Ukraine’s privatisation rematch heads for extra time in court

Date: 10/03/05

The prospect of large-scale state privatisations in Ukraine is currently the subject of fierce and occasionally violent debate. During the presidential election campaign Viktor Yushchenko expressed concern about the hasty privatisation of Ukraine's largest metals factory, Kryvorizhstal, which produces up to 21 million tonnes of steel each year.

When, on 12 May 2004, Ukraine's State Property Fund put 93% of the factory's shares up for sale, foreign investors such as the LNM Group, US Steel, and TATA Steel showed an immediate interest in the largest steelmaker in what is a major steel-producing country. But after the tender had already been announced, the State Property Fund ruled that potential investors must have a history of producing at least one million tonnes of coke per year in Ukraine. (Coke is a coal residue used in smelting iron ore.) Perhaps not coincidentally, only Ukrainian companies fulfilled this condition.

What particularly concerned Yushchenko, and many others, was that the buyer, Investment Metallurgical Union, won with an offer of $800 million (605m euro) that was only a little higher than the starting price of $715m (541m euro). Interested foreign investors had mentioned sums at least twice as large. The privatisation had also been completed at record speed, with the deal concluded by 14 June 2004. Investment Metallurgical Union was and is a joint venture between Viktor Pinchuk, the son-in-law of the then president Leonid Kuchma, and Renat Akhmetov, a man who later bankrolled much of the presidential campaign of the then prime minister Viktor Yanukovych.

After Yushchenko made her prime minister on 24 January, Yuliya Tymoshenko announced that Kryvorizhstal would be returned to the state and, on 8 February, her cabinet instructed the State Property Fund to cancel all its decisions regarding the metal giant's privatisation.

The real battle for Kryvorizhstal, it seems, is taking place in the courts. So far, Tymoshenko seems to be getting her way there. On 17 February a local Kiev court annulled its earlier decision of August 2004 that Kryvorizhstal's privatisation was legal, and on 25 February froze the company's shares. On 1 March, Ukraine's Supreme Court annulled a number of lower-court decisions that had ruled the sale legal. It sent the dispute to the commercial court to review the case from scratch.

In the meantime, Oleksandr Turchynov, the newly appointed head of Ukraine's secret service and before that the first deputy chairman of Tymoshenko's party, Batkivshchyna (Fatherland), said at a press conference on 17 February that his agency would pursue 3,000 cases of corruption in the privatisation of state enterprises. In what is probably not a coincidence, Tymoshenko had announced earlier that her government would review 3,000 privatisations. This policy has been dubbed "reprivatisation" and stirred lively debate in the press and among policymakers.

Indeed, even Yushchenko seems to have been taken aback by the ambition of Tymoshenko, his main ally in the Orange Revolution. He responded to Tymoshenko's declarations by saying that at most 30 large enterprises would be reprivatised. But the intense and driven Tymoshenko has proven hard to stop in the past.

The danger is that "reprivatisation" might run wild. Already, there is some sign that the Orange Revolution has introduced a new element of unpredictability into Ukrainian business life. At the eye of the storm has been ownership of the football team Dynamo Kiev, which was privatised in 1993 and sold to the Surkis brothers, Georgiy and Ihor. Since then, it has expanded into a sports empire worth $200m (151m euro), according to Kostiantyn Grigorishin, a former business partner of the brothers.

Grigorishin, a Russian businessman, began co-operating with the Surkises and their partners in 1998, when Ukraine's regional electricity distributors began to be privatised. But this co-operation had stalled by 2002. In October that year Grigorishin was briefly arrested at the instigation of another business partner of the Surkis', Viktor Medvedchuk, who is the former head of president Leonid Kuchma's administration. Georgiy Surkis is a member of the Social Democratic Party (United), a party led by Medvedchuk.

At the end of last year, Grigorishin declared publicly he would "take back" Dynamo Kiev. That threat gained credence in mid-February when armed guards hired by Grigorishin tried unsuccessfully to seize two energy companies from the Surkis brothers. An offshore company belonging to Grigorishin is now taking the football club to court for allegedly diluting the rights of minority shareholders. It has already won a court order prohibiting the sale of Dynamo Kiev shares, though this might prove problematical in practice since court executors have been unable to locate the shares' registrar.

All of this is worrying observers. Grigorishin clearly feels he has a chance to take control of companies belonging to the Surkis brothers at a time when their fortunes, closely tied for a long time to the political scene, have taken a sharp turn downward. Grigorishin knows that the new government will not interfere to protect the Surkises as it would have under Kuchma and Medvedchuk. Some fear Grigorishin may even have the backing of the current government. During the Orange Revolution, Grigorishin made several appearances on stage with members of the opposition. He denies he offered any material help to the opposition or to Yushchenko.

How far Grigorishin is willing to go in his pursuit of the Surkis family's assets is unclear, but his strong-arm approach suggests he will not be meek. Tymoshenko, too, can be remorseless in pursuit of her goals. The danger is that a Tymoshenko-backed mass reprivatisation might create a business and legal whirlwind in which men like Grigorishin will pursue their own wild reprivatisation. A sense of a free-for-fall akin to the privatisation of the 1990s is beginning to emerge. There are no known criteria governing which companies might or might not be reprivatised. The possibility now is that some, like Grigorishin, will look at Tymoshenko's initiative and believe that anything goes.

Those may just be fears, but already the atmosphere is unhealthy. What looks certain is that Ukraine's courts face a very busy period and a test of their malleability.

• Ivan Lozowy is a Transitions Online (TOL) correspondent and also runs an Internet newsletter, Ukraine Insider. This is a shortened version of an article published by TOL.

Article reports that two months after the regime change in Ukraine the prospect of large-scale state privatisations was the subject of fierce and occasionally violent debate. During the presidential election campaign Viktor Yushchenko had expressed concern about the hasty privatisation of Ukraine's largest metals factory, Kryvorizhstal, which produced up to 21 million tonnes of steel each year. Prime Minister Yuliya Tymoshenko had announced earlier that her government would review 3,000 privatisations. This policy, dubbed 'reprivatisation', stirred lively debate in the press and among policymakers.

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