March 26, 2015

Kolomoisky resigns after challenging the president


A photo from President Petro Poroshenko’s Facebook page captioned “No governor will have his own military force!” The reference was to Igor Kolomoisky of Dnipropetrovsk. The photo was posted on March 23.

KYIV – A struggle involving armed fighters erupted in Kyiv on March 19 for control of Ukraine’s biggest oil producer, Ukrnafta, between its majority stakeholder, the Ukrainian government, and Igor Kolomoisky, the billionaire who controls the largest minority stake through the Privat Group empire in which he’s a partner.

Billionaire Igor Kolomoisky submitted his resignation as head of the Dnipropetrovsk State Oblast Administration on March 24. This photo was posted on Facebook the next day.

Billionaire Igor Kolomoisky submitted his resignation as head of the Dnipropetrovsk State Oblast Administration on March 24. This photo was posted on Facebook the next day.

The standoff lasted until March 24, when Mr. Kolomoisky submitted his resignation as Dnipropetrovsk State Oblast Administration chair (a position commonly referred to as “governor”) during a meeting with Ukrainian President Petro Poroshenko, who has led the government’s drive to control Ukrnafta.

Both sides said the conflict had been settled, though neither side has yet to reveal just how. It threatened to open a frontline for the Kyiv government with Mr. Kolomoisky’s brigades based in his native Dnipropetrovsk, as well as undermine the partnership between the nation’s two most powerful figures that helped thwart the military advance of Russian-backed forces.

“This battle can be a risk for the government in the sense that it can lead to a second front within the country and become a gift for Putin,” said Volodymyr Fesenko, the head of the Penta Center for Applied Political Research in Kyiv. “The conflict over Ukrnafta needs to be resolved flexibly enough so as to not allow it to become a large war.”

It all began when the Ukrainian government took concrete steps to take control of Ukrnafta in order to collect its profit in the forms of stock dividends – which had been denied for three years by Privat – and better organize its operations, making it fully accountable to state authorities.

The Verkhovna Rada voted on March 19 to reduce the quorum needed to call a shareholders’ meeting to 50 percent plus one share from 60 percent plus one share.

Although the new law applies to all publicly traded companies, it was specifically targeted at wresting away Privat Group’s control of Ukrnafta, in which the government has precisely a 50 percent plus one share stake.

For at least 12 years, Privat, led by Dnipropetrovsk billionaires Mr. Kolomoisky and Gennady Bogolyubov, succeeded in preventing the government from asserting control by ignoring and therefore undermining shareholder meetings with its 42 percent minority stake, said Alexander Paraschiy, the head of research at Concorde Capital. (He said it’s unclear who owns the remaining 8 percent stake, which could be privately owned or shares traded on the Ukrainian Exchange in Kyiv.)

As a result of this tactic, Privat denied the state budget 3.7 billion hrv (about $462.5 million) in dividends from profit earned by Ukrnafta between 2011 and 2013, estimated Mustafa Nayyem, a national deputy with the Poroshenko Bloc. When combined with unpaid taxes, Privat deprived the state of 6 billion hrv (about $750 million), he said, as reported by the Ukrayinska Pravda news site on March 23.

“No one is trying to destroy Kolomoisky’s private business, but as with all the other oligarchs, he will have to realize the need to transform into a big businessman who plays by the rules,” Yurii Lutsenko, the parliamentary faction head of the Poroshenko Bloc, wrote on his Facebook page the same day.

“It’s utterly necessary to achieve rules that apply to everyone. The government should strive for dividends paid not only by Ukrnafta, but by all the other owners of natural gas distributors, electricity producers and industrial giants,” Mr. Lutsenko noted.

During the last several years, Privat offered various reasons for not paying the dividends. For instance, as recently as March 4, Mr. Kolomoisky claimed the government, through the state gas monopoly Naftohaz, owed Ukrnafta 40 billion hrv for 10.5 billion cubic meters of natural gas. (Although production of crude and other oil products is Ukrnafta’s biggest business, the company also produces natural gas.)

