Attempts to reverse questionable privatization auctions were championed by Yulia Tymoshenko when she served as prime minister
Attempts to reverse questionable privatization auctions were championed by firebrand Ukrainian politician Yulia Tymoshenko when she served as prime minister in 2005. However, the so-called re-privatization efforts have been put on the backburner since she was ousted from office in September that same year, with her opponents accusing Tymoshenko of shaking investor confidence.
But the issue of reviewing past state sales is resurfacing, possibly getting its second wind, without the negative political hype that accompanied the issue the first time around.
Ukraine’s Constitutional Court late last month started hearings on a 2004 appeal made by 47 legislators asking for a major stake in one of the country’s largest steel mills to be returned to state hands.
The appeal, signed back in 2004 by deputies from the Our Ukraine and Yulia Tymoshenko blocs, which at the time were in opposition to President Leonid Kuchma, asked the court to re-nationalize a 50 percent stake in Mariupol-based Illich Metallurgical Plant, privatized on privileged terms in 2000.
Even though analysts agree that the privatization of Illich was dubious and unfair, like the sales of many state assets during the 1990s, many fear that the reemergence of such privatization reviews could again rattle investor confidence in property rights.
The case
The privatization of Illich traces its roots to 1996, when a 42 percent stake was transmitted through a privileged privatization to Illich-Stal, allegedly owned by the plant’s 39,000 workforce.
Later, in 2000, parliament and then-President Leonid Kuchma approved the privileged sale of an additional 50 percent + 1 stake in the mill to Illich-Stal. This stake was sold for about $82 million, yielding Illich-Stal full control over the multi-billion-dollar mill. Analysts say the mill has a market capitalization today of $2.15 billion.
In the Illich privatization deal, no tender was conducted, as the privileged sale was intended to yield the shares to the mill’s workers, but rumors mounted that the company that bought the stakes was actually controlled by top management, namely, the plant’s director, Volodymyr Boyko. Sources also alleged that shares were being resold non-transparently to other parties.
Similar privileged sales were conducted throughout the 1990s into 2004.
The Illich factory is slightly smaller than Ukraine’s biggest Kryvorizhstal mill, which was re-privatized in 2005 after being sold a year earlier through an allegedly rigged tender to companies controlled by tycoons Rinat Akhmetov and Viktor Pinchuk for about $800 million. The Kryvorizhstal mill was reclaimed by the state following a court ruling, and resold the same year through a highly transparent tender to the world’s largest steel group at the time, Mittal Steel, for a whopping $4.8 billion.
Proponents of privatization reviews argue that Ukraine could raise badly needed funds for state coffers. And this argument just might win the day.
On Feb. 28, the Constitutional Court’s press service announced that hearings on the Illich appeal had already started and that a final decision should be made within months.
Serhiy Teryokhin, a legislator in Tymoshenko’s Byut bloc who signed the Illich re-privatization appeal, said the privileged sale “violated the constitutional rights [of other citizens] to participate in the privatization.”
Furthermore, Teryokhin claims the employees never really controlled their shares in the mill, as was initially intended.
“[They] gave power-of-attorney rights over their shares to Illich-Stal, so it was absolutely controlled by Boyko,” Teryokhin said.
The complete share ownership structure of Illich-Stal has not been made public.
Teryokhin said the case is important as a matter of principle and that it should “prevent attempts by some to use privatization for their own benefit under the slogans of workers’ or investors’ rights.”
“If the court decides that this sale was in line with the Constitution, then we may see more privatization deals of this kind in the future,” he added. However, if the court finds the sale to have violated the Constitution, then many other privatization dealings from the past could be challenged.
Teryokhin said it would be difficult to predict what decision the court would make, adding that “our courts are often guided by the political appropriateness of a decision rather than facts.”
A Pandora’s box?
Boyko, now a parliament deputy who serves as the honorary chairman of Illich, said violations can always be found in past privatization dealings.
At a March 7 press conference, Boyko singled out Our Ukraine deputy Mykhaylo Pozhyvanov, one of the legislators backing the appeal to the Constitutional Court, as a benefactor of past shadowy privatization dealings.
“As mayor of Mariupol [years ago], Pozhyvanov bought quite a bit [of other assets]. Didn’t he violate any rights here,” Pozhyvanov asked rhetorically.
Boyko also raised other problems with past privatization deals, noting, for example, that his mill had not been given a fair chance to bid for prized ore-mining enterprises. And Ukraine’s Constitutional Court has rejected appeals to cancel these allegedly unfair tenders, he added.
Boyko warned of the negative aftermath that could follow if massive re-privatization efforts experienced under Tymoshenko’s stint as prime minister regained momentum.
“I hope that common sense prevails. All 18 members of the Constitutional Court understand what they are doing and will, as a result, make a normal decision that will not explode, or destabilize the country. If they recognize the privatization of the mill as unconstitutional, then the cancellation of all previous privatization laws would follow,” Boyko added.
While premier in 2005, Tymoshenko was criticized for pledging to re-privatize dozens of large enterprises allegedly sold off through non-transparent means in the past. President Viktor Yushchenko cited her aggressive re-privatization rhetoric as one of the reasons for his decision to fire her in the fall of 2005. The two governments that have followed hers have toned down re-privatization rhetoric since and have pledged to ‘protect property rights.’ But a few quiet efforts to reverse questionable sales of large assets from the past have persisted.
Ukraine’s State Property Fund, for example, has continued to press ahead for the second consecutive year with efforts, through court litigation, to reverse the sale of a majority stake in the prized Nikopol Ferroalloy Plant. The majority stake was acquired years ago by companies controlled by Pinchuk, who is son-in-law to former President Leonid Kuchma. The sale was allegedly conducted with violations. Another Ukrainian business group offered significantly more than Pinchuk but was prevented from taking part in the final bidding process.
Oleksandr Paskhaver, director of the Kyiv-based Center of Economic Development and an advisor to Yushchenko, said Illich was privatized “the same way as hundreds of thousands of small and big plants through mechanisms yielding workers priority rights over shares.”
“But there always was somebody behind the workforce who in such a way purchased the enterprises cheaply,” buying out the shares from the employees, he added.
But Paskhaver sides with Boyko and warns that the consequences of reversing alleged unfair sales from the past outweigh the benefits and could be damaging to Ukraine’s economy and investor confidence.
“I think that the case is absolutely ridiculous. If [the Constitutional] Court find it illegal, then all the hundreds of thousands of similar privatizations can be challenged too,” he added.
