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Ukraine: Privatization Program Fails To Reach Targets

Kyiv, 2 February 1998 (RFE/RL) --Ukraine's government hopes to raise much-needed cash by pressing ahead with stalled privatization plans in coming months. But, financial experts say foreign investors, unnerved by recent turmoil on global markets, are unlikely to pursue aggressively stakes in Ukrainian companies.

"Investor interest in emerging markets, undermined by the recent financial crisis, is unlikely to be restored soon," said Fedor Grechaninov, research director at the Kyiv-based brokerage Alfa Capital. "The companies being offered for sale now could have been successfully sold last Summer - but not today." Demand for shares of Ukrainian companies has fallen steadily since last August.

Ukraine hopes to spark renewed investor interest in coming weeks with long-awaited auctions for large stakes in nine regional power distribution companies. But, even privatization officials acknowledge that the renewed drive to sell off state property comes at an awkward time. "The situation is not favorable in terms of raising a lot of money, but we cannot wait any longer," said State Property Fund (SPF) Acting Chairman Volodymyr Lanovy recently.

The government needs to meet deficit targets to qualify for loans from the International Monetary Fund (IMF), and hopes to pay off part of a huge backlog of unpaid wages, before parliamentary elections in March.

Last year, the SPF raised less than $40 million from privatization, falling far below the target of more than $200 million set by the 1997 state budget. The shortfall was partially covered with foreign loans and the sale of government treasury bills. But, with Ukraine's opportunities for foreign borrowing seen as diminishing, large-scale privatization looks to be the only way for the government to bring in the revenues required by this year's budget.

"For the third year in a row we failed to meet privatization targets," Prime Minister Valery Pustovoitenko said two weeks ago. "We will finally put an emphasis on privatization (in 1998)."

The draft privatization program for 1998, prepared by the SPF, projects $500 million in budget revenues, and puts 973 medium- and large-scale enterprises on sale. But experts, appraising the upcoming sale of power companies, say the government has set unrealistically high prices in its rush to boost budget revenues.

"These power companies are attractive to investors in terms of fundamentals," said Grechaninov. "But they are overvalued by the State Property Fund," he said. "The government's pressing ahead with cash privatization so far seems to reveal itself only as an attempt to close holes in the budget, rather than change the structure of the economy," said Serhy Oksanych, president of the investment firm KINTO.

Investors are wary because Ukrainian law does not specify how the state will manage any shares it retains in privatized companies, experts said. And, while some of the power companies up for sale have been assessed as solid investments, the government's continued regulation of the energy sector through subsidies and price controls makes shares in others less than attractive to free market capitalists.

"Energy sector in Ukraine is a business highly dependent on the state," said financial expert Grechaninov. "Knowing this, investors will hardly want to buy such enterprises without a large discount."

Another facet of the government's privatization plan, the much-publicized international tender for the right to market a 24-percent stake in the energy giant Donbassenergo, is not expected to bring the SPF any cash until the end of the year. The results of the tender are to be announced February 26. But, the winning firm will then have to spend time on audits and evaluations before marketing the shares to investors. Finalizing the transaction between the SPF and the purchaser could take additional months.

"Realistically, the stake can be sold no earlier than seven months after the tender was announced," said one investment banker whose firm is planning to submit a bid for the tender.

Some analysts think this may be the government's last chance to cash in on privatization, before elections in which leftist parties appear poised to increase their number of seats. Parliament's powerful Chairman, Oleksander Moroz, told the Den newspaper that state sell-offs through privatization certificates had been a "strategic mistake," and were to blame for the continued slide in industrial output. Moroz is also Chairman of Ukraine's Socialist Party.

Investors say another leftist-dominated parliament would only further limit privatization. "Parliament is trying to maintain control over privatization," said Alexandra Isaierych, economist at the Harvard Institute for International Development in Kyiv. "But between the run-up to the election (in March) and the month of May, parliament will be absent and the government has a window of opportunity."