The State Property Fund is again conducting an inquiry into the legality of privatization of the Donetsk and Yenakiyevo Metallurgical Plant. Previously, Donetsk oblast law-enforcement bodies had established the facts of undervaluation of the property in this enterprise by Hr 22 million. The damages caused to the state as a result of this privatization are now being defined in more detail, but as of today the examination has revealed a sum of $84 million which means at least a twofold undervaluation of the property. An investigation is being conducted at the plant, and the foreign investor who had invested heavily in the works says that he would have never run the risk if he had known the way it could turn out for him.
Even superficial analysis of Donetsk Metallurgical production last year gives adequate reason to consider the plant to have been lucky to find such an investor. Managers do not deny the fact that owing to the working capital invested and the plant's new economic and financial policy developed with aid of foreign experts, the plant's profit for 11 months of 1997 was Hr 740,000. It is not a large amount, but it is telling after many years of production decline. In 1996, losses were over Hr 44 million.
For a whole year Mohammed Zakhur, Chairman of the Board of Directors of the Metalsrussia Group, had tried to understand the logic of actions taken by Ukrainian authorities concerning privatized enterprises. Finally, he tried to ask Premier Valery Pustovoitenko to ask him about the reasons for the 50 inspections that were performed during the previous year at the enterprise and to clarify whether its privatization was legal. The question is not without foundation, especially taking into account that top state authorities had begun to question the correctness of the privatization after they had announced and successfully held bidding for a 40% block of shares with investment commitments. No meeting with the Premier took place and Mr. Zakhur started the new year with old problems, still having no idea what he should do about his shares and if they belonged to him.
According to the terms of non-commercial bidding that Metalsrussia won at the end of 1996, it was to invest $50 millions in the Donetsk Metallurgical electric arc welding complex. Last year it invested $9 million in the form of technology, cash, and non-tangible assets. At a press-conference in held in Kyiv Oleksandr Pylypenko, Deputy Head of the Board of Directors, said that the work on the investment project was going well. Metalsrussia delivered in Donetsk and installed equipment to upgrade the electric arc melting furnace, is installing equipment and has given $17 millions in a no-interest loan to increase working capital. For the same purpose, Meespierson Bank (Holland) and the First Ukrainian International Bank have granted a $8.7 million loan for 1998, against strategic investor guarantees.
According to firm management, all this has contributed not only to the enterprise's financial stabilization, but also to an increase in production of high-alloy steel products.
On November 4, Verkhovna Rada, after finding the performance of the State Property Fund of Ukraine unsatisfactory, stated that during its activity the SPF had occasionally violated Ukrainian law. In particular, some of the facilities subject to privatization, including Donetsk Metallurgical, had been undervalued. The heart of the collision is that the enterprise was evaluated according to the provisions of the Methods for Evaluating Facilities subject to Privatization, approved by Resolution of the Cabinet of Ministers on January 18, 1996, which was then in effect. These methods provided for evaluation of property at such facilities in accordance with accounting data. The new Methods for Evaluation of Blocks of Shares to be sold for Money requires expert examination. But it was approved by the Cabinet of Ministers August 15, 1996 while the allocation of shares against investment commitments was regulated by the Resolution of the Cabinet of Ministers adopted June 27, 1996. However, inspections are continuing.
A glance at the number and of normative documents regulating privatization procedures in Ukraine suffices to prove the popular wisdom that the law in this country is like a flashlight that can be turned wherever you want. And how in this case a naive Hong Kong investor should act, who hopes that at least the Ukrainian Prime Minister knows for sure if those ill-fated 40% of Donets Metallurgical shares still belong Metalsrussia or not. As locals accustomed to the fact that their rights are neglected several times per day by their own state, Ukrainians could give some advice to wealthy newcomers. However, today an experienced foreigner will find himself what to tell those who may happen to come here tomorrow.
Photo by Borys Dembytsky:
Molten iron at the Mariupol Metallurgical Combine







