Nation's wealth got sold cheaply to a few insiders
It took some of America’s robber barons many years to amass their enormous wealth. For example, John D. Rockefeller needed more than 30 years to become America’s first billionaire. In contrast, Ukraine’s billionaires achieved the same feat in less than half that time, thanks to the way privatizations were carried out from 1991 to 2004. As a result, billions of dollars in national wealth and potential state revenues were sold on the cheap to insiders. Other assets were squeezed for money that got laundered or moved offshore. Privatization was encouraged by Western experts as an essential step in breaking with the Soviet socialist past. It was a key step in the transition to a market economy, to be done as quickly as possible to undergo “shock therapy.” Some other countries that did so, namely the three Baltic States, Czech Republic and Poland, weathered the ensuing mayhem and bounced back. These nations are all members of the European Union and NATO, in contrast to Ukraine.
Ukraine, on the other hand, privatized gradually, amid sustained hyperinflation, capital flight and mass worker dislocation.
Beginning in 1994, privatization certificates of state factories, plants and enterprises were offered to the public under a voucher system. Nearly 10,000 medium and large industrial enterprises were privatized this way. Between 25 to 100 percent of shares were offered to employees, the general public, financial intermediaries and strategic investors. According to the United States Agency for International Development, “shares were extended to interested parties in exchange for vouchers, which were distributed to the general public in a nationwide program.” As a result, 90 percent of the population were allowed to obtain vouchers and open privatization accounts; 35 percent of Ukraine’s citizens became shareholders through this mass privatization program.
But most Ukrainians had no experience with such arrangements and were happy to exchange shares for small, short-term gains. They had little use for the voucher scrip that was, to them, just a piece of paper. Instead of the desired effect, like the creation of a broad base of stockholders among the entire population, the program led to the concentration of ownership in the hands of a few “investors.” This privatization effort became the first step in creating Ukraine’s economic elite.
“This was when gas traders like [Ihor] Bakai, [Pavlo] Lazarenko, [Hryhoriy] Surkis (who later became president of the Dynamo Kyiv football club and [Yulia] Tymoshenko made their money by selling gas using price transferring schemes and paying nothing for their profits in return,” said Anders Aslund, senior fellow at the Peterson Institute for International Economics in Washington D.C.
Commodity traders also reaped profits. The Donetsk clan – headed by Yevhen Shcherban and Akhat Bragin – began selling steel and other commodities on world markets for prices that were 10 times higher than at home. The future son-in-law to Kuchma, Victor Pinchuk, was already working along the same lines with pipe manufacturing companies in Dnipropetrovsk. Also in Dnipropetrovsk, the Privat Group took advantage of hyperinflation by running a commercial bank and raked in profits.
Asset stripping was also common, according to Volodymyr Ryabchenko, a former member of parliament’s privatization committee in the 1990s. Middlemen and factory owners sold goods abroad through offshore registered companies, evaded taxes, amassed capital and, once they acquired enough money, repatriated profits to scoop up ailing or already bankrupt state enterprises.
What followed were cash auctions of state assets which are still carried out today in Ukraine. As Aslund pointed out, cash privatizations are “always crooked and shady” since the true value of assets is difficult to ascertain. Nevertheless, the 2003 sale of Nikopol Ferroalloy Plant to Victor Pinchuk and the 2004 sale of Kryvorizhstal to Rinat Akhmetov and Pinchuk stand out as privatizations that garnered far less money than their actual worth.
While nominally legal for the Kuchma times, they certainly are not scored as fair or just. While no crime may have been committed, it certainly felt that way to many in the nation and abroad in an era widely regarded as lawless. These shady deals deprived the nation from getting full value for their national treasures. The only attempt to rectify a wrong came with the resale of Kryvorizshtal in a rare open auction in 2005. The result was spectacular: The steel plant sold for $4.8 billion, six times more than the $800 million paid the previous year by oligarchs Akhmetov and Pinchuk.
Before that sale, “these auctions were almost always rigged for a select few or pre-determined buyers designed to keep out higher bidders or stronger competitors,” said Alex Frishberg, managing partner of Frishberg & Partners law firm. He was involved in the privatization process in the 1990s.
Moreover, it was all done with approval from the top on the national and regional levels, Frishberg said.By comparison, U.S. tycoon J.P. Morgan and others with monopolistic control were forced to divest some of their holdings. Still, Morgan discovered oil and created wealth by producing it more cheaply, while others built a new nation. Many of Ukraine’s richest simply used connections to take over what was already there – very different from the experience of America’s robber barons.
