Democracy Watch, 2011 - Issue 10

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With Euro-2012 expenses threatening the already burdened economy, trade unions lobby for greater transparency in the markets. With the link between political authority and personal wealth clearly illustrated, Verkovna Rada raises allowances for Deputies.

National Deputy of Ukraine: cost effective?

The parliament of Ukraine is implementing some of the most stringent social and economic reforms in the country’s history, yet at the same time sees fit to increase the annual maintenance allowance for each Deputy to 700,000 UAH – at the Ukrainian citizens expense.

Ukraineis characterised by one of the highest international debts in Europe, a rapid growth of inflation and an unrelenting decline of the population's well-being and social-security. Nevertheless, the general budget of Verkhovna Rada was recently set at 980 million UAH - a 170 million UAH increase from 2010. The government has increased its allowance for travel expenses (from 7 to 9.5 million UAH) as well as the vacation budget, with 9 thousand UAH allotted to each Deputy for health resort treatment – the equivalent of six months living expenses for nearly 50% of Ukrainians.

It is worth noting that whilst their official salary is set at 17 thousand UAH (the average salary in Ukraine is under 2,500 UAH) Deputies receive at least that amount again, every month, for ‘working expenses’ without any requirement to declare how the money was spent. One might question whether Deputies really need such a comparatively large salary. It is no secret that the primary appeal of becoming a people’s Deputy in Ukraine is either to protect personal business interests, or to act as an oligarchical proxy. For example Ukrainian Deputies Akhmetov, Zhevago and Verevskyi are named among the richest people on the planet by Forbes Magazine, with fortunes accounting for 16, 2.4 and 1.1 billion US dollars respectively. Whilst Ukraine continues to suffer some of the worst social and economic performance in Europe, Deputies show no desire to follow the example of the European Parliament, which froze expenses in 2010 in sympathy for the population suffering from economic crisis. However, in March the European Parliament increased legislators' expenses for assistants by 17,800 Euro for each Deputy, which brought ordinary Europeans out onto the streets. For how long will Ukrainians be willing to fund the whims of their elected representatives?

People First Comment:

Forbes magazine has named three Ukrainian deputies as being amongst the richest people on the planet with a combined personal fortune in excess of $19.5 billion. One of these three has been conspicuous by his absence from the Rada for most of the current convocation. Therefore one has to ask firstly why such wealthy individuals should be paid so much relative to the national salary level for their services and secondly what value they deliver to the nation to warrant such a salary. In the Soviet era there was always confusion over price and value. In the Russian language the same word is used for both as it was assumed that you got what you paid for. Warren Buffet’s description is more applicable ‘price is what you pay whilst value is what you get’. In this case it is fair to say that the people are paying too much and getting too little.

The profligacy of the current government belies an underlying contempt for the nation. They cut budget allocations for state salaries, social protection, healthcare and education by just enough to make sure that the people do not rebel whilst at the same time they increase spending on areas of personal enrichment and aggrandisement. This indicates that they have no morality, no concern for the public good and no intention of expanding the total wealth of the nation unless they have a direct interest. Ukraine has developed over the past 20 years not into a functioning democracy but from a fledgling democracy into a classic Oligarchy and if it remains unchecked it can only get worse as the protagonists fight it out for ultimate control.

Is Euro-2012 more expensive than it is worth?

Expenses for the organisation of European football championship Euro-2012 may exacerbate economic crisis in Ukraine. Experts claim that Euro-2012 should bring in between 200 and 400 million USD profit (about 650,000 tourists are expected to come to Ukraine), however gross expenses may exceed 10 billion USD. Greece, for example, spent 11 billion USD on preparations for the Olympics but received only 2 billion USD in return. Outset estimates pitched the required developments for Euro-2012 at 280 million USD with the Ukrainian people expected to front 12%. The low investment attractiveness of Ukraine, misallocation of public funds and the lack of experience could potentially turn Euro-2012 from a celebration of football into a national economic disaster.

