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Ukraine: Government Makes Untimely Decision On Privatization

Kyiv, 9 December 1997 (RFE/RL) - Anticipated international tenders for selling large stakes in the most lucrative Ukrainian enterprises may be a good idea - but, the government is unlikely to realize its aim to profit from them immediately, say financial analysts. "The necessity for speeding up privatization (through international tenders) is obvious, but this should not be done at the end of the year," said Ukrainian Interbank Currency Exchange Chairman and former National Bank governor Vadym Hetman.

Analysts tell RFE/RL that foreign markets may not react promptly to the Ukrainian government's wishes at the end of the year. This is a time financial companies are very unlikely to be persuaded to decrease profit figures in the annual reports they are currently preparing by buying a stake in a Ukrainian enterprise, say observers.

"No one is going to take risks at the end of the year, and no one will be able to prove to his shareholders that it is now that they should (buy a stake in a Ukrainian enterprise)," said Erik Naiman, an analyst with Alfa Capital in Kyiv.

President Leonid Kuchma introduced preparations for international tenders in a November 18 decree, citing the urgent necessity to increase budget revenues as the primary reason for conducting the tenders. Under the decree, the State Property Fund (SPF) is to select foreign investment companies or commercial banks, authorizing them to sell a given share package in the international markets. SPF Acting Chairman Volodymyr Lanovy had said selection of such companies is scheduled to start this month. But foreign analysts, while welcoming international tenders, warn that their results may be harmed by Ukraine's poor performance in other sectors.

"Ukraine's government will finally need to demonstrate to foreign investors that it is serious about reforms," said Stuart Parkinson, a top economist with Deutsche Morgan Grenfell, a subsidiary of Deutsche Bank, in London. "People are starting to lose patience with promises."

The government has received only 60 percent of annual budget revenues through October, while the total decline in Gross Domestic Product over this period amounted to more than four percent. At the same time, the SPF has, so far, collected only 198-million hyrvnya of the 500-million hryvnya it is required to channel to the state budget by the end of the year.

The prospect of meeting the 5.5 percent budget-deficit target set by the government for this year was again questioned in recent weeks, when Ukraine had to cancel the planned issue of European bonds, citing recent turmoil in world financial markets.

According to economist Parkinson, whose company was selected along with JP Morgan to manage Ukraine's issue of Eurobonds, this should be a sign for the government to start paying closer attention to what is going outside Ukraine, rather than be concerned solely with collecting budget revenues. "It's good for the government to press ahead (with privatization tenders)", said Parkinson. "But the delay in the issuing of Eurobonds is a good example of how external conditions can influence its decisions."

Financial experts tell RFE/RL the SPF should not be disillusioned by the attractiveness of its proposals, because the immediate response to them from investors is unlikely, and they will take time - until at least February to consider them. "Conservatism in investments is always welcome," said investment analyst Naiman.

Some investors say the moratorium on signing privatization contracts imposed by Parliament November 4 is another factor that may prevent the SPF from raising the money they expected from international tenders. "The only way to privatize enterprises (under these conditions) is to sell them with a large discount," said Bob Foresman, head of corporate finance of ING Barings Bank in Kyiv. Parliament's justification for imposing the moratorium, generally accepted by many legal experts, is that the SPF still lacks a permanent chairman - as required by the constitution - which could lead to court challenges by companies which lose their bids. According to Foresman, the tenders may not be successful unless the moratorium is removed. "Otherwise, the investors won't be prepared to pay a large sum of money (for the stakes they want to buy)," he said.

Parliament, however, still has until December 18 to have its say on the international tenders. Since the tenders, introduced by Kuchma's decree, are a novelty under Ukrainian economic legislation, such a decree can be considered valid, under the constitution, only if Parliament either approves - or, fails to reject a law, within thirty days after the decree was signed.