Kakha Bendukidze: “It’s impossible to distinguish between an oligarch and a businessman”

Kakha Bendukidze

 

2014/07/09 • Featured, Politics

by Vladimir Fedorin, Forbes

Why shouldn’t Ukrainian reformers fight for restoring “justice” at any price.

The empty public purse, falling hryvnia [the Ukrainian currency–Ed.], declining economy, over-the-top corruption—this is far from the full list of achievements of the fallen regime of Viktor Yanukovych. If you add to this the fact that [Ukraine] is lagging behind neighboring countries in the intensity of reforms carried out during the post-Soviet years and the per capita GDP level, one can clearly see why the current members of the Ukrainian government call themselves kamikaze. Just after Yanukovych escaped, on 22 February [2014], I had an interview with Kakha Bendukidze on the prospects of Ukrainian reformers. Kakha Bendukidze is the founder of Tbilisi Free University, a businessman, and the co-author of Georgian liberal reforms. It’s been ages since then. But the threat of war appears to be receding [as of 6 March 2014], which means the issue of Ukrainian economic reforms is back on the agenda.
– What would a plan to fight corruption in Ukraine look like? Please list the six or seven most important items. Just describe them; no need to list them in order of importance.
– From what I hear, it is clear that the most corrupt areas in Ukraine are public procurement, the judiciary, and tax administration. If there is political will, it makes sense to attack them directly. It is necessary to carry out reforms in those areas where one is eager and capable of doing it, regardless of the risk of losing political capital. It is possible to reform public procurement—let’s introduce transparent electronic procurement, this will result in huge savings. There will be lots of those discontented, but not too many, not en masse—just a few hundred.

– And as a result, tough popular reforms.
– Yes, the range of those affected is very limited.

– That is what makes them popular.
– They won’t be particularly popular, because nobody will actually see the results. There are reforms with obvious results. When lines for public services disappear, for example. In Ukraine public services include a lot of things, so I believe there would be no problems with this. Hospitals are starting to work differently. In my opinion, the main thing to fight for is transparency. The fight against corruption will be supported by society. And the rest will only work to an extent.

– How should the transitional judiciary act and how long should it last? According to Åslund’s estimates [Mr. Anders Åslund is a senior fellow at the Peterson Institute for International Economics], the Yanukovych “Family” was stealing 10 billion US dollars a year from the state budget. Any government striving for macroeconomic stabilization and budget balancing could really make use of that money…
– 10 billion US dollars – what part of the GDP does it make?

– More than 5 per cent. It could also be viewed as follows: the amounts stolen in the past three years make in total double the amount of the financial aid package offered by Russia. Does it make sense to fight for returning the plundered?

– Well, how are you supposed to do that? That is the question of whether this revolution is the last one.

If this revolution is to be the last one – “we are creating an independent Ukraine, this is no longer the country that it used to be” – than you can say: we are starting from scratch.

Looking for something which has been plundered – oh dear. Let’s say 15% of GDP has been stolen. If you start fighting now to restore justice, you are doomed to stagnation in the next three to four years because of the message you make… When they got their hands on that money, they were not piling it up in big safes; they invested that money in some assets. This means that all assets throughout Ukraine are stained.

– Not all of them, just the assets of the so called “politically connected” businessmen.
– Well then, tell me the simple way to distinguish between the assets that are stained and those that are not. Imagine I am walking along the street and there is some nice building or a restaurant. How could I possibly identify whether it is “politically connected” or not?

– It depends which is it that you want – just to grab a bite or buy it?
– I would like to buy it.

– A good faith purchaser does not risk anything.
– But what if, possibly, the owner of this restaurant or a hotel stole the money via public procurement and used that money to bribe the tax inspection to withhold taxes. I am buying this asset and next thing I know the tax militia comes to me. What good would it do to me? I’d better wait or purchase elsewhere, in some other country. So ultimately you will not have any growth for three years.

– That would be the end of any government.
– Correct. You would lose the same amount of money for three years. 15% of GDP or even more would be wasted for the sake of restoring justice.

– That sounds like an argument. However, on the other hand, in such countries as Ukraine investing into politics is the most profitable investment. I spoke to the mayor of the City of Lviv, Andrii Sadovyi, on the 2 January [2014]. One of his questions hits the spot: how can you make people want to go into government not with the purpose of stealing money, i.e. investing money in the election campaign to later steal that same money… How can we liquidate this political “perpetuum mobile”? I suppose this requires both the carrot and stick. The stick by means of sanctions for making money on politics…
– I guess the pursuit of that money will lead nowhere. I believe it is necessary to introduce such electoral laws, which would reduce their response to money as much as possible. First, this requires the maximum transparency of election funds and imposing thresholds on individual donations, e.g. when you cannot donate more than 50,000 US dollars. Of course, this must be controlled really well. Second, this requires the public financing of political parties. This measure is arguable. I know a lot of people who are against this. But it enables the existence of those parties, which are not ready to sell themselves out. When there is no middle class, no long-term interest identified, no institutions established to allow that social class to preserve their political choices, the parties become very personalized… The Klitschko Party – which wing is it – the right of the left?

