by Ivan Lozowy
Might Ukraine's "reprivatization" merely be a repeat of the wild privatization of the 1990s? The signs are unhealthy.
When he was on the campaign trail last autumn, one of the more notable promises made by Viktor Yushchenko was that, as president, he would "separate government from business," a radical departure from the old ways of doing things in Ukraine where government and business were closely intertwined to the benefit of the country's nouveaux riches and the "oligarchs," super-rich businessmen with close ties to those in power. Yushchenko repeated his promise after his inauguration on 23 January, saying that members of his new government would sign a resolution in which they would promise to sell their businesses or transfer them into the hands of others. "This will serve as confirmation that this person will never use their official position to lobby for their own business interests," he said.
Yet, one month after Yushchenko's new government was sworn in, a scandal involving Ukraine's new justice minister, Roman Zvarych, suggests his ministers are doing little to offload their businesses, to stop lobbying, to heed Yushchenko's words.
Too oily to govern?
The Zvarych affair was sparked on 16 February, when Prime Minister Yulia Tymoshenko and her government banned the re-export of crude oil from Ukraine. The government argues that Ukraine, a country which imports over 90% of its oil, needs to maintain stable prices for petroleum products. The import of Russian oil for subsequent export at a hefty mark-up distorts and destabilizes oil prices in Ukraine, it contends. The next day, Zvarych said he would not sign off on the government's new decree, even hinting that he might resign.
Then an open letter to Tymoshenko appeared from a company, Oil Transit, whose deputy director happens to be Zvarych's wife, Svitlana. It complained that the government's decision interfered with its plans to re-export 3 million tons of oil from Russia to Slovakia. That would be roughly one-tenth of the 34 million tons of oil that Ukraine has so far imported each year from Russia. (Ukraine itself needs 22 million tons; the rest goes to Ukraine's petroleum refineries.)
For a country such as Ukraine, not used to debate about conflicts of interest, the Zvarych scandal has been a learning experience. (Zvarych himself, a former U.S. passport-holder, should know a little more about conflicts of interest.) Initially, the media were concerned primarily about Zvarych's accusation that the government was "attempting to drag members of [his] family into corrupt schemes," a reference to a complex business deal that he claims was suggested to him. When a connection with Zvarych's wife came to light, however, cries of "scandal" were heard and sentiment turned against the minister.
Yushchenko, however, came down on Zvarych's side and stated publicly that he was against banning the re-export of oil but favored imposing a value-added tax on the import of oil. That would limit the mark-up on re-exports by Oil Transit, while boosting budget revenues.
In the end, Svitlana Zvarych's business interests have been dealt a double blow: the government's ban on re-export has not been lifted, and oil imports are now subject to a 20 percent value-added tax (that is a hefty blow since Oil Transit had not yet imported most of the 3 million tons earmarked for re-export).
The scandal seems far from over, given that Zvarych last week claimed the ban on re-exports violated Ukraine's constitution, while the economics minister, Serhiy Teryokhin, claimed that there would be no re-export of crude oil from Ukraine, at least while he is a minister.
Government seeks metals giant for reprivatization
But a new government policy is attracting even more attention than this one minister's conflict of interests. That issue is the possibility of a large-scale review of previous privatizations.
The focus so far has been on Kryvorizhstal, a privatization singled out by Yushchenko in his election campaign as a particularly questionable deal. When, on 12 May 2004, Ukraine's State Property Fund put 93 percent of the factory's shares up for sale foreign investors such as the LNM Group, U.S. Steel, and TATA Steel showed an immediate interest in the largest steelmaker in what is a major steel-making country. But, then, after the tender had already been announced, the State Property Fund ruled that potential investors must have a history of producing at least one million tons of coke--a coal residue used in smelting iron ore--per year in Ukraine. Perhaps not coincidentally, only Ukrainian companies fulfilled this condition.
But what particularly concerned Yushchenko, and many others, was that the buyer, Investment Metallurgical Union, won with an offer ($800 million) that was only a little higher than the starting price ($715 million). Interested foreign investors had mentioned sums at least twice as large. The privatization had also proceeded at a record pace, with the deal concluded by 14 June 2004. Investment Metallurgical Union is a joint venture between Viktor Pinchuk, the son-in-law of former President Leonid Kuchma, and Renat Akhmetov, a man who later bankrolled much of the presidential campaign of then-Prime Minister Viktor Yanukovych.
