Double-edged Sword

Economic News

22 Jul 2010
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Eclipsing the entire privatisation revenue of the last 14 years, this week's landmark steel mill sell-off fuelled debate on the costs and benefits of Ukraine's controversial reprivatisation process.

The sale's success has also raised the question of whether the government should accelerate the privatisation of its remaining state assets.

By the end of auction day on October 24, it was clear that Ukraine was once again on international investors' radar screens, with most news agencies quite taken aback by the $4.8bn bid from Mittal Steel for Ukraine's flagship Kryvorizhstal steel mills.

Yet although the awe-inspiring price tag will provide extra ammunition to supporters of the controversial re-privatisation process, analysts hope that Kryvorizhstal will be the first and the last Ukrainian enterprise to be re-sold.

The company had originally - and controversially - been sold off for $800m to a firm that included the son-in-law of the former president, Leonid Kuchma.

Detractors of re-privatisation argue that, unless it is done in a very short period of time and in a very clear and transparent procedural manner, a review of past privatisations can paralyse the economy and lead to great political instability.

Yet, with Kryvorizhstal's repeat privatisation attracting six times more revenue to the National State Property Fund's account than when it was sold last year, many expect there will be a lot of popular pressure on the government for it to continue to go after other assets bought for a song by businessmen close to Kuchma.

The proceeds of the sale will account for some 6% of Ukraine's total projected GDP for 2005. They will also help to fix the expected 2% hole in next year's budget, created largely by last year's sharp increase in social payments, such as pensions.

Former Prime Minister Yulia Tymoshenko, an advocate of a more radical and comprehensive reprivatisation process, could not hide her satisfaction when she attended the televised Kryvorizhstal auction, which was supposed to mark the end of the reprivatisation process.

Apparently vindicated by perhaps the most successful privatisation in East European history, she is expected to keep reprivatisation on the political agenda in the run up to parliamentary elections in March 2006.

Indeed, during a press conference on October 26, Tymoshenko raised the issue of a second enterprise slated for repeat privatisation - that of the Nikopol Ferroalloy Plant (NFP).

Tymoshenko's political bloc in parliament has initiated a fresh investigation into why there has been a delay in selling this enterprise.

Nevertheless, Prime Minister Yurii Yekhanurov seems to be standing firm in the face of mounting popular pressure. Speaking at a press conference the same day, Yekhanurov expressed his reluctance to rush the privatisation of NFP, the fourth-largest ferroalloy producer, arguing that it needs to be carefully prepared for the market to secure a higher price in the future.

Along with President Viktor Yushchenko, Yekhanurov seems to favour a peaceful negotiating process with owners of enterprises deemed to have been sold at a market discount. Last week, the president invited some of Ukraine's top businessmen to his office in Kiev to negotiate a peace deal.

Although the outcome of this meeting is not yet clear, many analysts speculate that owners of these controversial enterprises will be offered an opportunity to make additional payments.

If the president and prime minister both agree on keeping a lid on reprivatisation, the president has expressed more enthusiasm for accelerating the stalled privatisation process.

He told a conference in Kharkiv soon after the Kryvorizhstal auction that it was necessary to privatise Ukraine's incumbent fixed-line operator, Ukrtelecom as soon as possible.

"A political delay, or any other delay in the realisation of this project, will harm Ukraine's interests," Yushchenko was cited as saying by the Ukrainian News Agency on October 26.

Yet, speaking on the same subject at a press conference the same day, Yekhanurov hinted that there would likely be problems in speeding up the privatisation of Ukrtelecom.

He said this was because the privatisation of this strategic enterprise was precluded by a law that bans the privatisation of any large enterprises until parliament adopts the 2005 privatisation programme.

Meanwhile, foreign commentators hope that the president and prime minister will capitalise on the fresh momentum created by the Kryvorizhstal deal to attract more foreign direct investment, without going any further down the road of re-privatisation.

However attractive that road may seem, reprivatisation, many analysts say, is a double-edged sword. Critics argue that without a halt to the process, alongside deeper economic and political reforms, business confidence will be undermined, and Ukraine will then face the risk of being consigned to the low investment grade of a politically risky country.

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