– They are right-wing centrists.

– Is that really so obvious? How do they differ from the Regions Party?

– The Regions [Party] is a party with the soviet ideology.
– Is it right-wing centrist?

– I would call them right-wing socialists.

– But in fact this is a party of Yanukovych, and the other one is the party of Klitschko. If Klitschko changes his mind tomorrow, that will be the end of the party.

The right thing to do is, of course, to keep agonizing in all this crap until the right political framework is formed, until it grows. But if you believe you don’t have that time, you can stimulate the growth (which is always arguable – whether one can stimulate growth). If you finance parties, their existence is not dependent on someone who gives money. If a party has 5 million US dollars from the state with some Sidor Sidorovich acting as its leader, your will be motivated to fight for his removal if you estimate you may lose the elections against him. But you realize that if he does not give money, the party will not disappear.

– So in other words the leader is no longer the main fundraiser.

– I wouldn’t even call him a fundraiser, rather an investor. Our main investor (Bidzina Ivanishvili) was the direct leader (of the presently dominating party “Georgian Dream”). It is necessary to impose high fines for the violation of campaigns financing rules and maintain effective and transparent control mechanisms. It’s easier to talk about it than to actually do it, but nonetheless…

– And where do you get that independent depoliticized governmental body, which would be penalize for unfair political rivalry?
– Depoliticized is difficult. Make it multi-party. This system has one flaw. It severely restricts new parties coming in. But there are no perfect systems; you will have to sacrifice something.

– In Ukraine a certain, so to say, financial industrial group or an organized crime group with its political arm being the Regions Party, came to power on its second try through democratic procedures and attempted to undermine the democracy. The financial and economic strength of this group was never disrupted in 2004 and 2005. Until this is done – thinking logically – Ukraine will face this problem again, again and again.
– How would you disrupt it? Would you simply dispossess Mr. N? (At Mr. Bendukidze’s request the names of the oligarchs discussed during the interview were not to disclosed in print – Forbes)
– Mr. N does raise some questions, but that was not my point. The tycoons of this group must be held accountable for what they have stolen.
– Won’t they simply flee?

– They will – and will be put on the wanted list. They were stealing openly in front of everybody. There are internet resources, which compared the gap between the procurement prices and market prices for tenders. The new General Prosecutor just needs to make a few clicks and proceedings may be readily initiated.
– The price of it all will be the absence of economic growth.

– In other words it would be impossible to deal with embezzlers of public funds even on an isolated basis.
– In a very isolated way, probably. To be exact – with Yanukovych personally.

– What about lame privatization transactions? You did tell me that in Georgia people who had lined their pockets on the state property during the time of Eduard Shevardnadze had to make up the difference.
– There weren’t that many incidents of that kind. I was the one who handled such transactions as I understood no one else but me would be able to do that without selling oneself out. I took a huge risk upon myself of being accused of corruption (and eventually I was so accused anyway). Who would rejoice in being required to pay additional 20 million US dollars? Any such attempts in Ukraine would actually come down to approaching Lakshmi Mittal, who is among those most exposed, to have him pay additionally for Kryvorizhstal. He is not a Ukrainian and would not bribe the procurator’s office or the journalists.

– Well, Mittal also has his ways. That is exactly what Yanukovych tried to do and as the result got some from Nicolas Sarkozy.

– Yanukovych did not have the support of the people. This time it will be arranged under such slogans as “Let’s Restore Justice”.

Restoration of justice, which is aimed at the future (“We are going to have justice”), is a good cause, but it is not fully clear how to restore justice which has already been meddled with before.
In this case you will have to liquidate the oligarchs as a class. Let’s take Mr. NN as an example. If you were to fully restore justice, how much money should be left with him?

– I suppose something like one billion US dollars being the debt to “Gazprom”.

– But will he tolerate this calmly? I doubt that. He is going to resist fiercely. Or else he is going to leave the country and you will get nothing if his assets are liquid.

– He owns plants.
– So, you are going to go there and say that based on a revolutionary sense of justice and without any court or investigation proceedings we order you to give up everything within 24 hours and never ever to litigate against the state? That won’t happen this way. These assets will be doomed to many years of judicial proceedings and no one will invest in them.

