State property keeps being stolen

The State Property Fund (SPF) of Ukraine has got carried away fighting shadow privatization. So much so that they are no longer happy about their attainments. Afraid that state controlling interests will be washed away, SPF stamps its foot at any attempt by Ukrainian companies to attract foreign investment through additional issues of stocks. “I have to sign several directives blocking such issues every day, although I realize that this may damage the companies concerned,” admits first deputy to the SPF chairman Mykhailo Chechetov. He believes that the problem can be solved by immediately selling all such blocking interests, retaining only the controlling ones – 51% and over. The SPF grapevine has it that the sales of such “small” interests are impeded by the Cabinet. When posed with this question point blank, the Premier carefully explained, “No one is blocking the sales of government interests, it’s just that they are carefully studying the consequences of privatization.” The way things are, however, it seems high time to study the consequences of no privatization.

Rosava, the tire-making factory in Bila Tserkva, remains a most eloquently scandalous example of the government’s struggle against shadow privatization. SPF prevented, albeit belatedly, the auction of its production sales to repay the factory’s debts. Those responsible were never found, however, with the General Prosecutor’s Office spending a long time, sending inquiries to various offshore banks. Even when the name of a Ukrainian people’s deputy had become known the media, the investigating officers persisted in keeping “inquest secrets.” While investigating the case, they managed to detain the head of the executive department of Kyiv’s Radiansky district state administration. The woman had secured the sale of factory property 20 times lower than its actual value, but was eventually released “for reasons of health.” In the end, the Rosava case somehow vanished from the headlines.

It was a signal to those engineering shadow property redistribution schemes to make another attempt. The Rosava management decided on an additional issue of stocks. The State Property Fund was not prepared to take part in investing in the factory, but nor was it willing to lose its 75% interest in that public corporation. And so the additional issue was blocked. Volodymyr Lynnyk, Rosava’s chairman of the board, found himself among those suspected of collaborating with the shadow operators. The man seems scared stiff to answer any journalists’ questions; no comments have been available to date. Among other things, it would be interesting to hear Mr. Lynnyk comment on all those attempts to steal Rosava from the state, selling the factory in return for token money; also, what he has to say about Bila Tserkva residents insisting that Rosava sells its products, being controlled by a Chechen racket.

The SPF did not bother to follow any of the leads, firing Lynnyk, hoping thus to end all attempts to shadow-privatize Rosava. Ihor Maloi, replacing Lynnyk, set about reforming Rosava with an enviable enthusiasm. Even though all his innovations had no positive effect on the workers manually sorting out tires on the conveyor belts, they had a lot of effect on the prices of the finished products. Also, changes were made in rubber procurements – Rosava had traditionally received it from Russia’s Amtel industrial group controlling Rosava through the Tropistron offshore firm. The Russians were outraged, of course. For those that don’t know the intricacies, Rosava is a public corporation [or a “public joint stock company,” to use the current bureaucratese], meaning the tire factory proper, whereas the joint venture Rosava is a company where that factory shares the property, with Amtel holding the 51% interest, anyway. The newly appointed manager tried to lower the rubber procurement prices (which he said surpassed the market costs by far), but the Russians, of course, showed no understanding. They decided to change the situation, using most banal means: stopping rubber supplies.

In September 2002, the factory continued to operate at 50% capacity, but came to a standstill October 1. Rubber supplies would be resumed after reinstating Volodymyr Lynnyk as manager, “authorized representatives” said. Ihor Maloi couldn’t find alternative sources of raw material– or he may have been denied the opportunity, being led to understand that looking for such alternative source would be damaging to his health. And then the Ukrainian State, represented by the State Property Fund, suddenly changed its mind about supporting Ihor Maloi. Finally, it became known that the Rosava tire supplies contract with Russia’s AvtoVAZ could be cancelled. Now it was perfectly clear that the interests of all those building private fortunes, using rubber-smelling hard cash in Bila Tserkva, reached far outside that city as well as the Ukrainian borders. Once again, the State Property Fund turned out unprepared to negotiate a deal at a so high (or rather, that deep) a level, so it resorted to the good old technique. In court, SPF representatives admitted that Ihor Maloi’s appointment was in breach of the labor laws. Mykhailo Chechetov, first deputy SPF chairman, tried to explain it by referring to the Kyiv regional state administration – that they had, allegedly, supported Ihor Maloi first and then had become disappointed and decided to reinstate Mr. Lynnyk. So that the State Property Fund seemed uninvolved. The enigmatic Viktor Lynnyk returned to his office, having managed to remain unavailable to the media throughout the scandalous affair. Accordingly, the likelihood of another attempt to shadow-privatize Rosava is anyone’s guess. The Security Service of Ukraine, SBU, are known to be still investigating the public corporation Rosava’s background, involving Tropistron.

President Leonid Kuchma, addressing the September privatization [Cabinet] meeting, admitted that allowing SPF to manage government interests in industrial enterprises was a mistake; SPF lacked the qualified personnel and finance. Rosava was a case study in SPF “chaotic management,” but it was likewise apparent that any other state structures would show as little efficiency in solving the tire-making factory’s problems, the latter boiling down to nontransparent sales patterns and mysterious raw material procurement conditions.

Without doubt, selling enterprises, where the state does not feel master in the truest sense of the word, would in many respects solve the problem of shadow privatization. The process is being slowed down by the government’s indecisive stand. Should the Cabinet resolve to bring Rosava back under state control, the law enforcement authorities would have little difficulty proving in court the unlawful nature of the entire joint venture involving offshore capital. As it is, the government’s current undetermined position plays into the shadow market operators’ hand. It is also true, however, that Rosava is one of many such dubious businesses. Oleksandr Paskhaver, head of the economic development center, notes that state-run enterprise are more often than not shadow-privatized without observing any legally established procedures – simply by some private financial groups making a deal with the manager and local authorities, getting the product sales and raw material procurements under control, meaning net revenues, without much ado. Unless the Cabinet determines to sell out such enterprises in the nearest future, there will be every reason to assume that money smelling of burned rubber finds its way to the pockets of ranking bureaucrats.