Bloomberg News

Ukraine Billionaires Desert Yanukovych After EU Reversal

December 11, 2013

Ukraine Oligarchs Desert Yanukovych After EU Reversal

Pro-European Union activists guard the barricade during clashes with riot police in Independence Square in Kiev, Ukraine, on Dec. 11, 2013. Photographer: Efrem Lukatsky/AP Photo

In the battle for Ukraine’s future, oligarchs are turning away from the government.

A newspaper owned by Billionaire Viktor Pinchuk gave journalists a makeshift office to cover protesters trying to topple President Viktor Yanukovych. Petro Poroshenko, Yanukovych’s ex-economy minister and the head of Ukraine’s largest chocolate maker, sided with demonstrators in a speech at Kiev’s Independence Square. Tycoon Dmitry Firtash’s TV station Inter aired footage countering government claims that protesters incited violence that has left hundreds hurt.

Yanukovych, who’s stood against hundreds of thousands of angry voters after snubbing a European Union free-trade deal in favor of Russia, is now seeing support from the nation’s richest executives slipping away. After boosting their fortunes and supporting Yanukovych’s tenure, oligarchs now face credit-ratings downgrades and the loss of lucrative Western markets, where 19 Ukrainian companies, including Mironovskiy Hleboproduct SA, the largest poultry producer, are traded.

“Yanukovych is in office because the oligarchs wanted him there,” Jan Techau, the director of the Brussels office of the Carnegie Endowment, said in a phone interview today. “If they abandon him, he’s toast.”

Hundreds of riot police in the former Soviet Republic last night flooded into a camp built by anti-government protesters and began dismantling it to end nearly three weeks of pro-EU demonstrations, drawing U.S. and EU condemnation and risking the threat of sanctions against Ukraine.

Falling Markets

Investors are also anxious. The cost of insuring Ukrainian debt against non-payment for five years with credit-default swaps rose as high at 1135, close to a four-year high, showing investors see the country as the world’s least credit-worthy after Argentina and Venezuela. The price was at 1102 at 6:12 p.m. in Kiev.

The UA Stock Index has lost 16 percent since Feb. 5, when it was at the highest level this year. Mironovskiy shares have fallen as much as 12 percent in London trading since mid-November, just before the crisis began. Farming company Astarta Holding NV, the first Ukrainian enterprise to be sold in Warsaw, is 19 percent lower this year.

Nine years after the first revolution that set Ukraine on the path to deeper EU integration, foreign direct investment from the EU dropped by more than half to $7 billion in the three years of Yanukovych’s term, from the $15 billion invested in 2008 and 2009, according to the state statistical office.

Profit Motive

About 1,000 German companies doing business in Ukraine now would feel “safer” with an association agreement, said Rainer Lindner, the managing director of the Berlin-based Committee on Eastern European Economic Relations, in a Nov. 6 interview at the World Economic Forum in Kiev.

The country’s oligarchs are looking to improve their profits with better access to the world’s largest trade bloc, which bought 14.6 billion euros ($20 billion) of Ukrainian goods last year. With an EU trade pact, Poroshenko said he would raise the share of EU sales to 40 percent of the total from 10 percent now.

Under a Russian customs union that President Vladimir Putin is using to lure Yanukovych, Ukrainian oligarchs would be subject to more-powerful Russian rivals with greater influence in the Kremlin. Ukrainian companies have borne the brunt of unannounced trade bans and duties, gas shutoffs and other regulatory hurdles designed to keep Ukraine from closer ties the EU.

‘Predictable Environment’

EU rules “will boost the rule of law and make the business environment more predictable” for Ukrainian business, said Ariel Cohen, a senior fellow for Russian and Eurasian studies at the Heritage Foundation, a policy institute in Washington, in a phone interview. “For people who have acquired assets worth billions of dollars, this is about a provision of safety for them and their families.”

Business oligarchs such as Rinat Akhmetov, the country’s richest man who acquired control of state stakes in leading power generators in 2011-2012, had relied on ties to Yanukovych to safeguard control of large sectors of the economy, according to the Carnegie Endowment’s Techau.

