Shady Revenues of Ukraine’s “Ruling Family”

Authoritarian regimes need natural resources: they are often both a means and a goal of an uncontested rule. Most post-Soviet authoritarian regimes (Russia, Azerbaijan) rely on oil and gas as major energy commodities. Yet not every country happens to be bountifully endowed with these resources. This is when the aspiring autocrats have to improvise and look for (not so alternative) resources to sustain their rule. Ukraine, a country owned by a dozen of oligarchs and clumsily governed by an intimate group of the President’s confidants termed ‘The Family‘, appears to be a curious case of just such a ‘non-oil’ model.

In the past three years, a circle of family members and confidants to President Viktor Yanukovich has emerged as a major pillar of the ever-changing Ukrainian political system. This clan is said to be lumped around President Yanukovich’s elder son, Alexandr, whose business appetites are no longer limited to the internal market only. However, the sources of financing that members of the Family enjoy have remained rather murky to the public until recently.

The suspicious increase in Alexandr Yanukovich’s profits, which coincided with his father’s years in office, earned him a place in the Ukrainian Forbes list of millionaires. The young prodigy “businessman” derives his riches from two major sources: tender purchases, and coal production and export. Ukraine’s murky state tender procedures are one of the key ingredients of the astonishing business prowess exhibited by the President’s elder son. According to Forbes Ukraine (Russian), his companies have received state contacts worth over 5 billion hrivnya (about 500 mln euro) in 2012.

Coal export is another controversial source of the Family’s rapid enrichment. In 2012, Sergiy Leshchenko, a leading investigative journalist, wrote (Ukrainian) that the prince-ling is connected to a company called Mako Trading S.A., which was established in Switzerland in 2011 to export hard and coaking coal from Ukraine to the European market. Importantly, the Family’s business entities do not own large coal-extracting capacities in Ukraine, and only claimed that they ‘source’ the resources in the internal market. However, the internal Ukrainian market is dominated by DTEK, the major coal producing and exporting company owned by Rinat Akhmetov, President Yanukovich’s close ally and filthy-rich sponsor. It would seem that the partnership expanded into business as well as politics.

However, nothing is as simple as it seems in Ukraine. Last week, Korrespondent, a Ukrainian quality weekly, published a large investigative article (in Russian) about the proliferation of illegal coal pits in the Eastern regions of Ukraine. According to the weekly, the abhorring conditions in these primitive, pre-industrial pits pose serious risk to employees’ life and might cause environmental damage, therefore they would be immediately shut down if it came to proper law-enforcement. Despite their illegal status, these pits are ‘protected’ by local authorities and the police, allegedly with the acquiescence (or the direct command) of the government in Kiev. Coal volumes extracted from these pits are then shipped to state-owned facilities and “laundered” as legitimate products for export.

Now this is where dirty internal business schemes and corruption in Ukraine spill over into the international context. Fueled by the recent spike in the European Union’s demand for coal as an energy source (see, for instance, the Economist Intelligence Unit report), supplies of Ukrainian coal to the EU were unexpectedly welcome. Given this  “window of opportunity”, the Ukraine’s ruling family appears to be desperately trying to extract easy profits in the EU, even by resorting to shady activities in its Eastern Ukrainian backyard.

Such a motive of unfettered greed might eventually be the most pertinent reason why Yanukovich’s family is still interested in the EU-Ukraine Association Agreement, which included enhanced free trade provisions. What they obviously do not take into account yet is the collateral damage of labour and environmental commitments that are included in the Agreement. The EU would be wise to think about imposing those commitments on energy resources imported from Ukraine, even if the Association Agreement is not signed this November in Vilnius.

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About Evgen Vorobiov

I am an analyst of international relations, currently working on civilian security issues. In the past 3 years, I've done research on Ukraine's regional politics, on EU-Ukraine Association process and the Russia-Ukraine conflict. I hold a Master's Degree (cum laude) in European Studies and International Politics from Maastricht University (The Netherlands). I tweet regularly at @vorobyov as a private person. In addition to native-level Ukrainian and Russian, I speak fluent English, passable German and Polish, basic Dutch and French.

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