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A Multimillionaire Helps Reinvent Ukraine

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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An incestuous relationship between government and business has brought Ukraine to the brink of failing as a state. Now, a multimillionaire who made his fortune thanks to his ability to coexist with the country's previous leaderships may be helping to bring it back. His name is Boris Lozhkin, and he is chief of staff for President Petro Poroshenko. 

Disclosure: I worked for Lozhkin in 2011 and 2012 as an editor and consultant. His media holding, UMH, was the biggest player in Ukrainian radio, printed and web-based media -- a growing, opportunistic publishing empire that had partnerships with major pro-Kremlin media as well as international brands such as Forbes and Vogue. It also had homegrown Ukrainian titles, such as the weekly news magazine Korrespondent, part-owned by confectionery tycoon Poroshenko. I had regular and direct contact with Lozhkin on projects that were important to his company, but we weren't close friends and our relationship remained professional. Before I interviewed him this week, the last time I saw him was two years ago.

Previously: Thankless Job? Try Fighting Graft in Ukraine

Lozhkin’s business was impossible without political connections. To his credit, despite the complaints of various officials and business partners, he never tried to pull a story from the titles with which I worked -- a restraint that no other media owner in Ukraine exhibited at the time. That said, he is no saint: He displayed a talent for survival in an environment where oligarchs and the politicians they controlled plundered the country. He's now trying to apply the same survival skills in a different endeavor. 

In the summer of 2013, when President Viktor Yanukovych reigned and his cronies could seize any Ukrainian business that caught their eye, Lozhkin sold UMH to Sergei Kurchenko, who had close ties with the Yanukovych family. Although Lozhkin may have had no choice (he denies this), many editors and journalists saw the move as treachery and left the company. The sale left Lozhkin with a fortune estimated at more than $150 million. He took a long vacation to travel, study and look for investment opportunities.

After Yanukovych was overthrown in Ukraine’s “revolution of dignity," Lozhkin got a surprise while traveling with friends in Israel: His old business partner Poroshenko, who had just been elected president, called to offered him the chief-of-staff job. Lozhkin accepted immediately. He was excited by the revolution, and he didn't have any other pressing business.

He says he didn’t fully realize how bad things were in Ukraine. “Looking back now,” Lozhkin told me, “I sometimes wonder how we pulled through. We were experiencing aggression in the east, we had almost no military and no one really had power.”

Lozhkin's tennis-court-sized government office, where he has sought to modernize a Soviet-era atmosphere by installing contemporary Ukrainian art, reflects what is so far his most visible achievement: the reform of Ukraine’s civil service. With the help of professional headhunters, he has spearheaded the recruitment of foreign citizens -- Economy Minister Aivaras Abromavicius, Finance Minister Natalie Jaresko and, by now, about a dozen others -- into the upper reaches of government.

“It was indeed my idea to infect the government with a different life form,” Lozhkin says. “They have to have a different genetic makeup to change the system. "

One challenge is figuring out how to pay such professionals a living wage. Lozhkin is hoping that privatizing about 1,350 state companies will help, by both raising money and getting rid of the bureaucrats who run them, often corruptly. "Most of these enterprises are not profitable," Lozhkin says. "Where is that money going?” He thinks the sell-off could make the entire Economics Ministry redundant.

Mass privatization is tricky. It’s hard to get good prices in a country where gross domestic product is expected to shrink by 5 percent this year. In February, Ukraine raised about 11 billion hryvnias (about $470 million) by auctioning 3G mobile phone licenses, a decade later than most European countries. “This proves that there’s demand for good assets even now,” Lozhkin says. Many of the state-owned companies, though, are appallingly bad assets.

In the meantime, Lozhkin is relying on various donor groups and nongovernmental organizations, which pay teams to help the government plot strategy, draft legislation and often do hands-on work. Lozhkin’s own press secretary is on the payroll of a private company funded with foreign donations. He recognizes the conflicts of interest inherent in the setup, but insists they are temporary, noting that even the billionaire Igor Kolomoisky, the once-renegade governor of the key Dnipropetrovsk region, has agreed to stand down from that position and publicly made peace with the president.

Kolomoisky's merging of big business and government "was fully justified in the situation of spring 2014,” Lozhkin says. “But in the situation of spring 2015 the country, public opinion, Western investors demanded something different, and he sensed it.”

How about Poroshenko’s own conflicts of interest? His confectionery company Roshen, which he promised to sell when he took office, has opened a dozen new stores in Kiev since he became president. “Well, that means he’ll sell it for more money,” Lozhkin said. “He definitely doesn’t want to be a big businessman. He’s a big politician, the leader of the country, that’s his mission, and everything else fades into the background.”

As an investor, Lozhkin is treading carefully in Ukraine. Most of the proceeds from the UMH sale -- which he didn't include in his income declaration -- went into an offshore fund that Lozhkin says he has no part in managing. “If I were not chief of staff I would definitely be investing here,” he says. “There is a big GDP drop while the global tendency is the opposite, which means there will be a significant rebound.”

Lozhkin said he sees the best opportunities in the agricultural sector, which was least affected by the revolution and subsequent war, and also in infrastructure projects -- not in media, the sector he knows best. “The time for that will come in 18 months to two years, except perhaps for some Internet projects,” he says. “The consumer market is too weak now -- there is no business model in TV, for example.” 

Lozhkin says he will stay on as long as Poroshenko wants him. He’s among the few Ukrainians I have talked to who believe the president is destined for a second term. That, and the economic rebound Lozhkin so confidently predicts, requires lasting peace in the eastern regions. Despite constant complaints from Poroshenko and other Ukrainian politicians that the truce is constantly being violated, Lozhkin says he believes the devolution of power envisioned in the Minsk cease-fire agreement can work.

“We really do aim for decentralization, not to be confused with federalization,” Lozhkin says. He thinks all the people in the east really want is more economic independence from the center, not unlimited power for pro-Russian rebel leaders who now control a large chunk of Ukrainian territory. “If we’re talking about the real interests of the population in Donbass, we can satisfy those," he says. "As for the political ambitions of certain individuals, I don’t know.”

As a Russian-speaking native of eastern Ukraine who has done business in the Russian media industry, Lozhkin is well-positioned to negotiate such compromises. Although he plays down the importance of his Moscow contacts, has has been spotted in the Russian capital a few times in recent months. 

“I think this year will be decisive,” he says. “By the end of it, we should have reforms in place that will let people notice changes, though perhaps not in their pocketbooks. That should come in 2016 and 2017.”

To be sure, Lozhkin is not satisfied with the pace of change or with what he's achieved so far. The conflict in the east still smolders. Ukraine is still barely manageable, highly corrupt and weighed down by debt. “We have to reform a country that was consciously destroyed for 23 years,” he says. “So unfortunately we’ve had to spent a lot of time just plugging holes.”

Lozhkin’s working day typically ends between midnight and 1 a.m., sometimes stretching further into the early morning. Running his own business was easier: He didn't have to deal with Ukraine's natural anarchy and a constitution that gives a lot of power to a fragmented parliament and coalition cabinet, to the detriment of the president. It’s hard for people from the private sector, accustomed to wielding near-absolute power, to accept the realities of government bureaucracy and consensus politics. 

Still, if the risks of government capture and corporate-style dictatorship can somehow be minimized, making use of the private sector expertise of people such as Lozhkin is perhaps Ukraine’s best chance at salvation.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net