Forging Ahead

Steel companies don’t usually help spark political revolutions. But then Ukraine’s Kryvorizhstal is no ordinary steel firm. With annual production of about 7 million tons, it is by far Ukraine’s biggest steelmaker, accounting for 20% of output, and one of the country’s most valuable companies. Last year, it became a powerful symbol of the nation’s crony capitalism. In a privatization widely decried as rigged, Kryvorizhstal was sold last June by the state to Viktor Pinchuk, the son-in-law of then-President Leonid Kuchma, and coal-and-steel magnate Rinat Akhmetov, for $800 million, less than half the amount offered by outside firms. The case stirred public outrage and quickly became a rallying point during Ukraine’s orange revolution. Viktor Yushchenko, the former opposition leader who was elected President in December after street protests forced a rerun of the vote, denounced the Kryvorizhstal sale as “theft” and made the issue a central plank of his campaign.

Now that Yushchenko has taken power, Kryvorizhstal has emerged as an early test of his resolve. Yushchenko and Prime Minister Yuliya Tymoshenko say they will re-examine the privatization of the company and dozens of other formerly state-owned firms, many of which were sold off to Kuchma allies over the past six years. Last week, Ukraine’s Supreme Court upheld previous decisions to undo the Kryvorizhstal deal; Pinchuk and Akhmetov are appealing. The giant steel mill could just be the first reprivatization. Potentially, some of the largest and most profitable companies in Ukraine could be up for grabs, including two big aluminum plants, and a major mining firm worth as much as $1.5 billion that was sold for just $100 million, also to a consortium linked to Pinchuk.

Rotterdam-based Mittal Steel, for one, is excited about the prospect. Its joint bid last year with U.S. Steel for Kryvorizhstal included $1.5 billion for a 93% stake in the plant, plus promised investment of $1.2 billion to raise production and improve quality. The offer was blocked on technical grounds that Mittal and others attacked as spurious. Now the company is hopeful it will win out. “If they do annul [the sale] and ask for bids again, we’d definitely be very, very interested,” says the company’s owner Lakshmi Mittal. He adds jokingly: “In fact, instead of going through a new process, this government should declare us the winner.”

While nearly everyone agrees that some of the business deals of the past were underhanded, undoing them is a tricky task virtually without precedent in Central and Eastern Europe. A full-scale reversal of past privatizations would likely give rise to a host of legal challenges that could swamp the government. Pinchuk has said he plans to defend his businesses, which include a huge Soviet-era pipe plant, four national TV stations, Kryvorizhstal and many others. Reprivatization could potentially scare away foreign investors, too, and, depending on which deals go under the microscope, may even hurt some Yushchenko supporters who benefited from previous privatizations, such as Petro Poroshenko, now head of the National Security and Defense Council, and Petro Yushchenko, the President’s brother. And if the President is perceived to be unfairly targeting his opponents, the scheme could raise unwelcome comparisons with Russia’s Yukos, the energy company many believe was driven out of business by the Kremlin for political reasons. Another concern is that regional and local officials might use reprivatization to settle old scores. Even Yushchenko and Tymoshenko potentially have big axes to grind. Tymoshenko spent 42 days in jail in 2001 on bribery and other charges, which the Prosecutor General’s office has since dropped as groundless, relating to her years as head of the gas-and-oil trading firm United Energy Systems.

Perhaps because the agendas are so complex, the official line has sometimes been confusing. Yushchenko has spoken of re-examining 30 or so cases of privatized firms, while Tymoshenko — who describes corruption as “a cancer tumor” that needs to be removed (see interview) — has said that as many as 3,000 companies could be reviewed. First Deputy Prime Minister Anatoly Kinakh, the head of a government commission on reprivatization, describes the previous sale of state assets as “a cynical carve-up and snatching of economic and material assets.” But he simultaneously pledges that there won’t be a witch hunt. “We won’t allow another redistribution of property in Ukraine outside of law or rules of market competition,” he says. At most, a few dozen firms could be affected: “There is no Yukos specter over Ukraine. There is no threat to the investment climate.”

International firms and investors hope he’s right. Ukraine is a promising new frontier for business development. Its economy grew by an impressive 12% last year, helped by strong demand from Russia and China for steel and other commodities that constitute the core of its industry. While that pace may not be sustainable — growth is expected to fall to about 6.5% this year — Ukraine continues to run up sizable trade surpluses. Some big consumer-goods firms, including the Swiss food giant Nestlé, already have plants in the country and are eager to build up their market share.

But compared to its neighbors, Ukraine remains relatively poor and deprived of investment. Measured by per-capita gross domestic product, Ukraine’s 48 million inhabitants have just one-fifth the wealth of Poland’s 38 million. And because Ukraine was late in starting a large-scale privatization program, and is nowhere near completing it, the amount of foreign direct investment into the country — about $1.4 billion last year — is just a fraction of the amount that has flowed into Poland, Hungary and the Czech Republic since the early 1990s.

