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Putin's American Foe in Ukraine: Finance Minister Natalie Jaresko -
Bloomberg Business

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Putin's American Foe in Ukraine: Finance Minister Natalie Jaresko -
Bloomberg Business

Ukraine is a nation at war, which is why Natalie Jaresko, the minister of
finance, has traveled 20 miles from Kiev to the town of Irpin, a settlement
of 40,000 on the edge of a pine forest. She’s here to visit a rearguard
army hospital and to console convalescing veterans of recent battles
against Russian forces and their proxies in the Ukrainian east. “Where did
you serve?” she asks, moving slowly from room to room. “How were you
wounded?” She may be from Chicago’s West Side, but she speaks Ukrainian
fluently, and if anyone notices her American accent, no one seems to care.
Jaresko tells the soldiers they’re heroes, the country’s national
accountant handling a job for generals. The crisis has thrust people into
unlikely roles.

Three months ago, Jaresko, 49, left the private equity firm that she
co-founded in Ukraine in 2006 to join the government of Petro Poroshenko. A
billionaire chocolate and confectionery magnate, he was elected president
after the uprising known as the Euromaidan Revolution. At the time, Jaresko
didn’t even have Ukrainian citizenship. Now, as the country’s top economic
official, she’s Ukraine’s liaison to the World Bank, the International
Monetary Fund, and the European Bank for Reconstruction and Development.
Tax reform is hers. So is the treasury. She must construct a national
budget out of lint. “I can’t wait for the situation to be perfect,” Jaresko
says.

Photographers, from top: Chris Ratcliffe/Bloomberg; Sasha Mordovets/Getty
Images

A little less than a year since Poroshenko took office, the world’s
attention has focused largely on the fighting in eastern Ukraine. It’s a
conflict that began in February 2014, days after President Viktor
Yanukovych fled Ukraine in the wake of the Euromaidan protests. The war has
since killed roughly 6,000.

Yet whether Ukraine succeeds as an independent democratic nation arguably
depends as much on the efforts of Jaresko and her colleagues as it does on
the military battles. Together they must rebuild a shattered economy and
restore international confidence in Ukraine while confronting the
corruption and cronyism that have haunted the country since the fall of
communism. And they must somehow do so as state-owned banks teeter on the
brink of collapse, the national treasury counts its last foreign notes, and
inflation is at 28 percent and rising. One day last month, within a few
hours, the local currency, the hryvnia, lost a third of its value. The
longer the war carries on and reforms are delayed, the more hostile
Ukrainians will become to their government and its Western supporters,
leaving the country even more vulnerable to Vladimir Putin.

Jaresko, 5 feet 6 inches tall, wears her dark hair at chin length. As she
continues through the Irpin hospital, she’s solemn, respectful. More
soldiers receive her, cramped two and three to closetlike rooms, jammed
into beds sized for children. They discuss their lack of firepower in the
field: Why don’t we have modern weapons? How does the enemy know where we
are all the time? Jaresko listens. She knows better than any general that
Ukraine doesn’t have the funds to better arm itself.

She asks the soldiers what they plan to do once they’ve recovered. To a
man, they say they’ll return to the front lines. Jaresko’s business until
now has been figures, not soldiers or sentiment. Carrying this new burden,
she walks the parquet floor of the hospital’s dark, old Soviet hallway.
There are tears. She blinks them away. This sure is something she’s gotten
herself into.

A recent protest organized by miners in front of the parliament in Kiev.

Photographer: Guy Martin for Bloomberg Businessweek

Jaresko’s father, Ivan, was born in 1932 in Poltava, 200 miles east of
Kiev. During World War II, he was deported with his family to a Nazi camp
inside Germany. After the war, he immigrated to Chicago, where he met
Jaresko’s mother, Maria, another Ukrainian refugee. They raised three
children in lower-middle-class Wood Dale, 20 miles northwest of the city
whose skyscrapers symbolized the ambition and opportunity of their adopted
homeland.

“It’s the typical story of a family that goes through Ellis Island,”
Jaresko recalls in mid-February at Ukraine’s Cabinet of Ministers building,
a Soviet-era structure of drafty imperiousness in central Kiev. It’s
evening, and we’re sitting at the head of an oval conference table. “The
United States offers that opportunity, freedom, the ability to
dream—especially in that ’50s, post-World War II period,” she says. Jaresko
spent childhood weekends at Ukrainian school and church, but her family
spoke English at home. “My father really wanted us to integrate into
American society,” she says. “He was very careful to avoid politics. The
post-McCarthy era convinced my father that we had to become middle-class
Americans.”

