The controversial sale of the Kryvorizhstal steel mill to a consortium backed by President Leonid Kuchma's son-in-law Viktor Pinchuk, and Rinat Akhmetov, reportedly Ukraine's richest man, is a dress rehearsal for a string of shady privatizations to come in the next few months, informed sources say.
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The sale of the mill on June 14 to Investment-Metallurgy Union, many think, is the first of a series of attempts by well-connected tycoons to grab hold of remaining state assets before presidential elections this fall.
“It’s not a coincidence that all strategic enterprises on sale now are being sold in a rush,” said Socialist faction deputy Valentyna Semeniuk, chair of parliament’s special controlling commission for privatization, adding that the ruling elite hope to gain control of the country’s big assets before elections.
“Ukrainian business-political groups understand that the situation in the country could change dramatically after the presidential elections,” said Oleksandr Ryabchenko, director of the Kyiv International Institute for Privatization, Asset Management and Investments.
“Kryvorizhstal was the first step, and next on the list are [coalmine holding] Pavlohradvuhilya, ore-mine holding Ukrrudprom, Odessa Portside Plant and possibly state-owned Ukrtelecom,” Ryabchenko said, adding that some of these state assets are already being managed, unofficially, by private business groups who don’t want to lose control over them.
Ryabchenko predicts that the assets, possibly including Ukrtelecom, will be sold before September.
Will foreign investors have an opportunity to buy these enterprises? Semeniuk says there’s “not a chance.”
“There was not a transparent tender process in the Kryvorizhstal sale,” Semeniuk said, “and people shouldn’t expect transparent tenders as the other companies are privatized, either.”
She added that she will continue efforts to reverse the Kryvorizhstal tender through lawsuits, even after the presidential elections.
The planned sell offs have, according to Semeniuk, received the blessing of Prime Minister and presidential candidate Viktor Yanukovych. Yanukovyck trails opposition leader Viktor Yushchenko in the polls, and the funds raised from the sales would allow his government to raise pensions and salaries paid by the state to workers ahead of the elections, she added.
At stake
Dnipropetrovsk oblast based Pavlohradvuhilya, which produces 13 percent of Ukraine’s coal, is already on sale. The State Property Fund launched a tender last year, at a starting price of about $200 million. The sale collapsed on a technicality and was re-launched March 17 with a starting price of about $170 million. The SPF announced that two bids were submitted by the June 23 deadline. Sale results should be revealed before the end of June, SPF officials said.
UK-headquartered LNM Group, the second-largest steelmaker worldwide which offered $1.5 billion for Kryvorizhstal, was expected to bid for Pavlohradvuhilya.
Ukrainian business groups are also expected to participate in the tender.
A controversial condition that required bidders to have produced 1 million tons of Ukrainian coke annually for three years effectively barred foreign bidders from the Kryvorizhstal sale. Insiders also said the Kryvorizhstal tender was “rushed” and foreign bidders had trouble receiving documents detailing Kryvorizhstal’s assets and operations. Fund officials admitted there were bottlenecks.
There are no similar conditions for bidders for Pavlohradvuhilya, but the sale is also being rushed, and stiff competition from local groups could keep foreign bidders out, Ryabchenko said.
“Unlike the case with Kryvorizhstal, foreign investors have a chance to bid for Pavlohradvuhilya, but they will have less of a motivation to compete as aggressively, as the coal produced by this company is mostly consumed in Ukraine,” he added.
Ukrrudprom, a holding that controls the state’s shares in several lucrative ore mining plants throughout the country, is expected to be broken up, with the separate groups of shares sold individually. Individuals and groups who already hold shares in the facilities will have priority purchasing rights; these existing shareholders, Ryabchenko said, are almost exclusively Ukrainian business groups.
Ryabchenko said foreign steel groups want control over Ukrainian ore producers, as they are among the largest suppliers of the raw material worldwide, but foreigners don’t stand a chance given the conditions set for the sale of Ukrrudprom. Parliament passed a law in April that gives priority purchasing rights to shareholders who own at least 25 percent stakes in ore companies in which Ukrrudprom also owns shares.
“This gives priority buying rights to companies such as [Akhmetov’s] System Capital Management, and companies affiliated with Dnipropetrovsk-based Privatbank,” Ryabchenko said.
Ukrrudprom’s statutory fund stands at Hr 1.343 billion (more than $200 million).
A firm hired by the SPF recently valued Odessa Portside Plant, which specializes in the production of ammonia, carbamide and loading chemical products exported through the Yuzhny port, at Hr 1 billion.
SPF chief Mykhailo Chechetov said June 14 that he planned on starting the Ukrrudprom and Odessa Portside Plant sales in July.
Ryabchenko described the Odessa plant as “very attractive,” and he expects tough competition.
“I think a Ukrainian group will win. We will know more when the conditions are publicized, but I won’t be surprised if they favor Ukrainian groups, as the conditions in the Kryvorizhstal sale did,” Ryabchenko said.
Foreign Partners wanted?
Cash-rich Russian investors bought up many of Ukraine’s oil refineries and other assets several years ago, outbidding Ukrainian groups. Ryabchenko said Ukraine’s five biggest business groups have grown aggressively in recent years and are now able to hold their own when competing against larger Russian and western investors.
“Now the situation has changed and Ukrainian groups are buying it all up themselves,” he said.
“If such a situation didn’t exist, it would mean that Ukraine doesn’t have big business able to defend its interests. I’m not saying this is transparent and legal, but these are people who are aggressively defending their interests. Four years ago they didn’t have the muscle to defend their interests this way.”
Nearly all of Ukraine’s steel mills have already been privatized into the hands of local business groups. But there is still a whim of hope that strategic foreign investors will have a fair chance to gain a slice of business in Ukraine that is currently being privatized.
“If the Kryvorizhstal sale is an isolated incident, then this will only have a short-term negative impact. However, if this is followed by other controversial privatizations that exclude strategic foreign investors, it will send a message that Ukraine’s most profitable enterprises are not open to foreign investors,” said a consultant to one foreign steel firm.
“We haven’t given up hope, but I understand it’s not going to be easy to get a foot in the door. There is still interest in Ukraine, as it is a country with some of the biggest raw material supplies for steel making,” said an official at one foreign steel group.
Jorge Intriago, a partner at the Kyiv offices of PricewaterhouseCoopers in Ukraine, which represented a foreign company with a strong interest in buying Kryvorizhstal, said there is a real possibility that foreign steel groups could establish a mutually beneficial partnership with Ukrainian steel groups, including Kryvorizhstal’s new owners.
“I think that a post-privatization partnership with an international strategic investor is feasible, and makes perfect sense, for a number of reasons. It would bring in needed inflows of capital investment, and a strategic partner can facilitate access to foreign markets, especially to markets in which Ukraine is not an important player,” Intriago said. “A strategic investor would also bring significant industry experience and technical know-how,” Intriago added.
Ukraine, currently not a member of the WTO or recognized as a market economy, faces a growing number of trade barriers directed at its exports.