“You’ll never get them,” Mr. Kolomoisky said of the dividends when addressing a March 4 meeting of the Privatization Special Monitoring Commission.

Within hours of the law’s passage, the government decided to stake its claim and dispatched police to the Kyiv headquarters of Ukrtransnafta, the fully state-owned oil transit subsidiary of Ukrnafta, in order to forcibly remove its board chairman, Oleksandr Lazorko, who had served the interests of Privat Group.

The decision was also based on a decision by the Ukrtransnafta supervisory board to place him on leave. Mr. Lazorko barricaded himself in his offices, the Energy Ministry police reported, requiring police to break down doors and glass to give his successor entry. Several employees were injured as a result, said Mr. Kolomoisky, who arrived at the scene with Mr. Lazorko within a few hours.

Mr. Lazorko’s dismissal was initiated by Energy Minister Volodymyr Demchyshyn, who alleged that he deliberately allowed Ukrtransnafta to pay the Privat subsidiaries excessive payments for the storage of technological oil that cost the state 2.5 million hrv per day.

Such fees didn’t exist until July and totaled 305 million hrv, according to an investigative report published on March 17 by journalists of the First National television network and Radio Free Europe/Radio Liberty (RFE/RL).

Messrs. Kolomoisky and Lazorko ended up retaking control of the offices with the help of the oligarch’s bodyguards and fighters, which numbered about 40, according to state officials present. The two met with state representatives, including Oleksandr Savchenko, the head of Ukrtransnafta’s supervisory board.

“It wasn’t a meeting, but a theater of several actors,” Mr. Savchenko said, as reported by Ukrayinska Pravda. “Kolomoisky also threatened all those gathered that he has 2,000 fighters and they’ll all be in Kyiv tomorrow because they’re stripping him of a company.”

Besides such threats allegedly made inside the building, once outside and questioned by RFE/RL reporter Serhii Andrushko, Mr. Kolomoisky unleashed an expletive-laden tirade, claiming that Russian saboteurs were trying to take over the building and verbally abusing the journalist. Mr. Andrushko was among the journalists exposing the alleged corruption at Ukrtransnafta.

“He was pursuing his business interests by speculating on social fears and clichés,” Mykhailo Basarab, a Kyiv political consultant, said of Mr. Kolomoisky’s words. “Yet any statements from politicians, particularly anti-Russian rhetoric, are perceived with a high degree of skepticism. To a great extent, it’s justified. The theme of Russian aggression is often speculated upon and draws a healthy skepticism from the Ukrainian public.”

Indeed Mr. Kolomoisky has long been accused by his critics of abusing his crucial role in supporting Ukraine’s military defense – partly in his capacity as Dnipropetrovsk governor, but also claiming to have offered support from his private funds – as a pretext to form his own personal armies and armed brigades.

He is certain to control the Dnipro-1 volunteer battalion (which is officially a part of the Internal Affairs Ministry), though he has denied this publicly, as well as the Sich paramilitary force, which has been characterized by his allies as both a security firm and a civil rights organization.

Mr. Kolomoisky also reportedly enjoys the loyalty of the Pravyi Sektor paramilitary organization, in which his close ally, National Deputy Andrii Denysenko, is involved.

(Fighters of the autonomous Pravyi Sektor, including its leader Dmytro Yarosh, have repeatedly denied receiving financing from him, though they have access to military bases controlled by the Dnipropetrovsk Oblast State Administration.)

Indeed, during the conflict’s peak, Mr. Denysenko accused Mr. Poroshenko of having reached a secret deal with Russian President Vladimir Putin on three goals: removing Mr. Kolomoisky and his team from the political arena, discrediting volunteer battalions and neutralizing the Pravyi Sektor Ukrainian Volunteer Corps.

The conflict over Ukrnafta seemed to have calmed, with assurances from Internal Affairs Minister Arsen Avakov that it would be resolved in the courts.

Even U.S. Ambassador to Ukraine Geoffrey Pyatt contacted Mr. Kolomoisky in order to discuss the need for Ukraine’s territorial integrity, stability and economic development.

