--senior staff from my local office and the Central Bank—all of whom who braved the cold for a new future. The Orange Revolution succeeded in forcing Kuchma out of power and electing their leader Viktor Yushchenko. But corruption and conflicts of interest still abound.

The presidential election was a bitter battle. Yushchenko accused Kuchma of using Ukraine’s secret service to try to assassinate him. Even today Yushchenko’s face is pock-marked from the poisons that the doctors in Vienna found in his body. Yushchenko wears the disfiguration as a badge of honor to show what he fought. As Yushchenko spoke during subsequent interviews, the attempted assassination sounded like the antics of the Russian secret service—similar to the accounts of Oleg Kalugin, a defected former senior officer of the Russian KBG, who in 1994 wrote, The First Directorate: My 32 Years in Intelligence and Espionage Against the West.

However to form a government, Yushchenko was obliged to rely on officials from Kuchma’s era. Yushchenko’s first prime minister was reform-oriented but had worked for Gazprom, one of the reputedly most corrupt companies in Russia. In the end, even she couldn’t hold the Government together and Yushchenko turned to Kuchma’s protégé (and his defeated presidential rival) to be his prime minister.

I hadn’t visited Ukraine since November 2002. I didn’t want to go again now but my colleagues cajoled and finally convinced me to try again to push for corporate governance reform. I reluctantly agreed but insisted that we stay at the only hotel with a swimming pool, the Premier Palace. (Due to hip problems, swimming is the only form of aerobic exercise permitted for me.)

When I arrived at the Premier Palace on a Sunday afternoon, I remembered that this was the hotel of the Ukrainian oligarchs. I felt as if I had come upon the wedding of Ukraine’s Mercedes-Benz dealer. About 30 black S-class Mercedes crowded the small street and the hotel’s doorman shooed us away. My driver, Oleg, had an Audi but we might as well as been in a Trabant, the old East German car that used to sell $1,500 and had no catalytic converter. Oleg drove around the corner and tried to park at the hotel’s casino. There security guards tried to shoo us away as well but Oleg got angry. He insisted that I was a hotel guest and needed to check into the hotel. Oleg and the casino security yelled at each other for a few minutes. Still screaming at the security guard, Oleg moved the orange cones, parked the car, and helped me take my bags inside the hotel..

Inside the Premier Palace, everything was different. The well-dressed front office clerks smiled as they assigned me a room. “No one knows whose wedding it is,” explained the porter who showed me to the room. This is the world of Ukraine. In America, a big sign would proclaim the names of the bride and groom, In Ukraine, the name of the wedding party is an official secret.

The rest of the week was not much better. In 2002, the oligarchs controlled the voting of the members of parliament. “Bought and paid for” was my description of the Verkhovna Rada (parliament) at the time. Now in 2006 the oligarchs sit in parliament directly—and they act as chairman of the key committees, such as budget and finance. They have discovered the benefits of parliamentary immunity: as long as they are elected representatives, they cannot be prosecuted for past breaches of the law.

So for a week, I talked about corporate governance with senior officials in the government ministries, the securities commission, and the think-tanks. We agreed that we should hold a workshop to disseminate a recent report prepared under my supervision. I explained to my colleagues that the only hope of legislative reform was to convince the key oligarchs that it would be in their best interest. It was a tough sell.

Two of the largest oligarchs are rumored to be interested in having their companies listed on the London Stock Exchange. (The European stock exchanges have become the favorite for eastern European companies, who do not want to have to meet the financial disclosure requirements of the US Sarbanes-Oxley Act.) Raising capital is far from the goals of such oligarchs. Their companies are largely cash generators (so called cash cows) and no expansion or modernization is planned. Instead the controlling shareholders are looking entirely for the prestige of being major players in the industrialized world. One of the two dominant oligarchs is the son-in-law of former President Kuchma and he left parliament when his father-in-law left power.

For a week I tried to meet with the two oligarchs, or at least their advisors. However in such a short period of time, it was impossible to meet with any but the senior staff member of one of the two. The staffer tried to convince me and my colleague how her oligarch was highly progressive and that he had hired McKinsey to reorganize his corporate structure. In preparation for a foreign listing, the company had started to prepare statements that claimed to follow international standards of accounting.

We asked for advice on a strategy to “reach out to the private sector.” She liked the idea of a workshop but had no suggestions on how to meet with the other oligarchs. She also noted that any interaction with one of the four most powerful would be “unpleasant.” In the press, he is quoted as saying that he pays neither his taxes nor his debts. His office reportedly has an aquarium where he adds predatory fish to watch them eat each other. He is also the primary opponent to any reform of Ukraine’s company law—and sits in parliament to make sure that no reform passes through.

The local think-tanks explained that there is still a lot of money to be divided up among the ruling oligarchs. A number of the major state companies have not yet been sold but privatization has been stalled with 70 percent of the population being strongly against it. The current Presidential administration talks about the need for effective and “pointed” reform; for fear that they will not be reelected if they cannot show economic improvements. My argument that week in Kyiv (or what used to be called Kiev) was that popular opposition to privatization was due to weak corporate governance—and parliamentary approval of a new company law was essential to improving corporate governance. But everyone nodded but explained that until the spoils had been divided among the oligarchs, these powerful interests would oppose any serious legislative reform.

Money seems to resolve many political problems in Ukraine. There’s a story that after the last election, the members of parliament could not agree as to who would chair which committees. Weeks passed and the 90 day constitutional deadline for forming a government approached. According to the story, $74 million in cash was brought to the floor of the Verkhovna Rada and placed on a table. The committee chairmen were named and the resulting debts were paid on the spot. The only good part of the story is the absence of murder and assassination as a method of ensuring that promises were kept.

Leaving the Premier Palace at the end of the week, I was grateful that no oligarch wedding was going on at the hotel. As Oleg and I drove out to the airport, I wondered just how much good a workshop could do—and why did I agree to go back to Kyiv in the middle of winter when the odds of success are so low. Within less than one generation, these oligarchs will likely be the Rockefellers and JP Morgans of Ukraine and Eastern Europe. I don’t believe that will happen during my lifetime, at least not in the four years before I plan to leave my current job. But now I have agreed to go back to Kyiv in January for the workshop and try anyway. I keep hoping that my analysis is wrong and that for the sake of Ukraine, its oligarchs will be ready to talk about serious corporate governance reform.

Sue