After visiting the partially constructed central football stadium in Kyiv, Vice-Minister Borys Kolesnikov noted that the 550 million USD already spent was quite reasonable and sits at 20% less than the expenses for the Warsaw stadium. President Yanukovych also visited the Kyiv stadium and promised that the construction would be completed in accordance with UEFA requirements by autumn at the latest. This year Ukraine faces the enormous pressure of paying back its multi-billion international debt, yet the new budget provides 18 billion UAH for the preparations for Euro-2012. To put the figures into perspective 9 and 18.5 billion UAH will be spent on health care and education in Ukraine this year respectively. A more covert issue is the overvaluation and non-transparency of championship expenditures. With the numbers to hand and the economic context in hand the answer to whether Ukraine can afford hosting Euro-2012 becomes quite obvious.

People First Comment:

When will the government of Ukraine understand that you can’t spend your way out of debt. The government’s debt mountain is one of the largest international debts in relation to GDP in the world and sooner or later somebody is going to have to pay the money back. The cost of Euro 2012 is completely out of control. How can Ukraine spend an estimated $10 billion on half of the Euro 2012 , Greece only spent $11 billion dollars on the whole of the Olympic Games whilst South Africa spent just $4.5 billion on the World Cup both of which are appreciably larger competitions. Financial control has simply been thrown out of the window and all on the excuse that the previous government messed things up…

In the government’s new budget the allocation for Euro 2012 is $2.4 billion, that’s double the amount allocated for health care and only a fraction less than that allocated for education in 2011. But the total bill is likely to be around $10 billion, therefore if the revenues are on target and the budget funds are real the government is going to have to find an additional $7.2 billion and this will be on top of the two tranches of around $25 billion each needed to pay international debts that will fall due at the same time. The chances of the nation being able to find $57.2 billion in time are unlikely especially when we see such profligate spending; therefore the people had better start planning now for the austerity measures that will undoubtedly follow.

In addition the government are predicting 650,000 tourists but Kyiv has only just been able to meet the minimum UEFA requirement of 7,500 hotel beds for the competition and few of the new hotels will be operational in time. Does this mean even more government expenditure to make enough accommodation available in time or do they envisage another tent city of type planned for Eurovision?

Absolute opacity in the Ukrainian "market economy"

Whichever market a company operates on in Ukraine non-transparency is an everyday norm. This issue is enshrined in a recent open letter to the President and Prime-Minister from the Ukrainian Union of Industrialists and Entrepreneurs, the Ukrainian Agrarian Confederation and the Ukrainian Grain Association. Entrepreneurs are particularly concerned with state price administration on the grain market, which among other factors is stifling competition. "Khlib Investbud" is currently establishing a monopoly on the grain market of Ukraine after being allocated large grain export quotas and other privileges. The Mass media has reported that local businessmen and Russian capital close to the President stand behind this potential monopolist. "Ukrtelekom", a state owned mass media group that held an effective monopoly, was sold-off which observers noted as indicative of the lack of transparency in the country. The new owner ESU - a subsidiary company of "EPIC" the Austrian investment and financial syndicate - bought "Ukrtelecom" for 10.575 billion UAH. Due to the fact that there was no competition, with only one potential buyer entered for the tender, and considering the buyers non-transparent financial assets, oppositional politicians and the mass media have pointed fingers at ties between the company and the President.

Olexandr Ryabchenko, head of the State Property Fund of Ukraine, commented recently on the privatisation plans for 2010-2014, which are expected to draw in about 10 billion UAH each year. His remarks reflected concern over the lack of transparency within the privatisation process and suggested that he fears state assets might be sold at reduced prices to people close to Ukrainian government. Monopolization within the Ukrainian economy, the introduction of non-transparent "game rules" with pro-government businesses having all the advantages might ultimately jeopardise the investment attractiveness of Ukraine leaving the modernisation of Ukrainian economy utterly unviable.

