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Things have not been going according to plan for Mohammad Zahoor, one of Ukraine’s most prominent foreign entrepreneurs.
In Luhansk, the country’s eastern-most region, a once-lucrative processing plant supplying coal for metals and mining group Rio Tinto lies mothballed in rebel-held territory. Zahoor’s renovation of a landmark hotel in the centre of Kiev, Ukraine’s capital, has ground to a halt, with the latest tranche of funding from the European Bank for Reconstruction and Development uncertain. And then Leila, the prized pet falcon of his pop star wife Kamaliya, fled their home in Kiev’s exclusive Koncha Zaspa suburb, leaving Zahoor to seek a replacement.
He blames his run of bad luck, apart from this latest incident, squarely on the rise of Russian-backed separatists, splitting the smokestack cities of Donetsk and Luhansk from the rest of Ukraine.
“There were a lot of raids on our factory and people wanted to grab it, but somehow our security guys have been able to stop these things,” explains the Savile Row-suited businessman as he relaxes next to a roaring fire in his north London house overlooking Hampstead heath. He lost $25m in revenues during 2014 after production stopped and expects to take a similar hit this year.
A hotel Zahoor owns in Donetsk has been overrun by fighters of the self-styled Donetsk People’s Republic, who pay his company a nominal “so-called rent” of Hr10 (44 cents) a month.
But he is not panicking just yet. The Pakistani-born businessman has been here before and his immaculate jet-black coiffure remains unruffled. He recalls the bloodshed in Pakistan, prior to the independence of Bangladesh in 1971. “In the 1970s, the deaths were in east Pakistan, destined to be another country. Nobody in west Pakistan ever cared about losing one big chunk.”
Similarly, several thousand deaths and a refugee crisis, which displaced more than 1m of east Ukraine’s people, could have been prevented, he believes, even though it is a difficult decision for any government to allow part of its territory to secede. “They should just let it go. If a wife doesn’t want to live with her husband and her intentions are firm, there is no sense in holding on to her. If they want to go to Russia, let them go to Russia,” says Zahoor, as he occasionally strokes a white Persian cat, which he speaks to in Russian. “The grass is always greener on the other side, but once they see the other side, they will understand they were either fooled or dreaming.”
After winning a metallurgical science scholarship to the Soviet Union in 1974, Zahoor eventually returned from studies in Donetsk to a career at Pakistan Steel. But his marriage to a Russian woman, his first wife, sparked suspicion in the secret services, spooked by Soviet involvement in the nearby Afghan conflict in the 1980s.
“I was travelling to Islamabad to meet government ministers, and the Pakistani intelligence services were not happy with the fast progress of my career. They told me, quite bluntly, that I would never move upwards. I could not accept this,” says Zahoor, recalling the conundrum he faced in his late 20s.
He resigned, moving to Moscow to run a metals company and eventually back to Soviet Ukraine. Following independence in 1991, he received a similarly unsettling knock on the door from Ukrainian authorities after he publicly backed Ukraine’s first president, Leonid Kravchuk, in the 1994 election, which was won by rival Leonid Kuchma.
But the approach was much less direct than in Pakistan. “In Ukraine, they don’t come and ask why you are on the other side. They just send people to constantly inspect your documentation and properties, and question whether what you are doing is legitimate.”
Ukraine and Pakistan are both corrupt countries cursed by geography, adds Zahoor. “Both have a hostile relationship with their neighbours and both struggle to keep their economy going.”
His biggest troubles, however, came at the turn of the millennium. When he tried to ramp up steel production, he attracted the attention of Ukraine’s business bosses, who had been gradually taking control of heavy industry. These included Rinat Akhmetov, the most powerful businessman in Donbass at the time, who was eventually forced out of his native Donetsk by separatists in 2014; and Serhiy Taruta, later to become Donetsk regional governor.
Until then “steel had not been a hot commodity”, recalls Zahoor. “People just wanted a quick buck from vodka or casinos.” But when “visitors” told him they were taking over his steel mill, he decided to play along, presenting them with a 40-page non-disclosure agreement. “The way I see it, everything is up for buying and selling.”
Luckily, a rival clan was keen to partner with Zahoor, saving him from the raiders. He agreed to share the mill, but offloaded the rusty, non-profitable part housing 10,000 workers, and held on to a smaller piece. “I got rid of everything I wanted to, while they got something big,” stresses the smiling entrepreneur. “In Russia and Ukraine, [disputes] are always about owning something big.”
