The year 2008 was supposed to be a watershed in Ukrainian privatisation, with Yulia Tymoshenko back in office and promising to bring her trademark transparency to the process as she had done in 2005. In reality, last year’s tug of war between President Viktor Yushchenko and the then prime minister Viktor Yanukovych has simply morphed into this year’s battle between Mr. Yushchenko and current PM Yulia Tymoshenko. Then, as now, one of the main consequences of the seemingly never-ending power struggle has been the postponement of long overdue sales of state enterprises. The State Property Fund itself has been transformed into a theatre of the conflict, with rival appointees vying to control the state body responsible for managing the privatisation process, while the list of state entities up for auction has been repeatedly whittled down by Presidential decree and investor confidence sapped by Yushchenko’s continual sniping at the government. The end result has been a failure to carry through any significant sales in the first five months of the year. Having built her political reputation partly on ensuring transparent privatisation auctions, Mrs. Tymoshenko appears to have been beaten in her own game.
Conflict behind cancellation
At the centre of the current privatisation fight is a highly sought after chemicals plant in the Black Sea port of Odesa that has been slated for sale on numerous occasions over the past few years old to be later taken off the shelf due to technicalities or bureaucratic obstacles. It was to be one of the showpieces of this year’s privatisation programme, but on May 19 Mrs. Tymoshenko’s government was finally forced to concede defeat and indefinitely postpone this year’s planned privatisation of a 99.5% stake in the Odesa Portside Plant (OPP), the country’s second largest fertiliser maker. “Today, the process of holding honest privatisations has been halted in Ukraine,” Tymoshenko announced the same day.
Her 2008 privatisation programme was one of the most ambitious in the country’s history and had included the country’s fixed-line telecommunications giant, Ukrtelecom and significant stakes in several regional energy suppliers, in addition to OPP. With inflation soaring to record heights and Russian gas giant Gazprom cutting into the government’s revenues from domestic gas sales, the premier saw privatisation as the surest source of quick cash to boost government revenues and help finance widespread social payment increases.
Political overtones to privatisation battle
President Yushchenko fears Mrs. Tymoshenko as an opponent in next year’s presidential race and has done everything in his power to keep her from generating the budget revenues that could finance the kind of vote-winning social benefit increases which have led her opponents to slam the PM for perceived populism. In order to prevent planned privatisation auctions from going ahead bureaucratic obstacles have repeatedly been thrown into the path of the current programme. The National Security and Defense Council (NSDC), which Yushchenko has often used as a counterweight to the Cabinet, prohibited the State Property Fund (SPF) from selling off any of the above named assets on May 16. However, Mrs. Tymoshenko has grown familiar with opposition to her privatisation plans from the President in recent weeks. For example, when she couldn’t fire SPF chief Valentina Semenyuk, the premier appointed and financed her own privatisation supremo who promptly set about moving forward with state auctions. She then remained unruffled when the Prosecutor-Generals’ Office announced that it had opened a criminal case against this appointee.
Mrs. Tymoshenko had previously contested the President’s decrees against the privatisation of OPP in court. Over a period of a couple of months in early 2008, OPP gradually took on more and more significance in the power struggle between the two Orange Revolution leaders until it became the Stalingrad of Tymoshenko’s and Yushchenko’s political war, with neither side willing to concede defeat. When it became clear last week that the much trumpeted auction of OPP wasn’t actually going to take place, Tymoshenko then moved to transfer management rights from the SPF to the Cabinet, while her first deputy, Oleksandr Turchynov, assured everyone that the sale could still take place in June. However, the failure of the Tymoshenko government to push through any significant part of their extensive privatisation programme is a serious blow to both its credibility and financial clout.
The bidders and the plant
The government had previously announced on February 20 that it would auction off OPP at a starting price of over USD 600 million (up from the USD 495 million, the price quoted by the previous government during a failed privatisation bid in 2007). The plant immediately attracted the attention of international bidders such as Norway’s Yara International and Russia’s biggest fertiliser maker Evrkhim. Ukrainian tycoons such as Ihor Kolomoysky of the Privat Group, Dmitry Firtash, half owner of controversial monopoly gas importer Rosukrenergo and Konstantin Zhevago of Tymoshenko’s BYUT faction, also expressed interest. By the time the government had postponed the auction on May 19, only Evrokhim and companies controlled by Mr. Kolomoysky and Mr. Firtash were still in the running.
Mr. Kolomoysky had reportedly tried to form a consortium among other bidders to prevent Russian giant Gazprom, which has connections to the other two bidders, from taking control of the strategic plant. OPP is not only valued as Ukraine’s second largest producer of urea and ammonium; it is situated at the end of an ammonium pipeline that runs right to the port of Odesa. Additionally, it includes a transhipment complex equally coveted by Ukraine’s other chemical producers.
President Yushchenko’s stated reason for opposing the privatisation of the plant is that the buyer would have a monopoly over the pipeline and thus an unfair advantage over other producers. Supported by the SPF, the president has argued that the plant cannot be auctioned off until parliament passes legislation that would regulate such a monopoly. BYUT lawmaker Serhiy Terekhin dismisses this line of reasoning. “What’s the problem? Monopolies of this kind exist all over Europe. And why talk about changing legislation before a monopoly even exists,” he told Business Ukraine. With or without the transhipment plant, OPP still needs to be privatised, as the state cannot afford to finance its much needed modernisation works. Kyiv-based investment bank Concorde Capital estimates that OPP could fetch as much as USD 1 billion due to high world prices for agricultural products and thus for fertilizers that go with them. But without the transhipment plant, the ensemble would go for only half as much. The Odesa Portside Plant, which posted net revenues of USD 372 million and a net income of USD 46.9 million in 2007, exports about 90% of its production.
Spoiling tactics pay off
The figures who eventually emerged as the likely buyers, including Ukrainian bidders such as Mr. Kolomoysky and interests related to Russian Gazprom, were not the kind of clients Mrs. Tymoshenko would have selected if given the choice. Besides Mr. Yushchenko, the premier also has poor relations with Mr. Firtash, Mr. Kolomoysky and even Gazprom, which she has fought to keep out of Ukraine’s domestic gas market. Mrs. Tymoshenko championed one of Ukraine’s greatest privatisation deals in 2005, which saw the country’s largest steel mill, Krivorizhstal, returned to state hands after a controversial tender and then resold for USD 4.8 billion, six times the original amount raised by the overturned 2004 sell-off. The deal was widely praised at the time as lucrative and transparent, handing a moral victory to the fiery political leader, who by the time of the sale had been removed from office and was back in opposition. As a result it is easy to imagine how she might have come to view further state sales as a win-win situation, allowing her to boost her market economy credentials and bring in additional revenues for government and voters while spoiling the business plans of her political opponents.
Unfortunately for the current government things didn’t work out quite that way. According to Mr. Terekhin, the government had to postpone the auction because the president scared off most bidders with his decrees and the criminal cases filed by the PGO. “The statements made by President Yushchenko caused investor interest to fall away,” he opines.
Kyiv-based political analyst Mykhaylo Pogrebensky concurs that the situation has reached an impasse and left the PM with no choice but to postpone her plans yet again. “Yulia Tymoshenko didn’t have any choice,” he states. “On the one hand, two of the three remaining bidders, Mr. Firtash and Mr. Kolomoysky, could have dropped out at the last minute and thus removed any sense of competition from the auction process, rendering it an empty gesture. On the other, even if the auction did take place, Mrs. Tymoshenko is unlikely to generate the budget revenues she was counting on due to the lack of serious international bidders such as Norway’s Yara.”
