Ukraine to Resume Privatization According to New Rules

The Ukrainian government will resume its privatization campaign in October, the acting head of the local privatization body, the State Property Fund, Vitaly Trubarov, announced on May 10. Speaking after a meeting of the cabinet of Prime Minister Volodymyr Groysman, which discussed privatization, Trubarov said all the large state-owned stakes slated for sale this year should change hands by the end of the year. Addressing his cabinet, Groysman vowed to put an end to “shadow privatization,” apparently meaning certain past privatization schemes in which lucrative businesses were sold to local oligarchs cheaply and without competition (UNIAN, Kmu.gov.ua, May 10).

The privatization list approved by Kyiv includes majority shares in several power generation and supply companies; turbine maker Turboatom and the manufacturer of electric equipment Electrovazhmash, both based in Kharkiv; the chemical plants Sumykhimprom and Odessa Port Plant (OPZ); and the United Mining and Chemical Company, which is a player on the international titanium market (Spfu.gov.ua, accessed on May 16).

The privatization of most of those companies has been delayed for years. Speeding up the sale of government-owned industrial assets has been one of the main conditions of the International Monetary Fund (IMF) for the $1.9 billion tranche of its Extended Fund Facility loan, which Ukraine hopes to obtain this summer. In order to convince the IMF that privatization will be honest, Kyiv last January approved new privatization legislation. It came into effect in March, later than planned initially, so the start of the privatization campaign this year has been postponed from last winter until the fall.

In line with the new law, privatization procedures have been simplified in order to make the process faster and to attract more foreign investors. At the same time, companies from Russia are explicitly prohibited from buying assets from the government. Russia is being punished for the continuing war in eastern Ukraine and the annexation of Crimea in 2014. The state-owned assets slated for sale were subdivided into two groups, for “big privatization” and simplified “small privatization.” In order to prepare assets valued at more than $9 million—the threshold for “big privatization”—the government has to hire international investment banks as advisors, which should enhance the credibility of the process. Cheaper assets will be put up for electronic trades. It should also now become possible to resolve privatization disputes in international courts (Segodnya.ua, January 18; Golos.com.ua, March 6).

Two companies stand out on the privatization list as potentially the most valuable ones: the regional power generation company Centerenergo and OPZ. Kyiv has been postponing their sales since the last decade, and the IMF has been insisting for several years that the two be sold. Centerenergo is the country’s second-largest regional power generation company. Since 2009, when then–Ukrainian president Viktor Yushchenko allowed the privatization of Centerenergo, its sale has been postponed almost every year. Centerenergo owns three thermal power plants in eastern and central Ukraine, with a total capacity of 7,660 megawatts. Last year, it cut power generation by 36 percent because of coal shortages caused by the government-imposed ban on coal purchases from mines controlled by Russian proxies in the Donbas region (see EDM, March 29, 2017). Nevertheless, Centerenergo managed to almost quintuple its net profits, to the equivalent of $73 million, in 2017.

OPZ’s privatization progressed to the stage of auctions several times, only to be derailed at the last moment. In 2009, the government of then–prime minister Yulia Tymoshenko invalidated OPZ’s sale to Nortima, a company reportedly linked to local oligarch Ihor Kolomoysky, for $600 million. The State Property Fund then claimed that the price was too low. Nevertheless, in 2016 the State Property Fund failed to find buyers for OPZ—initially for the equivalent of $527 million, and several months later even for $200 million. It may not be easy to find buyers for OPZ this year either, because it has been losing money for several years and accumulated large debts for natural gas to the state oil and gas firm Naftogaz Ukrainy and to Ostchem. The latter company is linked to local tycoon Dmytro Firtash, who is wanted in the United States on bribery charges. OPZ CEO Mykola Shchurykov said recently that the starting price of OPZ would be set at $54 million (day.kyiv.ua, May 2).

The state budget law for this year provides for privatization proceeds of $813 million. Ukraine’s total state budget for 2018 equals $37.8 billion (Interfax, December 30, 2017). Last year, the projection was for the equivalent of $653 million in privatization proceeds, but less than $8 million was received because almost all of the scheduled privatizations were eventually postponed until 2018. However, this year, privatization may be affected by the upcoming presidential and parliamentary elections, both scheduled for 2019. In the past, Ukrainian politicians used to buy the support of oligarchs ahead of elections with lucrative assets privatized for a fraction of their real value. If this year’s privatization campaign is honest, Kyiv will not only fill state coffers, but more importantly, also potentially earn the trust of serious investors, something it lacked for many years.