Whose side are they on?

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Ukraine's President Takes on Its Richest Man

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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A month after Ukrainian President Petro Poroshenko ostensibly defeated billionaire Igor Kolomoisky in a battle for control of a state-owned energy company, another oligarch is in his crosshairs: Ukraine's richest man, Rinat Akhmetov. 

For the last couple of days, hundreds of  people who say they are miners have flooded the government quarter in the capital, Kiev, banging their helmets on the pavement, demanding the payment of salary arrears and the firing of the energy minister. Poroshenko's allies say Akhmetov has engineered the protests as part of an effort to keep control over the assets he amassed under deposed President Viktor Yanukovych.

Akhmetov was a close ally of Yanukovych, helping bring him to power in 2010 and benefiting hugely from government contracts and privatizations afterwards. Bloomberg Billionaires estimates his fortune at $7.2 billion. The source of that fortune is System Capital Management, a huge diversified holding that includes steel mills, coal mines and power plants, as well as investments in media, telecommunications, financial services and real estate. 

Perhaps because he has so many assets in Ukraine, Akhmetov didn't flee to Russia with Yanukovych and many of his allies after last year's "revolution of dignity." Unlike fellow oligarch Kolomoisky, however, he's done little to fight the pro-Russian insurgency in his eastern Ukrainian power base, seeking only to keep most of his factories running. That requires maintaining a working relationship with Russia and its eastern Ukrainian proxies, which, in Kiev, is a badge of disloyalty. 

Given the delicacy of Akhmetov's balancing act, losses are inevitable. Last year, the revenue of steel holding Metinvest, SCM's most valuable asset with production facilities mostly in east Ukraine, dropped 18 percent and profit fell 59 percent. That, and the effect of the festering conflict on the entire group's results, led Bloomberg Billionaires to revise Akhmetov's fortune downward by $1.1 billion on April 8.

Apart from the military action, Akhmetov faces the repayment of debts denominated in foreign currencies, a difficult endeavor after the runaway devaluation of the hryvnia. DTEK, the power-generation arm of SCM, is now trying to restructure a $500 million eurobond due for repayment this month.

DTEK is at the center of Akhmetov's conflict with Poroshenko. Earlier this month, the Prosecutor General's office asked the courts to annul the privatization of several regional utilities acquired by the company under Yanukovych, claiming that the tenders had been rigged. The energy minister, for his part, is trying to get DTEK recognized as a monopoly: It does produce most of the non-nuclear power in Ukraine and practically all of the coal used in power generation. The government could then regulate the prices it charges.

DTEK insisted on raising the price of coal last year because it needed money to pay its foreign debts. Poroshenko and his allies are taking issue with that, saying Akhmetov is a monopolist engaged in price gouging and his foreign-currency loans are not Ukraine's problem. 

Mustafa Nayyem, a legislator allied with Poroshenko, claims to have unearthed an internal DTEK document laying out a strategy for fighting off attacks by Poroshenko and his ministers, which includes inciting miner protests. Although the unsigned document's authenticity is dubious, Akhmetov certainly has the means to stage impressive protests: Tens of thousands of workers depend on him for their daily bread. Pro-Poroshenko legislators have demanded that prosecutors look into the billionaire's attempts at "blackmail." Pro-Akhmetov media reports have responded by saying that Poroshenko is only trying to squeeze Akhmetov in favor of friends and business partners.

It would be wrong to completely discount Akhmetov's side of the story. Poroshenko may well harbor plans to distribute lucrative assets among people he can trust. The Poroshenko team makes a slick effort to portray him as a fairy-tale oligarch-slayer who heroically deals first with Kolomoisky's private battalions, then with Akhmetov's aggressive miners to safeguard state interests. The fundamental problem with this view is that the Ukrainian president is himself an oligarch who increased his fortune under Yanukovych. The powerful men fighting it out in Ukraine today were part of the country's problem for too long for any of them to suddenly emerge as a hero.

Ukraine is now at a crossroads in dealing with its oligarchs. It can renationalize some of their assets and hold new sell-offs, opening a Pandora's box of legal complications and accusations of selective justice. Alternatively, it can leave the oligarchs more or less alone, extracting from them a higher share of their profits and ensuring smaller businesses can compete with their empires. Poroshenko appears to vacillate between the two approaches and may be tempted to combine them, at least in the case of Akhmetov, a hated figure among the president's fiercely patriotic supporters. 

Poroshenko may choose to bring down Akhmetov, forcing his company to default and regulating it into oblivion as an example to other oligarchs who might try to bend him to their will, as Russian President Vladimir Putin did with Mikhail Khodorkovsky in 2003, when the latter was Russia's richest man. Such an approach, however, would suggest that Ukraine is still following in Russia's footsteps. Worse, it might not succeed: By taking on one billionaire after another, Poroshenko could bring on an early parliamentary election in which the oligarchs would put up a fierce fight to empower a government inconvenient to the president.

Ukraine's oligarch infestation is, perhaps, the biggest challenge to its switch to a European path. How the country handles it is as important as the resolution of the armed conflict in the country's east.

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