You're reading: Abromavicius: Unpunished corruption threatens economy

Maybe Aivaras Abromavicius should be Ukraine's prosecutor general rather than its economy minister.

Abromavicius, a Lithuanian native who has held the top job at the Ministry of Economic Development and Trade for 10 months, said it’s important for Ukraine’s democratic and economic future to punish corrupt lawbreakers. This is something that Prosecutor General Viktor Shokin has not achieved, despite commanding a national staff of 15,000 employees.

“The more the merrier. If you do not put people into jail and teach everyone else a lesson, then I think it’s going to be a longer journey to extinguish corruption,” Abromavicius said during an interview with the Kyiv Post on Oct 14. “It works. It has worked in all other countries. This is as old as, I guess, a thousand years.”

In Ukraine, people still feel that they can get away with corruption, the minister said.

This is seen in all layers of the government, especially in the 3,000 state-owned companies that are, collectively, bleeding $5 billion a year in taxpayer money through corruption and inefficiency.

“All of these companies steal money from citizens at the expense of modernization, creating jobs, at the expense of new technologies, and so on,” Abromavicius said. “Every single company continues to be run in the interests of private individuals.”

Some of the recent cases involved three state enterprises under Abromavicius’ supervision: Ukrhimtransamiak, Ukrtransmash and United Mining and Chemical Company. The minister has been battling to change the leadership of the companies, which he said are siphoning money through corrupt schemes.

After Abromavicius’ attempt to get rid of Ukrhimtransamiak head Viktor Bondyuk, the minister said he received a text message from David Zhvania, a businessman and former member of parliament, who said the removal is not the action of a “team player.” Zhvania could not be reached for comment.

Bondyk “took a sick leave,” the minister said. “He outlasted seven ministers, he knows all the tactics.”

That is just one example of the problems Ukraine faces with its state enterprises – about half of which are not working and most of which need to be sold, Abromavicius said.

But privatization sales are slow partly for justifiable reasons, he said.

Abromavicius and others want a law in place ensuring that oligarchs won’t get the winning bids and that the tenders will be open, transparent and competitive – with proper legal guarantees for the state and the buyer.

“We only want to be part of privatization that is transparent,” he said.

His privatization plan is to separate strategic enterprises from non-strategic ones. “Whatever is strategic, let’s keep it. Whatever is non-strategic, let’s sell it as soon as possible,” Abromavicius said.

Until then, however, Abromavicius said that the state will have a tough time running state enteprises properly.

As it stands now, most honest and qualified people will not take the top jobs without higher salaries than directors now get (approximately $500 per month). The low official pay encourages corrupt schemes – such as buying and selling from intermediaries and insiders at inflated prices. The right candidates also need personal security guarantees, since attempts to remove corrupt schemes encounter strong and potentially violent resistance.

“We have absolutely miniscule progress in appointing decent people,” the minister said.
Closing the non-operating state enterprises that continue to be a drag on the state is difficult because “you are not going to get a medal by shutting down 1,500 non-operating state-owned enterprises. It’s a lot of work and no credit whatsoever,” Abromavicius said.

The privatization process is also not simple. He said that every state company has its own story of corruption, while some are encumbered by salary or tax arrears while still more are in court cases “about who knows what.”

Abromavicius said that $5 million is needed just to close down non-operating state enterprises. “Maybe it’s a company with no revenue and hardly no assets but it’s still very capable of sucking out some budgetary funds,” Abromavicius said.

The relatively few strategic industries that the state should retain need to be transferred from ministries to a new centralized state structure that will keep all enterprises under one umbrella. “There are almost no countries that have banks managed by the Ministry of Finance or energy companies managed by the Ministry of Energy,” Abromavicius said.

For firms that are privatized, Abromavicius said that proper rules have to be in place to prevent theft and fraud in the sales.

“My proposal to the president and prime minister is: create mechanisms so that not only Russians cannot buy the largest 10-20 companies that will be put up for privatization but also Ukrainians,” Abromavicius said. Rather, he said, some enterprises should be sold to foreigners who are then obliged to live up to significant investment commitments.

“But we have another 1,700-plus companies that Ukrainians are more than welcome to buy, and particularly here I count on small- and medium-sized Ukrainian enterprises,” the minister said.

Privatization encounters stiff resistance for other, unjustifiable reasons in his view: Some don’t want any sales until they are in power and can benefit. Others are feeding off of the current corrupt schemes. And still more are skeptical about whether Ukraine is capable of conducting transparent privatizations.

