Ultimately, national affairs slid backwards into gridlock, authoritarianism and questionable government practices.
Still, the potential signing of an association agreement with the EU in late 2013 could provide some hope.
Can the rule of law and Western-style democracy take hold there?
Oddly enough, a court case in England might provide some of the answer.
London is now home to another large-scale litigation suit between oligarchs from the former Soviet Union.
Victor Pinchuk, the founder of the pipe and wheel producer Interpipe and the investment vehicle EastOne, is suing Gennadiy Bogolyubov and Igor Kolomoisky, business partners and co-founders of Privat Group.
Why should Western societies care about this case?
Because it carries significance beyond the dispute itself.
Ukraine needs a business climate where agreements are fulfilled, investments are secure, courts take independent decisions regardless of who the claimants are.
Then international investors will flow in, small and medium business will develop, competition will foster innovation and efficiency, and the country will finally be able to fulfill its vast potential.
To get there is a step-by-step process, working with imperfect material – as Ukrainian business was created in muddy circumstances.
Any step forward is to be welcomed, and the London court struggle could be a crucial one.
None of the men involved in this suit are perfect –not by any means.
Most people understand that rising out of the post-Soviet collapse to become an oligarch required questionable dealings, however decent your intentions.
But meanwhile, Ukrainian business has evolved, and so have its protagonists, albeit some more than others.
Ukraine could be at the threshold of a more benign business environment – if a more “Western” way of doing business and resolving conflicts can gain ground.
An independent lawsuit between powerful players will not only be fascinating, because it sheds light on how Ukrainian business empires were created.
It can also set a powerful precedent for solving corporate conflicts fairly and transparently.
Pinchuk’s suit, currently in English High Court, stems from an alleged breach of contract and breach of trust by the duo, Bogolyubov and Kolomoisky.
The nature of Pinchuk’s claim is simple: Bogolyubov and Kolomoisky are holding Pinchuk’s property illegally.
Pinchuk’s suit asserts that they sold him a shell company, Alcross Commercial Ltd., for $143 million in 2005.
They told Pinchuk that Alcross owned Krivorozhskiy Zhelezorudnyy Kombinat (KZhRK), a Ukrainian ore-mining company.
In reality, Alcross was worthless.
They have continuously promised to transfer the assets of KZhRK to Pinchuk but failed to do so—and then, in 2007, they turned around and sold about 50 percent of KZhRK to a third party.
They thus sold a stake in a business they did not own.
Written evidence in the case is by no means extensive, it being common practice in the post Soviet time to do business in that way.
The prima facie arguments in the claim look coherent enough to go to court.
Bogolyubov’s lawyer declared that his client regards the claim “as misconceived and will be vigorously defending it.”
The truth will come out only during the court proceedings.
This will surely be fascinating to watch because, as I made clear earlier, there are colorful people involved in the dispute.
Bogolyubov and Kolomoisky fostered strong reputations as corporate raiders in the mid-2000s, becoming notorious for a series of hostile takeovers.
Hostile takeovers Ukrainian style, that is, which often included the active involvement of Privat’s quasi-military teams.
These schemes included, among others, a literal raid on the Kremenchuk steel plant in 2006, in which hundreds of hired rowdies armed with baseball bats, iron bars, gas and rubber bullet pistols and chainsaws forcibly took over the plant.
More recently, Aerosvit Airlines, which according to the media was controlled by Mr. Kolomoisky, declared bankruptcy in 2012, stranding thousands of Ukrainians in Ukraine and abroad.
The Financial Times, when reporting on Kolomoisky’s recent conflict with UK company JKX Oil & Gas, stated in no uncertain terms, that “in Ukraine they [Kolomoisky and Bogolyubov] are called ‘The Raiders’”.
Privat Group has been involved in several court cases and arbitration proceedings in the US, UK, and Sweden.
In 2009, a US court made clear its distrust of Privat representatives:
“The Court has become increasingly skeptical of these gentleman [at Privat] and the credibility of their statements.”
Also, Bogolyubov has been involved in a lengthy dispute with OMH Holdings, an Australian mining company, over the attempted merger with his own Consolidated Minerals.
To quote OM Chief Executive Peter Toth:
“It is clear to me that ConsMin is prepared to exhaust an endless supply of legal and corporate antics to frustrate, slow down, undermine and de-stabilise the company from executing its strategic initiatives at a critical point in time, in order to pursue their own individual agenda and achieve their own strategic objectives.”
