The billionaire businessman who became Ukraine’s president on June 7 is a beneficiary of the same opaque and corrupt economic system he now pledges to change, lending the campaign a sense of irony.
Forbes Ukraine ranked Petro Poroshenko 6th in its latest list of the country’s richest, published on May 30, with an estimated $1.3 billion fortune.
Notwithstanding a 23.6 percent loss in total wealth from the previous year, the combined net worth of the 100 wealthiest still comprise a quarter of the nation’s 2013 gross domestic product of $175 billion. They are a class of super-rich who have reaped substantial benefits from a growing divide between the poorest and richest strata in Ukrainian society. And rising income and wealth disparity appears to have repercussions that extend beyond social discontent.
In a speech in London on Feb. 25, the International Monetary Fund’s Managing Director Christine Lagarde warned of the potential dangers of inequality for transitioning economies.
“Disparity… brings division. The principles of solidarity and reciprocity that bind societies together are more likely to erode in excessively unequal societies. History also teaches us that democracy begins to fray at the edges once political battles separate the haves from the have-nots,” she warned.
Official statistics on inequality offer few signs that such trends are likely to destabilize Ukraine’s development under the European model its new government aims to adopt. Based on the so-called Gini coefficient, a measure of global income distribution, they regularly rank Ukraine as one of the world’s most equal societies.
The World Bank’s 2011 data puts it just behind Norway, Denmark and Sweden, the three Scandinavian countries that consistently score well. Meanwhile the United Nation’s 2009 Human Development Report, which compares the income share of the richest 10 percent to the poorest 10 percent, places Ukraine ahead of all three.
According to Volodymyr Ishchenko, deputy director of the Centre for Society Research in Kyiv, the data on Ukraine fails to capture the scale of inequality in a country with an entrenched system of corruption.
“Official statistics show Ukraine as having one of the lowest levels of inequality in Europe. They’re not methodologically grounded. They’re based on public surveys that have little access to the richest members of society. The size of Ukraine’s shadow economy means reliable figures are impossible to obtain,” he says.
Based on data published by the Kyiv-based Ministry of Economic Development and Trade, Ukraine’s underground economy currently constitutes around 40 percent of its GDP. A study by two Ukrainian academics published last year put the figure at 44 percent. Corruption confounds the issue in 2013, Transparency International’s Corruption Perceptions Index ranked Ukraine 144th out of 177 economies.
While the Forbes list reflects the effects of the ongoing political crisis on the fortunes of the country’s most successful business people, closer examination into the roots of their wealth reveals equally stark issues about the lack of transparency and imbalanced nature of the country’s economy.
Among those featured are Oleksandr Yanukovych, son of fugitive ex-president Viktor Yanukovych, and close aides of the former head of state, the brothers Serhiy and Andriy Klyuyev. All three are thought to be evading law enforcement agencies from Russia. Also included is Dmytro Firtash, an energy magnate wanted by the U.S. on charges of bribery and creating an organized criminal group. He is currently challenging extradition in Austria to the U.S..
Prospects for Ukraine’s future are hard to predict. Poroshenko has an opportunity to signal his intent by fulfilling a campaign promise to relinquish his most profitable asset, chocolate company Roshen. Yet the extent to which his inauguration signals the emergence of a more transparent and accountable economic system in Ukraine is as yet unclear.
The recently-announced $17 billion IMF loan is tied to implementation of economic reforms aimed at increasing transparency and curbing Ukraine’s profligate energy consumption.
Policies demanded by the bailout are only set to exacerbate the rich-poor divide, according to Ishchenko. “Inequality in Ukraine is likely to get worse. Policies that have been implemented as conditions for IMF assistance target the poorest members of society, whose savings will be severely affected by the recent devaluation of the hryvnia. They do nothing to target tax-dodging or corruption,” he says.
However, Nick Piazza of SP Advisors, an investment bank, highlights an emerging middle class which can act as a counterweight to wealth concentration.
“It’s the smallest of the classes but it’s definitely growing. Look at the number of middle-class restaurants and hotels springing up, or the growth of the entertainment sector,” he says.
Some observers are more sanguine.
“If Ukraine is able to put through the necessary reforms, this should have a positive effect on income distribution,” says Oleksandra Betliy, research fellow at the Institute of Economic Research and Policy Consulting in Kyiv.
Kyiv Post staff writer Matthew Luxmoore can be reached at [email protected].