If all goes well, Abromavicius said many if not most state firms can be sold off next year.
“We understood that there are going to be endless opportunities for manipulation with the price, tender process and so on,” Abromavicius said. “We only want to be part of a privatization that is transparent.”

Regarding another impediment to the economy – the monopolization of key sectors – Abromavicius said that it will take a long time to rectify the situation. He cited the example of Megapolis, a monopoly distributor of cigarettes. “When it comes to demonopolization of entire industries, it will take substantially more time,” he said.

Despite the obstacles, there have been significant achievements, and Abromavicius said he still enjoys his job. Some of the improvements include: an obligatory audit by leading international audit companies of all the top state enterprises, obligatory publishing of financial statements and the simplification of corporatization rules.

Another law on the creation of supervisory councils in state-owned companies with independent directors has also been registered, Abromavicius said.

The minister also cut his staff by 30 percent and expects to increase that to 50 percent by the end of November, while salaries will be raised for those who stay, creating a more positive work atmosphere within the ministry. He said that 90 percent of the top positions are occupied by new people.

The ministry also has been moving forward on deregulation by cancelling many licenses.

Abromavicius outlines a somewhat libertarian view of Ukraine’s economic future. He even supports two pillars of the so-called “vice” industries, including expansion of legal gambling and encouraging greater exports of cigarettes from Ukraine’s domestic manufacturers.

On other fronts, he noted the imminent arrival of the Office of Effective Regulation, financed by the European Union and Canada, to oversee the regulatory process. “It’s going to be absolutely independent,” he said.

“There are changes. But, you know, we all expected that these changes would be more substantial,” he said.

Abromavicius called for a “complete revamp” of the Prosecutor General’s Office. But, when asked whether he agreed that the “revamp” should include President Petro Poroshenko’s firing of Shokin, a presidential appointee, as many lawmakers are demanding, Abromavicius wouldn’t say.

His reluctance to criticize Poroshenko or Shokin by name points to a criticism that some have of Abromavicius: That he is too much of a “team player” to explicitly call out corrupt and incompetent officials by name.

Abromavicius said that is not the case. He said that he operates with minimal interference from Poroshenko or Prime Minister Arseniy Yatsenyuk. Moreover, the nation’s two top leaders have also insulated him and other ministers from retaliation, he said.

He said that, among fellow members of the Cabinet of Ministers, he works most closely with Finance Minister Natalie Jaresko, Agricultural Minister Oleksiy Pavlenko, Infrastructure Minister Andriy Pyvovarsky and Justice Minister Pavlo Petrenko.

While reluctant to personalize disputes, Abromavicius called the Prosecutor General’s Office a “sad situation” and said that “time is running out, so it’s time for some serious action.”

Rule of law will boost the economy and make it easier for him to pitch investment on his multiple trips abroad, since most investors prioritize rule of law ahead of all else, he said. “They just don’t want to invest in countries where there is no rule of law,” Abromavicius said.

Abromavicius has been among the most outspoken in the government on the corruption issue.
At the Yalta European Strategy conference in September, he said that investment will not come without progress in reducing corruption. “Improve the investment climate and fight corruption. The first is not possible without the other,” he said.

A thorough purge of the courts, the prosecutor’s office, customs and tax police is essential, much the same way that the nation formed new police patrols by firing the old ones, he said.

“Kick out everyone and bring in new people, substantially less people but with a higher pay,” Abromavicius said.

He is also in favor of bringing in more fresh blood into Ukraine’s governance, including more international observers, foreign advisers and Western-educated managers. Such appointments will decrease the susceptibility of government officials to domestic political pressures, he said.

“Most of those people that cover up for the embezzlement and those people that run these companies – none of them went to Yale or Harvard. So the schemes that they apply are not sophisticated,” Abromavicius said. “Just allow us to do our thing – minimum political interference, shield us from these political attacks, from all of these crazy people from the parliament and elsewhere, and we will deliver you the ‘goodies’ in terms of the results on deregulation, public procurement, a number of other things.”

Abromavicius sees 2015 as one of war, financial stabilization and partial improvements, while 2016 will be one of peace, building new institutions and achieving sustainable economic growth.
“If we stick around until December… we will make substantial progress. If we are going to stick around for two years, we will make a lot of progress,” Abromavicius said.

Kyiv Post chief editor Brian Bonner can be reached at [email protected] and Kyiv Post staff writer Ilya Timtchenko can be reached at [email protected].