Mr. Pinchuk himself has been accused of questionable practices, mostly alleged favoritism from his close association with former President Leonid Kuchma – his father in law.
When Pinchuk and Rinat Akhmentov won the public tender for the state-owned steel plant, Kryvorizhstal, in 2004, Kolomoisky claimed favoritism.
Following the election of former President Victor Yushchenko, then-Prime Minister Yulia Tymoshenko renationalized Kryvorizhstal and held a new privatization tender in 2005 – a decision that Pinchuk and Akhmentov currently have on appeal in the European court.
Kolomoisky and Bogolyubov also claimed they had been excluded from the bidding process for another state company, the Nikopolsky Ferroalloy plant, because Pinchuk used his close relations to the President to make sure his own bid would be successful.
When Pinchuk acquired the Nikopolsky plant, they not only challenged the privatization in court – unsuccessfully.
They also tried a violent takeover that was rebutted by workers protecting the plant.
Pinchuk has refuted allegations of favoritism and insisted he played by the rules and did not have more favorable conditions than other big businesspeople in Ukraine at the time.
While he admitted in an interview, unusually for a Ukrainian businessman, that as the President’s son in law he maybe should have stayed away from the deal, he claimed it was legal and the price paid was relatively high compared to other privatizations.
But the above allegations do show that there have been questions raised about how Pinchuk has operated.
So all of the men in involved in this suit have had questions raised about their actions in the past, albeit different ones.
In the end, though, what matters most is their standard of conduct from that time to the present, and potentially into the future.
Not least because it will determine whether or not the world wants to do business with Ukraine.
Kolomoisky and Bogolyubov also made headlines more recently – trying to “export” their professional practices abroad, practices that endure from the muddy post-Soviet transition era, flabbergasting Westerners who have been affected.
As a US judge pointed out in December 2010, when talking about the business behavior displayed by Privat in the US:
“Your clients need to understand that they chose this country to do business, and they chose this court to file a lawsuit, and they will be held to the standards of this country and these rules, not their culture and their rules.”
There was a similar reaction recently when Kolomoisky and Russian businessman Alexander Zhukov in London failed in the attempt to oust Paul Davis, CEO of the above mentioned British firm JKX and to replace the management with their own people.
Davis is an executive with extensive experience in the oil and gas industry and in doing business in the former Soviet Union.
Coverage of this battle has been extensive.
While the approach was civilized by Kolomoisky’s and Bogolyubov’s standards in Ukraine (no chain saws and baseball bats involved), its heavy-handedness shocked shareholders in the UK.
In fact, it shocked them so much that a British shareholder asked Kolomoisky and Zhukov to “get their tanks off our lawn” in the shareholders’ meeting.
And even though there had been dissatisfaction with the current management before amongst shareholders, they rallied to vote 99% against Kolomoisky’s and Zhukov’s companies’ proposal to change the management.
In Australia, Consolidated Minerals was successfully taken over by the duo with the approach of buying shares as seemingly separate buyers, thus circumventing regulations for informing shareholders or receiving permissions (as reported by the media in October 2007).
This attempt to export a light version of corporate raiding Ukrainian style was successful.
Such an attempt has failed in London, at least for the time being.
The lawsuit of Pinchuk against Bogolyubov and Kolomoisky is meaningful not only because he stakes are high:
KZhRK could be worth more than $1 billion, as experts have said.
This is about more than money:
Making an example, among Ukrainian oligarchs, of how Western courts solve business conflicts will be a landmark for those in Ukraine who believe in the future of their nation’s commerce and societal standards.
Mr. Pinchuk has for over a decade presented himself as a leader in modernizing Ukrainian business and developing a culture of corporate social responsibility and philanthropy.
Strangely enough, he may end up doing at least as much good for his country with this lawsuit as with his philanthropic activities, even though in this case his goal is limited to getting an asset which he says he bought.
His decision to take the case out of dark backrooms, where pressure and deception rule, to an English court for an open court proceeding may be a game changer.
English courts and society may be tired of post-Soviet businessmen bringing their entangled and messy deals to London.
But when trials, as this one, offer an opportunity to set an example of fair and impartial legal rulings in post-Soviet business disputes, thereby injecting the culture of rule of law into those practices, the mission is worth the effort.