People First Comment:

How can a European Investment company based in Austria be the only company to comply with the terms of the tender to purchase Ukrtelecom? Only if the tender was specifically written to ensure that this was the only company that could comply. The only thing that is transparent about the sale of Ukrtelecom is the blatancy with which the government have sought deceive the public. This is exactly the same scenario that we saw over the initial sale of Krivorozhstal. It was sold off to ‘friends’, only to be repossessed by the following government and sold to legitimate bidders in a transparent auction. No doubt the same cycle will happen again…

What is even more confusing about this auction is that next year this government is going to have to find billions to repay national debts. These assets were a ready source of real income which they now appear to have been squandered. This will not go unnoticed by the IMF from whom this government is seeking to borrow billions or the syndicates of banks who expect to be repaid next year. Perhaps the government is basing their hopes on negotiating a roll over of the debts but this will be reliant on them proving their economic management credentials. Privatisations of this sort do little to inspire confidence and the financial world has a very long memory.

Power means personal enrichment in Ukraine

According to the "Focus" magazine rating of the wealthiest people in Ukraine for 2011, personal fortunes advance concurrently with political careers. Currently, Deputy Prime-Minister Andriy Klyuev and his brother Sergiy Klyuev are on 25th place with 900.8 million USD - a 100% increase since the Focus rating in 2010. Sergiy Tigipko, Minister of Social Policy of Ukraine, takes 30th place with assets increasing from 572 to 796 million USD.

The fortune of Valeriy Khoroshkovskyi, head of the Ukrainian Security Services, (42nd place) has increased from 357 to 430 million US dollars whilst Vice Prime Minister Borys Kolesnikov has appeared on the 59th place with 293 million US dollars.

"Focus" also reports that the number of Ukrainian multi-millionaires almost tripled - from 8 in 2010 to 21 people in 2011. The total private capital among them accounts for 58 billion US dollars. Vadym Novynskyi (US$2.63 billion) and Kostyantyn Grygoryshyn (US$2.169 billion) have become the wealthiest foreign citizens resident in Ukraine. Their fortunes are dwarfed however by those of the wealthiest locals, Rinat Akhmetov (US$15.59 billion), Igor Kolomoiskyi (US$ 5.323 billion) and Gennadiy Bogolyubov (US$4.975 billion). Ukraine remains crippled by major social problems and huge external debts with the majority of the population existing on a salary of less than 200 US dollars per month. It seems that the combination of politics and business, prohibited in the European Union and other democracies, remains the most profitable activity in Ukraine.

People First Comment:

The average growth of the top 50 oligarchs in Ukraine is in excess of 25% per annum which is extraordinary bearing the top levels of growth experienced by western banks who have some of the finest economic brains in the world is only around 8% over the same period. Are these oligarchs such brilliant business executives or do they perhaps have some alternative sources of profit that they are not admitting to?

According to a recent report by the respected investment house Sigma Bleyzer the Ukrainian economy may be expanding but only in direct proportion to the expanding world demand for raw materials. The whole Ukrainian economy is not only predicated on the fact that the world needs more but also it is focused on the business interests of an elite few. Future economic stability of the nation is now totally dependent on the whim of the steel, chemicals and coal barons… in fact they now literally control Ukraine and with it the future of everybody living here. Is it any wonder therefore that 34% of the nation really wants to leave and 39% of the work force already has?

The President may think he is in charge but in reality he to is just as much a hostage as every other citizen as if the barons decide to go in another direction there is nothing he can do about it. If they want to they can control the courts, the legislature, the militia and the security services simply because in this environment just about everything is for sale to the highest bidder. However we can take comfort from the fact that all Empires eventually implode through their own greed and Ukrainian oligarchies are no different.

Quote of the week:
We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can't have both.

Louis D. Brandeis
Associate Justice on the Supreme Court of the United States (1916-1939)

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