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Ukraine: Mass Privatization Does Work For Some

  • Robert Lyle

RFE/RL economics correspondent Robert Lyle has just returned from a week's tour of privatization projects in Russia, Ukraine and Belarus. Organized by the World Bank's International Finance Corporation (IFC), the tour took a small group of international journalists to dozens of sites in major cities, small towns and on farms. He will be filing reports on the places he visited over the next few weeks.

Zhytomyr, 1 April 1998 (RFE/RL) -- The mass privatization of large and medium-scale enterprises in Ukraine is a sometimes thing, depending first on the political decisions of what can and can't be privatized, but even more on the regional view of the whole idea.

In Zhytomyr, 150 kilometers west of Kyiv, pensioner Alexander Kuperenko has no qualms about the process of turning former state-owned enterprises into private companies. "The duty and obligation of each citizen of Ukraine is to promote privatization and market reform," he told a group of visiting foreign journalists one day recently at the Zhytomyr Privatization Certificate Auction Center.

The Zhytomyr regional center was the first of 26 opened, one in each of Ukraine's oblasts, to allow citizens, legal entities and even some foreigners, to buy shares in large and medium-size enterprises which are being privatized all over the country.

Kuperenko did not bring money to the center, however. The currency here is either privatization certificates -- the government distributed 48 million of these -- or compensation certificates -- issued to those who lost their savings in the hyper-inflation of the early 1990s.

Kuperenko carried four compensation certificates, valued at a total of 40 hryvna, he received in exchange for his erased bank savings. He didn't hesitate as he filled out the papers, saying he was buying shares in Ukraine's main sugar refinery.

"I learned that our officials have reached agreement with Russian officials on sugar sales to Russia, so I said to myself it would be a good chance to invest because as sales will boom, sugar refineries will prosper," he commented as he turned in his certificates. "Sugar has a bright future...this is a very good developing sector in Ukraine," he said, especially in Zhytomyr oblast.

Kuperenko has quietly become one of a legion of Ukrainians who have taken privatization to heart. He doesn't describe himself as a pensioner, but rather says he's a "senior consultant" with a private personnel placement firm and calls his age "a commercial secret."

According to Price Waterhouse company, which is working with the U.S. Agency for International Development-financed Ukraine Mass Privatization Project, more than 85 percent of the population has collected privatization certificates and 15 percent of the compensation certificates have been distributed.

Kuperenko does not know exactly how many shares his certificates will buy. His "bid," along with those from thousands of other Ukrainians around the country, was sent to Kyiv for the compensation certificate (CC) auction which begins on the 15th of each month and lasts for about 30 days.

There is no "auction" in the sense of live bidding, but rather a unique application of the market principle of supply and demand. The State Property Fund tallies all the bids like Kuperenko's (the demand) and divides that total by the number of shares offered by the privatizing company (the supply). That determines the winning share price. The more bids there are for a particular firm, the higher is the share price. Then, with various similar calculations, it determines the number of shares per certificate.

Individual bidders such as Alexander Kuperenko agree to "pay" whatever the winning share price is. Financial intermediaries and legal entities such as buyers associations can place bids with a price ceiling, but those bids are only considered after the citizen's bids are decided.

In the current 24th CC auction in which Kuperenko's bid is entered, shares for 337 enterprises are being offered, 131 of them for the first time. Most (26) are in Donetsk oblast, 25 are in Odessa and 20 are in Vynnytsia oblast. (The shares that don't sell in this auction will be offered again until they are sold off.)

Zhytomyr, being a rural oblast, doesn't have as many companies in the auction. But Deputy Governor Vladimir Matyushenko is proud of the fact that of 390 large or medium state enterprises in the oblast, 287 have been transformed into joint stock companies, 93 of which have already sold 100 percent of their shares. The rest have sold from 25 to 75 percent so far.

"Almost 94 percent of the population here have already used their privatization vouchers," Matyushenko told the reporters at the local certificate auction center, "and 34 percent have collected their compensation certificates for a total of 26 million hryvna."

Matyushenko said Ukrainian economy is facing "hard times," and that the atmosphere for private business is difficult. However, he says, among privatized enterprises in Zhytomyr, 95 percent have improved their operations.

People in Zhytomyr tend to invest only in enterprises in the oblast, generally only selling their shares when they move to another area. The director of the Ukrainian Securities and Stock Market Administration's Corporate Finance department in Kyiv, Vladimir Ulyanov, says this is typical because there is not yet an active market in the resale or trading of shares. "Currently, only the primary market is active," he told our correspondent. Part of the reason, he says, is that Ukrainians became shareholders "overnight" and haven't yet realized the full significance of trading shares.

Nationally, only around 8,000 large and medium size enterprises have been privatized so far in Ukraine, with an additional 1,000 authorized by President Leonid Kuchma in early March. What impact the parliamentary elections will have on this generally slow pace of privatization remains to be seen.

But for at least one of those privatized enterprises, the Biomedsklo glass company in Zhytomyr, there is no turning back. First turned into a joint stock company in 1994 with 60 percent still owned by the government, the firm is now 75 percent owned by private shareholders and is actively looking for foreign investors.

Company President Alexander Rudenky sounds like a salesman as he proudly shows visiting journalists around his plant, first opened as a top-secret producer of glass bottles for biological weapons by the Soviet Union in 1984.

Rudenky says the company raised five million dollars in the past two years, some from delayed wage payments from the firm's 760 employees, to begin revitalizing the plant. They built two new furnaces, purchased some fairly modern Indian-made equipment from a failed Russian plant and ordered new Italian and German glass forming machines which are to be delivered soon.

"The employees said they were prepared to work and not receive wages for some time because they want the enterprise to operate, they want these new production lines to be purchased," said Rudenky. Employee wage arrears have gone as long as a month, but are slowly being caught up, he adds.

The state has retained a 25 percent ownership in the plant because it is the only Ukrainian facility which makes borosilicate glass products for hospitals, medical and biological research applications.

However, says Rudenky, they are rapidly expanding other commercial lines, such as bottles for food products, perfumes and specialty oils, and looking for buyers globally. So far, he says, they are exporting over 60 percent of their production, which is running around one million dollars a month.

Rudenky is confident sales will pick-up soon, although production obviously still exceeds demand. Hundreds of pallets of glass bottles are stacked along the alley-ways and open spaces of the plant, awaiting customers.

Rudenky acknowledges over lunch that there is a serious problem with payments from those who purchase Biomedsklo's glassware. A great part of the company's sales in Ukraine and exports to neighboring Belarus and Russia are for barter -- goods used to keep employees going when they don't receive their wages on time.

Still, Rudenky says, it has been no problem to shift from state ownership, where the plant merely fulfilled state production quotas, to private ownership where commercial competitiveness rules.

Raising a glass of fruit juice, Rudenky smiles across the table and says: "If you want to drink champagne, you have to take the risks of ownership to afford it."
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