Thus, how Yushchenko’s government handles firms such as Kryvorizhstal is a “critical issue,” says Julian Exeter, a senior economist and Ukraine specialist at the European Bank for Reconstruction and Development (ebrd) in London. “There’s a need for some clear criteria about what cases they are going to review and why.”

Many prominent Ukrainian business figures agree that Yushchenko mustn’t go too far. “This country is moving toward Europe,” says Olexandr Tkachenko, a business manager and TV producer who supported Yushchenko’s orange revolution. “People do not live in Europe if they do not follow certain sets of rules. It means such rules must be created here.” Some think the entire scheme is just so much hot air. “I expect all this talk of reprivatization to fizzle out in a couple of weeks,” says Volodymyr Rybak, a senior official in the Party of Regions run by Yushchenko’s political opponent, Viktor Yanukovych. “We don’t need reprivatization. We need more jobs.”

But Yushchenko has already shown that he’s prepared to follow up on election promises. Last week, police arrested two men in connection with the murder of journalist Heorhiy Gongadze, a critic of Kuchma’s government whose decapitated body was found in November 2000. The murder became a potent symbol of alleged power abuses in Ukraine, and tracking down the perpetrators was another 404 Not Found

nginx/1.14.0 (Ubuntu) Yushchenko pledge. Yuri Kravchenko, who was the country’s Interior Minister when Gongadze was killed, was found dead last week, just hours before he was due to give evidence in the case. Kuchma returned to Kiev on Saturday from the Czech Republic, and Yushchenko told Ukrainian TV that the former President’s testimony “appears extremely important for the resolution of the case.”

In the longer term, boosting international confidence in Ukraine’s economy will be crucial. Critically, outside experts say the country needs to improve corporate governance and the functioning of the nation’s puny financial markets. Investors currently have little protection from powerful locals who use practices frowned upon in the West — such as sales of stock to insiders at below-market prices and reverse stock splits — to squeeze out small shareholders. “One shouldn’t get caught up in the emotion of a political fairy tale,” cautions William F. Browder, who runs Moscow-based investment firm Hermitage Capital Management and says Ukraine is about five years behind Russia in terms of investor-protection legislation. “There are serious legal and financial issues that need to be resolved before Ukraine becomes an attractive place for foreign investors. Anyone who rushes into Ukraine without a lot of caution will end up getting burned.”

Some investors say that may be an unduly bleak view. Nine years ago, two Swedish businessmen, Johan Boden and Carl Sturen, invested about $5 million to start up a company in the farming town of Kakhovka aimed at making use of Ukraine’s rich agriculture, including its tomatoes. Their firm, Chumak, named after Cossack salt merchants, is now a leading national brand, making a range of more than 30 types of ketchup, pickled vegetables, spaghetti sauce and other condiments for the Ukrainian and Russian markets. Sales last year grew by more than 50% to $60 million, and the firm is held up as an example by the ebrd, which lent it $15 million to extend its business in sunflower oil and other other types of oil. “There’s a lot of wind in the sails now, a lot of belief in the future,” says Boden, 33. With the change in political climate, Ukraine “is opening its doors to the world. We’re seeing lots of new interest.”

With the change of government in Kiev, many expect an influx of other big companies. Russia could be a model. While conditions there were much harder a decade ago, many consumer-goods firms who got into the market early are now enjoying fast-growing sales. Already some wealthy Russian oligarchs have jumped into Ukraine’s market. They include Oleg Deripaska of the aluminum group Rusal, which has acquired Ukraine’s Mykolayiv alumina refinery, and Mikhail Fridman of Alfa Group, which has an oil refinery in the country.

The trick for Ukraine’s new government is to keep such momentum going and build on it. The events of the past few months have “created a high level of trust and confidence in this country,” says Kinakh, the First Deputy PM. “It’s a chance we must use. Unless we guarantee safe business and protection of property rights we have no trust, and no trust means no investment.”

For now, the privatizing action is a matter for the courts, which two weeks ago cleared the way for a resale of the popular Dynamo football club. There are bound to be protracted legal challenges to come. Pinchuk and Akhmetov are said to be trying to work out a behind-the-scenes deal for the steel mill, but they have also filed their appeal. Pinchuk’s lawyer Serhiy Vlasenko told the daily Kyiv Post last month: “I do not see the legal grounds on which to review [the Kryvorizhstal] sale.”

Under the circumstances, even Yushchenko’s supporters worry that the question of how and whether to reprivatize Kryvorizhstal and other companies could be an unwelcome distraction. Yuri Klyuchkovsky, an M.P. in Yushchenko’s Our Ukraine party, frets that the process could degenerate into “a major redistribution of property that will drag along for years.” Election promises aside, reprivatization is an issue that the young Ukrainian government needs to resolve well — and quickly — if it’s to reap the benefits of the goodwill that accompanied its revolution.