Publication: Eurasia Daily Monitor Volume: 2 Issue: 92

Foreign investors are showing more interest in Ukraine since the Orange Revolution. Nevertheless, they remain cautious because of uncertainties surrounding the threat of re-privatization. Until this issue is resolved, something President Viktor Yushchenko supports but Prime Minister Yulia Tymoshenko opposes, Ukraine’s positive international image will not generate additional foreign investment.

Potential foreign investors have been alarmed by the manner in which the government threatened TNK-BP and OASO Lukoil with the re-privatization of the refineries they acquired in the 1990s. To stem inflation, caused partly by continued high social spending, the government ordered oil companies to not raise prices or else face the re-privatization of their Ukrainian refineries.

The Yushchenko team did little to assure their commitment to a market economy by appointing Valentyna Semeniuk as head of the State Property Fund. While she has experience as head of the parliamentary commission on privatization, Semeniuk and her Socialist ties will add to the populism of the Tymoshenko group within the government. Like Tymoshenko, Semeniuk backs a more extensive investigation into the privatization deals of the 1990s. Both Semeniuk and Tymoshenko have hinted that Kryvorizhstal, which oligarchs Viktor Pinchuk and Renat Akhmetov purchased for a third of its real price in June 2004, should remain in state hands.

The Yushchenko team faces divisions on re-privatization and other issues because is an extremely broad alliance that stretches across the entire political spectrum seen in any European democracy. The alliance includes left-wing social democrats, business representatives, liberals, and populist right parties.

The main fault line runs between Yushchenko’s Our Ukraine and Anatoliy Kinakh’s Party of Industrialists and Entrepreneurs. Both parties include medium and small businessmen and back liberal market economics. These more liberal, free marketers are more inclined to minimize the number of companies subjected to re-privatization. They also favor offering re-privatized companies for tender.

A second group represents a more populist, anti-oligarch orientation grouped on the left (Socialists) and the right (Prime Minister Yulia Tymoshenko’s bloc). These populists are in favor of reviewing a far longer list of privatizations and, in some cases, keeping firms under state control.

According to Tymoshenko, “If an enterprise brings profits to the country, it is not necessary to sell it into private ownership.” Such comments do little to allay fears that she is more a populist than a free marketer. She has already ruled out the privatization of companies that are “essential for the country’s viability or national security” (Zerkalo Tyzhnia, April 16-22).

As a result of these mixed messages, the Yushchenko team has had to issue “a lot of contradictory messages,” according to the head of Renaissance Capital Ukraine. This, in turn, “creates al kinds of uncertainties.” The Carnegie Endowment’s Anders Aslund has warned, “Members of this government right now are going in very different directions” (Wall Street Journal, May 4).

The government’s inconsistent message is partially the fault of Yushchenko himself, who occasionally launches into anti-oligarch populism. Upon nominating Semeniuk, Yushchenko ordered her to work on returning “everything that was stolen to the state,” which would require a full inventory of what had been privatized (Ukrayinska pravda, April 18). Tymoshenko asked the Prosecutor-General’s office to examine all privatization deals by mid-February in order to evaluate the legality of the deals. Based on this still-undisclosed list, Tymoshenko wants the courts to contest 3,000 privatizations. She reported that the Prosecutor-General’s office opened criminal investigations into 2,000 of them (Ukrayinska pravda, March 2). The executive soon quashed this massive review, as it would have undermined foreign investor confidence.

Yushchenko publicly registered his opposing view by announcing that only 30-40 companies would be re-privatized. Unlike Tymoshenko and Semeniuk, Yushchenko believes that 90-98% of Ukraine’s privatizations followed the laws then in effect.

Hoping to calm foreign investors, Yushchenko called in February and again in April for a final roster of companies subject to re-privatization. On April 28 he gave the government only 10 days to finalize the list. Tymoshenko opposed the idea of drawing up a final list. First Deputy Prime Minister Kinakh at first supported her but then shifted to Yushchenko’s position (Ukrayinska pravda, May 4, 5).

Three factors have fuelled the government’s populism.

First, it is tempting to be selective about which of the 30-40 (Yushchenko) or 3,000 (Tymoshenko) companies would be investigated and re-privatized. Parliamentary speaker Volodymyr Lytvyn (who was head of the presidential administration during six of Kuchma’s 10 years in office) has indirectly defended the illegality that pervaded Ukraine at that time. According to him, nearly everyone broke a law at one time, because the legal system was so inconsistent (Silski visti, October 8, 2004).

Second, the volume of corruption uncovered since Yushchenko’s election has hardened the left and right populism within the government. During the last two years of the Kuchma presidency, the authorities launched a de facto free-for-all that handed out choice state assets to loyal allies. Theft from the budget and international aid was widespread. “When we came to office, we discovered that all public life in Ukraine had been corrupted,” lamented Economics Minister Serhiy Teriokin (Washington Times, April 15).

Third, Tymoshenko has an eye on the 2006 parliamentary elections. Her anti-oligarch populism has made her highly popular — perhaps more popular than Yushchenko.

National Security and Defense Council Secretary Petro Poroshenko has explained that re-privatization would only be undertaken in cases where there was only one bidder, the tender was not transparent, the price was not fair, or the investor did not fulfill his obligations. Yushchenko ally and First Deputy Prime Minister Mykola Tomenko advised that at a government meeting they banned use of the word “re-privatization” (Ukrayinska pravda, February 17). Unfortunately, Tymoshenko and Semeniuk seem to disagree.