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Central & eastern EuropeSeptember 3 2006

Billionaires, their politics and their big business empires

Captains of industry or oligarchs? Many of Ukraine’s billionaires rub shoulders with politicians and some even taken up office themselves. Ben Aris reports on how the political tides are buffeting the country’s richest men and how they made their fortunes.
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“Millionaires are making money and billionaires are making history,” Ukrainian billionaire Viktor Pinchuk boasted to a group of journalists in July, while standing with his back to the Livadia Palace on the Crimean riviera, where Stalin, Churchill and Roosevelt held their historic conference in the closing phases of World War Two.

Ukraine’s second wealthiest man, Mr Pinchuk is busy trying to remake his image. Married to former president Leonid Kuchma’s daughter, he was a big winner from close ties to the state during the previous regime. However, since Mr Kuchma was ousted in the Orange Revolution in the winter of 2004/05, Mr Pinchuk has suffered more than any other oligarch from the change of guard. He did not bother to defend his parliamentary seat in March’s elections and is trying to recast himself as a “clean hands” captain of industry.

“I am a businessman. I am not oligarch,” says Mr Pinchuk. “I am not connected either to politics or to power. I am a big Ukrainian businessman, who wants to take an active part in his country’s social life.”

In July, Russian language magazine Korrespondent, the English language newspaper Kyiv Post and Ukraine’s leading investment bank, Dragon Capital, produced Ukraine’s first comprehensive rich list that contains 30 names worth a collective $38bn. Russia’s economy may be 10 times bigger but Ukraine sports more billionaires per head, although the top three Russians (Roman Abramovich with $18.3bn, Oleg Deripaska with $14.2bn and Vladimir Lisin with $11.3bn) have more money than the entire Ukrainian rich list taken together.

The Ukrainians are catching up fast. After a brief pause caused by the revolutionary brouhaha, the economy roared back into life this year. Ukrainian asset prices tripled in 2004 and doubled again in 2005. Now that oligarchs have smelt the change in the wind and begun to open up their companies ahead of tapping international capital markets, valuations are expected to rise again; it is much harder to renationalise a company if some of its shares are listed on the London Stock Exchange.

Ukraine’s three richest men are easy to identify because they head the three business clans that are centred in Ukraine’s three main cities. Rinat Akhmetov is by far Ukraine’s richest man and controls steel mines in the Donbass. Mr Pinchuk is the head of a pipe and media empire centred in Kiev. And the reclusive Ihor Kolomojsky, who comes in at number three, heads the Privat group financial-industrial group, headquartered in Dnipropetrovsk.

Under Mr Kuchma, oligarchs made money by being close to the government but, under president Viktor Yushchenko, Ukraine’s new path clearly leads to closer ties with the EU and deeper integration with global capital markets. Mr Yushchenko’s election has catalysed a move towards initial public offerings (IPOs) and increased transparency that had already begun in 2003 on the back of blistering economic growth.

The house cleaning should accelerate after Mr Yushchenko was forced to bury the hatchet with his nemesis, former prime minister Viktor Yanukovych, in August and give him his old job back. The deal brought a dramatic end to the Orange Revolution, but has been welcomed by businessmen as a ‘grand coalition’ between the old and new guard that offers the best prospects of reuniting a country that was split down the middle by the regime change.

Steel is the source of the biggest fortunes; Ukraine is the seventh biggest producer in the world. However, unlike in Russia – the only other country in central and eastern Europe to boast billionaires – banks have played an important role in creating the rich list: only 16 of Russia’s 100 richest men own significant bank assets, whereas 18 of Ukraine’s top 30 own big banks. Only one Russian (Vladimir Kogan) owes his wealth entirely to banking, whereas five Ukrainians have earned their fortunes exclusively from financial services.

The Korrespondent-Kyiv Post rich list is a first stab at guessing who has the most money. But even the analysts at Dragon Capital, which made the calculations, say the numbers are only “guesstimates” because Ukrainian business remains opaque. For example, the name of Ukraine’s eighth richest man, Dmytro Firtash, would not have come up last year, but he ended years of speculation a few months ago by admitting to being the owner of RosUkrEnergo, which handles all of Ukraine’s gas trading with Russia, and is thought to be worth $1.4bn.

To rub the point in, the state tax authorities said only three Ukrainians declared incomes of more than Hrv1bn ($200m) in 2005, while another 20 declared more than Hrv500m. The tax service said it “supposed” there were more people who earned more than Hrv1bn, who probably had “not yet filed declarations”.

“I think it’s good that the country has legal businessmen like us and we are developing,” says Mr Pinchuk. “I understand that rich people are not loved by everyone. But politicians should not heat up this hatred in the society. Better to say that business is necessary for the development of the economy. The country should be proud of its businessmen, rather than treat them harshly.”

Rinat Akhmetov is the undisputed king of Ukraine’s oligarchs. Worth an estimated $11.8bn, he is more than three times as rich as his next nearest rival, Mr Pinchuk. Despite his high profile, no-one is sure how he earned his first million or what jobs he did before heading the Shakhtar football club, where his career apparently started.