After her appointment as prime minister on 24 January, Yulia Tymoshenko announced that Kryvorizhstal would be returned to the state and, on 8 February, her cabinet instructed the State Property Fund to cancel all its decisions regarding the metal giant's privatization.
The real battle for Kryvorizhstal, however, is taking place in the courts. So far, Tymoshenko also seems to be getting her way there. On 17 February a local Kyiv court annulled its own decision from August 2004 that Kryvorizhstal's privatization was legal, and on 25 February froze the company's shares. On 1 March, Ukraine's Supreme Court annulled a number of lower-court decisions that had ruled the sale legal. It sent the case back to the commercial court to review from scratch.
In the meantime, Oleksandr Turchynov, the newly appointed head of Ukraine's secret service and before that the first deputy chairman of Tymoshenko's party, Batkivshchyna (Fatherland), said on 17 February that his agency would investigate 3,000 cases of alleged corruption in the privatization of state enterprises. In what is probably not a coincidence, Tymoshenko had earlier announced that her government would review 3,000 privatizations.
A bad example?
This policy has been dubbed "reprivatization" and stirred lively debate in the press and among policy-makers. Indeed, even Yushchenko seems to have been taken aback by the ambition of Tymoshenko, his main ally in the Orange Revolution. He responded to Tymoshenko's declarations by saying that at most 30 large enterprises would be reprivatized. But the intense and driven Tymoshenko has in the past proven hard to stop.
The danger is that "reprivatization" might become wild. Already, there is some sign that the Orange Revolution has introduced a new and disturbing element into Ukrainian business life. A case in point is the ownership of the football team Dynamo Kyiv, which was privatized in 1993 by the Surkis brothers, Hryhoriy and Ihor. Since then, it has expanded into a sports empire worth $200 million, according to Kostiantyn Grigorishin, a former business partner of the brothers'.
Grigorishin, a Russian businessman, began cooperating with the Surkises and their partners in 1998, when Ukraine's regional electricity distributors began to be privatized. But this cooperation stalled by 2002, when Grigorishin was briefly arrested at the instigation of another business partner of the Surkis brothers, Viktor Medvedchuk.
Medvedchuk is the former head of President Kuchma's administration. Hryhoriy Surkis is a member of the Social Democratic Party (United), a party led by Medvedchuk.
When the Orange Revolution was in full swing in November and December, Grigorishin declared publicly that he would "take back" Dynamo Kyiv. That threat took a tough form in mid-February when armed guards hired by Grigorishin tried unsuccessfully to seize two energy companies from the Surkis brothers. His attention has now turned to Dynamo Kyiv, although in a less violent fashion. An offshore company belonging to Grigorishin is now taking the football club to court for allegedly diluting the rights of minority shareholders. It has already won a court order prohibiting the sale of Dynamo Kyiv shares, though this might prove problematic in practice since court executors have been unable to locate the shares' registrar. All of this is worrying observers. Grigorishin clearly feels he has a chance to wrest control over companies belonging to the Surkis brothers at a time when their fortunes, long closely tied to the political scene, have taken a sharp downturn. Grigorishin knows that the new government will not interfere to protect the Surkises as it would have under Kuchma and Medvedchuk. Some fear Grigorishin may even have the backing of the current administration. During the Orange Revolution, Grigorishin made several appearances on stage with members of the opposition. He denies he offered any material help to the opposition or to Yushchenko.
How far Grigorishin is willing to go in his pursuit of the Surkis family's assets is unclear, but his strong-arm approach suggests he will not be meek. Tymoshenko, too, can be remorseless in pursuit of her goals. The danger is that a Tymoshenko-backed mass reprivatization might create a business and legal whirlwind in which men like Grigorishin will pursue their own wild reprivatization. A sense of a free-for-fall akin to the privatization of the 1990s is beginning to emerge. No detailed criteria about what companies might or might not be reprivatized have been announced. The possibility now is that some, like Grigorishin, will look at Tymoshenko's initiative and believe anything goes. Those may just be fears at this point, but already the atmosphere is unhealthy. What looks certain is that Ukraine's courts face a very busy period and a test of their malleability.
Ivan Lozowy is a TOL correspondent and also runs an Internet newsletter, the Ukraine Insider. 3 March 2005 http://www.tol.cz/ [1]