How is Ukraine negotiating with its investors? Why is a law on oligarchs not an ideal solution? And how long will the Russian economy keep going? NV has interviewed Dragon Capital owner, Tomáš Fiala.
The CEO and owner of Dragon Capital investment company, Tomáš Fiala, is one of the most famous foreign investors in Ukraine. By purchasing warehouses, offices, and shopping malls, he has amassed one of the largest real estate portfolios in the country in just a few years.
And thanks to investments in the NV media group and the purchase of Ukrainska Pravda, he became a prominent player in the media market. The concentration of big businesses and media assets in the same hands has given journalists a reason to jokingly talk about Fiala as a new wave oligarch.
The Oligarchs Registry law has made this issue nothing to laugh about, however.
In order to officially receive the status of an “oligarch”, it is enough to simultaneously meet three of four criteria: to participate in political life; to have a significant impact on the media; to control monopoly enterprises, and to have assets whose value exceeds 1 million living wages as of January 1 of the corresponding year (UAH 2.19 billion at the time of the law’s adoption).
To reduce the risks of falling into this toxic "club", Rinat Akhmetov and Vadym Stolar have already got rid of their media business, and Vadym Novinskyi has officially left politics, having handed over his deputy mandate.
The following interview took place at the initiative of the editors of NV Business. Fiala explained whether he considers himself an oligarch, whether a default of Ukraine is possible and whether the work of “apolitical” Russian business is permissible in the country.
ON OLIGARCHS, MEDIA AND UKRAINIAN CITIZENSHIP
Recently, the law on oligarchs came into force. Because of it, Rinat Akhmetov has already quit the media business, Vadym Novinskyi has surrendered his deputy mandate. Have you studied this law?
You already have big business and control over the media. Are you sure the law won't affect you?
We can take a look at the classic definition of the word oligarch … To put it simply, it is a person who uses power for profit.
Yes, one who makes money, thanks to his proximity to power. I absolutely do not fall under this definition of an oligarch.
I didn't have close ties to any of the presidents. I always talk openly about the problems that exist in the country, and the presidents never liked it, neither Yanukovych, nor the previous one, nor the current one. I don’t consider myself an oligarch, my business doesn’t depend on electricity tariffs and I didn’t acquire assets thanks to family ties. There is nothing like that in my biography.
We don’t need such laws in order to fight oligarchs. What we need is structural reforms of law enforcement agencies and courts.
Of course, this is a more difficult way, but it’s the correct one. We still have to go through it in the process of being a candidate to join the European Union.
The adopted law has four criteria for determining an oligarch. Before the war I met two of those criteria – we have media and expensive assets. Now, I don't know. It’s hard to say how much the assets in Ukraine are worth, as there’s no market.
Do you subsidize media owned by Dragon Capital — Ukrainska Pravda, NV, Ministry of Finance?
Currently, we don’t subsidize either NV or Ukrainska Pravda. They are self-sufficient. As for Treeum (combines the minfin.ua and finance.ua platforms. - Ed.) - the generation of leads has fallen sharply, but every month it is growing a little.
The company partly lives on the money it earned last year, partly on what we invested the year before last. I had to cut costs, as in other businesses.
You say that you don’t participate in politics, but you are friends with Svyatoslav Vakarchuk and supported him.
Svyatoslav Vakarchuk was supported by my wife. Not him directly, but the Golos party in 2019, which was three years before the law came into force.
Now his place as a new promising politician is being replaced by volunteer Serhiy Prytula, who was the host on Radio NV, which you own. In opinion polls, his rating is measured along with Zelenskyy and Zaluzhnyi (the Commander-in-Chief of the Armed Forces of Ukraine).
I only have a Czech passport and as a foreign citizen, I don’t have the right to finance politics. I have no influence on either the president, or the government, or the deputies. You won't find a single law or a decision that I lobbied for.
Have you thought about applying for Ukrainian citizenship?
I love Ukraine very much and have been living here for more than 20 years. I have family and businesses here. This is a country of great opportunities, and wonderful people, and I have always tried to be as useful as possible here. I think you would agree that for this it is not necessary to have Ukrainian citizenship. And at the same time, I am a patriot of the country where I was born and raised, and it seems to me that it would be wrong to change citizenship.
You have been critical of the oligarchs before, but the oligarchs in Ukraine sometimes play a stabilizing role. Like in 2014 when they led oblasts and resisted Russian aggression. Don't you see the risks that power will be in the same hands? If you look at the parliamentary majority, the Cabinet of Ministers and the state security forces, it basically has already happened.
