Investors have arrived

In recent days Ukraine’s attention has been focused on the sale of Kryvorizhstal. Can the outcome of this auction be absolutely assessed with regard to Ukraine? Yes, we can now patch up some budget holes. True, foreign investors, one of whose representatives was the successful bidder, have received a positive signal. Maybe now they will not be investing so fearfully in the Ukrainian economy, thus creating jobs and introducing their corporate culture, leading-edge management, and modern technologies. The question is, will the statistically average domestic producer, along with big Ukrainian business (less and less loved in the last while), be able to compete with powerful, experienced, and above all civilized Western investors (on an equal basis, i.e., without support from our state)?

Optimists claim that any competition is beneficial and that restricting it can only hurt the economy. This is true, except in the case of international competition. While everywhere in the world competition is welcomed on the level of consumer goods, here the issue of paternalism emerges once any strategic sectors are mentioned, where more often than not big business rules the roost. The Day’s experts believe that no one in the world sells strategic enterprises without securing a controlling interest, which allows them to make all the most crucial decisions to serve the national interest. Paternalism by the state is also manifested in the fact that foreign investors are offered worth no more than 20 percent of the shares. This limits the possibility of monopolizing the domestic economy, which is especially dangerous when it comes from a foreign investor.

Neither can the possibility be ruled out that domestic big business will simply be pushed out of its own country. As a result of this, will Ukraine’s economic geography and social profile change for the worse? Will we switch from being claimants to full-fledged Europeanness to permanent residents of a peripheral zone of the world economy? Will the state body responsible for supporting entrepreneurship have to deal exclusively with Ukrainian small and medium business?

A little over a year ago the Center for Economic Development, in collaboration with the International Renaissance Foundation, published the book Formation of Big Private Business in Ukraine by O. I. Paskhaver, L. T. Verkhovodova, and L. Z. Suplin. When the book came out, the situation with big business in Ukraineв — in the majority of cases now described by the angry epithet “oligarchic business” — was not that exacerbated. But clearly the book’s authors were already picking up on something (the book traces the configuration of certain business groups, their sources of income, and their role in the transformation of society) and they were issuing a warning. “It should be understood that big business is the energy of the economy of society. Like energy, it is neutral; the results of its functioning can be positive as well as negative. Everything depends on the effectiveness of society’s control. The quicker this society realizes this, the quicker and more consistently it will be able to protect itself against negative consequences by accumulating the positive actions of big business.”

Unfortunately, these ideas did not become very popular. It appears that now is the very time to convey them to the masses thrilled by the success of the Kryvorizhstal resale. Big business, pardon me, foreign business, unlike our own, seems to be an ideal partner of this society. A recent poll conducted by a TV network demonstrated this trend very convincingly. Commenting on this, Oleksandr Paskhaver, the presidential adviser and head of the Center for Economic Development, explained to the public that they are idealizing foreign investors, who play by civilized rules only in their home countries, whereas in Ukraine they very quickly master local “customs.”

Furthermore, by letting a large investor into the industrial sector of the economy, whose revenues can essentially be compared to our state budget, aren’t we risking hanging on to our current economic setup, while throughout the world information technologies and economics of knowledge — a new advanced order increasingly being mastered by humanity — are becoming more prevalent?

We thus have certain grounds to regard with a certain degree of skepticism the mass influx of foreign capital, for which our government is creating most favorable conditions for entering Ukraine. True, expert assessments differ markedly here. For instance, Oleksiy Danilin, an expert with the Martin Group, questions Mittal Steel’s ability to meet its investment obligations with respect to the development of the Kryvorizhstal plant and to ensure the workers’ social guarantees. Lakshmi Mittal’s statement that there will be no mass layoffs at Kryvorizhstal does not dovetail with the company’s global strategy of continuing the reduction of industrial personnel in the course of rationalizing production or with the precedents of rather tense relations between Mittal Steel and working personnel in Kazakhstan, Poland, and the Republic of South Africa. Danilin also suspects that this company, known for its strategy of purchasing relatively cheap assets, accepted such a high auction price (24.2 billion hryvnias, 4.79 billion dollars) fully aware of the potential political risks in Ukraine and its rather unstable economic development. This expert also finds it interesting that the Industrial Group consortium left the bargaining table after bidding $24.1 billion. Danilin predicts that the Industrial Union of Donbas (ISD) thus made a friendly gesture toward Mittal Steel, giving it the green light in Ukraine in return for concessions on Western European markets.