Once an unknown figure who enjoyed close ties to the Kuchma regime, Mr Akhmetov is the financial force behind Mr Yanukovych’s Regions of Ukraine party, the biggest faction in the Rada. He came out of the shadows in March to be elected an MP and has been a key figure in the negotiations with Mr Yushchenko to form a new government. At least 20 of his associates also won seats (including the director, the general secretary, the head of security and the assistant to the president of the Shakhtar football club). In effect, Mr Akhmetov heads the fourth largest, but unacknowledged, faction in the new parliament.

Mr Akhmetov is the head of the holding company Systems Capital Management (SCM) that became internationally known after he dropped an estimated $20m in an international media blitz last summer – as much to buy some political insurance as to promote his company.

However, an astute businessman, Mr Akhmetov has tacked as the wind shifted and is rapidly cleaning up his companies ahead of possible IPOs in the next few years. His various businesses are being regrouped in a number of management companies that will be sold or floated.

The basis of his wealth is a steel empire that has boomed on the back of sky-high international process and these assets are already collected in the MetalInvest holding. His energy assets – mostly located in his home town in the Donbass region – have also been gathered together in the Donbass Fuel & Energy Company, which controls 15% of Ukraine’s power-generating capacity. The SCM empire includes machine-building and telecoms companies.

Viktor Pinchuk has been having a hard time since Mr Kuchma’s fall. Originally from Dnipropetrovsk, he was the leading member of the Kiev politico-commercial clan that drew its power from a close association with Mr Kuchma. Mr Pinchuk’s wife is a major stakeholder in Kyivstar – one of two mobile phone providers slugging it out for dominance of a market that reported 75% penetration in July.

Faced with the thousands of demonstrators on Maidan Square in central Kiev during the Orange Revolution, Mr Pinchuk gave up his parliamentary seat (and his immunity) this spring and has vowed to withdraw from politics. He has been trying to navigate the rough waters of regime change with the minimal damage, but the going has been choppy. In April, the general prosecutors office opened two criminal investigations into privatisations that his Interpipe holding company won.

Mr Pinchuk bought the Nikopol Ferroalloys Plant in 2003 for $80m although the company is estimated to be worth about $1bn. Ms Tymoshenko personally headed a campaign to have the plant returned to the state until Mr Yushchenko sacked her last autumn. The dispute over the Nikopol Ferroalloy plant is still ongoing.

In a second deal in 2004, Mr Pinchuk bought the Kryvorizhstal steel mill in a controversial auction for $800m together with Mr Akhmetov. One of the first actions of the Yushchenko administration was to renationalise the plant and resell it to Indian metallurgical tycoon Lakshmi Mittal for an eye-popping $4.8bn less than a year later.

Mr Pinchuk is a keen art collector and is funding a movie directed by Steven Spielberg about Babi Yar, the site of the slaughter of tens of thousands of Jews just outside Kiev during World War Two.

Like several of Ukraine’s oligarchs, Mr Pinchuk got his start by supplying natural gas to cash-strapped, state-owned companies, but soon expanded into pipe manufacturing. Today, the Interpipe financial industrial group is one of the major suppliers to Russia of gas and oil pipes, and includes the Nyzhnedniprovsky pipe-rolling plant and the Novomoskovsky pipe plant.

More recently, Mr Pinchuk has been diversifying. He now controls four broadcasters and two newspapers. He has said that he intends to IPO some of his broadcast assets and, despite his political retirement, his grip on the media means he retains considerable power in Ukraine.

Ihor Kolomojsky is the driving force behind the Privat group, which was founded in 1992 and is closely aligned with Ms Tymoshenko.

Based in Dnipropetrovsk, the Privat group is the third of Ukraine’s business clans and was the least political until recently. Unlike the other major groups, which are one-man shows, Privat is controlled by three men, who are united by their orthodox Jewish beliefs and are active members of Ukraine’s Jewish community.

Unusually, Privat’s success is built on banking rather than raw materials. Mr Kolomojsky founded Privatbank with his partner Hennady Bogolubov in 1992 with $1m of capital.

The members of Privat group keep such a low profile that the local press is not even sure where they live. Mr Kolomojsky is reported to live in Geneva, only visiting Dnipropetrovsk occasionally. Mr Bogolubov is a well-known philanthropist but Mr Kolomojsky is said to have rebuffed all of president Mr Yushchenko’s approaches to play a more active role in developing Ukraine’s society, and he remains something of a recluse.

From banking, the Privat group moved quickly to capture Ukraine’s oil sector. Although the country does not have enough oil and gas to meet its own needs, the country inherited a significant refining sector from the Soviet Union. Privat either owns or is a partner in three of the seven big refineries with a 42% market share producing 420,000 barrels a day – enough to entirely cover domestic demand.

The group also holds 42% of Ukraine’s dominant oil producer, Ukrnafta, which accounts for 90% of the country’s oil production. The state owns 43%. After taking office, Mr Yushchenko ordered the privatisation of the state’s stake in Privat but the attempt quickly ran aground in the Rada. The group also has a stake in Naftohaz Ukrayiny, the state-owned gas monopolist.

