Polish goverment's decision on sale of steel mill angers Ukraine (03/07/04)

Polish goverment's decision on sale of steel mill angers Ukraine

by Roman Woronowycz
Kyiv Press Bureau

KYIV - A decision by the privatization arm of the Polish government to offer to sell a Polish steel mill to a British-Indian consortium threw Polish-Ukrainian economic relations into turmoil on February 28. The determination contradicted an earlier announcement in which the Polish government said it would favor the tender offer of a Donetsk-based Ukrainian firm.

The diplomatic turmoil that ensued after Ukraine's government questioned the transparency of the privatization process of the Huta Czestochowa steel mill forced Prime Minister Leszek Miller on March 1 to call for a government review of the matter. Mr. Miller acted after a telephone call from Ukraine's Prime Minister Viktor Yanukovych in which the Ukrainian government leader said the manner in which the tender was awarded to the British-Indian concern, LNM Group, was "discriminatory" against the Ukrainian-owned corporation, Industrial Union of Donbas (IUD).

Mr. Yanukovych told reporters in Kyiv on February 28 after a meeting of his Cabinet of Ministers that economic matters between the two strategic partners must be decided on an equal and fair basis.

"If there was a mistake, it should be corrected," explained Mr. Yanukovych.

The previous day, while on a trip to Zaporizhia, the Ukrainian prime minister had said that matter threatened the strategic partnership between Poland and Ukraine. "We will look into the matter and build our relations taking into account what has occurred," said Mr. Yanukovych.

He went so far as to state that "if Poland discredits Ukraine," Kyiv might look to Hungary to become its unofficial voice within the European Union, a responsibility Poland had earlier said it would retain.

The Ukrainian Embassy in Warsaw submitted a diplomatic note to the Polish government protesting the manner in which an unpublicized "second tender" allegedly accepted by the Polish government had allowed the LNM Group to up its bid after the IUD proposal had become public.

The Ukrainian embassy also accused Warsaw of failing to stipulate in its tender offer that it had an agreement with the European Union to limit steel output until 2006 after it entered the economic commonwealth in May. IUD had stated in its bid that it would triple steel output at Huta Czestochowa.

IUD, a Donetsk-based manufacturing conglomerate with close ties to the Ukrainian prime minister, looked positioned to obtain the purchasing rights to Huta Czestochowa after it had submitted the most comprehensive and financially sound bid package. On February 12 a Polish government tender commission had announced that it had voted to support the IUD bid proposal. The package IUD had proposed included extensive investment to physically refurbish the plant and included wage guarantees.

However, a bit later on the same day Poland's Vice Minister of the Treasury Andrzej Szawranski issued a statement explaining that, before the decision was finalized, the prime minister and the president needed to review the matter.

When Minister of the Treasury Zbigniew Kaniewski announced on February 20 that the LNM Group bid had been accepted, IUD reacted by releasing a statement that it would protest the decision. It accused the LNM Group of repeatedly pressuring the Polish government in contravention of "the procedure of a European privatization tender."

"The corporation believes LNM has repeatedly pressured the Polish government, creating the conditions for the insincere correction of its tender submission at the last minute for its own benefit," IUD explained in a statement issued on February 23.

During a press conference on February 26, Oleksander Pylypenko, director of investment and corporate rights at IUD, said he believed LNM had made a post-deadline last ditch attempt to win the Huta Czestochowa tender because it was desperate to obtain ownership of the relatively small steel mill. He explained that LNM had not realized that the European Union had imposed steel production limits on Poland until 2006, which would limit LNM's ability to develop the Polskie Huty Stali (PHS) steel mill it had bought earlier. He explained that by buying and then closing Huta Czestochowa, which is much smaller than PHS, LNM could add to the amount of steel it would be able to manufacture from the plant it already owned.

"In the heat of the fight for PHS as they worked to resolve the various problems associated with signing sales and purchase contracts, they (LNM) failed to study the issue carefully, that the EU considered PHS a company sustained by government budgets and thus the rule on production restrictions would apply," explained Mr. Pylypenko.

The IUD executive stated that his company's own interest in Huta Czestochowa was based on a desire to own a plant within the EU to overcome restrictions on the import of Ukrainian steel into the economic commonwealth. By buying Huta Czestochowa IUD would be able to ship unfinished, low-cost steel products it manufactured in Donetsk to Poland, where the manufacturing process for rolled steel and tubing would be completed, avoiding EU restrictions.

Matters became still murkier when Ukraine's Vice Minister of Foreign Affairs Oleksander Chalii said in Brussels on February 24 that members of the European Commission with whom he had met had expressed surprise at the way the Polish government had explained the situation. Mr. Chalii said EC members had insisted that no limits had been placed on Polish steel or metallurgical output, reported Interfax-Ukraine. Mr. Chalii was in Brussels to discuss minimizing the negative affects for Ukraine of the EU's expansion eastward, including quotas on Ukrainian metallurgical output.

On March 2, during a Radio Liberty interview, Mr. Chalii added that after some investigation it had been agreed among EU, Polish and Ukrainian officials that Huta Czestochowa in particular was not bound by EU production limitations.

The controversy, which has received extensive coverage in the Polish press, widened still further after the country's leading newspaper, Gazeta Wyborcza, reported on March 1 that Polish Treasury Minister Kaniewski had explained that the reason the LNM offer on Huta Czestochowa was reconsidered was "to avoid stiff competition between PHS and Huta Czestochowa," which divided ownership would have undoubtedly brought.

IUD responded by submitting an unsolicited bid for the PHS steel mill to the Polish prime minister in which it offered to raise investment in the mill by 10 percent over the LNM commitment.

"If the investor that was selected for PHS has not yet completed the transaction for fear of competition from Huta Czestochowa, IUD is prepared to take upon itself all the commitments of the original investor regarding PHS, including the price of the sale, the investment and social package, payment of outstanding debt and an increase in the statutory fund," read a letter from IUD Chairman Serhii Taruta to Prime Minister Miller, parts of which were published in Interfax-Ukraine.

On March 3 Gazeta Wyborcza reported that IUD had stated in its offer that it was prepared to pay the astronomical sum of nearly $2 billion for both PHS and Huta Czestochowa steel mills.

The Polish government has promised that a review of the controversy surrounding the privatization of Huta Czestochowa would be completed by March 30. Ironically, Polish President Alexander Kwasniewski is scheduled to visit Kyiv that day to open the Year of Poland in Ukraine.

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