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Ukraine’s Oligarchs Take to Economic Warfare

Despite his reclusive tendencies, businessman and politician Ihor Kolomoisky is trying to tip economics and diplomacy in his holdings’ favor.

The grinding war in eastern Ukraine is grabbing global headlines again as President Barack Obama weighs the merits of providing the Kiev government with U.S. weapons and European leaders make a new stab at compromise with Russian President Vladimir Putin. But Ukraine has an unorthodox homegrown weapon that will likely play a much more important role in its future: billionaire businessman Ihor Kolomoisky.

Ranked as Ukraine’s No. 3 oligarch, with a net worth of $2.3 billion in a survey last autumn by Kiev magazine Novoye Vremya, Kolomoisky controls PrivatBank, the country’s largest commercial bank, as well as industrial companies, oil and metals concerns and consumer goods and services such as airlines and television. For many years he ran his empire largely from Switzerland. But after the February 2014 Maidan revolution, he went home to an appointment from then-acting President Oleksandr Turchynov to one of the nation’s hottest seats: governor of his native Dnipropetrovsk Oblast, a Russian-speaking territory that borders the conflict zone in Donetsk province.

But the billionaire’s patriotism may come with a steep price for Ukraine, analysts fear. In a slow-motion conflict in which snarling rhetoric between Kiev and Moscow alternates with cooperation on practical matters, like gas shipments, Kolomoisky seems to go out of his way to inflame passions.

Although Ukraine’s military struggled in the face of separatist attacks last summer, Kolomoisky organized and paid for a private army of sorts, the Dnipro Battalion, which helped hold the line with thousands of troops. An official of the pro-Russian separatist group Donetsk People’s Republic paid Kolomoisky’s troops a grudging compliment, telling the Russian-language version of Forbes magazine, “They are the most organized, motivated and aggressive” among the pro-government forces.

A semirecluse despite his public office, the oligarch makes the most of rare meetings with outsiders, peppering his speech with obscenities and feeding shrimp to the pet sharks he keeps in a tank in his private office. In his first television interview as governor, he described Putin as a “schizophrenic of short stature.” Kolomoisky’s right-hand man, deputy governor Gennady Korban, lately warned Russian investors holding property in Ukraine, saying, “Be afraid. You know our talents. We will find where and how to take from you.”

Although Dnipro and other local militias are supposedly subject to the command of the national Ministry of Internal Affairs, Kolomoisky remains the effective boss of his crack troops, observers say. “His battalions do not really report to the Ukrainian Army commanders,” an official at an international lender in Kiev comments. “This potentially presents a problem for Ukraine.”

A more concrete concern is how Kolomoisky leverages his role in national affairs to defend his own business interests, which could undermine Ukraine’s plans for economic reform. Never shy about playing at national politics, the governor emerged as a key financial backer for Prime Minister Arseniy Yatsenyuk’s party, Popular Front, in parliamentary elections last October. In Ukraine’s ever-fractured landscape, the party took 82 of 450 seats, but Yatsenyuk managed to retain power via coalition building.

The first battle between Kolomoisky and government reformers revolves around upstream oil monopoly Ukrnafta. The state owns 58 percent of the company, but Kolomoisky’s Privat Group exercises effective control through its 42 percent minority stake. Ukrainian law requires a 60 percent quorum to hold any shareholders’ meeting.

Under Privat’s suzerainty, Ukrnafta drastically underperformed, at least in part because it sold oil and gas on favorable terms to Privat-controlled distributors, says Dennis Sakva, energy analyst at Kiev-based investment bank Dragon Capital. The company reported a loss of $70 million in the third quarter of 2014, despite Brent crude oil prices near $105 per barrel in September and still above $80 in November. “That suggests either inefficient management or deliberate attempts to shift profit outside of Ukrnafta in favor of third parties,” Sakva says. The company has not paid Ukraine’s cash-strapped government any dividends from 2011 to 2014.

The new parliament moved to rectify this situation despite Kolomoisky’s influence, passing a law reducing the quorum at Ukrnafta to 50 percent. That should allow the government to call an annual general meeting and clean up management, but Privat so far has the measure tied up in the courts. And Ukrnafta is just one point of intersection between Kolomoisky’s interests and the state’s. PrivatBank is sure to be leaning on Ukraine’s central bank amid the chaos afflicting the country’s financial system. Ukraine International Airlines, which Privat Group bought in a 2011 privatization, will be looking to defend routing monopolies.

If Kolomoisky has had a “good” war in Ukraine so far, Rinat Akhmetov, Ukraine’s richest man before Maidan, has not. Akhmetov’s home base was Donetsk, and his estimated $12.4 billion fortune is based on coal mines and metals plants that straddle what is now the front line.

A principal financial backer of ousted president Viktor Yanukovych, Akhmetov refused to sign up with the Donetsk separatists. Instead he retreated to government-held territory and organized his steelworkers to patrol the streets of Mariupol, a strategic port city the rebels have been sieging for months. He cast himself as the peace oligarch, financing food and clothing handouts across the war zone and pleading for a political solution. “We only have one weapon, the negotiating table,” he told Ukrainian media last summer.

But Akhmetov’s attempts at diplomacy have earned him scorn from both sides in the conflict. The Donetsk rebel authorities have threatened to nationalize his property if he doesn't pay what have been euphemistically called "taxes," whereas government supporters mistrust him as a crony of the hated Yanukovych. “When you behave as a parasite, that will determine people’s attitude toward you,” says Oleksandr Romanenko, a former editor of Ukrainian Forbes who now publishes his own Kiev-based site, Akhmetov has played no visible role in Kiev politics since the revolution, adds Dragon Capital’s chief political analyst, Viktor Luhovyk. “He has kept a very low profile, almost disappearing from the public eye,” he remarks.

Whatever assistance the U.S. and Europe may provide, Ukraine’s future as an independent state ultimately depends on its own resources — military, financial and moral. Ihor Kolomoisky has proved to be a resource no one expected at a critical time, while also threatening other resources for the future — one more challenge for a country that already has a full plate.

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