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Ukraine: Daewoo/Avtozaz Joint Venture Stalls

Kyiv, 5 May 1998 (RFE/RL) -- The much-publicized Daewoo/Avtozaz joint venture has stumbled, as Ukraine put off further privatization plans for the government-owned car manufacturing concern. Factory management confirmed that they had requested the delay announced yesterday.

"As long as the joint venture is at the stage of gaining strength, it would be better for the government to remain the chief property holder, to manage us and to help us," the plant's Deputy Director, Mykola Lastovetsky said.

Experts say she is optimistic. They question whether the contention about management concern is plausible. They suggest the underlying cause is money - or, the lack of it.

Ukraine is running a budget deficit more than double the 2.5 percent of Gross Domestic Product that it pledged the International Monetary Fund Kyiv would maintain for the entire year. Ukraine continues foreign borrowing, while collecting only a fraction of taxes owed. An International Center for Policy Studies report to be released this week predicts a Ukrainian financial crisis, because of ballooning deficits.

A top Kyiv-based Western market analyst (anonymous) tell RFE/RL, "I don't want to be negative - but, the Ukrainian government is going to have a massive cash flow problem this Summer, and, if I were them, I would look at any way to cover T-bill (treasury bill) redemption, even if less than conventional."

Postponing Avtozaz privatization as long as possible, the analyst says, might allow Ukraine to funnel Daewoo funding through the National Bank of Ukraine (NBU), and redirect some of those funds to redeeming T-bills.

A Central Bank spokesman declined comment.

But cash is not just Kyiv's problem. Overseas market specialists argue that the Asia crisis has hit Daewoo hard, placing its ability to invest more than 200-million over the next six years to finance a joint venture to build cars in Ukraine under question. Daewoo executives have repeatedly maintained that their company will meet its commitments to Avtozaz. They and their Ukrainian partners declined comment when asked if the first installment of Korean money had in fact been paid.

"Well, no one can say exactly what Daewoo money has or doesn't have, it's a privately held company," Credit Suisse First Boston auto industry analyst Richard J. Pyo tells RFE/RL. "But you don't have to be a rocket scientist to figure out that they don't have enough cash these days to do everything they would like to do."

And, since the Koreans might not be making funding available as fast as planned, the shares of Avtozaz that they were to have gotten in exchange for their investment do not need to be created immediately - which might well be the most important reason Ukraine's State Property Fund is not hurrying to privatize more of Avtozaz.

"It could be, the Koreans just don't have the cash to buy more car manufacturing capacity right now," analyst Pyo said.

The Ukraine-Daewoo deal, on its face, was the best of deals. The Ukrainians would contribute cheap, technically-adept manpower, while the South Koreans would invest 1,300-million dollars in cash and world-class technical know-how. The Koreans and the Zaporizhiya factory signed an agreement last September to co-produce upgraded Tavria hatchbacks and later Daewoo Nexias.

The first installment of Korean funds was to have moved to Avtozaz's account as recently as last month, after Ukraine erected tariff barriers to protect domestic cars from Western used-car competition. But to date, the most visible result of Daewoo investment in Ukraine has been a distinct lack of activity. The first Korean-technology Avtozaz Tavrias were to have rolled off the lines as recently as the end of April. They have not.

Daewoo also intended to enter the real estate market, earmarking 283-million dollars to build an office building in central Kyiv. There was even a ground-breaking ceremony last October.

Today, the construction site is very quiet.

So what is going on? The answer is: car kits.

Last month, Daewoo announced that the first assembly it will be doing will be in the port of Ilychevsk. Using some of its massive, estimated two-million unit international excess capacity, built cars will be shipped to a former military factory near Odessa, and, after minimal addition of value by Ukrainian labor, sold locally as a domestic car.

"They'll (the Daewoo Nexias) have their wheels taken off in Varna, Bulgaria," said Vladimir Ushakov, an Odessa shipping professional. "Then the Koreans will bring the wheels in separately and put them on. "Voila!" says Ushakov, "A Korean car made in Ukraine!"