Ukraine has entered the time of large-scale privatization, when controlling interests in big and investment-attractive companies that are vitally important for the country’s economy will mostly be put up for sale. Pursuant to the freshly approved 2000-200
RUSSIAN INVESTORS FOR UKRAINIAN PRIVATIZATION
Ukraine has entered the time of large-scale privatization, when controlling interests in big and investment-attractive companies that are vitally important for the country’s economy will mostly be put up for sale. Pursuant to the freshly approved 2000-2002 Privatization Program, the ‘leading man’ of the Ukrainian privatization is an industrial investor, namely, a domestic or foreign firm that is interested in further progress of the enterprise subject to privatization, as well as in retention of its market share.
It is quite natural that representatives of large Russian businesses take the first lane among potential purchasers of the most appealing Ukrainian companies. It is a matter of historical economic relations that the Russian business keeps an eye on a number of companies in Ukraine’s basic industries, such as oil & gas, electric power, nonferrous industry, ironmaking, and steelmaking. For instance, a 30% interest in Nikolayev Alumina Plant (Mykolayivsky glynozemny zavod) was sold this March, thus, transferring control over this Ukrainian factory to Siberian Aluminum United Company (Objedinyonnaya kompaniya Sibirskiy alyuminiy) via limited liability company Ukrainian Aluminum (Ukrayinsky alyuminiy) that was set up a year ago. Taking advantage of a similar approach, i.e. making use of its resident subsidiary company TNK-Ukraine, Tyumen Oil Company (Tyumenskaya neftyanaya kompaniya) acquired a 67% stake in public joint-stock company LiNOS (abbreviation for Lisichansknefteorgsintez or Lisichansk Crude Oil Refinery). By and large, it is easy to predict the results of privatization involving Ukrainian crude oil refineries. Most likely, by the end of autumn 2000 Ukrainian refineries will be acquired by Russian oil concerns, such as LUKoil, Tyumen Oil Company, etc. Russia’s SibUr – a subsidiary company of JSC Gazprom – has recently expressed its willingness to acquire Kalush-based public JSC Oriana and Severodonetsk-based Azot association. Russian investors are more than concerned with such Ukrainian companies as Turboatom; Khartsyzsk Tube Works (Khartsyzsky trubny zavod), which works exclusively for Gazprom; and so forth.
Meanwhile, the once firm standing of quite a few large-sized Russian businesses that had lasted over the past 3 to 4 years was impaired all at once in late May 2000. Privatization of Russia’s basic industries, which are closely related to the Ukrainian economy, was called in question. Rem Vyakhirev’s status in Gazprom goes downhill, while pressure is exerted on another VIP of the Russian heat and power industry, that is to say on Anatoly Chubais. Suddenly, there have come up criminal lawsuits on privatization in Russian nonferrous industry that were filed by the Russia’s General Public Prosecutor’s Office a couple of years ago.
The Ukrainian business society became anxious about the Russian problems because of events involving LiNOS privatization. Exactly when TNK-Ukraine was announced a preliminary winner of the tender for a 67% stake in LiNOS, the head offices of Russia-based Tyumen Oil Company were searched. This move related to a criminal suit about Tyumen Oil Company’s failure to purposefully use the money raised during the company’s privatization. This suit was filed by the General Public Prosecutor’s Office of Russia back in 1997. A short while after the incident with Tyumen Oil Company, Russia’s tax police brought a criminal litigation against LUKoil company that holds a rather weighty interest in public JSC Odessa Crude Oil Refinery (Odesky naftopererobny zavod).
In general, one can make a more or less sound assumption that another repartition of the market is unlikely to succeed, while the Russian economy would simply have to play using new rules. On July 28, 2000, Pres. Vladimir Putin held a meeting with the prominent Russian businessmen discussing "the relations between the business and the power". Shortly afterwards, several large Russian companies, which used to be subject to administrative pressure, were sort of ‘amnestied’. Nevertheless, the cohort of Russian businessmen led by Roman Abramovich, who gave rise to Mr. Putin, will hardly give up the fight that easily.
How can the latest events of Russia’s political life influence the results of Ukrainian large-scale privatization that involved Russian industrial investors?
Siberian Aluminum promised to give Ukraine a complete aluminum-making CYCLE
The terms of tender for a 30% interest in Nikolayev Alumina Plant provide for large investments to be made by the winner, namely, by Ukrainian Aluminum. In fact, two Russian companies took indirect part in this tender, viz. Krasnoyarsk Aluminum Smelter (Krasnoyarskiy alyuminiyeviy zavod) and Siberian Aluminum United Company.