Jaresko majored in accounting at DePaul University, then picked up a
master’s in public policy at Harvard’s Kennedy School in 1989. Her father
wasn’t impressed. “He very much believed in only the private sector,” she
says. “Government, for him because of his background, was something you
wanted to avoid.” After the Kennedy School, Jaresko took a job on the
economic desk of the Department of State’s office of Soviet affairs. When
the Soviet Union collapsed, she went to Kiev in 1992, one of eight
diplomats charged with opening the U.S. embassy there. She’s lived in
Ukraine ever since. “My father couldn’t understand what happened, what went
wrong,” she says. “He came to the land of milk and honey, and here I was,
attracted back to the other.”

Jaresko could see firsthand that there would be no easy path for Ukraine to
follow in its transition to a market economy. Criminal posturing was the
national style. All the same, she recognized the opportunities that existed
in a country that was rapidly privatizing its state-owned assets. She left
her diplomatic post and joined the Western NIS Enterprise Fund, an
organization backed by the U.S. Agency for International Development and
designed to kick-start small and midsize Ukrainian businesses.

In the mid-1990s, Ukraine endured hyperinflation of 10,000 percent. A few
years later came the shock waves of Russia’s financial crisis. The
Ukrainian economy showed its first signs of growth only in 2000, after
almost a decade of decline. Then, in 2004, came the Orange Revolution.
While the country entered a new period of uncertainty, international
institutional investors began to arrive. Two years later, Jaresko and three
partners opened investment management firm Horizon Capital. It managed the
Western NIS Enterprise Fund and eventually raised two more. When she left
last December, it had roughly $600 million of Ukrainian investments under
management. (Jaresko and her husband, Ihor Figlus, divorced in 2011. He’s
returned to the U.S. Their two school-age children live in Kiev with
Jaresko.)

“I have no other reason to do this, other than to make a difference.
Ukraine must succeed”

Last year’s regime change, Jaresko says, represented a real turning point—a
chance to finally end kleptocratic rule. “Anyone close to Ukraine
understood that this was an incredible moment to take Ukraine forward in a
way that it hadn’t gone quickly enough over the past 22 years,” she says.
“That there had been a radical change in civil society, and that civil
society’s expectations could no longer be put on the back burner by anyone.”

Ten months later, representatives from a headhunting firm hired by the new
government, WE Partners, visited Jaresko at the Horizon Capital offices.
They discussed candidates for various government posts before asking her if
she would be willing to serve. Her first response: “I have a job.” Still,
she agreed to meet with Poroshenko and his prime minister, Arseniy
Yatsenyuk. “They played hard on my patriotism. We found a common vision of
what we thought we needed to do in terms of the reforms, the business
climate, the international financial institutions, our bilateral
relationships. I was able to raise money for this country during difficult
times. I was able to convince investors who had never invested here before,
institutional investors. We convinced them of how, despite all the
challenges, there was a way to be successful and profitable in Ukraine in a
transparent fashion. I think the president and prime minister wanted me to
bring that experience.” In a little over a week, she accepted the job as
finance minister. “I sometimes wonder what my father would think,” she says.

Jaresko’s appointment, especially considering Horizon Capital’s ongoing
relationship with USAID, provides fuel to conspiracy theorists, who depict
Euromaidan as a Western plot aimed at luring Ukraine out of Russia’s sphere
of influence. The new finance minister is hardly the only target for the
conspiracy-minded. Jaresko joins two other foreigners in Ukraine’s cabinet:
Aivaras Abromavicius, a 39-year-old Lithuanian, is the minister of economy
and trade. The minister of health care, Alexander Kvitashvili, a Georgian,
served in the same capacity in his home government.

No matter their origin, these ministers—and the numerous Poles, Germans,
Canadians, and other foreigners who’ve joined the government in senior and
midlevel positions—are pulling the same oar. Jaresko is no longer a foreign
national, President Poroshenko having granted her the citizenship necessary
to serve. “I’ve always been a Ukrainian,” she says. “Now I’m a Ukrainian
citizen.” By local statute, she’s prohibited from holding two passports,
though she has a couple of years to relinquish her American one. It’s hard
to imagine she’ll stay in the job that long, considering her government
salary of 10,000 hryvnia per month, or about $300. “I’m doing this out of a
sense of patriotism,” she says. “I have no other reason to do this, other
than to make a difference. Ukraine must succeed. There is no room for any
of us to fail.”

One morning last month, a modest crowd of journalists and television
cameramen gathered in a fourth-floor ballroom inside the National Bank of
Ukraine. Built in 1905, the Italian Renaissance-style building’s ornate
solidity shields interior troubles. Largely because of Russia’s military
intervention, Prime Minister Yatsenyuk has said, Ukraine has lost
20 percent of its economy in the last year. Jaresko has also said that
Yanukovych left the country $40 billion in debt. Ukraine’s international
reserves have fallen from $204 billion to less than $7 billion. From a
sustainable 8 hryvnia per dollar before Euromaidan, the hryvnia slipped to
an all-time low of 32.5 per dollar on Feb. 25, when the central bank
suspended trading of the currency for three days. The news came when the
country was preparing to restructure its sovereign debt. It was like
spinning plates on a high wire during an earthquake.

