Ukraine’s Zelenskiy Can’t Afford to Fail His Oligarch Test

(Bloomberg Opinion) -- Ukraine’s president, Volodymyr Zelenskiy, may be more popular in his country than Vladimir Putin is in Russia, but he’s facing his first crisis since taking office in May, and it could undermine his approval, at home and abroad. The trouble has to do with Igor Kolomoisky, a billionaire and the owner of the channel that distributed Zelenskiy's TV shows when the president was a comedian.

Kolomoisky's hopes of a major comeback under Zelenskiy are increasingly apparent. Such a comeback would mean a premature and inglorious end to Zelenskiy’s promises of a new beginning for Ukraine, one of Europe’s most corrupt countries. 

Kolomoisky was one of the biggest losers under the rule of former President Petro Poroshenko. Appointed by Poroshenko to the governorship of a region in southeastern Ukraine, he funded the volunteer battalions that helped stop the spread of Russian-backed separatism while the Ukrainian military was still weak. In return, Kolomoisky wanted more power and more access to lucrative state-controlled businesses than Poroshenko, himself a billionaire, was willing to give him. The two fell out; the conflict culminated in late 2016, when Ukraine nationalized Kolomoisky’s Privatbank, which held most of Ukrainians’ savings at the time.

The nationalization came at a cost to the government of more than $6 billion, but it was backed by international financial institutions. Ukraine’s National Bank said at the time that the bank’s shareholders, Kolomoisky first and foremost, had robbed it to the tune of $5.5 billion by getting it to issue loans to shell companies that were never expected to be recovered. The accusations were confirmed by an investigation by Kroll, the American risk-mitigation company, conducted for the National Bank.

Kolomoisky, who has multiple nationalities, was forced to hole up in Israel, which doesn’t extradite its passport holders. But he never gave up on winning back his bank, filing countless lawsuits in Ukraine to reverse the nationalization. His prospects in the courts, however, didn’t look promising under Poroshenko (the Ukrainian legal system isn’t free from political influences, to put it mildly). But as Zelenskiy looked poised to win the presidency in April, having beaten Poroshenko in the first round of the election, a Kiev court ruled in Kolomoisky’s favor. The International Monetary Fund, Ukraine’s biggest creditor, responded with a news release defending the 2016 nationalization, and the National Bank appealed the ruling, but Kolomoisky pressed on. After Zelenskiy’s victory on April 21, he returned to Ukraine.

Soon afterward, strange things started happening to Valeria Gontareva, who was the National Bank’s governor during the nationalization and fiercely defends it. In July, she told an interviewer she was getting threats from Kolomoisky and hiding out in London. In August, she was hit by a car on a London street and ended up in the hospital. And on Monday night, Gontareva’s house near Kyiv burned down, most likely as a result of arson. Gontareva has suggested Kolomoisky could be behind both incidents; he has denied it. The National Bank, meanwhile, issued a statement denouncing “terror” against Gontareva as directed against all Ukrainian reformers, former and current. 

Meanwhile, Kolomoisky is a welcome guest at Zelenskiy’s office. On Sept. 10, he met with the president and several administration and government officials. The official story is that strikes at Kolomoisky’s factories and energy tariffs were discussed. But on Tuesday, the Financial Times published a story quoting Prime Minister Oleksiy Honcharuk, who was at the meeting, as saying the president wanted to reach a settlement with Kolomoisky over Privatbank. “I am very positive about any rhetoric directed towards searching for a compromise,” Honcharuk told the paper.

The prime minister quickly issued a statement in response to the story, saying his government was “carefully studying the Privatbank situation” and “not conducting any negotiations with anyone.” That, however, isn’t much of a denial considering the Financial Times said it was the president who wanted a settlement. Honcharuk was proposed for the prime minister’s job by Zelenskiy’s chief of staff, Andriy Bohdan, who used to do legal work for Kolomoisky. 

The Privatbank case is a complex legal tangle. Kolomoisky isn’t necessarily guilty of everything the National Bank tried to pin on him under Gontareva, the Kroll report notwithstanding. But his return to Kyiv, his excellent contacts in the new administration, the sudden brightening of his prospects in the courts, and Gontareva’s troubles form a chain of coincidences that looks increasingly damaging for Zelenskiy. 

The new president has been lucky so far. Ukraine is enjoying an economic boost from a record grain harvest, a recent European Union court ruling has strengthened its position in energy talks with Russia, and a successful prisoner exchange with Moscow has set the stage for progress in ending the conflict in eastern Ukraine. Zelenskiy appears to be hoping his early successes and his young administration’s good intentions will overshadow the Kolomoisky issue for most voters, even if he makes a deal with the oligarch. But any kind of settlement that would either reverse the nationalization of Privatbank or allow Kolomoisky to get away with not covering the cost of the bailout would signal to the world, if not yet to most Ukrainians, that Zelenskiy may be no different from Ukraine’s previous leaders, who were often venal, beholden to oligarchs or both.

Coming to power on a platform of all-encompassing change imposes certain obligations on a politician and his team. Kolomoisky isn’t someone willing to play by any new rules, and that alone should make Zelenskiy and his appointees extra careful and refrain from any dealings with him. Ukrainian politics is a slippery slope, and before the president and his team know it, they could be as indelibly tarnished as their predecessors. Zelenskiy needs to prove that he’s not going to use his power to help old friends and partners. Cutting off Kolomoisky’s access, and publicly supporting a speedy investigation into Gontareva’s troubles, would be a start.

To contact the editor responsible for this story: Tobin Harshaw at tharshaw@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

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