Russia’s presence in Ukraine economy may become even bigger


Three years after the Russia’s aggression on Crimea, Russian businesses are feeling very much at home there. Capital from the north does not lose ground, but is gaining new outposts.

According to the data provided by the State Statistics Service of Ukraine, Russian businesses invested USD1.67bn in Ukraine in 2016, which constitutes almost 38 per cent of last year’s foreign investments. Formally, in the same period more funding was received from the European Union, at USD1.97bn. However, nearly USD428m of Cypriot investments is in fact domestic Ukrainian capital – first diverted to Cyprus as a tax optimization, and later reintroduced to Ukraine by oligarch corporations.

The western Europe looks even bleaker in this comparison if one takes a look at investments broken down into EU member states. USD403.9m of capital came from the United Kingdom, i.e. four times less than from Russia, USD255m arrived from the Netherlands and USD250m from Austria. Similar to the Cypriot inflows, this capital in reality belongs to Ukrainian owners of companies registered in the respective countries.

“Europeans” with Russian passports

The process of the “Europeanization of Russian capital” was first described by the Ukrainian news portal Donetskye Vesti in summer 2016.

According to the journalists’ findings many Russian companies had changed their names, and their formal ownership was placed in the hands of citizens of Cyprus and other states. “Nevertheless, there is indirect evidence that not only do the citizens of the aggressor country have serious business interests in Ukrainian business, but they also maintain monopolist positions in many areas of the economy. Should the Kremlin choose to use this advantage against Ukraine, we are in for a really rough ride. Currently, Russia appears to content itself with siphoning off profits and having a political influence in Ukraine, which comes in tandem with controlling big business,” Donetskye Vesti concluded.

Russia exercises immense influence over the banking sector, the strategic energy sector and mobile telecommunications (the two largest telecoms are in Russian hands: MTS, which is owned by AFK Sistema and recently started to use the European Vodafone brand, and Kyivstar).

Russian banks are the Kremlin’s financial leash

According to the data of the Association of Ukrainian Banks, approx. 40 per cent of capital in the Ukrainian banking sector is Russian-owned. Seven Russian banks operate in Ukraine: Sberbank, VS Bank (a daughter company of the state-owned Sberbank of Russia), VTB and its subsidiary BM Bank, Prominvestbank (a daughter company of Vnesheconombank), as well as Alfa-Bank and Forward Bank, whose Russian owners hide behind the backs of Western intermediaries.

The strong position of Russian capital in the Ukrainian banking sector has long been a source of anxiety for Ukrainian business.

“Russia has not succeeded in conquering us by force, so it might try other methods. Within a couple of months Ukrainian businesses may no longer belong to Ukraine. Something must be done to prevent an annexation from within,” warned lawyer Oleksandr Ogiytschuk, who was asked for a comment by the business news broadcaster UBR in autumn 2015.

Volodymyr Lanovyi, former Ukrainian Deputy Prime Minister and Minister for Economy, underscores the lack of proportion between the volume of Russian capital present in the banking sector compared to its meagre 14 per cent share in the provision of banking services in Ukraine. This proves, he believes, that the intention of Russian banks is not so much to earn money, as to control the Ukrainian economy.

“These banks are here to aid in the execution of these or other plans, to their own detriment. The Kremlin will cover the losses of its banks, because they have not come here to make profits or for opportunities to invest. Their banking activities do not benefit Ukraine. We are told that these banks keep our shaky banking sector together. In reality, they are useless to us in terms of investment and lending,” Volodymyr Lanovyi argued in an interview by Hromadske Radio.

Vasil Furman, member of the board of directors at the National Bank of Ukraine, is of a similar opinion. He believes that Moscow exercises control over the Ukrainian economy through Russian banks.

“There is no private property nor market economy in Russia. Russian banks have come to Ukraine to lend and finance Russian enterprises and the oligarchs. They do it to control our economic space, as well as the electoral and political processes, they do it to further their expansion,” he told Ukrainian media in March.

Energy sector for a Kremlin man

Russia’s influence has also been intensifying in another strategic industry – the Ukrainian power industry. In March, the Ukrainian antitrust committee allowed VS Energy to take over state-owned shares in Chernivtsioblenergo, a regional distributor of electricity in Bukovina.

VS Energy is owned by Alexander Babakov, an MP from the pro-Putin United Russia (Yedinaya Rossiya), who in 2014 voted in favor of the annexation of Crimea in Russia’s State Duma. The Russian parliamentarian, and Vladimir Putin’s advisor in matters of cooperation with Russian organizations abroad, is not officially engaged in business in Russia. However, he is considered one of the wealthiest businessmen in Ukraine.

Babakov considerably consolidated his stake in the Ukrainian economy at the time when Petro Poroshenko was the Minister of Economic Development and Trade in the pro-Russian government formed by Mykola Azarov. According to the data of the State Property Fund of Ukraine, from the autumn of 2012, the holding group VS Energy, owned by Babakov, was the 6th largest buyer of Ukrainian state property, having spent USD210m. In 2015, it already controlled one third of Ukraine’s electricity distribution market.

“This combination looks astounding indeed: Babakov, a secret oligarch, earns a fortune in Ukraine, which he invests in France – by helping out the French alt-right. The French alt-right, having received the money, pays back with adoration for Putin and lobbying for the international recognition of the Donetsk People’s Republic. He is using Ukrainian money to destroy Ukraine and grease the palms of European politicians. How lovely! The fact that this scenario is played out by the very Babakov who is on the European sanctions list adds spice to the situation. To me, Babakov’s case is one of the most inexplicable issues in today’s Ukraine,” said Alexei Navalny, quoted by the Ukrainian portal in the autumn of 2014.

“Many people accuse the Ukrainian authorities of being inconsistent. But the recent events prove them wrong completely. As they were selling Ukrainian property to the Russians back in 2014, so they keep on doing it today. It should be recalled that the power industry is a critical branch of the economy. They laid their hands on Oblenergo even earlier. But now? After the annexation of Crimea and at the time of Donbass? To the aggressor state? It is as if the Council of People’s Commissars decided to sell the oil fields of Baku in 1942 to the Germans,” writes the Hvylya portal (the portal is linked with the think-tank Ukrainian Institute for the Future).

The consent of Petro Poroshenko’s cabinet to the dominance of Russians in the Ukrainian energy sector is a source of bewilderment abroad as well.

“It is a strange situation indeed, when Ukraine demands that the West impose sanctions against Russia – both individual and industry ones – but the Ukrainian authorities themselves for some reason fail to apply sanctions at home. This remark recurs quite frequently in conversations with Western diplomats,” commented Andriy Levus, a member of the Verkhovna Rada of Ukraine.

Will the shipbuilding industry end up in Russian hands?

In March, the media informed of a risk of Russians taking control of one of the most important factories of the Ukrainian shipbuilding industry: the NSZ Okean plant in Nikolaev. The entity attempting to gain control, via the court of law in Kiev, is Zonel Operations Ltd, registered in Cyprus, a company connected with the former Russian energy minister Igor Yusufov. Its representatives have submitted to the court that the property of the plant be released to them free of charge. “Should that happen, control over Ukraine’s most modern shipyard will be given up to the inner circle of Vladimir Putin,” writes, the local website of the port town.

When describing the sequence of events which accompanied the preparation for the takeover of the shipyard, the media again recounted an operation of the Security Service of Ukraine, which helped the Russians in the forceful seizure of the plant’s premises last autumn.

Michał Kozak,

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