Tips for owners

President Viktor Yushchenko of Ukraine said recently that 65 percent of Ukrainians support a revision of the privatization deals.

This is a debatable point. Judging by opinion polls, the public has yet to cultivate an acceptance of big capital’s right to exist in Ukraine. A majority of Ukrainians still believe it is necessary to “expropriate the expropriators.”

This conviction is at least partly due to the scandals surrounding privatization. After making it abundantly clear that it did not always follow the law, the government never explained to the nation what should be done about this now.

To call the privatization processes that took place in Ukraine after independence absolutely fair would be too great an exaggeration. In the wake of the USSR’s breakup, assets were divided among people close to the party elite, which is why transparent auctions, let alone adequate budget receipts, were out of the question. Stanislav Belkovsky, founder of the National Strategies Institute, which recently hosted a roundtable discussion entitled “Revision and Legitimization of Privatization in Ukraine: the Future of the Country’s Largest Enterprises,” says that companies changed hands by being passed from owners whom those in power found objectionable to owners who were loyal to the government.

A similar thing is happening now, except that businessmen are no longer trying to squeeze as much as possible out of the enterprises. Instead they have started investing in production facilities. Because the government could not simply return the privatized property to state ownership, it had to find a way to legitimize it.

Reprivatization was the first result of this search. However, an outcry from the business community and the obvious damage that was done to the country’s economic climate forced the government to abandon reprivatization, a method favored by leftist politicians. But it did so only after reselling Kryvorizhstal. What can replace reprivatization? According to Belkovsky, the only possible alternative would be to oblige current owners to make additional payments, the amount of which should be based on the given company’s earnings in the year that it was privatized. But experts oppose this method. According to Viktor Lysytsky, former aide to the Cabinet of Ministers, one shouldn’t forget that when enterprises were being privatized for a song, many of them were in terrible condition. So, the government must acknowledge the entrepreneurial courage of these businessmen and refrain from putting up their normally functioning enterprises for reappraisal. Professor Aleksandr Rozenfeld of International Solomon University has another argument against the proposed requirement to make additional payments. He says that risks were much higher when such enterprises were being privatized, which reduced their sale price substantially. The sale prices of many enterprises appear to be more adequate if one takes reckons with this circumstance. But this applies only to privatization deals that took place in the first five or six years after independence. Rosenfeld’s method involves resizing share stakes by holding additional stock emissions, reducing the current owners’ stakes, and selling off the remaining shares. The question is whether the owners would agree to give up control of companies that so far are theirs.

They may not agree, especially since they have more than enough defenders. Viktor Nebozhenko, director of a social service called Ukrainian Barometer, also defends Ukrainian business in this matter. He says that foreign companies have only just started to enter the Ukrainian market, whereas in the past Ukrainian businessmen simply did not have enough money to pay the fair value of such companies. An appropriate rejoinder would be: since you didn’t have money, you shouldn’t have bought it in the first place. Most experts, however, believe that Ukraine was simply forced to create big domestic capital, which is why privatization encompassed all assets and was carried out in a totally chaotic fashion.

According to Nebozhenko, capitalism will arise in Ukraine only when Akhmetov and Pinchuk recover the money they spent on Kryvorizhstal. Perhaps it will begin after all. But according to Yaroslav Zhalylo, chief of the economic and social strategies division at the National Institute of Strategic Research, the investment climate is suffering not just from reprivatization but from mere discussions of how legitimate privatized companies really are. He is convinced that now is the time to try to forget all discussions of the legitimate or illegitimate nature of certain privatization deals and start putting things in order by reviewing a limited number of glaringly illegal privatization deals, while leaving all other companies in peace. This belief is shared by Volodymyr Fesenko, chairman of the board of the Penta Center for Applied Political Research. According to Fesenko, global additional payments will lead to a situation similar to the one that arose after the sale of Kryvorizhstal, with no one knowing what to do with all the money. The same will happen with the proceeds from the additional payments. As for further privatization, there is no clear agenda either. The upcoming sale of the telecommunications operator Ukrtelekom and oil industry giant Ukrnafta has already been announced. These two monopolies in the nation’s strategic markets will certainly generate large profits. Yet what are the chances that the government does not regress to this past summer, when many statements were made about the government’s leading role as a safeguard against market crises?