It depends on what you compare it to. A partially oligarchic system – with multiple centers of influence – is perhaps better than a system with one dictator, like in Russia. But in any case, it’s worse than democracy, as in the European Union, where we all aspire.
That is, your recipe for deoligarchization? Independent law enforcement agencies?
Yes, courts and law enforcement agencies. This has always been the main demand to the authorities from the business. If Ukraine needs more investment, first of all it’s worth copying the law enforcement and judicial systems that are present in more successful European countries.
Basically, the only motivation for the authorities to take these steps is the prospect of becoming a member of the EU. Do you believe this is enough?
Yes, it's a "carrot." Over the past eight years, many positive changes and reforms have taken place in Ukraine. On the one hand, civil society, journalists and publicity help fight corruption more than law enforcement agencies or courts. On the other hand, the motivation is visa-free zone, free trade, grants, loans from the International Monetary Fund and now the status of a candidate for the EU has been added.
ON THE DOLLAR EXCHANGE, NEGOTIATIONS OF UKRAINE WITH CREDITORS, NAFTOGAZ DEFAULT
A question that interests all Ukrainians: The National Bank of Ukraine recently raised the exchange rate to UAH 36.6/$ to bring it closer to reality. After that, it grew even more. Do you see market prerequisites for new growth?
In order to diversify their savings, people continue to convert hryvnia income into dollars in the cash market. So there will be two courses. The National Bank has taken measures in the cash market, which will not allow a large divergence of rates.
Do you think that the exchange rate can roll back?
Everything is up to the National Bank. The volumes on the cash market aren’t that large.
Did the communication of the National Bank with the increase in the official exchange rate reassure or disturb you?
It reassured me, that this was the right decision. So far, the National Bank is acting correctly. The only thing that worries me is that the National Bank has to buy government bonds, which means printing the hryvnia. Even if it's a necessary measure.
The big news of last week is the technical default on Naftogaz bonds. Is there a possibility that it influenced the growth of the exchange rate?
No, I do not think so.
And who, in your opinion, is to blame for the default? The management of Naftogaz or the Cabinet of Ministers? They point fingers at each other.
Hard to say. The government has a clear strategy: to defer the payment of the debt of the state and state-owned companies, primarily Naftogaz. On the other hand, a month before the repayment of the Eurobonds Naftogaz announced that it would pay – they have money. This news raised its bonds in price to 80% of their face value and they were bought. And now they are worth 20% of the face value. Investors expected payments, so Naftogaz didn’t get the number of votes necessary for restructuring.
The Cabinet says that if Naftogaz nevertheless pays, the holders of state bonds won’t tolerate that, as they were also offered to postpone payments for two years. Is this a fair statement?
Yes, this is one of the reasons. It is important not to create a precedent that would complicate the restructuring of public debt. Dragon Capital has state Eurobonds, we supported the proposal of the Ministry of Finance and voted for restructuring. We agree not to receive any interest or repayment on these bonds for the next two years.
On Aug 10, the results of the investors' vote will be announced. In order for the restructuring to pass, the government's proposal for a delay must be supported by more than 50% of the votes on each bond issue. In general, Ukraine has more than 10 bond issues worth $20 billion, and the holders of 66% of these securities must support the offer.
But, I think that investors would rather agree. Then Ukraine will save $6 billion and will save money for the next two years. But they will still have to pay later.
Important news for the economy is the opening of Odesa ports for the export of Ukrainian grain. How much can Ukraine get? I've heard estimates – a maximum of $6 billion by the end of the year. How much will this improve the situation with the exchange rate and the budget?
We believe that in the coming months, grain deliveries can bring $800-900 million in additional foreign exchange earnings per month. This will increase our exports by more than 25%, which is good news for the economy, farmers and the hryvnia.
You can’t envy the Ministry of Finance now. Until recently, taxes and fees provided 30-40% of the budget. Do we have any alternative to international aid?
Printing money by the National Bank, but this is not a very good alternative. Therefore, we must behave rationally. Due to the war, budget expenditures increased significantly, while incomes have fallen and the deficit has increased. I understand the government, which wanted to revive the economy, but it seems to me that it was wrong to cut taxes in mid-March, they should have been left or returned back already in April.
