Foreign bidders shut out as Kryvorizhstal is sold (06/20/04)

Foreign bidders shut out as Kryvorizhstal is sold

by Vasyl Pawlowsky
Special to The Ukrainian Weekly

KYIV - Ukraine's State Property Fund (SPF) on June 14 announced the results of the tender for the controversial sale of a 93.02 percent stake in the Open Joint Stock Company Kryvorizhstal. According to the SPF, only two companies met the tender requirements. Much of the controversy over the sale was due to the conditions that were set, which some say were geared toward shutting out the possibility of a foreign buyer.

One of the terms, for example, was that the bidder must have a controlling interest in a profitable coke plant in Ukraine, which had been operating over the last three years and was capable of producing not less than a million tons of coke per year. The only two bidders who met this requirement were the Industrial Group (Donbas Industrial Union) and the Investment-Metallurgical Union (IMU), an organization that was recently formed between the Interpipe Corp., headed by Viktor Pinchuk, the president's son-in-law, and System Capital Management, headed by Renat Akhmetov, Ukraine's richest man.

The IMU won the bid by offering 4.26 billion hrv, around $8.5 million (U.S.). The sale price drew the ire of both Ukrainian legislators and foreign bidders.

As reported by Interfax, Oleksander Moroz, leader of the Socialist Party of Ukraine, said his faction is likely to push for the resignation of Mykhailo Chechetov who heads the SPF. The Socialists charge that the SPF chairman violated the law and the Constitution of Ukraine, and that the sale failed to meet the commitments made during a meeting of the conciliatory council on the privatization of Kryvorizhstal.

The bid presented by the consortium made up of London-based LNM Corp., the world's second largest producer of steel, and Pittsburgh-based U.S. Steel, the seventh largest producer, was in fact much higher at 14.31 billion hrv, or about $2.7 billion (U.S.).

The consortium issued a press release on June 14 which read, "the consortium is disappointed with the fact that the State Property Fund chose to ignore this opportunity and believes Ukraine has missed a real opportunity by effectively ruling out foreign bidders from the privatization of Kryvorizhstal." LNM said the consortium's bid also addressed social and environmental issues.

"The LNM-U.S. Steel bid guaranteed all existing jobs and declared its commitment to maintaining and improving social harmony at the plant, and fulfilled all the terms of the tender relating to this issue," read the consortium's press release. While it may have met these particular terms of the tender, Valentyna Semiuk, who heads the special Parliamentary Commission to Control Privatization, told the UNIAN news service that it was her opinion the conditions of the tender were written up in such a way that the only possible buyer was IMU.

The LNM-U.S. Steel consortium has called on President Leonid Kuchma and Prime Minister Viktor Yanukovych to look into the sale, which has become nothing short of a scandal. However, it is unlikely that Mr. Yanukovych will take any concrete steps in the matter unless he is going to backpedal. At a June 9 press briefing, Mr. Yanukovych had said, "If we are unable to privatize Kryvorizhstal on time, we'll lose a great deal in the value of the company."

In a Deutsche Welle radio interview, Ferdinand Pavel, a consultant for the Ukrainian government said, "Of course it's a scandal. The plank was at an even $1 billion. A lower price is simply not possible. I would call what happened a thoughtless political calculation." The conditions laid out by the SPF were not simply a discriminatory condition against foreign buyers, stated Mr. Pavel, adding, "The SPF should have explained why it created such a condition. This wasn't done in Ukraine. Thus, the entire tender process was not transparent."

"The condition regarding coke can not be rationally explained, because coke, as a product, can be purchased on the world market. To stipulate that the company would be ensured of a coke supply would not be a problem for the potential foreign investors," said Mr. Pavel.

While there are many who are upset over the sale, Reuters reported that Mykhailo Chechetov, head of the SPF, said that there would be no reconsideration of the tenders. "It is with 100 percent certainty. There will be no reversal. The decision is final," said Mr. Chechetov.

Earlier Mr. Chechetov had said that the SPF would consider the matter through the courts, but on June 16 he clarified his statement. "They (the non-residents) could turn to the international courts if they had a signed agreement with us. In the given situation we do not have any legal relationship. If they want to take this matter to court, then they will have to do so in Ukraine," he said.

Mr. Chechetov is to report to the Verkhovna Rada on June 22 regarding not only the sale of Kryvorizhstal, but all matters related to the privatization of state-owned assets.

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