Thursday, October 1, 2009

A bungled privatization in a bungle of a country

by Tammy Lynch

Given Ukraine’s political situation, perhaps it should not be surprising that the privatization of a major state asset failed yesterday. Or rather – that the privatization technically succeeded but was quickly cancelled.

In a televised public auction ultimately termed a “farce” by Reuters, Ukraine opened the bids of three companies for the Odessa Port Plant, the country’s second largest producer of ammonia. The State Property Fund (SPF) announced that Ukraine-based Nortima company submitted the winning bid of $624 million.

Soon, however, the SPF announced that the bid was “inadequate”; and refused to approve the sale. Prime Minister Yulia Tymoshenko agreed with the decision, accusing the three bidders of colluding “to buy the Odessa Port Plant for a song.” Nortima representatives say they will head to court.

The decision provides another reason for international investors to be wary of committing resources to Ukraine.

It is unclear why the government chose to proceed, but some suggest Tymoshenko may have been misled about potential bid prices.

While the term farce does appear to apply, the hows and whys of what happened provide a useful metaphor for Ukraine’s entire political system. The process was unnecessarily drawn-out, unpredictable, confused and beset by internecine battles.

In 2005, at the start of the Yushchenko administration, the plant’s privatization was intended to be part of a new, foreign-investment-friendly policy.

Tymoshenko placed the plant on a potential privatization list in 2005. President Viktor Yushchenko first supported the privatization, but then shifted his position as his relations with Tymoshenko soured. When Tymoshenko was dismissed from her office in September of 2005, all privatization initiatives ceased. Two years later, Yushchenko suddenly and unexpectedly approved a plan by then-Prime Minister Viktor Yanukovych to allow the plant’s privatization. But when Tymoshenko returned to office following the next election, the President changed his mind again and vetoed it.

In 2008, Prime Minister Tymoshenko used the Odessa Port Plant to challenge the President’s authority. She attempted to take control of the SPF from the President, both through the courts and through physical occupation of the SPF building, but failed. The Odessa Port Plant remained with the state.

One year later, both leaders were ready for another round of the Odessa Port Plant Privatization Wars. Tymoshenko announced its privatization and (shockingly) Yushchenko vetoed it – apparently afraid to provide his opponent in the upcoming presidential election any opportunity for positive press. Unlike earlier, however, Tymoshenko ignored the veto and held the auction.

Nevertheless, over a dozen bidders dropped out following the president’s veto. This left three companies with direct and indirect ties to each other as well as to Russia’s Gazprom.

Nortima’s owner, the well-connected oligarch Ihor Kolomoysky, told journalists in 2005 that he owned several regional energy companies with Konstantin Grigorishin, the apparent owner of second bidder Frunze-Flora. In turn, Grigorishin, who is a Russian national and supported Yushchenko during the Orange Revolution, worked with Gazprom representatives while involved with Unified Energy System of Russia. Gazprom is said to control the third bidder Azot Servis. These connections allowed Tymoshenko to claim collusion and a threat to state interests, whether true or not.

No matter what occurred, during this bidding process, behind-the-scenes maneuvering and previous undermining of the process virtually ensured a failure – and an international embarrassment.

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