“I think that Kolomoisky understands, as with the majority of the representatives of the Ukrainian elites, that the conditions in Ukraine have changed and the law of the jungle under the times of Yanukovych will lead to tragedy in Ukraine,” Ambassador Pyatt told Radio Vyesti in Kyiv.

Yet Mr. Kolomoisky demonstrated the lesson hadn’t quite sunk in when armed men took control of the Ukrnafta’s Kyiv headquarters on March 22, providing cover for workers erecting a metal fence around the building. Messrs. Poroshenko and Avakov both issued statements calling for their disarmament.

Mr. Poroshenko alleged the armed men were dispatched by Mr. Kolomoisky, yet his officials denied that claim. National Deputy Serhiy Leshchenko recorded on video a commander claiming he was from the Dnipro-1 battalion controlled by the oligarch, drawing immediately denials from Mr. Avakov (who is officially responsible for the battalion as minister) and Yurii Bereza, the battalion commander.

The recording lent further credence to concerns that Mr. Kolomoisky is using volunteer forces, which are supposed to be defending the Ukrainian state, in resolving his personal business conflicts.

“If this one oligarch is a part of the state apparatus and – using all the instruments accessible to him as an official – pursues his own personal interests, he is a threat to the whole country, undermining the fundamentals of statehood with his cynical and demonstrative disdain,” Mr. Nayyem stated on his Ukrayinska Pravda blog.

Mr. Kolomoisky also made a personal appearance at Ukrnafta headquarters that evening, claiming the measures were to protect the building from “raiders,” even identifying them as oil business rival Ihor Yeremeyev, Naftohaz Deputy Head Andrii Pasishnyk, newly appointed Ukrtransnafta Head Yurii Miroshnik and Mr. Savchenko. The conflict reached its boiling point on March 23 when the Security Service of Ukraine (SBU) called in for questioning Dnipropetrovsk Oblast Administration Vice-Chairs Gennady Korban and Svyatoslav Oliynyk. It was the second time Mr. Korban was questioned in Kyiv, the first being in November 2014 by state prosecutors. (State oblast administrations are the Presidential Administration’s representative bodies in the nation’s oblast and district centers.)

Afterwards, SBU Chief Valentyn Nalyvaichenko told a press briefing they are being investigated on suspicion of financing criminal gangs that are engaged in kidnapping, murder and transporting contraband across the separation line of the Anti-Terrorist Operation (ATO).

That same day, Energy Minister Demchyshyn told a press conference he ordered the funds of all state companies managed by his ministry, including Ukrtransnafta, to be transferred to state accounts at state banks. The decision came after Naftohaz revealed the prior week that most of Ukrtransnafta’s funds are in a private bank account controlled by Mr. Kolomoisky.

Mr. Demchyshyn also expressed confidence that Ukrnafta’s management would be replaced. Mr. Poroshenko was next to issue an announcement, making the bold declaration that he won’t allow the emergence of “pocket armies.”

“The territorial defense will be organized under a clear hierarchy, and we won’t have any governor with his own pocket armed forces,” he said, as reported by the presidential website. He ordered the disarming of all men at Ukrnafta headquarters, identified by the SBU as belonging to Mr. Kolomoisky’s Sich security firm.

In response to the president’s claim, Ukrnafta released a statement on its website stating that no arms are on its territory, or those adjacent.

In response to the criminal investigation, Mr. Korban demanded the creation of a parliamentary temporary investigative committee to examine the allegations against himself and Mr. Oliynyk.

Mr. Nalyvaichenko’s claims are “cynical, brazen lies,” and he should resign if they are proven false, Mr. Korban said. Moreover, he alleged the SBU itself is transporting contraband in the ATO zone. The Kyiv government has failed to uphold its promises of financial decentralization, he said, accusing it of also lying about the ATO’s progress and the number of casualties.

“Thieves are sitting in Kyiv today, and it’s time that they leave,” Mr. Korban said.

