Corruption threatens war gains in Ukraine

Oliver Bullough

 

ALL I WANT FOR CHRISTMAS…

It’s the time of year when maddeningly catchy seasonal hits live rent-free between my ears and, just when I rid myself of them, someone starts whistling a snatch of Mariah Carey and all progress is lost. So, since I can’t think of anything else anyway, and since this is the last newsletter of the year, I thought I’d tell you all I want for Christmas.

Obviously, there is just one thing Ukraine needs right now, and that is generosity, so it can continue to repair the damage caused by Russian attacks on its electricity system and keep both its soldiers and its civilians warm and equipped this winter. But, without conquering the corruption that has allowed oligarchs to undermine it from within for so long, military success alone would be a partial victory.

  • “The fight of Ukrainians against corruption has always been and will be one of the obstacles to destruction of our state by Russia. These are not empty words. It is corruption, among other things, that draws us to the “Russian world” of tyranny,” as the Anti-Corruption Action Center’s Vitaly Shabunin put it last month.

Even when corrupt politicians and officials have lost their jobs, they remain rich and thus able to buy the support needed to regain influence. An example is the court case brought by the long-overthrown Ukrainian president Viktor Yanukovich, who was seeking to have his title restored to him. Amazingly, a court in Kyiv was not only prepared to give him a hearing but assigned the case to a judge who previously served as a minister in one of Yanukovich’s governments.

Uprooting the networks of influence embedded within such institutions, and confiscating the wealth of corrupt politicians, requires detailed, committed and complex work, which is unglamorous but vitally important. It’s the political equivalent of being a sewage engineer: it’s never going to be fashionable but, without it, civilization collapses.

So, I was delighted to see that the judge who heads the Kyiv District Administrative Court (which accepted the scandalous Yanukovich case, along with many, many others) was last week sanctioned by the United States, showing an attention to detail from the U.S. — and an appreciation that Ukraine’s problems do not all originate in Moscow, but have been stoked by corrupt actors within its borders for decades — far beyond what’s been provided in other Western countries. That is the kind of Christmas present I can get behind.

Foreign partners need to be committed and focused in their strategy, but flexible and pragmatic in their tactics, if they are to help Ukrainians defeat corruption. It isn’t enough to offer a pathway to European Union membership, when oligarchs will always find people prepared to sabotage it.

Of late I keep hearing good things about reforms happening over the border in Moldova, a place I had previously pretty much written off thanks to it having had so many false dawns in the last 20 years. This is a very interesting document about how to dismantle corrupt networks, and build the rule of law, prepared by a Chisinau-convened panel of experts created “to analyze systemic corruption issues that cut across Moldovan institutions and improve implementation of anti-corruption measures.” It is clear-eyed about the scale of the challenge.

  • “Over the past thirty years, the country endured economic collapse, extensive brain drain, poverty, endless political strife and endemic corruption at all levels. Privatization led to massive misappropriation by politicians and public officials. Bureaucrats were used by several individuals who managed to illegally appropriate state properties and grow into oligarchs,” the report says. As if that’s not enough, check out pages 9 and 10, for a long and detailed list of the specific problems that resulted.

The solutions proposed are examples of the kind of detailed thinking required to tackle corruption in every country where it exists. It is not enough to talk about “capacity building” and other donor-approved buzz terms that pop up in Western-funded programs until the money runs out (at which point they die without issue), but instead to really engage for the long term.

We also need to stop thinking of corruption as something that can be completely defeated. Recent scandals in both the EU and the U.K. show that cronyism and nepotism exist everywhere. The challenge is to reduce crooks’ room to maneuver and to make sure they get punished when they get caught. Several years ago, I asked Shabunin’s colleague Daria Kaleniuk how she doesn’t lose hope considering how hard it has been to defeat corruption in Ukraine.

  • “I don’t think about defeating corruption,” she replied. “We are at four percent of where we need to be, and my ambition is to get to five. Then, when we get there, I’ll think about six.”

If I could have just one thing for Christmas, it’s for Western governments to spend a lot more time asking for advice from her, and from other people like her, then acting on it carefully, diligently, and meaningfully.

MAKING A LIST, AND CHECKING IT NOT AT ALL…

As for what I don’t want for Christmas, it’s the kind of short-termism encapsulated in the U.K. government’s decision to roll back reforms enacted after the 2007-8 financial crisis to strengthen its banks, intended to stop them going on another debt-funded binge that the rest of us have to pay for.

I don’t want to go on about this too much, because it’s supposed to be the season of goodwill, but I want to talk a tiny bit about why this is terrible. Imagine one member of your family lacked house insurance, so had more money to spend on lovely things than the rest of you, and spent that money ostentatiously and obnoxiously while boasting about how clever they were. Then their house burned down, they were left homeless, and everyone else had to chip in to build them a new home. Your sole condition was that — in the future — they took out insurance. But then, in a few years’ time, they decided it was wasteful and inefficient to spend all that money on insurance, and they’d be better off going back to buying lovely things instead. So they did. Then their house burned down again and you got stuck with the bill again, and so on.

This is just incredibly dumb, and the complete opposite of the kind of strategic, patient, committed, long-term thinking the world needs to secure prosperity for everyone. It’ll be great for a small number of well-connected financiers though, who’ll employ politicians when they retire, and they’ll all have cashed out by the time the next crisis comes, so who cares?

