The State Property Fund on June 14 announced that it had sold a controlling stake in Kryvorizhstal, Ukraine’s largest steel mill, to a consortium backed by President Leonid Kuchma’s son-in-law, Viktor Pinchuk, and Donetsk-based tycoon Rinat Akhmetov - even though some of the largest steel groups in the world had submitted bids almost twice as high.
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Citing “national interests” as the reason the reason it imposed a controversial condition that effectively barred foreign bidders, the fund announced it had awarded the prized asset to Investment-Metallurgy Group, a conglomerate affiliated with Pinchuk, a parliament deputy and businessman, and Akhmetov. Ukrinvest, a shareholder in Ukrsibbank, is also a member of the consortium. Ukrinvest is co-owned by parliament deputies Oleksandr Yaroslavsky and Ernst Galiyev, according to documents obtained by the Post.
Investment-Metallurgy Group bid about $800 million for the share, not dramatically more than the $715 million starting price.
Speaking to journalists at a news conference on June 14, just after the decision was made, SPF chief Mykhailo Chechetov said the sale was the largest in the country’s privatization history, bringing in more than six times as much as Ukraine’s previously largest privatization.
“These added funds will allow the government to increase budget revenues (currently at just more than $10 billion) and raise pensions and salaries for state employees,” he said.
The sale of Kryvorizhstal, which produces about 20 percent of Ukraine’s steel, was the most transparent tender in the nation’s history, Chechetov said.
“The SPF, the government, the parliament and the president all clearly understood that mistakes were not acceptable, as such mistakes could threaten the economic security of the nation.”
Chechetov said a controversial tender condition that effectively shunned bids made by foreign bidders by requiring them to produce more than 1 million tons of Ukrainian coke annually for the past three years was motivated by “national interests.” None of the foreign bidders for the stake in Kryvorizhstal met the coke production requirements.
He said the condition was meant to ensure that Kryvorizhstal’s sale would be to the advantage of local coke producers, as a foreign owner might be expected to import coke.
A lack of transparency in the Ukrainian steel industry has in the past kept foreign steel out of the country, which ranks 7th in global steel production.
Foreigners cry foul
Kryvorizhstal’s sale is final, Chechetov said.
Oppositionist political groups have unsuccessfully attempted to halt the sale through court rulings, alleging the tender was rigged in favor of businessmen close to Kuchma. They promise to continue their attempts.
Several foreign bidders who rank among the world’s largest steel producers also want the sale results overturned. Among the tender’s foreign participants were Russia’s Severstal, which planned on bidding jointly with Arcelor, the world’s largest steel producer. However, the Luxembourg-based Arcelor said it didn’t have enough time to prepare for the tender, so it did not enter the tender. Severstal offered $1.2 billion for Kryvorizhstal.
A joint bid was submitted by LNM Group, the world’s second-largest steel maker, and United States Steel Corporation, ranked sixth in the world. They offered to pay $1.5 billion for the share and to invest another $1.2 billion into the mill.
Yevrazholding, Russia’s largest steel holding, also bid, through one of its steel mills.
None of the foreign bidders met the minimum coke production requirement, which they argued should be revoked.
One Ukrainian consortium, Industrialna Grupa (backed by Ukraine’s Donbas Industrial Union), did meet the coke requirement, and placed a bid. The group held talks with foreign bidders interested in partnering up in order to qualify for the tender, but ultimately it bid alone, offering about $750 million for the shares, slightly more than the starting price.
A mysterious firm called Partner Ltd., registered in a village in Zakarpattya oblast, also placed a bid, but was disqualified.
India’s Tata Steel earlier this year announced its interest in buying Kryvorizhstal, but did not bid.
Insiders said the tender was “rushed” and foreign bidders had trouble receiving documents, detailed information about Kryvorizhstal’s assets and complete information about its operations. Fund officials admitted there were bottlenecks, but did not give details.
In a statement issued after the sale results were unveiled, LNM Group expressed its dissatisfaction with the sale’s handling.
“The LNM-U.S. Steel Consortium urges the Ukrainian president and prime minister [Viktor Yanukovych] to investigate the tender process,” the statement reads.
“Ukraine has missed a real opportunity by effectively ruling out foreign bidders from the privatization of Kryvorizhstal… A successful privatization should be based on economics and by limiting the privatization in this way, the Ukrainian economy is being deprived of a competitive tender which would provide substantial additional investment for the country’s development,” the statement reads.
Kuchma tried to distance himself from the steel tender scandal on June 9, telling journalists that the government, led by Yanukovych – and not the Presidential Administration – was responsible for the sale. However, Kuchma also expressed his view that the sale should go through as planned.
“It is my personal opinion that the sale should occur,” he said. “We have seen time and time again, that when a [private] owner arrives at a factory, the situation [at the factory] improves dramatically.”
Meanwhile, Chechetov said on June 14 that he was happy with the tender’s results.
The SPF will rush forward in an attempt to privatize other big enterprises ahead of presidential elections, Chechetov said, citing enterprises such as ore-mine holding Ukrrudprom, coalmine holding Pavlohradvuhilya and the fixed-line telecom monopoly Ukrtelecom.
Kryvorizhstal posted sales of more than $1.3 billion last year, churning out about six million tons of rolled steel, seven million tons of steel, and 7.8 million tons of pig iron.
