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Ukraine: Foreign Investors Complain Of Poor Business Practices

Kyiv, 15 May 1998 (RFE/RL) -- The same day President Leonid Kuchma's advisory council on foreign investment was discussing in Kyiv ways to attract more foreign money to Ukraine, the leading international producer of construction materials complained it was being denied a stake in a plant it purchased two months ago. Officials from the French company Lafarge complained Wednesday that their company was denied registration of the 28 percent stake in the Mykolaivtsement cement plant in western Ukraine that the company won in a tender held by the State Property Fund (SPF) in February.

"Our rights are being violated in a number of ways," said Lilia Jolibois, Lafarge's development director for Central and Eastern Europe. She said the Ukrainian company Partner, which was appointed by the State Committee for Securities and Stock Market (SCSSM) to register stake ownership for Mykolaivtsement, had refused three times to register the acquisition by Lafarge of the 28 percent stake, and, thus, allow the company to become an official shareholder.

The SPF, the government privatization agency, officially sold Lafarge the stake in one of Ukraine's largest cement plants March 13, in an agreement, under which the French company was to pay about $1.5 million for the stake, and implement a number of other investment conditions. These included investment of seven-million dollars in the plant within five years, and repayment of about $225 million in the enterprise's debts within 60 days after purchase of the stake.

However, two months after signing the agreement, Lafarge, which owns 74 cement plants in 23 countries in the world, cannot get access to its latest acquisition. Partner, which is one of the state-appointed independent registrants of privatized enterprises' stock ownership, has so far refused to register Lafarge's stake, citing the failure of Lafarge and the SPF to submit the required documents.

"They asked for registration, but did not submit, on time, the documents required by the registration procedures approved by the SCSSM," said Partner Deputy Director Nadiya Pavlova. "So any accusations of us being biased (towards Lafarge) are groundless." Pavlova said the SCSSM inspected its company recently and offered no objections to Partner's refusal to register Lafarge's stake. However, Lafarge's Jolibois was of different opinion, alleging that Partner was pressured by owners of the controlling stake in Mykolaivtsement, who did not want Lafarge to expand its stake in the plant by bringing in investment and increasing the company's capital. Lafarge is currently able to control 41 percent of Mykolaivtsement's stock, after it established cooperation with Ukraina Investment Company which owns 13 percent of the plant.

Mykolaivtsement is capable of producing three-million tons of cement a year, but worked at eleven percent of its capacity in 1997 due to lack of demand. The plant has not paid its employees for five months, and is behind in tax payments.

Despite an obvious need of investment for Mykolaivtsement that Lafarge promised to bring, the majority shareholders in the plant counter-attacked this week, claiming Lafarge acquired the stake in order to destroy Mykolaivtsement as a potential competitor to Lafarge's cement companies in Poland, the Czech Republic and Romania. They also said the investment commitments Lafarge gave to the SPF were too small and would not help the plant to recover.

"We don't want the plant to be destroyed," said Parliament Deputy Viktor Zherdytsky, who spoke on behalf of the group of shareholders that collectively own a 52 percent stake in Mykolaivtsement. Zherdytsky is the former chairman of the board of Gradobank, who was replaced last year after police charged him with misappropriating funds, which Germany's government was channeling through Gradobank for the victims of Nazi repressions in the World War II. Prior to that, in the fall of 1995, Gradobank purchased an eleven percent stake in Mykolaivtsement, and eventually came to control the 52 percent stake by establishing cooperation with the plant's other shareholders. Seven percent of the plant are owned by the employees.

After Lafarge bought the remaining 28 percent of Mykolaivtsement in March, Gradobank filed a lawsuit against Lafarge and the SPF, demanding that the tender be held anew, because the stake was sold for less than its market value. In turn, the SPF filed a lawsuit with Partner charging the Ukrainian company illegally refused to register Lafarge's stake. Court rulings are expected soon.

Meanwhile, the conflicting parties each claims the truth is on its side.

"We'll use all legal means to resolve the problem... and we hope (it) will be resolved in our favor," said Lafarge's Jolibois.

Mykolaivtsement Deputy Chairman of the Board Yury Haponenko tells RFE/RL, the company is "protecting the interests of the state and are determined to maintain our position."

Half of Ukraine's U.S. aid program this year of more than $200 million was in jeopardy until recently, when the State Department certified (in Apr.) Ukraine had made some progress in eliminating corruption and poor business practices, affecting American companies in Ukraine. The American Chamber of Commerce in Ukraine had recommended the aid be withheld. And, almost all the 12 American companies cited in disputes said they had seen virtually no progress in their cases.