However, the general mood in the community of experts is more optimistic. The 24.2 billion-hryvnia argument cannot help but have an impact on the best informed and most patriotic individuals.

COMMENTARIES

Ihor MITIUKOV, former Ambassador of Ukraine to UK and ex-finance minister:

The Kryvorizhstal privatization will certainly have a positive impact on competition in this sector. The spheres of influence and markets among Ukraine’s metallurgical enterprises, which are working with considerable success, have already been divided up, and no competition among them on external markets has been observed. As for competition in terms of production organization, let’s hope that the new owner of Kryvorizhstal can add further managerial experience. I guess that the next six months or a year will show how much the investor is interested in the further development of this business and not just in the simple exploitation of the existing capacities. The fact that the national investor in this competition could not come out a winner should not be interpreted as a sign that it was discriminated against or a signal that a more cautious approach is needed to investments within this country. I think the government will be able to prove the opposite, and it has the proper instruments for this. Nor should we forget that the national investor comes from Ukraine, and he has a better orientation as to our political and other risks. This is his advantage, which levels out the chances of all sides. Successful privatization can allow the government to wage a more liberal fiscal policy without relying on the accumulation of tax pressure on business. This may be the main benefit for the domestic participant in the competition over the privatization of Kryvorizhstal.

Vasyl YURCHYSHYN, director of economic programs at the Razumkov Center:

Unfortunately, I can’t say that all the processes relating to Kryvorizhstal have been completed. Therefore, in the short range the sale of Kryvorizhstal will have no direct impact on the level of competition in Ukraine (at least before it becomes clear where the court proceedings are heading). In the long run this sale should not have any negative effect on competition. This prospect indicates that Ukraine seems to want to carry out the privatization process transparently and allow the greatest possible number of participants, and to build up the institution of an effective private owner. This may yield positive results. However, everything depends on the outcome. Personally, I am afraid that this (the sale of Kryvorizhstal — Ed.) is just the beginning. Capital, as everyone knows, doesn’t have a nationality. If our investors have enough money to buy businesses abroad, let’s hope that they will work in the same conditions or even better ones. If any protectionist measures are adopted, they will cause investors’ concern everywhere, as usual. We all know that money comes to money. If our economy grows, we’ll have domestic as well as foreign investments.

Anatoliy OTCHENASH, head of the financial group Avtoalians:

Competition in our metallurgical industry is growing, and I think the sale of Kryvorizhstal will only encourage this. The only problem will be coordinating efforts, but Ukraine will not lose out, of course. With the arrival of the big producer there are more forces in this branch. I predict that the Kryvorizhstal auction will have normal consequences for the country in terms of competition, although competition among big businesses will be severe because the limits of this country will obviously be reviewed and revised. But our large enterprises already have their distribution network, which will somewhat lower the intensity of the competition that will increase no matter what. I am certain that our companies will endure this competition. And they will have to come to terms with the foreign investor; there are a lot of stumbling blocks. Everyone has to consider everyone else’s interest. Will this be easy? The labor union movement will also receive a developmental boost, as arrangements must be negotiated with the new owners. The Kryvorizhstal case is a serious challenge to the country. The transaction with a transnational company will allow Ukraine to acquire experience in dealing with such structures. This opens up the road to Europe, where we have been aiming for the past several years.