From capitalism to oligarchy: What Piketty tells us about Ukraine.

From humble economist to international rock star: this has been the fate of Thomas Piketty, a French economist that has almost become a household name after publishing the modestly named Capitalism in the Twenty First Century. The 696-page book quickly shot up to the top of bestseller lists around the world (becoming Harvard University Press’ best selling book of all time), gathering rave reviews along the way.

The basic assumption behind Capital is, as summed-up by Nobel Prize-winning economist Robert Solow, the “rich-get-richer dynamic.” In other words, Piketty argues that capital accumulation for the top one percent of earners does not proportionally “trickle down” to the poor, but instead leads to ever-increasing inequality gaps.  Drawing from the conclusions of the book, Solow remarks that “if the ownership of wealth becomes even more concentrated during the rest of the twenty-first century, the outlook is pretty bleak unless you have a taste for oligarchy.” Isn’t that a strong word to describe a logic that Piketty claims is so deeply ingrained in the very nature of Western capitalism?

As it turns out, not at all. Seen in political terms, the corollary to Piketty’s economics translates thusly: Wealth attracts more wealth, which subsequently leads to a concentration of power. The problem of income distribution therefore makes its way to the political system and the overall system of governance, as the economic elite seeks to protect its concentration of power, leaving elected rulers powerless to stop this self-sustaining process. In the long run, widening economic inequality would impact the political class, depriving it of the power to act as the rich get more powerful and more united while the poor lose the capacity to impact the polity. The end state of this slow, incremental process spells the end of the democratic process. A once-liberal society would therefore be transformed into an oligarchical society.

Ukraine’s power structure

One of the few countries in the developed world that can effectively test Piketty’s hypothesis is Ukraine, with its highly influential class of businessmen-cum-power brokers. Their power should not be underestimated, as they control “some 80 to 85 percent of GDP” according to Alexander Motyl, a professor at Rutgers University. Having acquired their fortune in the early days after the fall of the Iron Curtain by buying up state assets, the oligarchs have consolidated their economic wealth by using it to influence the outcome of the political process. To this end, they have used their wealth as a lever in national elections, throwing their support behind various political candidates and turning polls into contests between varying groups of oligarchs.

Piketty’s thesis seems to have found a real-life expression in Ukraine. Indeed, wealth breeds power, which in turn supersedes and slowly replaces the democratic political process. But why has this happened in Ukraine, of all places? Why has it not affected other ex-communist states?

The answer is that the former Soviet bloc witnessed a sudden transition from communism to capitalism that was forcefully applied through the mass privatization of state assets. In the bleak years following 1989, this process had lax rules and virtually no oversight. Thus, the individuals that benefitted most from the transition found themselves very rich, very fast, in a society that had just begun to open up to Western markets. Seizing the opportunity, oligarchs were quick to interfere in the democratic development of their respective societies and gear the political system to their favor.

Except for Belarus, Russia, Ukraine and Moldova, all former communist countries of Europe had to rid themselves of the nefarious influence of oligarchs in order to join the ranks of the European Union. This meant creating strong democratic institutions and inclusive political processes.

Belarus has been ruled by strongman Lukashenko for the past 20 years and Moldova, one of the poorest regions of the former USSR, was pushed forward by Romania to stay on the European track. Russia is an interesting case; its infamous oligarchs were tamed by Putin, some fleeing for London, others bankrolling the regime while others ended up in jail with their assets seized. Which just leaves Ukraine.

Indeed, a few powerful individuals have held the key to the castle: Rinat Akhemtov, Dimitri Firtash, Viktor Pinchuk and, surprisingly, Petro Poroshenko, who is also the frontrunner in the upcoming Ukrainian Presidential elections. Throughout the Maidan movement, they were courted by both protesters and international actors, all urging them to turn their backs on Yanukovych. Easier said than done.

According to the Chatham House, Akhmetov controlled a bloc of 50 lawmakers in Parliament, while Firtash controlled another 30. Furthermore, companies belonging to Akhmetov were consistently awarded 31 percent of state contracts under Yanukovych’s rule. We therefore have an insidious blend of political and financial interests, powerful enough to effectively pilot Ukraine from the shadows. The best example for this can be found in the way the two oligarchs changed their stance when they realized that Western sanctions could actually bite into their business interests.

With a flick of the fingers, the media empires controlled by Firtash and Akhmetov (some ten TV stations, including Ukraine’s largest) began openly supporting the Euromaidan, while their groups in the parliament endorsed an initiative to depose the scandal-prone president. This two-pronged approach accelerated the collapse of the regime and the start of a new chapter in Ukraine’s troubled history. The scenario isn’t at all new, having been played out along similar lines during the Orange Revolution of 2004. The regime held together until the same group of oligarchs endorsed Viktor Yushchenko’s party.

A tale of two elections

This brings us the Ukrainian elections scheduled for Sunday. Following the fall of Yanukovych, the fledgling opposition wooed the same people that once supported him, in order to obtain both their financial backing and their support for the upcoming presidential elections of May 25. When an agreement was finally reached, Vitali Klitschko, widely touted as the potential President, withdrew from the race and endorsed Petro Poroshenko, a chocolate magnate and the country’s eight richest man.

A notorious party flip-flopper, Poroshenko’s appointment signifies a new step in the strengthened grip the oligarchs have over Ukraine. If up to this point, they limited themselves to bankrolling political candidates, in a rule-by-proxy type approach, this new evolution signals their unwillingness to entrust the levers of power to one who is not part of their tightly knit clan.

More proof of the emergence of a government-by-oligarch transformation in Ukraine’s political scene came in February, days after Yanukovych’s departure, when the new government in Kiev appointed two billionaires Ihor Kolomoysky and Serhiy Taruta, as governors in two regions of Eastern Ukraine.

Everything points to the fact that Ukraine is the only country in the region where the oligarchs have thrived, playing political leaders off against each other and skewing the political system to their favor. Were Poroshenko to win the elections, we would see the birth of the first truly oligarchical society in Europe. Piketty, start writing the sequel!