ANALYSIS: Privatization Ukrainian-style benefits pro-government oligarchs (06/27/04)

ANALYSIS

Privatization Ukrainian-style benefits pro-government oligarchs

by Jan Maksymiuk
RFE/RL Belarus and Ukraine Report

State Property Fund head Mykhailo Chechetov announced in Kyiv on June 14 that the Investment-Metallurgical Union had won the tender for the sale of a 93.02 percent stake in the Ukrainian steelmaker Kryvorizhstal, which accounts for some 20 percent of the country's steel output. Mr. Chechetov said the union paid 4.26 billion hrv ($800 million) for the stake at a starting price of 3.8 billion hrv ($715 million). The Investment-Metallurgical Union represents the interests of the Interpipe corporation - owned by Viktor Pinchuk, President Leonid Kuchma's son-in-law and a national deputy - and the System Capital Management company, which is controlled by Donetsk-based businessman Renat Akhmetov, reportedly the richest man in Ukraine and a longtime crony of Prime Minister Viktor Yanukovych.

In the past few weeks, Ukrainian opposition lawmakers made several unsuccessful attempts to block the sale of Kryvorizhstal - a giant steelmaker employing some 52,000 people - which was widely seen as yet another privatization, at a price well below the real value of the privatized company, intended to enrich the already-rich circle of pro-government oligarchs. On June 3 the legislature fell just eight votes short of the 226 needed to approve a resolution halting the Kryvorizhstal tender.

The terms of the tender were formulated in such a way that it was clear to everybody that Kryvorizhstal was poised to become the property of Messrs. Pinchuk and Akhmetov. In particular, the tender's qualifying conditions announced in May included the provision that any bidder must have a history of producing 1 million tons of coke and 2 million tons of steel in Ukraine annually in the past three years. Of the six bidders that submitted purchase offers, only two meet this condition: Investment-Metallurgical Union and the Industrial Union of Donbas, another Donetsk-based oligarchic holding. The Industrial Union of Donbas offered $750 million for the stake, just slightly over the starting price of $715 million, but below the Investment-Metallurgical Union's bid.

It is noteworthy that the Anglo-Dutch concern LNM and U.S. Steel, which made a joint bid, offered to pay $1.5 billion for the stake and add another $1.2 billion in an investment package. A higher bid than that of the Investment-Metallurgical Union was also made by Russia's Severstal steelmaker ($1.2 billion). LNM and U.S. Steel have reportedly called on President Kuchma and Prime Minister Yanukovych to revise the tender. "By limiting the privatization this way, the Ukrainian economy is being deprived of a competitive tender," LNM and U.S. Steel said in a statement.

The Kryvorizhstal sale - which many Ukrainian commentators have said is a large improvement on previous dishonest privatizations - nevertheless highlights Ukraine's notoriously clannish organization of the state power branches. Not only did the executive and legislative branches not see anything objectionable in such a tender, but even the judiciary expressed its approval.

Socialist Party lawmaker Valentyna Semeniuk on June 8 lodged a complaint against the Kryvorizhstal sale with the Holosiyivskyi District Court, arguing that the tender terms do not sufficiently protect Kryvorizhstal employees against layoffs. In theory, any court complaint should automatically suspend the privatization in question. Later the same day, however, the documents of the case were transferred to the Pecherskyi District Court, whose jurisdiction was deemed by judicial authorities more appropriate for the State Property Fund, which managed the privatization on behalf of the government. The Pecherskyi District Court - which is famous in Ukraine for many cases of ruling in favor of the authorities - rejected Ms. Semeniuk's complaint and said the privatization may continue.

More curious still, trade-union bosses at Kryvorizhstal have organized a petition among employees saying that they want a domestic investor for their enterprise. The petition was signed by more than 30,000 people, of whom the overwhelming majority, if not all, were reportedly completely unaware of not only the sums offered for their enterprise but also of the tender's provisions regarding guarantees for the Kryvorizhstal workforce.

Kryvorizhstal is a juicy privatization morsel - it reported net sales of $1.4 billion on production of 7 million tons of steel last year. Therefore, some Ukrainian media assert, it should be expected that the 93 percent stake will unavoidably, even if inconspicuously, be resold in the future, partly or completely, and with a hefty profit for the Investment-Metallurgical Union. Why the state did not want to put this profit in its coffers is, of course, a different question.

Jan Maksymiuk is the Belarus and Ukraine specialist on the staff of RFE/RL Newsline.

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