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June 18, 2005

Ukraine: Government Seeks To Recover Investors' Trust

by Jan Maksymiuk

Ukrainian President Viktor Yushchenko

18 June 2005 (RFE/RL) -- Ukraine held a World Economic Forum roundtable in Kyiv on 16-17 June at which senior Ukrainian officials sought to allay investor fears surrounding previously announced plans to reverse some privatization deals. Officials also wanted to reassure the business sector that the country is firmly set to follow a path of market-oriented reforms made possible by 2004's Orange Revolution.
Kyiv has solemnly pledged to embark on a reformist course in the second half of 2005, pursue an active privatization policy, and guarantee property rights for all assets in Ukraine aside from those contested by the courts.

However, it appears that investors will exercise caution before the March 2006 parliamentary elections, when the level of legislative support for the post-revolutionary government's reformist agenda should become more clear.

President Viktor Yushchenko told the Kyiv gathering -- which was attended by the presidents of Poland, Estonia, Georgia, Azerbaijan, and Moldova as well as nearly 200 international businessmen -- that the country will speed up reforms later this year so that every Ukrainian can enjoy the "fruits" of last year's democratic revolution. Ukraine's economic growth this year will not fall below 7 percent, according to Yushchenko, thus providing favorable conditions for both domestic and foreign businesses. He stressed that privatization will be continued and pursued even more actively than before, naming the much-coveted Ukrtelekom telecommunications company as one of the major state-run businesses to be offered for sale in the near future.

Pledging Transparency

To make his point even more strongly, Yushchenko -- jointly with Prime Minister Yuliya Tymoshenko and Verkhovna Rada speaker Volodymyr Lytvyn -- signed a memorandum pledging government guarantees to property rights in Ukraine. The memorandum stresses that the government will conduct future privatizations strictly in accordance with the constitution and laws, create a favorable climate for investors, and seek the resolution of potential property disputes through amicable arrangements.

"The memorandum signed just now means that Ukraine is putting a full stop in the discussion of privatization processes that has been pursued for several recent months," Yushchenko commented. "The properties that have been privatized with violations of privatization tenders or the law in force will be contested in the courts."


The memorandum represents a significant departure by the Ukrainian government from the rhetoric it has pursued so far, following Yushchenko's repeated pledges to demonstrators on Kyiv's Independence Square in November-December 2004 that the new authorities would return to the people everything that was "stolen" from them. What was "stolen" in Ukraine has never been precisely defined, but it was widely understood during the Orange Revolution that the description applied to many companies privatized by Ukrainian oligarchs under questionable circumstances, particularly since Yushchenko himself named the metallurgical giant Kryvorizhstal, bought by Ukrainian oligarch Renat Akhmetov and Viktor Pinchuk, as one of such "stolen" asset.

Confusing Signals

Yushchenko, Tymoshenko, and other Ukrainian officials have on numerous occasions announced the release of a list of dishonest privatizations that would be reversed by the government. There were disagreements, however, about the length of that list. Yushchenko talked about some 30-40 companies, while Tymoshenko suggested at one point that it might include no fewer than 3,000 names. Little wonder, then, that current and potential investors in Ukraine reacted with bewilderment and distrust.

Tymoshenko subsequently changed tack and began to assert than no such list is necessary, as the government was working out a bill on revaluing privatized assets that would presumably address the issue of re-privatization en masse, without the need for any re-privatization inventories. That did not appear to improve the atmosphere for investors. Calls were heard among political and economic pundits, both at home and abroad, urging Yushchenko to sack Tymoshenko as the main proponent of administrative and non-market methods for running the Ukrainian economy.

However, the real problem for the Yushchenko-Tymoshenko tandem is that it urgently needs money to continue making what appear to be economically disastrous social outlays, in light of last year's massive pension hikes by the previous government and this year's lavish wage increases for public-sector employees to keep potential voters happy with an eye to the 2006 parliamentary elections. The easiest idea for replenishing state coffers -- backed by three-fourths of Ukrainians -- was either to resell some "stolen" assets to new owners for higher prices or to make their current owners to make additional payments to the government to close the gap between purchase prices and what was referred to as "real market prices."

The Case Of Kryvorizhstal

The 16 June memorandum on property rights does not kill this idea altogether, but it introduces some important modifications. Now the task of squeezing more money from the owners of dishonestly privatized companies appears to have been shifted from the government to the courts, while the threat of new privatization tenders has been replaced by an evidently more palatable proposal of "amicable settlements" between the government and the owners. Such a settlement has reportedly been proposed to the government by the Industrial-Metallurgical Union, the nominal owner of Kryvorizhstal, in the ongoing legal dispute over its privatization. Kryvorizhstal was sold in 2004 for some $800 million, a sum significantly lower than offers by other bidders.

If the government and the Industrial-Metallurgical Union strike a friendly deal in the dispute and the latter agrees to pay an extra sum to the state, it could prove an auspicious sign for everyone concerned. It would mean that Ukraine has taken a small step away from its command-economy past and toward a more civilized economic model. And, no less important, the government would receive the money it wants to maintain popularity for its reformist agenda among the electorate.

But if, as some predict, the Kryvorizhstal dispute drags on in front of international panels of judges, the big loser will be the Ukrainian government. Kyiv would then find it difficult to persuade investors through memorandums or business forums that it truly has their interests in mind.
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