A peaceful resolution was reached late on the night of March 24, when Mr. Poroshenko accepted the resignation of Messrs. Kolomoisky and Korban after eight hours of talks between Mr. Kolomoisky and Borys Lozhkin, the head of the Presidential Administration, as reported by the Ukrayinska Pravda news site.

The main themes of the talks in Mr. Lozhkin’s office were that Mr. Kolomoisky can’t wage war against the state, he needs to play by civilized rules, and he should submit his resignation, the news site reported, citing anonymous sources.

The SBU confirmed that Mr. Kolomoisky removed his armed men from Ukrnafta headquarters by morning. Yet no details were offered on whether the government would gain its sought-after dividend payments and replace the management of both firms.

“Kolomoisky’s main mistake is that he brought armed men to barricade themselves in Ukrnafta. Kalashnikov automatic rifles, armored vehicles, a newly erected fence and tales of ‘Russian saboteurs’ – all that looked like the first act in an armed overthrow. That was the point of no return. He cast doubt on the government’s monopoly on force,” Mr. Leshchenko said on his Ukrayinska Pravda blog.

Borys Filatov, a Poroshenko Bloc national deputy and Mr. Kolomoisky’s former deputy administration chair, wrote on his Facebook page on March 25 that “the dismissal occurred maximally appropriately” and that all matters would be transferred to his successor “in a maximally comfortable regime.”

He said a public concert will be held on March 28 in Dnipropetrovsk under the slogan, “For a United Ukraine,” during which Mr. Kolomoisky’s team will submit an annual report on its performance.

Among those present will be Valentyn Reznichenko, Mr. Kolomoisky’s successor, who has close ties to both Mr. Lozhkin and Privat Group’s partner Mr. Bogolyubov, indicating that a peaceful settlement has been reached.

The Presidential Administration also made a special effort to prove the conflict had been settled, releasing video of the final minutes of the meeting between Messrs. Poroshenko and Kolomoisky in which they agree on the need for peace, stability and unity in Ukraine.

Yet Mr. Nayyem said the conflict was merely the beginning. “Obviously, Kolomoisky’s team doesn’t intend to surrender just like that,” he wrote on his blog. “I don’t rule out that the game will lead to early elections. The issue is which institution will be chosen as a target – the Parliament or the president.”

For the time being, however, Mr. Kolomoisky appears to be sticking to the courts to pursue his fight. The Ukrayinski Novyny news agency reported on March 26 that one of Mr. Kolomoisky’s offshore companies filed a lawsuit seeking to overturn the decision reached by shareholders in October 2014 to pay 3.8 billion hrv in dividends owed for 2011-2013.

Moreover, the Poroshenko administration needs to remove the influence of other oligarchs from state bodies and enterprises, Mr. Nayyem said. “After Kolomoisky’s removal, the president, the government and Parliament don’t have a different option than to declare war against all the remaining oligarchs,” he said “Any attempts to fill the niche of the preferred oligarch should be halted by society, journalists and politicians. Halted harshly and uncompromisingly.”

The U.S. State Department characterized the Ukrainian president’s decision as an internal matter, while it drew the approval of most observers and consultants, including Anders Aslund, a senior fellow at the Peterson Institute.

He called Mr. Kolomoisky’s dismissal a correct, necessary and decisive act towards consolidation of state power and elementary corporate governance of Ukrnafta. “By taking down Kolomoisky – if successful – Poroshenko has defeated the oligarchs as a class in Ukraine as Ted Roosevelt did with Rockefeller,” Dr. Aslund tweeted on March 25.

Still, Westerners shouldn’t be too excited, said Ukrainian political observers.

Under the guise of addressing corruption and gaining needed revenue for the state, the president is also enhancing his chain of command in government, said Oles Doniy, the director of the Political Values Research Center in Kyiv.

Mr. Poroshenko is also interested in expanding his own business empire since he’s a billionaire oligarch, just like Mr. Kolomoisky, he added. Though promising to sell his businesses, Mr. Poroshenko has been expanding them and boosting profits since becoming president in June.

“I don’t rule out that Poroshenko is trying to strengthen his own influence on business in Ukraine with the help of his position in power,” Mr. Basarab commented.