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Ukraine: Privatization Picture Not As Bleak As It Appears

Prague, 10 November 1997 (RFE/RL) -- The latest row over privatization between the Ukraine Parliament and the government of President Leonid Kuchma would seem to dampen prospects for the coming key sell-off of large enterprises.

Last week the Parliament, the Verkhovna Rada, passed a resolution barring the State Property Fund from finalising contracts on the sale of state-owned enteprises until the Fund has a new head. The Rada is not in favour of the Fund's acting director Volodymyr Lanoviy, who was appointed by Kuchma in March, but who has never won parliamentary approval.

For his part, Kuchma says he will not drop Lanoviy. And Lanoviy says the government will push ahead with privatization despite the Rada's resolution, which he says is not a law and thus need not be obeyed by either the Property Fund or the Council of Ministers.

In a further thrust at the government, the Rada also created a parliamentary commission to investigate the "negative consequences" of the privatization process, and to examine possible corruption on Lanoviy's part. Lanoviy countered by accusing deputies of seeking to subjugate the Property Fund to various political and business factions for their own interests. He said his agency must function as an independent state institution.

The row is taking place within a tangled web of institutional uncertainties, in that there is still argument about who has the right to define and control the privatization process -- the parliament, the president or the government. And the Property Fund itself is now functioning without a legal foundation, pending passage of a new law.

Between the political games and institutional chaos, foreign investors might appear to be deterred just at a time when the Property Fund is set to sell-off an attractive package of large enterprises, a number of them profitable, such as oil refineries, regional energy companies, and automotive and shipbuilding plants.

But Jurgan Conrad, a senior analyst with Deutsche Bank Research, believes the picture is not as bleak as it appears. He told RFE/RL that although much of the privatization program may now be stalled until after the elections next March, there can still be forward movement. He sees room for compromise between Kuchma and the parliament. For instance, despite his assertion that he will retain Lanoviy, Kuchma may decide to sacrifice him in favour of someone acceptable to the Rada. Or Kuchma could do the sort of trade-off with deputies that he has done before: the Rada's acceptance of all or part of the privatization program in exchange for concessions in another area.

Conrad says one possible tactic is for the government to draw up a short list of those enterprises, the sale of which the deputies are least likely to oppose, and then to press ahead with their privatization.

Conrad says major foreign direct investors, the sort interested in buying the Ukrainian objects, are not greatly deterred by the present squabbling in Kyiv. He says such companies have a perspective of 20 years or more. They can see bargains among the enterprises soon to be offered, and they also realise the strategic importance of Ukraine in future -- its location at the heart of Europe, its pool of labour with very low wage costs. Foreign corporations which have successfully established themselves in Hungary or the Czech Republic are now considering the Ukraine as a site for production.

To support his assertion, Conrad notes that the inflow of direct foreign investment in Ukraine actually increased during the first half of this year to $340 million. That was despite factors which would normally be seen as deterrents to foreign investors. For instance the state budget was not passed until mid year, there was disagreements over the International Monetary Fund program, and there were changes in the cabinet which were considered unfavourable to reform.

Both the government and parliament are desperate for the revenue that would be raised by the cash sale of privatization objects. The Rada wants financing for its laws on pensions and wages, among other things, and this may be a possible lever for getting deputies to agree to go ahead with the privatization.