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Putin Vs. The Accountant


She's from Chicago. Her last job was in private equity. And Ukraine's future is in her hands.

American Woman.jpg

Ukraine is a nation at war, which is why Natalie Jaresko, the country’s 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 Euro- maidan 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. 

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 days after the Euromaidan protests that ousted President Viktor Yanukovych in February 2014. The war has since killed more than 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 closet-like rooms, jammed into beds sized for children. They discuss their lack of fire- power 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. 

Jaresko’s father, Ivan, was born in 1932 in Poltava, 200 miles east of Kiev. At 10 he was deported with his family to a Nazi camp inside Germany. After the end of World War II, he emigrated 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 Cab- inet 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 eco- nomic 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 per- cent. 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, who’d been a partner at Horizon Capital, divorced in 2011. He’s returned to the U.S. Their two school-age children live in Kiev with Jaresko.) 

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 dis- cussed 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 some- times 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 mid-level 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 from Roshen, the confectionery that made him a billionaire. Ukrainian law prohibits those in government from owning a profitable business. Poroshenko, however, 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 email. A third had never used a computer. Paper- work, 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.” 

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 occa- sion 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 with 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 port- folio. “We believed that there were serious tail risks to invest- ing 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 called 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 peo- ple 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.” 

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 salesman- ship 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.” 

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