Publication: Monitor Volume: 7 Issue: 126

Newly appointed Prime Minister Anatoly Kinakh has admitted that Ukraine may experience serious problems meeting this year’s target of 5 billion hryvnyas (US$920 million) in privatization revenues (Reuters, June 18). The State Property Agency had collected only 1.25 billion hryvnyas in privatization revenues in the first five months of this year, compared to the 1.94 billion hryvnyas planned for this period. In addition, some of the asset sales planned for the second half of 2001 and early 2002 now seem increasingly unlikely to be held.

President Leonid Kuchma’s recent decision to indefinitely postpone sales of twelve electricity distribution companies (“oblenergos”), which were to take place during 2001-2002, is particularly important in this regard. Earlier this year, Ukraine successfully sold six. Slovakia’s Vychodoslovenske Energeticke Zavody (VEZ) purchased majority stakes in Khersonoblenergo, Kirovogradoblenergo, Zhytomyroblenergo and Sevastopoloblenergo, while America’s AES acquired Kyivoblenergo and Rivneoblenergo. These sales contributed more than 700 million hryvnyas (US$130 million) to state coffers. They were also Ukraine’s first fully transparent privatization auctions where foreign investors were selected on the basis of price offered for the asset rather than other considerations. In the past, most privatizations in Ukraine involved either local businesses or subsidiaries of major Russian companies. This apparently was not good enough for Kuchma, however. In putting further energy sector sales on hold, he stressed the need to make future transactions even more transparent (?!) and to ensure that “proper prices” are obtained from the sales.

In addition to advancing the process of ownership change in the industrial sector, these privatizations were intended to play a major fiscal role in Ukraine. According to the Ukrainian methodology, revenues from privatization are considered as budget revenue and are necessary in balancing this year’s consolidated budget. In order to meet the requirements for IMF financing, any shortfall of revenues from privatization would have to be matched by a corresponding cut in spending. Any budget shortfall could further reduce the prospects for renewed IMF financing, without which Kyiv may be unable to cover the US$2 billion in foreign debt payments that come due early next year.

While the monthly schedule of privatizations prepared by the State Property Agency for the rest of the year includes such potentially attractive companies as National Airlines of Ukraine, the Zaporozhye Aluminum Plant, Luhansknaftoproduct and Khartsyzk Pipe Plant, the sale of additional twelve oblenergos is widely seen as being able to attract the most interest among foreign investors. Moreover, Kuchma’s decision will do little to improve Ukraine’s investment reputation among foreign investors–which has already been damaged by the president’s alleged role in the Gongadze scandal and in the removal of Kinakh’s predecessor, the pro-Western Viktor Yushchenko.