Today, however, is a day for more positive news. Sitting at the middle of
an oak conference table, Jaresko announces that the IMF has pledged
$17.5 billion to Ukraine over the next four years. “This will return
confidence to our economy,” she says. “It also unlocks bilateral and
multilateral support for Ukraine at this difficult time.” The U.S. has
guaranteed $2 billion in Eurobonds. The European Union has pledged a loan
of €2.2 billion. Germany, Japan, and Canada have also promised to
contribute, each in amounts south of $1 billion. The IMF deal, a year in
the making, is essential for Ukraine. But the funding will work only if it
enters a system in the process of radical reform.

Campaigning for the presidency, Poroshenko pledged to divest himself of
Roshen, the confectionery that made him a billionaire. However, he
continues to own a majority of Roshen, along with interests in at least
10 other companies. The dirty, open secret behind his facade of reform is
that oligarchs have only gained in influence since Euromaidan. Oligarchs
control media. They stock the seats of the parliament. The state—fighting
Russia, fighting for its financial life—is too weak to fight its own power
structure. In a recent poll conducted by the Kiev-based Research & Branding
Group, a marketing consulting company, 46 percent of respondents
disapproved of Poroshenko’s performance as president.

There have been some encouraging signs. Early last month, Ukraine initiated
an electronic system for filing corporate taxes. The process is meant to
eliminate roughly $1 billion a year in tax fraud. Value-added tax fraud is
another major source of corruption, blamed for a loss to the national
budget of 25 percent. The system is in the middle of an overhaul. At the
same time, it’s hard to find anyone of stature in Ukraine whose past is
unimpeachable. Reform of the judiciary has so far fallen short. Neither the
president nor parliament has demonstrated willingness to relinquish
influence on the courts.

These are just a few of the 60-odd major reforms discussed at the
semiweekly meetings of the new National Reform Council comprising
Poroshenko, his ministers, the head of the national bank, parliamentary
leaders, and prominent members of civil society. Coordinating the effort is
Dmytro Shymkiv, the deputy head of the presidential administration and
former chief executive officer of Microsoft Ukraine. Half of his new
employees had never sent an e-mail. A third had never used a computer.
Paperwork, with the many signatures and stamps needed to approve a land
deal or a building permit, was the mechanism of corruption. Grasping this,
Shymkiv understood the depth of his challenge.

“There are a lot of questions, and for 20 years no one was looking at
them,” he says. “We have to build a system that can be sustainable. It’s
not sustainable now. Every day we need to create something that can’t be
rolled back.” That’s the reason, he stresses, why Poroshenko, a former
executive himself, has made a point of engaging Ukraine’s business
community. “Some results will be slow,” Shymkiv says. “But we’ve seen how
quickly things can change in business. We are very results-driven.”

Ukraine is one of the few countries in Europe without a 3G network because
of an oligarchic shell game played out under the Yanukovych regime. The
Poroshenko government recently completed a transparent sale of 3G licenses
to several telecom companies, which will inject a total of almost
$300 million into state coffers. Ukraine can celebrate building 3G—while
the rest of the industrialized world is planning 5G. This is where Ukraine
is today, caught between idealism and despair. The reforms that have come
have been so slow that, to some, reform can seem a joke.

“We have veterans of deregulation in this country,” says Abromavicius, the
economics minister. He sits in his office among the modern sculptures and
prints he transplanted to liven up this former apparatchik’s den. A section
of his ministry, the State Statistics Department, employs 10,450 people.
Such numbers are emblematic of across-the-board waste, and they make a fine
target. “There’s a high demand from business and society to attack this,”
Abromavicius says. “It’s a new generation of people in power. They mean
business, and they need other people who mean business. It would be sad to
waste this crisis and not make reforms.”

Abromavicius says his office projects a 5.5 percent reduction in the
economy this year. That doesn’t take into account Putin’s future actions in
the east. “We work under the assumption that there will be peace very
soon,” he says. “This conflict is misguided. The Russian leadership is
misguided about Ukraine in general. They just don’t understand Ukraine.
This country wants to be left alone. This country wants to make its own
decisions.”

Jaresko during her visit to a military hospital in Irpin.