Genuine entrepreneurs are muscled out of Ukraine’s business world by warring clans, he says. As well as expecting big changes to this system, he hopes to send more young people abroad for work experience in different industries. “Just like The Apprentice [television] programme, we need to encourage young people to be entrepreneurs and become rich,” he says. “Only 10-20 per cent of Ukraine’s economy is owned by [small and medium-sized enterprises]. The rest is big business. For a country to regenerate, that has to be over 50 per cent.”
Zahoor’s experience in Ukraine is by no means unique. “We have a European client in Crimea whose factory was confiscated by the Russians,” says the chief executive of a leading global private bank. “A year later, they had figured out they didn’t know how to run it and asked him to come and sort out the mess they had made. Now they want him to stay there and run his business.”
This type of scenario is common in many developing countries. “Exactly the same thing happened with the Muslim Brotherhood in Egypt,” recalls the banker. “For one year, nobody was investing or taking decisions any more. They were all busy running for the door.”
Foreign investors have become increasingly wary of Ukraine since Russia’s annexation of Crimea and the start of the rebellion in the east last year. But there is room for optimism. Valentyna, a cheery stallholder on Kiev’s most picturesque cobbled street, Andriyivsky Uzviz, selling traditional embroidered scarves for Hr220–Hr1,000, says US and Canadian tourists were the first to avoid Ukraine. “When the war started, customers stopped coming, because they feared instability,” she says. “Even those from former socialist allies such as Kazakhstan disappeared. But Europeans are starting to come back, as word gets around that it’s safe to visit Kiev.”
This could be a good time for foreign investors, believes Robert Koenig, a US businessman and adviser to Kiev mayor and former heavyweight boxing champion Vitali Klitschko. “My own investment experience shows there is a lot of money to be made in a crisis situation,” says Koenig, who controls the Ukrainian franchises of luxury brands such as Tiffany, Burberry and Montblanc. “We are now at the bottom, so it’s definitely not time to sell.”
Koenig is sitting in the high-ceilinged canteen of Kiev city hall. Bracing himself for a marathon council meeting addressing Kiev’s waste management problems, he takes a few slugs of Ukrainian bottled water and talks about current investment opportunities: “Since the cost of communication and price of advertising has fallen, it’s a great time to reinforce the strength of a brand.”
Indeed, at the time of going to press, Koenig and Klitschko were planning to visit New York and Washington to raise money for an investment fund focused on the capital’s urban projects. The fund is managed by Ukrainian brokerage Dragon Capital for pension schemes and wealthy individuals.
Yet the American half of this duo also urges caution: “The crisis may look over, but it’s not over. [Russia’s president Vladimir] Putin wants to make Ukraine as unattractive a place as possible for foreign investors. His main aim is to keep things unstable.”
In addition to pressures from across the border, Ukraine’s government faces huge challenges of modernising and “de-oligarchising” a floundering economy dominated by four big business clans.
President Petro Poroshenko has achieved the first stage of this task by curbing the powers of metals, media and banking magnate Ihor Kolomoisky, recently stripped of his duties as governor after camouflage-clad men turned up at an oil company that Kolomoisky was battling to retain control of. One of the most vocal critics of the oligarchs is Serhiy Leshchenko, a well-known journalist and activist in the street protests that led to the abdication of President Viktor Yanukovich last year. Leshchenko has been elected to parliament in Poroshenko’s bloc. Armed people being sent on to the street outside the headquarters of [partially state-owned oil company] Ukrnafta was a challenge to the president’s legitimacy to govern Ukraine, says Leshchenko, a gangly, bearded figure, known for his fearless investigations. “Only Poroshenko has the right to do this. The president did the right thing by sacking him. This marks the first stage of de-oligarchisation of Ukraine.” Kolomoisky has denied that the armed men were summoned by him and that they came from one of the volunteer military battalions he supports.
The dismantling of oligarchs’ power must coincide with a small business renaissance. Remixing the economy by encouraging start-ups and entrepreneurs in information technology, farming and agriculture is undoubtedly the way forward, says political analyst and former presidential adviser Vadym Karasyov over green tea in his favourite O’Panas restaurant in Kiev. “Ukrainian economics needs to move from a post-communist model to a European model, involving a new middle class, but this will take at least 10 years.”
“At the moment, everything is imported — even toilet paper and toothpaste are Polish,” adds Leshchenko. “This is the opportunity for the rebirth of domestic manufacturing, which will be much cheaper for consumers than buying foreign goods. Currency devaluation means that for $300, people will work eight hours, five days a week.”
For foreign investors in particular, this may be a unique window of opportunity.