Tax cuts do nothing to motivate businesses to work more or less. If a business feels safe, it works; if it doesn't feel safe, it doesn't work. The military defense of the country and the liberation of Ukrainian territory is now priority number one, security is number two, macroeconomic stability, primarily risks in fiscal policy, and financing the fiscal deficit is number three. Taxes are priority number ten in the current situation.
The situation in the economy as of now – is this approximately what we will have until the end of the war?
I think that there may be an improvement due to the grain export, perhaps something else will be added. The export capacity of our western border is increasing. Plus, people get used to it. In Kyiv, you can see a huge difference compared to April. About 80% of the people have returned.
What points of growth do you see for Ukraine?
Right now it is the opening of the sea ports. In the medium term – the process of integration with the European Union. These are two key growth points. Integration implies reforms, including the rule of law.
ON THE FALL OF THE RUSSIAN ECONOMY AND BUSINESS IN TWO COUNTRIES
You are a marathon runner. Obviously, the war has already turned into a marathon. Not a very pleasant question: will Ukraine have enough strength for a year of war or for two years? How long will Russia last? They also have problems over there because of the sanctions, the withdrawal of Western companies and technologies.
I see that the Ukrainians have enough strength and solid intentions, but they need to be supported by Western military and financial assistance. If they are, then Ukraine has enough of everything to successfully end the war. Unfortunately, Russia's GDP will fall by only 5% this year. They have had a huge drop in imports – by 50%, but their exports aren’t falling.
Export volumes have fallen, but prices have risen. There may still be changes, because the world may enter a recession – commodity prices may fall significantly this year or next. Western sanctions, of course, are putting on pressure.
When will Western sanctions against Russia start to work?
We expected in March that the Russian economy would lose 10-15%, maybe more. But now analysts' forecasts, unfortunately, are improving.
J.P. Morgan predicts a fall in Russian GDP by 5%, I think. They have a budget surplus and foreign trade surplus. Economically, Russia will be able to hold out for the next year. The only thing that can weaken it is a fall in raw material prices. Why did the Soviet Union lose the Cold War in the 1980s? In the second half of the 1980s, oil prices fell below $20 per barrel, other raw materials became cheaper and they lacked resources.
And what if next year Europe actually refuses to buy Russian oil and gas?
So far, unfortunately, they are successfully redirecting oil to other markets – India, China. This won't help us. Gas will be harder to redirect…
So far, unfortunately, they are successfully redirecting oil to other markets – India, China.
This won't help us. Gas will be harder to redirect…
Do you expect a strong drop in prices for raw materials, following the example of the 2008-2009 crisis?
I don’t predict such a deep recession. But forecasts for the global economy have been deteriorating from month to month over the past six months.
Should Russian businesses be allowed to work in Ukraine?
I don’t think so. If the owners have a business both here and in Russia, then the Russian authorities are in the hands of a strong lever of pressure. Businessmen have something to lose. So they become agents of influence of the Russian authorities. You have to be either here or there.
ON DOING BUSINESS DURING THE WAR
How do you relieve stress? Now, this is an important question for everyone.
Sports. Every morning I try to do an hour-and-a-half: either running, or cycling, swimming, or going to the gym.
How are your companies recovering?
At the beginning of the war, we thought that everything would fall very hard. Now, on average, everything has probably recovered by 60-70%, some less, some more.
You said that Dragon Capital lost three warehouses near Kyiv for 116 thousand square meters. How much has already been restored?
Yes, 30% of our warehouse real estate portfolio was destroyed. We’re slowly rebuilding everything. In early July, for example, one of the buildings of the West Gate Logistic complex in Stoyanka, along the Zhytomyr highway, was renovated and leased out.
The company has retail, warehouse and office real estate. Can you now say where the most difficult situation is and where is it better?
In the mall and warehouses, activity is gradually recovering. The return to pre-war indicators in offices will probably take three years.
You have a residential real estate project, Obolon Plaza, in Kyiv. Was it all sold before the war or not?
We have sold most of the apartments and retail space on the first two floors. On the third-fourth – offices – more than half aren’t sold. We are still completing the construction of this complex, some work will go on until the end of the year.
How long will it take for the residential real estate market to recover?
Good question, but it depends on what and where. Currently, in Lviv, sales of residential real estate in hryvnia are 70-75% down on last year. In square meters – it’s down 75-80%. In Kyiv – it’s down about 95%. It will take a long time for the market to recover. It all depends on when people return. There will be internal migration, from eastern Ukraine to Kyiv or to the west. We have 4.5-5 million people abroad. According to some polls, about 90% want to return, but the majority wants to return after the war.