– Let’s drop this subject for a while. There are certain people who have obtained their assets based on their political connections, through bribes. How can one pull their teeth? Does it make sense to do that at all?
– You see, it totally makes sense, but it’s impossible. You cannot distinguish between an oligarch, a young oligarch, a micro-oligarch and a businessman. There is no line to distinguish among them. You would interfere with everybody. What you need to do is just the contrary – you need to remove fear.
What happened in Georgia in 2012 is a good example. A new government was elected. Economic growth should not cease upon electing a new government – it has not done anything yet. The growth should at least continue at the same level or even build up. They [the presently governing coalition “Georgian Dream”] claim everything is going to be better, more transparent, no violence and business will be at ease and so on. The growth ceased. Why did it?

Because they had a slogan: we are going to restore justice now, we will expose and punish anyone who had connection to the previous government. This promotes uncertainty.

I would like to buy that company, but who the hell knows what’s gonna happen to it. I would like to buy another company – but who the hell knows whether I should. And if I supported financially the previous governing party, that’s the worst scenario. What if I will be punished too? So, I’d better get the money out of my business, put it into sacks and see what’s going to happen.

– What you describe is a fear multiplier: we want to punish a dozen while everything gets paralysed. In 2005 Yulia Tymoshenko took exactly this course at the cost of her premiership. Grigoriy Yavlinskiy at his time was promoting the idea of amnesty for the capital. The main explanation for this was to pull the oligarchs’ political teeth while leaving their business alone.
– I don’t see how this would work.

– The point there was that their property should be decriminalized, possibly upon the payment of some tax, however they would actually – not sure if it is possible to do this in writing or at all possible – be disqualified for any participation in politics. They would in fact lose their civil rights.

– These considerations have nothing to do with real life. How will this deprivation of civil rights work? Will they be deprived of the right to express their opinion? “Our schools should really work better” – so, “You get 15 years in prison”. He will never run for an election or never vote again? Few of them actually vote anyway. But what do you care if, say, Mr. NN will come to a voting station? Was he actually ever elected anywhere?

– Funding politics would be among the applicable limitations.
– How can you prohibit financing politics with “black” money? This is prohibited already.

– From the point of economic efficiency one must agree with you. On the other hand, the government must somehow sell the story to the people. There we go again not putting a finger on anyone. Nine years ago we did the same and now ended up with all of this…
– Well, maybe you should slightly put a finger on somebody. But only slightly.

– Propose to oligarchs to chip in for reforms supporting fund…
– That would be an option. Depending on the seriousness of the government’s intentions this fund could accumulate 10 million US dollars or 100 million US dollars, or the impossible scenario – up to several billion.

– Wouldn’t such an amnesty be interpreted by the leaders of the financial industrial groups as a weakness of the new regime? How can we prevent them from falling back into the old ways?
– You will have new laws and new executives. If those won’t work then it doesn’t really matter who will take advantage of this – the old oligarchs or the new ones. The problem is that otherwise you will destroy capital. It’s not just a revolution if you do it this way, you are effectively introduce military communism.
Destroying capital is a process that takes many years and hinders the development of new capital; and without new capital there will be no economic growth. The decay af the power of existing capital will shift set back the economic clock of Ukraine.

One of the problems of Ukraine was that its loved it’s factories too much.
As soon as it stops doing that, the inefficient ones will die themselves; the efficient ones will continue, whereby you must create conditions for economic growth for the new companies to emerge. Compare the S&P500 or the Fortune 500 fifty years ago and now: you will see there are only two companies that continue to be in those lists and the rest are brand new. Ukraine can follow a wonderful example of WhatsApp. A guy from Kyiv came to the United States, established a company and sold it for 19 billion US dollars. A former Ukrainian earned 11 billion US dollars. Are there many Ukrainian businessman who have 11 billion US dollars?

– According to Forbes’ estimates, Akhmetov has got more than that. And the rest of them have much less.

– The man was born and raised in Ukraine. He left when he was 16. He has 50 employees now and he has earned 11 billion US dollars. You need to create a framework to make this possible in Ukraine. And nobody will ever remember such a problem as oligarchs.

– Actually, the key question is – how to liquidate the coalition, which is, under populist slogans, blocking the access for anything new. 90% of Ukrainian proprietors and businessmen would endorse the idea that national producers must be supported.

– Same thing in America. And in France. Economic nationalism reappears all over the world. You see, I was shocked to incidentally find out that Ukrainian agricultural oligarchs fight against land being privatized. This seemed very bizarre to me. The ideology of “Keep them out!”.

– Who would then be able to curb this coalition?

– The people. Everything that had happened in Ukraine emerged around Europeanization. I believe the mandate for this is more clearly supported now. Do Ukrainian oligarchs want to protect themselves? Of course they do, but who doesn’t? The problem is when these people receive full voting status.

Translation: Svitlana Skob
Edited by: Chris Abbott

  • sandy miller

    Interesting article. However, people in Ukraine need to be educated to capitalism. America is turning away from it themselves.