Privat’s third direction is metals. It has a tight grip on Ukraine’s ore market, which it has leveraged into control or influence over the ferrometals industry at home and abroad. The group controls the Stakhanovsky Ferroalloy plant and is in the middle of a fight for control of the Nikopol Ferroalloy plant with Mr Pinchuk.

Like any self-respecting oligarch, Mr Kolomojsky has a football team: Dnipro, based in Dnipropetrovsk.

Hennady Bogolubov is co-founder of the Privat group. There are few details available about his past. He is reported to live in Germany and rarely appears in either Kiev or his hometown of Dnipropetrovsk.

An orthodox Jew, he is president of Ukraine’s Jewish association based in Dnipropetrovsk, and actively supports its various social programmes.

Camera shy, he made his first fortune in the early 1990s, trading in computer parts, before setting up the country’s first privately owned bank together with Serhiy Tyhpko, who later left to pursue politics and was Ukraine’s central banker until last year.

Privatbank was founded with $1m in capital and has since grown into the biggest and most successful commercial bank in the region and the biggest retail bank in Ukraine, with an estimated $1bn in capital as at the start of this year, and has the largest retail network in the country with more than 1400 branches.

The group is less well defined than its peers: the three main partners have large stakes in all their businesses – Mr Kolomojsky and Mr Bogolubov hold about 40% each in the group – but they work together with a variety of partners in the different businesses.

And both owners’ decision to maintain homes abroad belies their regional ambitions, as in the past few years they have been snapping up assets abroad: the group also controls ferroalloy plants in Romania, Russia, Poland and the US.

Konstantin Zhevago was only 19 years old when he hit the big time. Appointed the finance director of Finance & Credit, one of Ukraine’s largest banks, when most of his friends were still at university, it only took him a year to become the manager of the Poltava Ore Mining & Enrichment Works, which forms the foundation of his empire.

Known affectionately as ‘little Kostya’ by colleagues, Mr Zhevago is at least 10 years younger than his peers in the business elite and Ukraine’s youngest billionaire, believed to be worth $1.9bn.

Using the bank and mine as the basis for a financial-industrial group, Mr Zhevago quickly expanded, adding the country’s leading automaker AvtoKraz and tyremaker Rosava among others. Automotive sales are booming in Ukraine and in July AvtoKraz’s sales had nearly doubled to $121m after it boosted production by more than half last year.

Poltava remains a major asset for the group. In January, Mr Zhevago confirmed plans for an IPO of the mining company on international markets, but so far has not set a date. The group has announced it will pump $2bn in to the construction of brand new, state-of-the-art metallurgical plants in Ukraine and Hungary. Ferrexpo, one of the group’s holding companies, aims to create a vertical production chain from pellet production to the manufacturing of rolled products in Hungary, which could then be shipped directly to EU markets. And Mr Zhevago wants to move into transport with a project to build a deepwater port on the Black Sea.

His empire was built on a combination of business nous, good timing and excellent connections. In his early years, he was allied with the powers in Kiev and Mr Kuchma’s right-hand man Viktor Medvedchuk in particular. Later, he fell in with gas-trading kings Igor Bakai and Oleksandr Volkov, who were also close to Mr Kuchma in the late 1990s.

Mr Zhevago has also played the political game: he was first elected to parliament in 1998 but has changed camps with the changing of the political winds. Today, he is a member of Ms Tymoshenko’s eponymous bloc, but has backed both horses as his close associate Oleksiy Kucherenko is a member of Mr Yushchenko’s Our Ukraine.

Serhiy Taruta is chairman of the Donetsk-based Industrial Union of Donbass (IUD), one of the biggest metallurgical concerns in the country, which is also Mr Akhmetov’s home.

His rivalry with Mr Akhmetov is not limited to the business world – both men regularly meet by proxy on the football pitch: Taruta owns several football teams, the best of which is Donetsk-based Metallurg. However, as in business, he has failed to beat Mr Akhmetov’s Shakhtar (Miners) in the Ukrainian football league.

Mr Taruta shares control of his empire with his partner Vitaly Hayduk (the seventh richest man in the country) in an almost 50/50 split. The group is based in the eastern regions, including Donetsk, where much of Ukraine’s steel industry is located.

The origin of his wealth is fairly typical: he made his first million supplying natural gas to cash-strapped, state-owned companies. These companies paid for the energy supplies in barter, which could be exported.

His big break came in 1995, when he did a brief turn as head of the foreign economic activity department at the Mariupol-based steel mill Azovstal, where he set up a payment scheme that involved swapping pipes for gas. This scheme turned into IUD and, flush with export cash, went on to gobble up the country’s most promising steel industry assets during privatisation or forced bankruptcies.

In recent years, IUD has begun to move abroad, buying steel mills in the Czech Republic, Poland and Hungary, and has also been diversifying into hotels and media assets.

Mr Taruta has dabbled in politics but, because he is not aligned with any of the main parties, he has maintained a reputation as largely independent: although he has been sympathetic to the Orange Revolution goals.

Additional reporting by Olesya Oleshko

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