The risk for magnates is that a violent crackdown may signal that Ukraine is adopting the model of next-door Belarus and its authoritarian leader, Aleksandr Lukashenko, according to Tim Ash, the London-based chief economist for emerging markets at Standard Bank Group.

The EU has imposed a visa ban and asset freeze on Lukashenko and top officials, accusing them of political repression, while the EU pact would offer Ukraine duty-free access to more than 90 percent of its products.

Overlord Status

“The oligarchs would probably be nervous over the imposition of Western sanctions given many of their assets are offshore in Western capitals,” said Ash, adding that this would further concentrate power around Yanukovych and his immediate entourage and give Russia and its billionaire tycoons overlord status.

The U-turn on the EU association agreement was an “unexpected reversal” for the business elites who were counting on it to lead to “increased legal, regulatory and political convergence with the EU,” CitiGroup Inc. said in a Dec. 9 research note.

Opposition supporters Dec. 7 gathered outside the London home of Akhmetov, a penthouse in the One Hyde Park apartment building that cost about 137 million pounds ($225 million), urging him to cut all ties to Yanukovych, according to Ukrainian newswire Unian on Dec. 8.

Business Empire

The businessman, who’s worth $12.9 billion according to the Bloomberg Billionaire’s Index, has companies that own steel plants in Italy, Bulgaria and the U.K. and export electricity to European countries including Poland, Hungary, Slovakia and Romania.

Akhmetov, whose System Capital Management (NLY:US) holding group on Dec. 2 said it was built on “basic European values” such as private property rights and freedom of peaceful gatherings and opposed “any violence,” declined a request for an interview. Firtash and Pinchuk, who are worth $2.3 billion and about $3 billion respectively, according to Kiev-based Korrespondent, also didn’t respond to requests for comment.

Ukrainian billionaire Oleksandr Yaroslavskyi, the owner of DCH Holding, which includes chemical, banking, real-estate businesses, said by e-mail yesterday that he supports closer ties with the EU, U.S. and Russia. In an interview in Kiev on Nov. 6, he declined to give his personal opinion about the president, saying “I am purely a businessman, these questions are more for politicians.”

‘Every Side’

“I think it is necessary to get close to every side as this is very positive for business,” Yaroslavskyi said.

The most outspoken has been confectionary king Poroshenko. Two days after Ukraine froze talks with the EU as Russia pressured it to join a rival customs union, Poroshenko strode onto a stage at Kiev’s Independence Square and condemned the move, to the cheers of 350,000 protesters. He then climbed a bulldozer standing before a phalanx of police and urged calm on all sides.

Poroshenko recently expanded his chocolate factory, Kiev-based Roshen Confectionary Corp., into Hungary and has been in talks with French importers to expand sales of his premium Roshen bon-bons to western Europe.

“We demand Ukraine immediately turns around and signs the EU association agreement,” he yelled to the crowds waving EU and blue-and-yellow Ukrainian flags, in scenes reminiscent of the 2004 Orange Revolution. “I feel deep sadness and shame.”

Ukraine was classified as the most corrupt country in Europe, according to Berlin-based Transparency International’s Corruptions Perception Index released last week, ahead of Russia, Belarus and Moldova.

Fitch Ratings

Easing restrictions to the world’s largest trading bloc probably would increase revenue, spur investment, raise Ukraine’s credit rating from junk and offer it a way out of its third recession since 2008.

Mironovskiy Hleboproduct and Pinchuk’s Interpipe Group, a maker of seamless steel pipes for the oil and gas industry, are among 12 Ukrainian companies whose ratings Fitch cut this month because of a worsening economic outlook and weakening domestic demand.

“If the oligarchs are turning away from Yanukovych it’s because they did the math and found their business model fits better with the EU than with Russia,” said Carnegie Europe’s Techau. “The entire domestic scene in Ukraine is now in flux.”

To contact the reporters on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net; Kateryna Choursina in Kiev at kchoursina@bloomberg.net; Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net

To contact the editors responsible for this story: James M. Gomez at jagomez@bloomberg.net; Balazs Penz at bpenz@bloomberg.net


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