What else don’t I want? I don’t want short-term selfish politicking to scupper crucial long-term reforms. But sadly, we’ve got that as well, thanks to the EU’s failure to agree to the minimum global tax detail despite having already agreed to it last year.

  • “First, it was Poland blocking it. When the Polish government withdrew its longstanding veto last July, Orbán’s government unexpectedly vetoed the agreement. Then in October, the Czech presidency did not even put it on the agenda of the EU finance ministers,” say three MEPs in a comment piece.
  • “EU national interests have prevailed despite the cost-of-living crisis,” said Oxfam’s EU tax expert Chiara Putaturo. “This is a loss to ordinary people who are struggling with the cost-of-living crisis and a win to the ultra-profitable corporations.” 

Ukrainians are dying for the ideals of a free and democratic Europe, but EU politicians cannot find it in themselves to agree to a 15% tax rate on already-staggeringly-wealthy corporations that they’ve already agreed to so as to defend those ideals from the world’s greediest people. Yuk.

THEY’VE GOT CARS BIG AS BARS, THEY’VE GOT RIVERS OF GOLD…

Here’s a weird story from the Financial Times about a Luxembourg-based holding company LetterOne, which begins back in the spring, with the chairman “changing the art work and removing furniture from its Mayfair offices” to symbolically separate the fund from its wealthy Russian founders — Mikhail Fridman, Pyotr Aven, German Khan and Alexei Kuzmichev — who were sanctioned after the assault on Kyiv.

LetterOne has substantial investments in the U.K., the EU, the U.S. and elsewhere, all of which were put in jeopardy when its owners had their assets frozen. But the fund’s board — chaired (because they always are) by a former British government minister and member of the House of Lords — acted swiftly to disassociate itself from them.

  • “Mikhail Fridman and Petr Aven have stepped down from the LetterOne board. As a result, they will no longer have any involvement with or influence over the business or its investments. They will not receive dividends, communications or any funds or economic resources, directly or indirectly,” LetterOne said in a statement in March.

After completing its hasty redecoration, both literally and metaphorically, the fund felt bullish once more, and began splashing a bit of money around, as well as giving money to charity and decorating its website with the Ukrainian flag. Here, for example, is a summary of all the money it had given to Ukrainian causes by September (that is so far the first and only monthly edition of a newsletter it issues to keep us all updated on its giving, but I am sure another one will be along at some point), all of which suggests it has moved on from its Russian founders.

  • “I don’t mean this in a lighthearted way. But in terms of the business what is happening with them is not my problem,” Lord Davies told the Financial Times. “For them to come back into the company in any way, shape, or form, they’ve got to pass a fit and proper test. And for me, the bar on fit and proper test is pretty high now.”

But, as my boys might put it, is it though?

Both Aven and Fridman are challenging the legality of the EU’s sanctions against them, and Khan and Kuzmichev have transferred their stakes in LetterOne to an unsanctioned oligarch named Andrei Kosogov (who also ended up with an unexpectedly-vast stake in Alfa-Bank).

  • “Kosogov financed the purchase of Khan and Kuzmichev’s LetterOne stakes with a note repayable within a decade bearing 2 percent interest, according to a person familiar with the matter. The loan was financed by other sanctioned LetterOne executives, people familiar with the matter said,” Bloomberg reported in May. (I keep reading that paragraph, and keep struggling to understand how it makes sense.)

Fridman’s ex-wife has already dropped off the EU’s sanctions list, which — as happened after 2014, when the EU sanctioned people involved in annexing Crimea — is shrinking in the face of what amounts to an overwhelming DDOS attack of legal challenges. So, what happens to LetterOne if Fridman and Aven’s appeals are successful, the Luxembourg-listed fund’s owners are no longer EU-sanctioned, and therefore everyone involved basically returns to how they were last year?

  • “They have no rights as shareholders and – if sanctions are lifted – the board is under no obligation to return these rights,” LetterOne said in its March statement.

I have no problem believing Father Christmas can deliver presents to 22 million kids every hour of December 25, or that Rudolph and chums can fly him further than the distance from the Earth to the sun over the course of a single day, or that I’ll get all the festive cooking done without losing my temper, but I do struggle to believe that.

WHAT I’M READING

I’ve been spending a bit of time of late trying to learn more about how globalized finance used to work in its early days, so this week I read “The Rise and Decline of the Medici Bank” by Raymond de Roover, an astonishingly detailed and fascinating account of the legendary renaissance institution. I admit I did skip past the tables, as well as some of the denser descriptions of the trade balance between Florence and other Italian city-states, but the story is an incredible one with funny parallels to the modern world.

“A Milanese, Damiano Ruffini, sued the Bruges branch of the Medici bank for damages because of defective packing of nine bales of wool bought by the plaintiff from Simone Nori, manager of the London branch. Tomasso Portinari, as acting manager of the Bruges branch, denied all responsibility because the bales had not been sold by the Medici of Bruges and pointed out that Ruffini, if he had any claims, should bring action against the Medici of London. To this argument the plaintiff replied that the two branches were part of the same company and had one master. Thereupon Tomasso Portinari declared under oath that, while it was true that both branches had the same master, they were nonetheless separate partnerships, that one was not answerable for the other, and that the wool had sold to Ruffini for account of the Medici of London, not of Bruges.”

If you dislike this newsletter, please forward all complaints to my alter ego in the Marshall Islands, as they’re not my responsibility. Sorry, not sorry. Happy Holidays, Happy New Year, see you in 2023.