DJ Ukraine's New Pres Expected To Re-Examine Privatizations

KIEV (AP)--Ukrainians joke bitterly that this ex-Soviet republic's privatizations of government enterprises were models of transparency - clearly rigged to benefit the elite.

New President Viktor Yushchenko's vow to re-examine the deals in which prize industries were sold at unexpectedly low prices has sparked optimism that real transparency may return to Ukrainian business. But it's also given rise to fears that the move could devolve into political revenge and thereby scare off investors.

"Ukrainian society is watching for a clear signal that privatizations can be fair and transparent and benefit the state, but it would be a very big mistake for this to turn into an act of revenge," said Ina Pidluska, a Kiev-based political analyst.

For most of the post-Soviet period, Ukraine had been comparatively laggard in its privatizations. But in the first six months of last year - with lame-duck President Leonid Kuchma's term about to expire - some prime industrial jewels were rushed onto the auction block, and the government raked in $1.5 billion.

That was far less than they should have fetched, analysts and Yushchenko's new government contend. Critics note that tycoons with close government connections were the big winners, including Kuchma's son-in-law, Viktor Pinchuk, and coal-and-steel magnate Rinat Akhmetov.

The most-criticized sale was that of Kryvorizhstal, Ukraine's largest steel mill. As one of the world's most profitable steel operations, it attracted substantial outside interest, including bids from Russia's OAO Severstal and a consortium of United States Steel (X) and LNM Group.

But a peculiar tender requirement that successful bidders must have produced at least 1 million tons of coking coal annually in Ukraine during the past three years shut the door to all but a handful of homegrown companies and a consortium including Pinchuk won, even though its $800 million bid was lower than Severstal's and LNM/US Steel's.

"Without competition, without a realistic price ... I don't consider that privatization," said Yulia Tymoshenko, Yushchenko's prime minister-designate.

The sale sparked outrage in Ukraine and abroad and is currently being challenged by a Ukrainian parliamentary commission in the courts. Pinchuk said he would adhere to any court decision provided it is "according to the law."

Some in Yushchenko's circle have hinted that they may be prepared to let the sale stand - as long as the new owners pay additional cash. The amount could be huge, with analysts predicting at least an additional $700 million.

Other companies in the firing line could be Ukrrudprom, an iron-ore company that was also sold last year for a pittance to a Pinchuk-linked group and the Petrovsky steel mill, in which only local companies were allowed to participate.

"Privatization in Ukraine is a shadowy part of the country's economy and Krivoryzhstal is certainly not the only case and probably it isn't even the worst," said Andriy Dmytrenko, an analyst with Kiev's Dragon Capital investment bank.

But it is the most visible and how the new government handles it will be a significant signal.

"It is very important that the new government not get carried away by this victory wave and that it resists the temptation to reprivatize attractive pieces of property to their own benefit," Pidluska said.

Viktor Medvedchuk, Kuchma's powerful former chief-of-staff, also warned that if the government appeared to be on a witch-hunt, "the investment climate could significantly deteriorate."

Yushchenko can't risk that. He has promised to raise pensions and create jobs with higher-paying salaries, and needs an influx of cash and new investment to achieve that.

One option is to fulfill a long-delayed promise to privatize the communications giant Ukrtelekom, which is likely to draw significant foreign interest and a high price. A transparent tender would offset investor fears about renationalization. The risk, though, is that a foreign owner might raise tariffs, angering consumers.

Dmytrenko said: "There are no easy solutions. Someone will always complain."

(END) Dow Jones Newswires

January 29, 2005 06:45 ET (11:45 GMT)