Bankruptcy of state enterprises has become a variety of shadow privatization
Three consecutive scandals in the past month over the debt recovery privatization of state-run enterprises has forced this country’s leadership to deal with this problem. President Leonid Kuchma has instructed the Cabinet of Ministers to take immediate (!) measures to ban court-ordered alienation of state-owned blocks of shares. To do so, amendments will be made to the foundation documents of the largest joint stock and holding companies. The president also suggests that the integrity of proprietary units be defined in a special law whose draft is to be submitted for parliamentary approval in the nearest future on a priority basis.
The haste with which the leadership set out to save state proprietary units is easy to understand. The shares of industrial and energy giants are precipitously coming into private ownership, with the state getting not one cent. The sensational stories surrounding the attempts of commercial facilities to assume control over Donbasenerho, Rosava, and Luhanskenerho show the government completely unprepared for this development. The debts of dubious origin state-run companies incur is quite a legitimate basis for these companies to be taken over by their creditors. Civil courts, even if fully aware of dealing with a well thought out premeditated job, can do nothing. The law is today unequivocally on the side of creditors.
The first serious warning signal rang in the middle of last month, when Kyiv’s Starokyivsky District Court ruled that the Luhanskoblenerho power grid be taken over by Ukrsotsbank. Of course, in all this story the bank itself only represented its clients who preferred to keep a low profile. The court proceedings pivoted around a staggering 115 million hryvnias (about $20 million). Chairman of the bank’s board, People’s Deputy Valery Khoroshkovsky, noted then ironically and with barely hidden satisfaction that “the amount fully meets the price paid by a Slovak and a US companies at a recent oblenerho (regional electric company — Ed.) privatization tender. Yet, the facility fell into the hands of a domestic buyer.” We can only guess who the real buyer was, but it is beyond any doubt that the industrial consumers of electricity are most interested in exercising control over power grids. They can thus insure themselves against unexpected outages and demands to pay on time. What also supports this supposition is that just a few days after the court had ruled in favor of Ukrsotsbank, the board of the latter chose Valery Tymonkin as chairman who, according to the most popular version, represents the banking circles serving the interests of Donbas industrial, including coal-mining and metallurgical, managers.
A new scandal burst, again in the Donbas, two weeks after the Starokyivsky Court made its decision. Three most efficient Donbasoblenerho thermal power plants in Luhansk, Zuyivka and Kurakhivka were auctioned off for debts after bankruptcy suits had been filed. This means the buyers managed to evade all formalities connected with privatization through the State Property Fund (investment-related and social commitments). Donbasoblenerho had run up a debt of 160 million hryvnias. The most striking thing is that the public still does not know the commercial company that has acquired by far the largest power supplying facilities of the region. The State Property Fund is now making attempts to bring Donbasoblenerho back to government ownership, with its suit still pending in court. SPF Chairman Oleksandr Bondar claims the Donbasenerho property was assessed at a mere 20% of its market value. Moreover, the assessment was carried out by a company stripped of its SPF certificate a short time before. Yet, all these claims look like a feeble attempt to brandish fists after a fight. Oddly enough, the fund failed to timely supply the court with a complete set of its arguments. Now the matter is being dealt with by prosecutors, the Security Service, and the government. Maybe, they will save the situation. Minister for Fuel and Energy Stashevsky has even said in a characteristic manner that the state does not intend to obey this court decision. This sounds somewhat like a bad joke. In any case, Ukrainian privatization and the stock market as a whole have sustained tremendous damage.
Volodymyr Tsveniadi, analyst at the Alpha Capital brokerage, maintains that it is the Luhansk and Donetsk energy company scandals that provoked a fall in the share prices of almost all oblenerho enterprises on the stock market. According to the analyst, the now- fashionable shadow privatization scares off influential foreign investors ready to invest live money in the Ukrainian economy, making certain commitments to the state. He also points out that steel mill managers are interested in establishing control over Donbasoblenerho.
However, that was not the end of scandals. Last week, a familiar-scenario event occurred in Bila Tserkva, Kyiv oblast, where the local tire plant was almost privatized for debts. Only in the last minute on May 14 owing to intervention of the Prosecutor General’s Office, the SPF managed to stay the auction sale of the enterprise. Ukraine’s largest tire producer, also known as the Rosava Company, the plant was put up for auction as part of a Ukrainian-Irish joint venture at a starting price of UAH 103 million. This time, the attempt at illegal privatization was so obvious that the media began to report on the expected hoax well before the auction. Later on, SPF Chairman Bondar even thanked journalists for telling all details of this affair. But is it not simply more proof that the state exercises a weak and even a bit light control over its property?
The presidential decree signed last Wednesday binds over the government to carry out internal investigation into the involvement of state-run enterprises’ managers in the attempts at shadow privatization. Conversely, instructing the Cabinet of Ministers to recover the state-owned blocks of shares of the enterprises already privatized (even though illegally) looks like nationalization. If the law is not to be breached, the lost Donbasenerho thermal power plants can only be returned through a court action. But the state’s arguments will look rather weak in court, if, of course, Verkhovna Rada does not pass an ex post facto law by then. Whatever the case, the incompetent (at best) management of state-run property have created kind of a catch-22: to defend its legitimate interests, the state will have to resort to extraordinary actions.
