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News Analysis: Ukraine Risks 'Feudalization' As Conflict With Oligarchs Boils Over

March 25, 2015
by Robert Coalson

The unfolding conflict between Ukrainian President Petro Poroshenko and oligarch Ihor Kolomoyskiy is a symptomatic and dangerous moment in Ukraine's post-Soviet history. And the danger has not passed simply because Kolomoyskiy stepped down as governor of Dnipropetrovsk Oblast.

Ukraine is a fathomless tangle of geopolitical, political, and economic interests, as well as a country struggling to break out of the oligarch-state model.

That struggle is being played out against the background of the upheavals within the oligarchy caused by the essentially antioligarchic Maidan protest movement and of the ongoing conflict with Russia.

So what is happening now? Is Kyiv making a serious effort at breaking the oligarchs' grip over Ukraine? Or is the country in for another round of self-destructive infighting that could produce political and economic disaster?

'Maidan initiated a process of oligarchic restructuring,' says analyst Andriy Zolotaryov of Kyiv's Third Sector think tank. 'Some oligarchs lost influence and a significant part of their wealth. Other oligarchs, on the other hand, despite losses, became stronger, more secure. Ihor Kolomoyskiy was one of the latter. It was a redistribution.'

He adds that it is too early to tell whether Poroshenko is truly committed to 'the necessity of the de-oligarchization of Ukraine's economy and the removal of the oligarchs from political power.'

Kolomoyskiy resigned as Dnipropertrovsk governor on March 24 following a showdown with Poroshenko over control of state oil companies. Poroshenko accused Kolomoyskiy of using 'private militias' to promote his business interests after armed men occupied the Kyiv headquarters of Ukrnafta oil company on March 22. Days earlier, other armed men briefly occupied offices of Ukrnafta's pipeline subsidiary Ukrtransnafta.

Ukraine's government was badly weakened by the Maidan protests, which drove President Viktor Yanukovych from power and forced a reshuffling throughout the ruling elites. But Maidan didn't break the oligarchic system, as evidenced by the fact that Poroshenko himself is a card-carrying member of the oligarchic club.

As Russian journalist Leonid Bershidsky wrote recently for Bloomberg, 'Ukraine remains an oligarch-run country plundered for years by a small group of ruthless men.'

'So far, the Ukrainian people have been unable to bring them down,' Bershidsky added.

Kolomoyskiy backed the Maidan movement and used his wealth to create several units of volunteer fighters to secure his eastern Dnipropetrovsk region and fight against the separatists in Donetsk and Luhansk. This, Zolotaryov says, gives him the conviction that 'the government owes him something.'

In addition, Kolomoyskiy controls Ukraine's most successful bank, one that is widely considered too big to fail.

'That is why he takes risks,' Kyiv-based journalist and political analyst Vitaly Portnikov says. 'Because he thinks there are red lines' his competitors will never cross.

Portnikov, however, doubts whether such red lines really exist.

'All these people -- the oligarch club, the current government -- have shown many times that they don't have red lines because they only think 24 hours in advance.'

​​And Kolomoyskiy is only one piece of this puzzle. Others, like Rinat Akhmetov, Dmytro Firtash, and Viktor Pinchuk continue to control large swathes of the Ukrainian economy.

'The oligarchy is still in control,' says Oleksandr Bondar, the former head of Ukraine's State Property Fund. 'Akhmetov controls the energy sector, the metals industry, and telecoms as well. Firtash controls the chemicals sector. They continue to wield power and they will continue to blackmail the government. Kolomoyskiy is not the only one doing this.'

Portnikov agrees that Ukraine's 'lub of oligarchs' is 'trying to do everything they can to preserve the oligarchic state, including by using their political power and media resources.'

​​Meanwhile, any rift that divides Ukraine and weakens the central government plays into Russia's hands in the ongoing conflict between the two countries. The flashpoint conflict between Poroshenko and Kolomoyskiy centered around two state oil companies. But Russia's LUKoil, controlled by oligarch Vagit Alekperov, also has an important interest in those firms.

Paradoxically, Poroshenko must take into account Russian interests in such conflicts, Portnikov says.

'He is in constant peace negotiations with Russia's political leadership and he knows that whenever matters touch on the business interests of [Russian President] Vladimir Putin and those oligarchs that support him, the position of the Russian president becomes uncompromising.'

Moscow has been pushing for 'federalization' in Ukraine -- a weaker central government and broad autonomy for the regions, especially the ones with large ethnic-Russian and Russian-speaking populations. The current struggle among the oligarchs and between the oligarchs and the government, Portnikov says, could result in something even worse.

'Instead of the federalization that we have all been so afraid of, we are getting the feudalization of Ukraine,' he says.

It was never realistic to imagine that ending the oligarchic model in Ukraine would be a simple, consensus-based process, analysts say. Particularly if it is played out at a time of a crippling economic crisis and an open conflict with Russia.

'We are losing the chance to reform,' says former official Bondar. 'We are being distracted from what is really happening in the economy. Everyone has forgotten about the banks, about the exchange rate, and everything else that is going on. Instead of focusing on the needs of investors, we have lost their confidence.'

'The hryvna is being destroyed,' he adds. 'I have already said -- Putin can relax because our government and our oligarchs will do everything for him.'

Based on reporting by RFE/RL's Russian and Ukrainian services

Source: http://www.rferl.org/content/ukraine-analysis-feudalization-oligarchs/26920398.html

Copyright (c) 2015. RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave., N.W. Washington DC 20036.

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