The `Queen Of Gas' Aims To Reign In Ukraine

But as Timoshenko battles the President, the economy sinks

With her delicate looks and designer clothes, Yulia Timoshenko seems too refined for corporate and political infighting. In fact, the 37-year-old president of United Energy Systems of Ukraine rarely shrinks from a slugfest--even with a national leader. In less than five years, Timoshenko elbowed competitors aside to make UESU an $11 billion trading and brokering operation stretching from London to Siberia. Now, she's taking on Ukrainian President Leonid Kuchma for his crippling attacks on her empire. "He's destroying the nation," Timoshenko says, jabbing the air with a manicured finger. "But this is only temporary."

Teamed up with former Prime Minister Pavlo Lazarenko, her political patron, Timoshenko intends to challenge Kuchma in parliamentary elections on Mar. 29. It is not the holiest of alliances. To many Ukrainians, Timoshenko and Lazarenko are prime examples of the cronyism that has made their country the biggest disappointment in the former Soviet Union. Now, it looks as if they are playing politics to protect Timoshenko's business interests. The casualty could well be Ukraine.

The political squabbling may derail Kuchma's belated move--under pressure from the International Monetary Fund--to launch reforms promised since his 1994 election. This spring, Kiev will privatize a major aluminum enterprise and several electric utilities. Such steps are crucial. The economy has shrunk 60% since 1991. Industrial subsidies take a third of the budget. Far from welcoming investors, insiders control the few enterprises still generating revenue. "What we have is essentially a corporatist state," says Markian Bilynsky of the nonpartisan Pylip Orlyk Institute for Democracy in Kiev. "Rather than assist business, it is business."

Hromada, the moribund party Timoshenko and Lazarenko have revived, does not stray far from Kuchma's centrist platform. But in pursuit of their political vendetta, the two allies could still tip the balance against reform. Hromada, named for a 19th century social movement, is expected to pick up less than 15% of the legislature's 450 seats. But it could ally itself with opposition parties across the spectrum to block Kuchma's initiatives at least until a presidential election in October, 1999.

"FABULOUS" PROFITS. Tension between Timoshenko and Kuchma flared last summer, when criticism of UESU's political privileges led Kuchma to sack Lazarenko. Soon after, the government revoked UESU's gas-trading license and sent tax inspectors in to pore over its books. Within weeks, Timoshenko and Lazarenko began plotting an audacious comeback. The political organization they formed is expected to be the platform from which Lazarenko challenges Kuchma next year.

To hear Timoshenko tell it, she is a Ukrainian Horatio Alger. Trained as an economist in the city of Dnepropetrovsk, she saw an opportunity as the Soviet Union broke up. Ukraine's factories were cut off from Russian customers--and from fuel supplies. With her husband and father-in-law, Timoshenko set up a trading company to help factories swap output for oil from cash-strapped refineries. In one early deal, a Russian refinery traded oil with a Dnepropetrovsk mill for pipe it needed to modernize.

In 1995, UESU persuaded the government to let private traders sell gas to industrial customers. But there was a catch: Each trader was assigned certain factories, and Lazarenko, by then Deputy Prime Minister, gave UESU nearly all the healthiest ones. A year later, the company was importing more than 30% of Ukraine's gas supply. Although UESU does not release financial statements, profits were "clearly fabulous," says Oleg Schmid, editor of a Ukrainian oil and gas newsletter.

Profits were only the start. UESU paid virtually no taxes because it set up a London affiliate to qualify as a tax-exempt foreign joint venture. And in short order, Timoshenko became Ukraine's first celebrity executive. Fans in Dnepropetrovsk renamed a soccer club in her honor, and a leading fashion designer created a "Queen of Gas" collection. In 1996, she won a parliamentary by-election with more than 90% of the vote.

RETALIATION. Scarcely six months later, though, UESU had neither a political protector nor a trading license in its key business, and the tax auditors were knocking at the door. The inspectors say they have uncovered tax-evasion schemes by UESU and other traders that cost Kiev more than $2 billion. Timoshenko acknowledges that Lazarenko--who declined to be interviewed--helped UESU. But she rejects charges of cronyism, insisting that Lazarenko's support benefited Ukraine. She also asserts that UESU has paid all the taxes required of it.

Timoshenko's political momentum has been swift. Hromada now has 700 local offices and claims 300,000 members. But Kuchma is retaliating. In January, the government closed Hromada's national newspaper, Pravda Ukrainy, charging financial illegalities. As the mudslinging intensifies, the public's disillusionment is deepening. In a mid-February poll, 23% of Ukrainians said the March elections would produce improvements. More than half predicted ballot fraud.

Many analysts believe that as president, Lazarenko would be comparable to Indonesian President Suharto, privatizing state companies but giving cronies controlling stakes. Kuchma is viewed as more open to foreign investment--although his dismal record keeps investors away in droves. Even under Kuchma, says Alexander Bazarov, who heads the Kiev office of Credit Suisse First Boston, "the country is heading toward major disaster. And no one is reacting."

It's hard to imagine how things could get worse for Ukrainians. The economy is expected to shrink further this year. The river of subsidies forces Kiev to borrow at exorbitant rates to cover ballooning deficits. And as the political sparring intensifies, leaders may spend even less time on pressing economic problems. Ukraine's downward spiral could still have a way to run.

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