Election fever infects privatization

Shady transfers of state property to well-heeled Ukrainian and Russian businessmen have been on the comeback in Ukraine ever since the Orange parties lost control of the government in mid-2006.

Now with President Viktor Yushchenko and opposition leader Yulia Tymoshenko set to try and take back the government from Prime Minister Viktor Yanukovych through snap parliamentary elections, the questionable privatization of valuable enterprises has become even more frequent if somewhat less conspicuous.

As Ukrainians go to the polls on Sept. 30 to once again choose between the bitter foes of the country’s 2004 Orange Revolution, billions of dollars in plants and factories hangs in the balance, to be handed over to new owners or possibly taken away from old ones. Whether a tycoon wins or looses in this cutthroat scrap for assets seems to depend largely on whom they support in the struggle for control of the next government.

The Odessa Portside deal

Last week, the Ministry of Economy announced that it would go forward with the sale of a 99 percent stake in a prized chemical plant, despite a presidential ban.

Economy Minister Anatoly Kinakh told journalists on Sept. 20 that “the government intends to implement its decision, despite the presidential ban.

He said that procedures for preparing the prized Odessa Portside Plant for privatization had not been suspended.

The Odessa Portside Plant, Ukraine’s leading producer of nitrogen fertilizer and ammonia, had been put up for sale on Aug. 15 at a starting price of $500 million. Analysts have said the plant could be tendered off for at least $1 billion. A handful of domestic and Russian bidders have expressed interest in participating in the privatization bid.

Yushchenko suspended the sale of the chemical plant on Sept. 12, just over a month after the government announced it would tender it off in the midst of the fierce election campaign. Analyst criticized plans to sell the plant during the election period through what they described as a rushed sale.

Leading up to the Sept. 12 decree, the president had been speaking out against a resurgence of questionable acquisitions of state-controlled enterprises, some sold through rushed, uncompetitive tenders, others snapped up by influential tycoons through bankruptcy dealings. Often, the sale prices were suspiciously low.

“Over the last year, transparent privatization tenders have been virtually halted,” he told a party congress on Aug. 7. “In the last year, Ukraine has forgotten what it means to hold a transparent tender. The state budget has yet to receive the millions of hryvnias [from privatization sales] that could go toward helping simple people,” he added.

Under Yushchenko’s predecessor, Leonid Kuchma, Ukraine saw tens of billions of dollars in state assets sold at a pittance to Russian and Ukrainian businessmen with the right connections. The shadowy deals picked up pace in 2004, as Yushchenko challenged Kuchma’s hand-picked successor, Prime Minister Viktor Yanukovych, for the presidency.

When Yushchenko came to power in 2005 on the wave of the country’s Orange Revolution, he and his first premier Yulia Tymoshenko challenged one of the more sleazy privatization deals - the sale of the country’s largest steel mill, Krivorizhstal, for a fraction of its worth.

By October of that same year, the Orange politicians had repossessed and resold the mill for $4 billion more than its original sales price to world steel giant Mittal Steel (now ArcelorMittal).

But since Yanukovych returned as premier in mid-2006 to again challenge Yushchenko for executive power, the bargains on state assets have returned.

“It feels like a pandemonium, where everything that’s not nailed down is going before the elections,” Yushchenko said on Aug. 7, adding: “I have an extremely wary feeling toward the institutions or powers currently initiating any privatizations. I am convinced that the current SPF (State Property Fund) is not capable of conducting an objective, unbiased and truly competitive legal auction.”

Rushed power sales

Besides the Odessa Portside Plant, the government also announced in August that it would auction off the state’s blocking stakes in six lucrative regional electricity distribution companies. Observers and Yushchenko himself had criticized Yanukovych’s team for slowing privatization to a halt since taking over the government, and the share packages in the so-called oblenergos had been slated for sale for several months.

But critics of the government’s renewed privatization zeal noted that all six oblenergos were the subject of bitter disputes for full control by competing Ukrainian and Russian tycoons. This, combined with the fact that the auctions were scheduled to be held sometime in October, just after the Sept. 30 vote, has led some observers to fear that the winners of the tenders would turn out to be tycoons loyal to Yanukovych’s Regions party.

With voting expected to be close, and control over both the parliament and government on the table, the support of wealthy patrons could tip the balance during talks to form a majority.

Ukraine’s SPF, which oversees privatization and his headed by a member of Yanukovych’s coalition, denies any political motivation behind the recent spur of auction announcements.

“Everyone says that we have not done enough to move forward with privatizations, but as soon as we do, they start saying it’s connected to the elections,” SPF spokesperson Nina Yavorska said.

Yavorska said that despite Kinakh’s public statements, the government has yet to officially give the order to move forward on the privatization of the Odessa Portside Plant.

However, the SPF has ways of transferring ownership of state property without holding a tender.

Stealing steel assets

Also last week, the SPF announced that it was about to finalize a deal that would transfer half the state’s interest in a potentially lucrative but still unfinished ore-enrichment plant into private hands: Kryviy Rih Oxidized Ore-Enrichment Plant (KGOKOR).

The deal was first announced last September and involves a joint venture between the SPF and Russian-Ukrainian investors. The SPF had pledged to privatize the KGOKOR in a transparent tender.

Instead, the plant is set to end up in the hands of Moscow-based Metalloinvest and Dnipropetrovsk-based Smart Group on the basis of a closed-door government decision. Russian Metalloinvest is widely believed to be calling all the shots among the ‘international investors,’ with Ukrainian Smart Group acting as a junior partner.

ArcelorMittal, Ukraine’s biggest investor to date, has asked that the tender be put off until after the elections.

