Is Ukrainian Flight Capital Flying Back Home?

By Wolodymyr Derzko

Since Ukrainian independence, enormous sums of money have flowed out of the country.  For 15 years, Ukraine’s nouveau riche have invested their money outside of Ukraine. But, several indicators suggest that this trend might be reversing. 

To understand what is happening in Ukraine, it is useful to look at the history of America, which went through a similar evolutionary process. During America’s Wild West days, many families made their fortunes through ways that would now be thought to be shady or illegal.  Largely to evade taxes, their capital often did not necessarily find a place at home either.

The American nouveau riche sent their children to foreign schools overseas and did little to support the US economy.  In time they were forced by the US government to become legitimate.  They were given a choice to either pay their fair share of taxes or go to jail. And, these families eventually became more nationalistic and sent their children to private American schools and created foundations and endowments that to this day support major American universities, such as Harvard, Yale and Princeton.

A similar process may be beginning in Russia, where billionaire Roman Abramovich, once hounded by the State, recently funded an MBA business school.

And in Ukraine, there are signs that the outward flow of capital is reversing. This is happening partly due to external factors. Investing money in Russia, where much of Ukrainian capital had gone, is not considered safe. Turf wars between mafia groups go unabated, and contract killings remain a common means of settling accounts, eliminating competition, or suppressing media criticism. It is estimated that in 2003 organized crime gangs were responsible for some 5,000 contract killings in Russia.

Also, Ukrainian oligarchs have learned that making money in the West isn’t as easy as they thought. There are more natural advantages and opportunity windows for them at home.  A booming construction and real estate market in Ukraine has been one attractive place to park excess cash. 

Recently another recent popular area has been social and humanitarian projects that build political capital and leave a lasting legacy for the donor’s family name. Questions do remain about whether this newly acquired money was stolen from the people and state. I believe that this is an issue for the Ukrainian legal system to challenge and the courts to rule on, as was done in the case of the Kryvorizhstal steel company, which was eventually bought by Mittel.

Undoubtedly, the earliest example of Ukrainian philanthropy was set by a Ukrainian Canadian, the late Petro Jacyk, whose Foundation has been funding a national Ukrainian Language and Essay competition for the past ten years.  (This annual event been now taken over by the Ministry of Culture.)

There is evidence to suggest that a philanthropic awareness is spreading and taking root in Ukraine. Increasingly, wealthy Ukrainians are beginning to donate money for social causes.  It seems that every oligarch is setting up a foundation in the game of “keeping up with the Joneses.”

Businessman Victor Pinchuk announced in September that the Victor Pinchuk Foundation has launched a program to support talented, underprivileged youth. The Foundation will provide students who demonstrate a level of intelligence and leadership skills with a scholarship of 6,000 hryvnias (500 hryvnias a month).  It also promised to find jobs for graduates of university business programs.

In addition, on September 16, Pinchuk’s Contemporary Art in Ukraine Foundation announced its involvement with a Centre of Contemporary Art in Kyiv. It will be a 2500-square-metre facility that, according to Director of the Foundation Dmitry Logvin, “will be the largest museum of its kind in the Eastern Europe between Prague and Moscow–both in terms of exhibition space and size of collection.”

Not to be outdone, billionaire MP Rinat Akhmetov recently donated funds for reconstruction of Saint Sophia Cathedral’s Metropolitan Chambers. His football club, FC Shakhtar, has been involved in various charitable activities as well as helping families of victims of mining disasters in Donbas.

SCM, the company owned by Akhmetov, carries out charity projects though the Foundation for Development of Ukraine. According to their press-service, SCM spent 24.2 million hryvnias for charity from January to August of 2006. In the future, it plans to invest some $10 million annually in social projects.

Oleksandr Slobodian, owner of Obolon, Ukraine’s Beverage and Beer conglomerate, has also been an active donor, sponsoring many events and causes in Ukraine.

These developments are especially important given that they are occurring at a critical period in Ukrainian nation-building.

Hopefully, the recent examples of philanthropy will inspire some of Ukraine’s other millionaires and billionaires, living in Ukraine and abroad, to donate a portion of their wealth back to good social causes in Ukraine and across the Ukrainian diaspora.

Wolodymyr (Walter) Derzko is a Associate of CERES at the MUNK Center, University of Toronto.  He works in strategic planning, business development, foresight and emerging technologies with private, public, and not-for-profit organizations in Canada, the United States, Europe and Ukraine.  Visit his Smart Economy blog at http://smarteconomy.typepad.com