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Ukraine: Agro Sell Offs Could Further Empower Regional Clans

Kyiv, 21 May 1998 (RFE/RL) -- The privatization of Ukraine's state grain monopoly shows that unless sell offs are closely regulated in the former Soviet Union, they can easily lead to new private monopolies that are controlled by regional clans.

The ongoing sale of the "Bread of Ukraine" monopoly also reveals that Kyiv only has the political will to move ahead with agriculture reforms when the government is under pressure from foreign donors.

A year ago, when Ukrainian President Leonid Kuchma visited Washington, he was told by U.S. Vice President Al Gore that future aid disbursements to Kyiv would be linked to progress on market reforms.

The privatization of "Bread of Ukraine" is a key component of what Kyiv's elite circles now refer to as the "Gore-Kuchma agenda."

"Bread of Ukraine" continues to hold a monopoly on the pricing, storage, distribution and processing of grain. Breaking up that monopoly is seen by Washington as a vital step toward making agriculture profitable for new private farmers.

In recent years, largely due to state control of the market, Ukrainian farmers received about $60 less per ton for their grain than American farmers. That means that on a national level, Ukrainian farmers are being deprived of more than $1.2 billion a year that could otherwise be invested in badly needed tractors, seed, fertilizer, fuel and long-term infrastructure projects.

Since the Kuchma-Gore meeting, Kyiv's progress on privatizing "Bread of Ukraine" has amounted to the bare minimum needed to keep aid from Washington flowing.

Grigoriy Omelyanenko, the board chairman of "Bread of Ukraine," denies that his company is "monopolist." He blames western grain traders in Ukraine, like the firms Cargill and Toepfer, for encouraging "chaos." Omelyanenko told RFE/RL that 31 of the 574 enterprises under his direction have been "fully privatized" so far.

The plans originally called for all but 100 of the firms --including grain elevators, storage silos, flour mills, bakeries and distribution centers -- to be sold off by the end of this year. Omelyanenko now says the process is likely to continue through next March. But he says 250 of the enterprises should be privatized by the end of next month.

Among the first branches of the firm that he says have been privatized are those in the Donetsk Oblast, where Omelyanenko was a vice governor until last year. He says the main share holders now include the region's collective farmers, who have a legal right to a 51 percent stake, and the managers and workers of the grain enterprises. By law, workers and managers receive 15 percent of the shares. The remainder should be sold publicly.

Meanwhile, the head of the Ukrainian branch of a London investment bank told RFE/RL that he is already working for "Bread of Ukraine" managers and "powerful businessmen of the regions" in an effort to buy up controlling stakes of the enterprises.

Anatoliy Lipatov, a registered securities dealer and chairman of Vega International Capital's Kyiv office, said he now is identifying the employees and farm workers who should receive shares. By using his securities license to buy directly from those workers, Lipatov said he can obtain shares for his clients at almost half the price of the over-the-counter market. He said it will be easy for ?Bread of Ukraine? managers and their regional business allies to gain "large, even majority stakes" early in the process.

Lipatov said there is some "cooperation and coordination" between managers and the regional bosses. He said the managers know the grain firms while their business allies have the money to buy up shares from the workers.

He predicts that the end result will not bring more competition to Ukrainian grain marketing and processing, but rather, "sectionalized control by private monopolies."

A specialist with a U.S. funded project to develop Ukrainian agricultural markets agrees that foreign firms are not likely to play a big role in the sell offs.

Steve McCoy, of the Ukrainian Agrarian Commodity Exchange Project, told RFE/RL that European, Turkish, Saudi Arabian and Asian companies have shown some interest. But he predicts most multinational firms will continue to focus on trading ventures rather than make long-term investments in Ukrainian grain facilities.

"Bread of Ukraine" chairman Omelyanenko says privatization laws prevent the company's managers from buying more than five percent of the shares in their own enterprises.

But there is nothing in the law to stop new private monopolies from being formed by the clans whose roots lie in the Soviet era affiliations of collective managers, oblast and state administrators and powerful regional business bosses.

See also Crisis on Ukrainian Farms -- Photo Feature