Saturday, April 07, 2007

One reason for the political crisis

Recent turbulent events on the Ukrainian political scene have permitted a semi-rigged 'privatization' a few days ago of the biggest railway locomotive factory in the CIS - Luhanskteplovoz, to go almost unnoticed.

The Ukrainian state property fund [FDM] had intended to stage a public auction a la the Kryvorizhstal reprivatization last October.

In 1995 24% of the company had been been sold on the stock market and to employees, and in 2006 the FDM began preparations to sell off the controlling packet of Luhanskteplovoz shares. The German company Siemens, United States Bombardier, Ukrainian 'Privat' Group, and the Russian Transmashholding all showed interest, with the German and the Russian company being considered favourites to buy.

Andriy Klyuev and Viktor Yanukovych got involved, and eventually competition was closed to all companies except those that were either a supplier of components to Luhanskteplovoz, or purchasers of their products - leaving only 'Privat' and two subsidiaries of Transmashholding left in the chase.

It was suspected at that time that the Ukrainian KabMin would favour any Russian bid for Luhanskteplovoz as part of "asymmetrical arrangements with Russia on gas and other relevant issues between the two countries."

Independent investment assessors valued the packet of shares on offer, together with a controlling premium, at around $100 million.

The Russian 'Kommersant' ran this story [in English] a few days ago focussing on the Luhanskteplovoz privatization, and how Ukrainian political enemies are fighting over the carve-up of the country's wealth. I've included a portion [with very minor alterations]:

"The last few months have seen privatization actively moving forward in Ukraine under the supervision of the State Property Fund [FDM] , whose leader Valentina Semenyuk is a member of the Socialist Party, which is a partner in Viktor Yanukovych's "national unity coalition." Coincidentally or not, the decisions that the FDM has been making lately have been unfavorable for businessmen associated with Yulia Tymoshenko.

The noisiest scandal involved the recent privatization of the holding company Luhanskteplovoz: although Privat Group, which is owned by long-term Tymoshenko associate Igor Kolomoisky, wanted to bid on shares in the company, the FDM ruled that only two Russian companies, Demikhovsky Mashinostroitelny Zavod (Moscow Oblast) and the managing company of Bryansk Mashinostroitelny Zavod (both companies are controlled by the group Transmashkholding), would be allowed to participate in the auction.

When Luhanskteplovoz eventually went to Bryansk Mashinostroitelny Zavod for $58.5 million, BYuT charged that the deal was illegal and initiated a parliamentary investigation lead by BYuT deputy Andrey Kozhemyakin, the head of the Committee for Privatization Issues.

The fiercest battles over privatization still lie ahead, however. This year the FDM is preparing to auction off shares in Ukrtelekom, and Mr. Akhmetov's SCM has already expressed interest. The goverment has also given its consent to a broad privatization campaign in the electrical energy sector. Shares will be offered for sale in numerous government-owned regional energy companies, including Prikarpatenergo, Lvovenergo, Sumyenergo, Chernigovenergo, and Poltavaoblenergo, and experts are already predicting that SCM, Interpipe, and Privat will fight tooth and nail over the spoils.

Such a state of affairs does not sit well with the rest of the heavyweights in the Ukrainian market, who are now determined to see a change in the current political landscape. In large measure, the actions of Yulia Tymoshenko and Our Ukraine are driven by the expectations of businessmen claiming offense at the hands of the government.

"Yanukovych is lobbying not only for the interests of Akhmetov but also for those of Russian business, which the Luhanskteplovoz affair shows," believes Vadim Karasev, the head of the Kiev Global Strategy Institute. "If BYuT and Our Ukraine succeed in getting early elections called and form a coalition that ends up holding the reins of power, the oligarchs standing behind them, i.e., Privat, will also win. That is the cost of dissolving the Rada – Ukraine as a business asset."

LEvko says the $40 million lost on the sale would have come in handy to pay for any possible snap election.

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