“The creation of a joint venture in the run-up to the parliamentary elections, during a period of political instability, will aggravate mistakes already made and hurt the investment image of Ukraine,” reads a press release from ArcelorMittal’s representatives in Ukraine.

“A government formed after the elections must select a partner to help it finish building KGOKOR in accordance with the principles of open competition among investors,” the statement continues. 

Frank Pannier, chief of HR and Public Affairs for ArcelorMittal in Ukraine, questioned the rush to confirm the deal between the SPF and the Metalloinvet-Smart Group partnership during an important national election campaign.

“It’s as if they are concerned about what will happen under the next government,” he said.

Pannier also questioned why Prime Minister Yuriy Yekhanurov, an ally of President Viktor Yushchenko, approved the deal on his last day in office, just before Yanukovych took over.

“He didn’t even wait for the official evaluation by the Ministry of Industrial Policy.”

Retaliation

Insiders said business tycoons are pulling strings of influence in each of the country’s leading political camps.

President Yushchenko’s Our Ukraine-People’s Self-Defense bloc is no exception.

In particular, Ihor Kolomoisky, one of the country’s richest men and a head of the powerful Privat Group, is widely thought to be backing the president’s team this time around.

That’s why it should come as no surprise to hear the SPF threatening to repossess assets controlled by Kolomoisky’s group.

The SPF announced on Sept. 24 that it would review the privatization of the Marganetsky and Ordzhonikidzevsky Mining and ore complexes, currently connected to the Privat Group. The SPF said the law was violated in the sale of 25 percent stakes in the enterprises. The SPF, however, didn’t specify its sudden interest in a sale that took place years ago. The two plants together are the only producers of manganese in Ukraine.

Rewarded for loyalty

Another long-running privatization dispute is the lucrative Nikopol Ferroalloy Plant, currently controlled by tycoon Viktor Pinchuk. While his father-in-law Leonid Kuchma was still serving as president, Pinchuk picked up a ‘50 percent plus one share stake’ in the plant for a fire sale price of $80 million.

Analysts estimate that Nikopol, the world’s largest producer of manganese-based alloys, earns $30 million a month. Now Pinchuk is said to be sympathetic to Yushchenko’s cause, while also insuring himself with former allies, such as Inna Bogoslovska on Yanukovych’s party ticket.

As with Krivorizhstal, the courts under Tymoshenko and Yushchenko overturned the 2003 privatization of Nikopol, with Ukraine’s Supreme Court putting the final nail in the hopes of Pinchuk early last year. Nevertheless, the SPF was never able to recoup the shares, and in March of this year the Supreme Court effectively allowed Pinchuk to legally retain control of the plant.

But just like businessmen associated with Yanukovych’s Regions party, Pinchuk is apparently not taking any chances, with a new government possibly on the horizon. It can’t be excluded, for example, that Yulia Tymoshenko will return as premier and re-launch her campaign against dirty state sales.

That’s why few analysts were surprised to learn that the management at Nikopol, which is 25 percent owned by Kolomoisky, was about to do a share emission that will effectively reduce the state’s stake to 10 percent.

Insiders said the emission deal was part of a peace agreement between the Privat group and Pinchuk, with both agreeing to jointly take control of the plant.

The idea for the emission, which was first announced earlier this year, is meant to attract investment, Nikopol’s management has said, while companies owned by Pinchuk have denied initiating the idea.

But a shareholders meeting to confirm the emission was recently scheduled for Nov. 8, just a month after the elections. As with the ore facilities owned by Kolomoisky, the SPF has vowed to foil the tycoons’ plans, but few expect this to happen.

Privatization politics

Vadym Karasyov, a Ukrainian political analyst, said that despite its backing from the Region’s party, the SPF is not in a position to counter top businessmen like Pinchuk and Kolomoisky.

Instead, he said, the threats coming from the SPF are more a response to accusations by the Tymoshenko and Yushchenko camps against Regions’ main businessman backer, Rinat Akhmetov, Ukraine’s richest man.

“They want to say something like, ‘don’t start a war of re-privatization, or all our business interests will suffer,’” he said.

Tymoshenko’s aggressive privatization review campaign in 2005, during her first tenure as premier, spooked investor confidence. Yushchenko claimed to have fired her partially for this in response.

Since then, however, her popularity ratings have surpassed those of the president’s party. The president’s loss of popularity, as well as power, however, is largely due to his indecision in forming another Orange coalition after the 2006 parliamentary elections, which allowed Yanukovych to return as premier in a coalition with the Socialists and Communists.

Together with Yanukovych’s team of Russian-speaking eastern industrialists, the shadowy acquisition of state assets has also returned.

Akhmetov increased his stake in Ukraine’s largest thermoelectric generator as the result of a controversial share emission held last month. With the blessing of the government, shareholders at Dniproenergo agreed to water down the state’s 76 percent stake to 50 percent plus one share, with the only company effectively purchasing the new shares being Donbass Fuel-Energy (DTEK), the energy arm of Akhmetov’s System Capital Management holding company.

DTEK increased its holding in Dniproenergo as a result of the share emission from 8.7 percent to 40 percent, paying a total of $208 million. The current market value of the shares received by DTEK, however, amounted to around $500 million, with the share price expected to continue rising.

Earlier this year, the SPF auctioned off a lucrative locomotive plant, Luhanskteplovoz, for at least half its market value 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. But in March, the SPF announced that the locomotive plant had been sold in a last-minute auction that included only one bidder from Russia for around $60 million.

"Kyiv Post", 26.09.2007