Kiev Begins Redistribution of Property

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Translated by Ollie Richardson for Fort Russ

4th February, 2016


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“Efficient, transparent and competitive” privatization in Ukraine, a declared priority for the government of Yatsenyuk in 2016, is entering the home straight. Full-scale redistribution of assets was one of the main goals of Kiev revolutionaries, however, in 2014-2015, the Cabinet was not able to begin the process of privatization of state property, limiting “presales”, meaning a decline in the carrying value of objects. In particular, the planned (2015) 17 billion UAH (0,7 billion USD) in the budget allocated 144 million or 0.8 percent for the privatization plan.

Kiev started the redistribution of property

Nevertheless, privatization is an irreversible process. In late January, the Verkhovna Rada adopted, at the first reading, the draft law needed to start “carving up” the remnants of the Soviet legacy that sparked the joy of the American Ambassador Geoffrey Pyatt.

In turn, the Ministry of Economic Development and Trade reported that the list of state properties subject to privatization included 342 state-owned companies, whose sale will generate three billion dollars. The office intends to exceed the budget figure, according to which the proceeds of privatization in 2016 are planned at the level of 17.1 billion (0,7 billion USD), covering the “loss” of previous years. Arithmetic calculations show that “homeland granaries” sold for a pittance – the average cost of one company is 8.7 million dollars.

However, the plans of the “gray cardinal” of Ukrainian politics are much more ambitious, the head of the presidential Administration, Boris Lozhkin, said that the state should leave the property of 200-250 companies, and the remaining 1400 should be sold as quickly as possible.

The collective memory of the people

Privatization at the peak of the acute systemic crisis at bargain prices – this behavior is typical of the minions and the marauding wing of oligarchs, converting political capital into financial. It is necessary to recall the processes of the nineties, which resulted in the destruction of a number of industries and the tremendous stratification of society. The collective memory of the people is so strong that the terms “voucher” and “mortgage auction” still cause a nervous reaction in people. In the pursuit of profit, comical incidents do happen – the Cabinet of Ministers put up for sale a stake in the mine named after Zasyadko, in Donetsk, located respectively beyond the control of Kiev.

Ammonium war

In addition to the enrichment of Ukrainian elites, privatization in 2016 has several aspects. First, the costs to external actors – the EU and USA – who have financially supported Kiev for the last two years. Secondly, the PR effect for the government of Yatsenyuk – predatory redistribution will be declared the highest since independence due to the “influx of foreign investment”.

The “blue chip” of the privatization campaign – Odessa port plant (OPZ), the estimated cost of one billion dollars OPZ – endpoint of the main ammonia pipeline “Tolyatti-Odessa” with a capacity of 4.7 million tonnes (world trade volumes of ammonia at 20 million). Moreover, the OPZ can be considered as a base for the construction of a LNG terminal.

If you remember the public argument between Avakov and Saakashvili, it began during a discussion about the privatization of the OPZ, which is a conflict at the higher level between the business teams of Kolomoisky and Poroshenko respectively, for the ownership of the Odessa plant.

The USA may make amendments to the plans – it is possible that the United States, the main buyer of ammonia OPZ, will take part in the concourse of privatization.

The second object which Washington is potentially interested in is Odessa’s sea trading port, which was introduced, as well as 12 other sea and river ports, by “a team of European professionals” to the privatization list. Odessa port is a strategic facility, through which, according to some experts, the smuggling of oil from Islamic State (is prohibited in the Russian organization) takes place, and armaments to the Middle East. The purchase by US residents of Odessa port fits into the logic of the government of Yatsenyuk, planning to pass customs control onto foreign companies.

Auction of Ukrainian enterprises

The next interesting asset – 78,29% of the shares of the second largest power generating company of the country, “Centrenergo”, operating three thermal power plants. According to the relevant Minister, Abromavicius, “Centrenergo” is currently worth $200 million, while two years ago it was worth $500 million, and five years ago – a whole billion of “green”.

In addition, the Cabinet will sell a controlling and blocking package (not less than 25 percent) of the shares of the regional power network (“Dniprooblenergo”, “Zaporozhyeoblenergo”, “Kharkivoblenergo”, and so on) and city gas companies. The most likely buyer is the richest man of the country, Rinat Akhmetov, who is seeking to monopolize the energy sector of Ukraine. Akhmetov, of course, will be included in the race for the privatization of the mines of Donbass (Kiev-controlled) and the Lviv-Volyn coal basin.

“The gavel” will successfully leave the company able to compete in foreign markets. We are talking about Kharkov “Turboatom” (producer of turbines for power plants), “Sumykhimprom” (mineral fertilizers, acids, titanium dioxide) and Mariupol “Azovmash” (railroad cars and tanks, metallurgical equipment, industrial cranes).

The land — the ruling elite

Gradually the privatization of the main Ukrainian heritage begins – the soil. State enterprise “horse Breeding of Ukraine” will go to the auction, owning 40 thousand hectares of land. A further step will be the lifting of the moratorium on the sale of agricultural land (temporarily valid until January 1, 2017), followed by a grand redistribution of the land market. Taking into consideration that the average price of 1 hectare of land is $1,500 and the state’s land bank contains 10 million hectares, there is no doubt that local elites would be able to scoop 15-20 billions of dollars.

Finally, in the medium term, the issue of the privatization of the gas transportation system providing for the transit of “blue fuel” from Russia to southern and Central Europe will be on the agenda, as well as the net monthly profit to Ukraine of over 100 million. In this case, Ukrainian “pipe” can be bought and then cut up for scrap by international players (USA, Qatar) who want to eliminate a competitor in the form of Moscow, and to impose their own supply of LNG on European countries.

The man with a gun

Contrary to the interest of the countries in the Euro-Atlantic region in the privatization of state-owned companies, most of the assets that will be transferred will still be in the hands of the Ukrainian oligarchic capital, partly camouflaged offshore (by the way, it’s a way for residents of the Russian Federation to circumvent politically motivated barriers to participation in the contest). Obviously, no private foreign investors will come to a country where even in a relatively stable and prosperous time, the property could be “re-privatised” by the court’s decision using absolutely contrived reasons. This is exactly what happened with “Luganskteplovoz”, whose owner, the Russian “Transmashholding”, was forced to pay twice for the facility in 2007 – 292,5 million (58 million dollars) and in 2010 – 410 million (51 million dollars). In conditions when the real power in Ukraine is a “man with a gun”, the raider’s spoils are directly supervised by the provincial governors and MPs (recent high-profile new year event – capture attempts of “Zhytomir Confectionery” by ruling coalition Deputy Pashinsky), who rely on systematic, rather than speculative foreign investors, which is unwise in the highest degree.

An example is the controversial sale of the plant “Kryvorizhstal” in 2005, when $4 billion disappeared in an unknown direction, which demonstrates the potential financial results of privatization of strategic objects of the common people. A new wave of redistribution will only strengthen the wall of alienation between the people and the elites – however, the latter should be referred to as the liquidation Commission of the state of Ukraine.

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