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The cost of grabitization

Oleksandr RIABCHENKO: Ukraine is swept under another tidal wave of uncontrollable hostile takeovers
20 October, 00:00

The economic well-being of a country largely depends on the government’s ability to manage the state property the right way. Ukraine is reaping the first gruesome harvest of the big-time privatization campaign. There are still attractive state-owned enterprises to be put up for sale, among them the Odesa Port-Side Plant (OPZ) and Ukrtelecom. How will these tasty morsels be transferred into private hands next year? What is the impact of the OPZ bungled auction on the investors? How will the mounting hostile takeover rate influence the privatization campaign? These and other issues are raised in the following interview with Dr. Oleksandr RIABCHENKO, Ph.D. (Economics), director, International Institute for Privatization, Property Management, and Investments.

Could you comment on the consequences of the failed OPZ auction? What can result from the litigation between the government and the highest bidder?

“The situation with the Odesa Port-Side Plant is obviously part and parcel of our current realities. The auction was announced because the [central] budget was counting on receiving 8.5 billion hryvnias. Instead, it received half a million. To implement the budget receipts, this government must sell another state property and receive eight billion hryvnias. The OPZ is the only one that can be sold, because other enterprises will take eight to twelve months to prepare for sale. Besides, in the fist and second quarter of 2009, the OPZ lost 38 million hryvnias (another formal reason for putting it up for sale). If effectively sold, the OPZ would have made the Ukrainian govern­ment’s talks with the IMF easier in terms of consumer gas prices by showing that Ukraine had some­thing else besides requests for loans on its agenda.

“I’m convinced that the bidders and our government had their stands figured out between them­selves before the auction. The investors wanted to hear that their bonds would be refunded in due course after the auction and that the entire affair was on a best-man-wins basis. The government wanted to make sure there would be bidders prepared to part with 8 billion hryvnias. This was a matter of principle; otherwise the auction would leave the government empty-handed. The government wanted at least eight billion hryvnias added to the central budget. That was why the situation remained calm before the auction, despite the president’s criticism. Yet when the auction got stuck at five instead of eight billion hryvnias, the prime minister gave her stormy response. This wouldn’t have happened without previous arrangements and promises.

“Talking of the winners and losers, the bid evaluation com­mission resolved not to name the successful bidder. Then what? Considering that the de facto successful bidder was a Ukrainian company close to Pryvatbank, a lawsuit is more than likely. This team knows how to defend its property interests and has repe­atedly demonstrated that it is not scared by lawsuits. I believe that Pryvatbank will win the OPZ sale case in court, although it won’t get the enterprise itself. The govern­ment, as the seller, has lots of opportunities of using civil law clauses that will allow it not to part with the OPZ. An amicable agreement is another possibility, with both sides reaching an understanding and finding a new buyer prepared to add something like three billion to the existing five billion hryvnias.”

How would you explain the mounting rate of hostile takeovers along with legitimate acquisitions? What are the reasons behind this phenomenon in Ukraine and elsewhere in the world?

“We’re now swept under the second tidal wave of hostile takeover. There are no psychological or mental reasons behind this phenomenon. Hostile takeovers thrive on the lack of respect for the law, as well as on the corrupt judicial system. For so long as such hostile takeovers can exist, with its components — corrupt judges, law enforcement authorities, and paying for and providing protection to authorities — this will remain the least expensive means of getting property rights. If the government fails to combat such hostile takeovers, one ought to remember that any kind of property must be made functional. If you stash it away, you stand a good chance of having it stolen. It is the government’s task to make such property start making money instead of gathering dust as a title deed file on a lawyer’s shelf. What I mean is that the time is ripe for Ukraine to finish constructing the institute of private property.

“Hostile takeovers are nothing new elsewhere in the world. On the stock market this is done by purchasing shares and obtaining a majority interest without notifying the company’s owners. Of course, any such transactions are subject to legislation. In the United States or in Europe you can’t hold a fictitious stockholders’ general meeting and then expect the court to accept its resolutions, including the new statute and the new CEO and then carry out the takeover. Such stunts simply can’t be pulled off in Europe. In fact, hostile takeovers are the brainchild of Ukrainian and Russian oligarchic structures.”

What can hostile takeovers eventually lead to in Ukraine?

“Such industrial giants as Kryvorizhstal or Azovstal are immune to hostile takeovers, nor can such takeovers affect the GDP indices. However, violations of property rights that are legitimized rather than punished under the law are sending alarming signals to society. Such hostile takeovers constitute a threat to national security in that by allowing such criminals to operate freely and without fear of punishment, the authorities, particularly the law enforcement agencies, are losing people’s trust. This is when the whole political system starts having very shaky prospects. Elsewhere in the world there are notions such as “moral spirit” and “state image.” It is very easy to ruin them, and very difficult to rebuild them.”

How would you comment on the hostile takeovers of land plots, their scope, and the local peasantry’s ways to resist them?

“Hostile takeovers of land haven’t acquired the scope they could haven. All land issues are resolved by using illegal purchase-and-sale schemes. This is only natural, considering that our state doesn’t have a transparent land market. I think that our peasants shouldn’t be prohibited from selling their parcels of land, for the simple reason that it is their property. The government must prevent the appearance of monopolist buyers on the land market by issuing special purchase authorizations and keeping all contractual commitments on official record.”

How are other countries combating such hostile takeovers? What should Ukraine do to reduce them to a minimum?

“My impression is that our government isn’t treating the issue of hostile takeover with due consideration. We have all those anti-hostile-takeover commissions and they meet but have any apparent effect on the situation. In fact, to improve the situation, it would suffice to bring to justice and mete out harsh legal punishments to all the executors and their noted customers involved in a single hostile takeover. After that there would be no more than 10 percent hostile takeover operators left on the market. The main reason behind the revival of hostile takeover business in Ukraine is the fact that such operators fear no legal retribution, and that there is no civilized property transfer system. Of course, I could list dozens and dozens of anti-hostile-takeover measures, but all this remains on paper. We will see practical steps against hostile takeovers when the leadership of Ukraine has formed the political will to pursue them.”

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