Photographer: Guy Martin for Bloomberg Businessweek

On a suitably cold February evening, I move across the apron of Kiev’s 11th
century St. Sophia Cathedral and toward the Hyatt hotel. Gathered in the
hotel’s eighth-floor bar are some of the most wing-and-a-prayer investors
in Eastern Europe. The occasion is the 11th annual investor conference
hosted by Dragon Capital, a leading Ukrainian investment bank. Among the
few dozen people in attendance are overworked functionaries from the
mayor’s office and a dour man representing a group of Chinese investors
displeased with their inability to pull money from the market. Despite some
sad souls, the spirit of adventure is alive in the room, especially among
those accustomed to the special charm of the post-Soviet world’s enduring
volatility.

Genna Lozovsky, a director at Sandglass Capital Management, an emerging-
and frontier-markets fund based in New York, has come to identify
opportunities in Ukraine’s debt restructuring. Like many investors, he last
year reduced his fund’s Ukraine portfolio. “We believed that there were
serious tail risks to investing in Ukraine,” he says. Lozovsky’s focusing
now on exporters that can generate their own foreign-currency cash flow
while benefiting from the devaluation of the hryvnia. He gestures at his
fellow investors at the bar. “You gotta have big balls to be in this room,”
he says. “What is it they say? There’s no bad asset, only a bad price.”

As the young government’s leaders and supporters tirelessly point out, the
war with Russia has so far been contained to less than 10 percent of
Ukraine’s territory. Even so, international investors won’t return to this
marketplace in normal numbers until peace comes to all of Ukraine. “This is
what differentiates Ukraine from a more classical distressed investment
environment,” Lozovsky says.

A little later, Michael Maltzoff hands me a business card from Petro
Partners that has an address in Houston. Descended from a line of White
Russians, Maltzoff started investing in Ukraine in 1995 with the East
Europe Development Fund. Toward the end of Yanukovych’s time as president,
Ukraine’s “unabated gangster capitalism,” as Maltzoff calls it, drove him
out. He spent the last couple of years investing in Texas shale. Now he’s
back, trying to figure out whom to believe. Maltzoff cautions me to keep an
eye on Ukraine’s state-owned banks, which, he says, are likely to fail any
day. “Another thing that people aren’t talking about is the fact that the
president and prime minister can’t stand one another,” he says. I’d heard
just the opposite from equally convincing sources. All the same, Maltzoff
says, “I’m bullish. My experience has been that recovery happens much
faster than we think. I give it a year. A year of restructuring and pain,
and then the clear signs of the shoots of economic growth come the spring
of 2016. I think history will show that we needed this severe shock to
really break the old system.”

“I ask you to step back from the brink. I do believe”

As the drinks go around, it’s difficult to tell if the enthusiasm in the
room, such as it is, is genuine or simply part of the salesmanship of the
investment game. While major international institutions may see an
opportunity to do some social good, others clearly have survival squarely
in mind.

The following day, I meet Simon Cherniavsky outside the Hyatt ballroom. A
dual U.S. and U.K. citizen, he was chief executive officer of HarvEast, the
agriculture company owned by Rinat Akhmetov, the wealthiest man in Ukraine.
Akhmetov’s holding company, System Capital Management, is based in Donetsk,
the site of the fiercest fighting. Cherniavsky says he’s left HarvEast: “I
got tired of being thrown into ditches at checkpoints.” He recently took
over as head of Mriya Agro Holding, a wheat and potato grower that’s
drowning in $1.3 billion of debt. “We don’t know what we have yet,”
Cherniavsky says. “There’s a real possibility we can’t turn this around.”
And if he can’t turn Mriya around, it will be a signal setback for a sector
that accounts for 25 percent of Ukrainian exports. Cherniavsky has worked
in Ukraine for five years, but recent events have painted a stark picture.
“I was in D.C. for three weeks over Christmas with my family,” he says. “We
said, ‘This is really nice.’ ”

As I make my way into the ballroom, the Dragon conference gets under way,
and I remember something that Jaresko told me in her office. “I don’t
ignore the problems in this country,” she said. “But I can separate the
problems from the opportunities.”

Jaresko is onstage, sitting beneath a chandelier, looking out at her former
colleagues, now her constituency. She’s energetic as she speaks, jaunty
even. “No one is fooling themselves about the complexity of the challenges
we face,” she says. “I ask you to step back from the brink. I do believe.”

Is it real? Or is it that old fund manager salesmanship so familiar to
everyone in the room? At one point, Jaresko gets ahead of herself, saying
that Ukraine will show that it is “a good creditor.”

“Did I say good creditor?” she says with a smile. A titter ripples through
the crowd. “A good borrower,” Jaresko says, amending her remarks. “The day
will come when we’re a good creditor. One step at a time.”


Eric D. Schwerin
eschwerin@rosemontseneca.com

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