JOHN MARONE, KYIV
WHERE IS UKRAINIAN PRIVATIZATION GOING?
Ever since Viktor Yanukovych returned as Ukraine’s prime minister last summer, the country’s privatization drive has started moving in reverse, back to the days of shady state auctions, as under former President Leonid Kuchma.
In fact, concerns have recently been raised that Yanukovych’s government may now find it expedient to turn over valuable state assets without even going through the trouble of holding tenders.
Bolstered by the pro-Moscow majority it controls in parliament, the government appears to be particularly sympathetic to business interests in Russia, from where it continues to enjoy no little support in its fights with Ukrainian President Viktor Yushchenko.
One of the most significant achievements of President Viktor Yushchenko’s first two pro-Western, or Orange, governments was the resale of the country’s largest steel mill, Kryvorizhstal, which had been auctioned off under the Kuchma administration for a fraction of its worth to companies controlled by Kuchma’s son-in-law and another tycoon close to Yanukovych.
Using the country’s courts, Yushchenko’s Orange governments repossessed Kryvorizhstal and re-sold it at a crystal clear auction for $4.8 billion – $4 billion more than it had fetched the first time – to the largest steel company in the world.
Many, including Western investors, were initially frightened that the resale of the major steel mill would lead to a witch hunt into the many other questionable privatization deals that had taken place after Ukrainian independence.
This did not happen. Instead, Yanukovych returned to power as premier, and privatization started going back in the other direction.
Protection of property rights and the rule of law are, indeed, the pillars of a democratic society. But so is social justice.
The billions of dollars in assets acquired by well-connected businessmen at a pittance from the state could have financed the rebuilding of the country’s crumbling infrastructure, a professional army, or the salaries of honest officials not inclined to taking bribes.
The often heard explanation from Ukraine’s privatization chiefs, when asked why one firm was allowed to buy a state enterprise for much less than what other bidders had offered, is that the deal was done in the state’s interest.
However, no few Russian companies have been among the bargain buyers of Ukrainian enterprises.
Moreover, it hasn’t been uncommon for a Ukrainian business group to get an enterprise for cheap from the state, only to resell it at a higher price to a foreign buyer.
The money bilked from the state often didn’t stay in Ukraine but was channeled to off-shore accounts.
But most important of all is that shady privatization deals are recurring with greater frequency.
Last month, a lucrative locomotive plant was sold for at least half its market price to Russian investors during a highly questionable tender.
Luhanskteplovoz, a monopoly Ukrainian producer of locomotives and trams, was only last year being eyed by major European investors, such as German electronics giant Siemens, with some analysts estimating at the time that the state could fetch as much as $200 million.
The State Property Fund (SPF), Ukraine’s privatization body, announced in March that the plant had been sold in a last-minute auction that included, essentially, one bidder from Russia for around $60 million.
The auction was supposed to have been held last October, but was suspended immediately following public statements made by Yanukovych, who said the issue should be studied more closely.
The head of the parliament’s Special Monitoring Commission on Issues of Privatization, Andriy Kozhemyakin, said that there was no competition, no transparency and that the 76 percent stake should have been sold for far more.
The SPF denied any wrongdoing, but President Yushchenko has since asked the PGO and SBU to look into the deal to see if the SPF had held a fair tender.
In December 2006, the city of Kyiv had its majority stake in a prized bank watered down in a controversial share emission deal that opposition parties say robbed the capital of hundreds of millions of dollars.
Khreshchatyk Bank, ranked 20th out of more than 150 Ukrainian banks, with over $600 million in net assets, was until late last year 51.2 percent owned by the Kyiv City Administration.
Supporters of the emission said it was intended to raise additional investment into bank capital, but instead it diluted the city’s stake to 23.7 percent.
A private company’s stake in the bank went from 34 percent to 44.2 percent. Other privately-owned minority stakes were also increased.
The city’s administration declined to take part in buying up the new shares from the emission, yielding the majority stake to private interests.
The opposition ByuT faction said the city’s shares could have been sold for hundreds of millions of dollars in badly needed municipal revenues.
ByuT, which is in opposition in the Kyiv City Council as well as the national parliament, accused the majority in the Kyiv City Council of promoting the interests of two councilmen allegedly affiliated with the companies that gained from the share emission.
Most worrying of all, in the government’s privatization policy, is its willingness to relinquish valuable state assets without holding any auction.
A top SPF official announced last September that a joint venture between Russian and Ukrainian investors had moved in as the main investor in a potentially lucrative but still unfinished ore-enrichment plant.
The SPF is headed by a member of the Socialist Party, a part of Yanukovych’s parliamentary majority since last summer.
The SPF had repeatedly pledged to transparently auction off the Kryviy Rih Oxidized Ore-Enrichment Plant (KGOKOR).
Instead the plant has now effectively ended up in the hands of Moscow-based Metalloinvest and Dnipropetrovsk-based SMART-group on the basis of a closed-door government decision.
World steel giant Mittal-Arcelor, Ukraine’s biggest overall investor to date, had hoped to take part in a tender for KGOKOR but has now been left out in the cold.
The SPF said that the KGOKOR deal concerned the creation of a joint venture, in which the Ukrainian state would hold a controlling stake, and no actual sale of state property was involved.
However, Metalloinvest is financing the completion of the plant, and is therefore calling the shots. SMART-group is widely considered the Russian company’s junior partner in the deal.
Although the attention of the world and the media are glued on the latest political standoff between Yushchenko and his premier, the government says it is planning to move ahead with even more lucrative state sell-offs
On April 18, the Cabinet confirmed a list of state enterprises to be sold this year, including fixed-line monopoly Ukrtelecom and the Odessa Portside chemical plant, valued at up to $400 million, but auction dates have yet to be set. Also slated for sale are 10 regional energy suppliers.
Successful privatization of these assets could be a boon for the treasury and attract a strategic investor willing to put money into modernization and restructuring.
Another rigged tender will mean more losses for the state and confirmation for foreign investors that Ukraine’s privatization is going back into the shadows.
Ironically, the longstanding political chaos in Ukraine is playing into the hands of the country’s well-connected tycoons by scaring off competition from Western bidders willing to pay top dollar in privatization tenders for Ukrainian assets. The opportunity is open for Ukrainian and Russian tycoons to snap up what’s left for below market prices.
John Marone, Kyiv Post Senior Journalist, based in Ukraine.
April 23, 2007
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