Oligarch’s Privatize Ukraine Before Elections

Publication: Eurasia Daily Monitor Volume: 1 Issue: 33

On June 14, Ukraine’s two largest oligarchic clans undertook what are likely to be one of the first of many insider privatizations before this year’s elections in October. Ninety-three percent of shares in Ukraine’s largest steel producer Kryvorizhstal were purchased for a staggeringly low sum of only US$800 million. In an article entitled “Ukraine Gives Foreigners the Finger,” the influential Economist magazine on June 11 described the deal as, “rigged so blatantly as to be a joke.” In on the deal were Ukrainian President Leonid Kuchma’s son-in-law Viktor Pinchuk, who controls the Interpipe Group and is the power behind the Donetsk clan, and Renat Akhmetov of Security Capital Management. Pinchuk and Akhmetov teamed up to create the Industrial-Metallurgical Union (IMS) as the clear favorite in the privatization of Kryvorizhstal. The “tender” was announced on May 12 and potential investors were given only one month to bid. The short tender and the stringent requirements were aimed at blocking the entry of foreign investors into the privatization of Kryvorizhstal. Only two of the six companies, both Ukrainian, which submitted tenders could meet the requirement of having produced at least one million tons of coke and two million tons of rolled steel for the last three years, two of them profitably, inside Ukraine. Besides IMS, the other Ukrainian tender came from the Industrial Group, linked to the Industrial Union of the Donbas (ISD).

Foreign tenders came from the world leader Arcelor, the number two LNM Holdings-US Steel, Russia’s Severstal-Evrazkholding, and India’s Tata Steel. All offered bids in excess of $US1 million. Kryvorizhstal produces 20 percent of Ukraine’s steel market in a full production cycle. Its annual production includes 7 million tons of rolled steel and nearly 8 million tons of cast iron. The speed with which it was privatized, just 16 days before the official start of this election campaign, “has produced an impression that the main thing for this country is to have everything sold by November” (Zerkalo Nedeli, June 12-18). What will follow will be additional rapid sales of Ukraine’s major businesses to pro-Kuchma oligarchs at cut-rate prices. Before the elections the telecommunications giant Ukrtelecom, the Odesa Port Authority and 310 other entities will be privatized.

There are several reasons why the privatization of such lucrative state properties is being rapidly launched. The first is to bribe oligarchs to support Prime Minister Viktor Yanukovych, the pro-Kuchma presidential candidate. Second, some of the funds from the sale of privatized state entities, such as Kryvorizhstal, would go to Yanukovych’s election campaign. One populist way would be in the paying of extensive wage and pension arrears while another would be in creating an untraceable slush fund (Ukrayinska Pravda, June 8). Other sources for the Yanukovych election slush fund would come from tax revenues diverted from the budget. This is especially the case with VAT refunds to exporters. Last year, 5 billion hryvni ($US900 million) was stolen from the budget in this manner, Our Ukraine member Petro Poroshenko, head of the parliamentary budget committee, revealed (TV 5, June 13). A third reason for rapid privatization is that Ukraine’s oligarchs are threatened by a Viktor Yushchenko election victory because they fear re-distribution of their assets and being held accountable for illegal actions. Yushchenko has ruled out re-opening non-transparently conducted privatizations undertaken in the 1990s. Nevertheless, President Yushchenko would be under intense pressure to reverse the privatization of Kryvorizhstal and then hold a transparent tender.

Despite being sidelined, foreign tenders had two advantages over their two Ukrainian competitors. Firstly, they were willing to pay over US$1 billion, 20 percent more than Ukrainian bids. Secondly, as pointed out by Severstal, by excluding foreign companies, “Ukraine is missing a chance to attract capital which it needs so badly and to develop its metallurgical industry” (Financial Times, May 26). Only Western investment can modernize Ukraine’s Soviet-era industrial infrastructure. Yet, Ukraine’s record on attracting foreign direct investment is poor. This will be made worse by a rigged privatization that has infringed Ukrainian and international law (Zerkalo Nedeli, May 15-21). Such blatantly rigged privatizations seems to indicate that, “Ukraine doesn’t seem to care at all about how it is perceived”, believes Rob Edwards at Renaissance Capital, a Moscow investment bank (Economist, June 11). Pavel Ferdinand, a German adviser to the Ukrainian government, described the privatization as a “scandal” because it was non-transparent, the price of less than US$1 billion was too low and it was discriminatory against foreign bidders (Ukrayinska Pravda, June 15). Protests at the speed with which the non-transparent privatization of Kryvorizhstal was undertaken reverberated throughout Ukraine’s political system. Attempts to block the privatization through the courts failed, showing the degree to which the rule of law is absent. Parliamentary Speaker Volodymyr Lytvyn called for all privatizations to be suspended until after the elections. Lytvyn argued against the continued “embezzlement of the state” by oligarchs (UNIAN, May 4).

Nevertheless, Lytvyn’s duplicity could be seen when the People’s Agrarian Party, which he heads, did not vote in favor of an opposition resolution to halt the privatization of Kryvorizhstal (Ukrayinska Pravda, June 3). The resolution obtained 218 votes, eight short of a majority. The lack of transparency in the privatization process extended to the inability of parliamentary deputies to attend meetings held by the State Property Fund which oversees tenders. It was unsurprising that the privatization was described by the Socialists as similar to, “thieves entering the building who began to steal the property” (Ukrayinska Pravda, June 14). But, even Viktor Yushchenko’s pro-economic reform Our Ukraine bloc demanded that privatizations be suspended in election year. Ironically, on May 25, just three weeks before Kryvorizhstal’s rigged privatization, the Industrial Union of Donbas (ISD) filed a lawsuit in Warsaw complaining about the uneven treatment of the ISD when it submitted a bid for the Huta Czestochowa steel plant in Poland (Polish News Bulletin, My 25). Touché?