According to its spokesmen, Ukrainian Aluminum company, which was registered in Leningradskiy District State Administration of Kiev city on March 11, 1999, was set up to partake in the Nikolayev Alumina Plant tender. By the time of the tender, this company had already allocated more than 35 million Ukrainian hryvnyas to purchase shares in Nikolayev Alumina Plant. The founders of this company comprise about a dozen of both resident and non-resident legal entities. Ukrainian Aluminum’s authorized capital totals over US US$120 million, though resident companies, namely, Ukrainian Metallurgical Company (Ukrayinska metallurgiyna kompaniya) and Ukrsibbank, hold only 25% with the rest belonging to nonresident firms, which take part in execution of Siberian Aluminum Group’s projects in Ukraine.
Ukrainian Aluminum organizes supplies of rolled aluminum and aluminum-based products within the framework of large-scale national programs of Ukraine, such as the Sea Launch (involving Yuzhmash scientific and manufacturing association), and construction of An-70 military transport aircraft and An-140 short-haul airplanes (Antonov Aviation Scientific and Technical Complex (ANTK im. Antonova) and Kharkov State Aviation Plant (Kharkivskiy derzhavniy aviatsiyniy zavod)). The company has close cooperation contacts with public JSC Zaporozhye Aluminum Smelter (Zaporizky vyrobnychy alyuminiyevy kombinat), particularly, renders assistance in construction of a foil-making mill; and has its own trading firm, which arranges supplies of the bulk of aluminum foil and semi-finished aluminum on the Ukrainian market.
Having won the tender, Ukrainian Aluminum started meeting its investment commitments. It has launched a production upgrade program and held negotiations on acquisition of raw material deposits in Guinea. At the latest of 2002 it will commence construction of a 100,000-130,000-tpy aluminum smelter in Ukraine. Ukrainian Aluminum works out this construction project jointly with Zaporozhye Titanium Institute (Zaporizky instytut tytanu). Right after the tender’s results had been made public, Herman Tkachenko, chairman of the board with Ukrainian Aluminum, mentioned that construction of a new aluminum smelter in Ukraine would cost roughly US US$180-200 million. Most likely, this money will come from Siberian Aluminum United Company, be borrowed from Ukrsibbank and other petty investors. It is anticipated that Nikolayev Alumina Plant and the future aluminum smelter will become the core of a large aluminum consortium. According to Herman Tkachenko, Yuzhmash, Ukrgrafit, and Frunze Manufacturing Association of Sumy (Sumske vyrobnyche obyednannya im. Frunze) have already given preliminary agreement to partake in the future manufacturing process.
So, wellbeing of Siberian Aluminum Group established in 1997 is the ultimate pledge of development of the Ukrainian aluminum-making. Companies within the Siberian Aluminum Group have the annual consolidated turnover of some two billion US dollars. At this point of time, the group has structured out aluminum, aircraft construction, and mining and metalmaking businesses. Public joint-stock company Siberian Aluminum United Company with some US US$244.5 million of share capital is a cornerstone of the group’s aluminum business. This company controls productive capacities of Sayansk Aluminum Smelter (Sayanskiy alyumiyeviy zavod), Sayansk Foil (Sayanskaya folga) Plant, and Samara Metallurgical Works (Samarskiy metallurgicheskiy zavod).
While signing an acquisition contract on a 30% stake in Nikolayev Alumina Plant, president of Siberian Aluminum Group Oleg Deripaska voiced his confidence that this deal would be the first step in creation of the largest aluminum company in the CIS on the grounds of Ukrainian and Russian companies. This new aluminum company will work not only in favor of its shareholders, but also to the benefit of both countries. Responding to the question of how the company would manage to take leadership on the global aluminum market, Oleg Deripaska said, "We shall see that in the coming two months". Well, two months later the Russian business entered the disquieting times… Meanwhile, as long as Siberian Aluminum belongs to Roman Abramovich and as long as Mr. Abramovich is favored by the Russian President, one can be confident about the good future of Ukraine’s aluminum-making. The case of Odessa Oil Refinery and LiNOS is a whole different issue.
LiNOS – the first sign of Tyumen Oil Company in Ukraine
Nobody really had much hope about the tender for a 67% interest in public JSC LiNOS. Considering the situation with this company, chairman of the State Property Fund of Ukraine Alexander Bondar said time and again that re-commencement of the company’s normal manufacturing activities and prevention of the possible bankruptcy were the main objectives of this tender.
Indeed, the refinery with engineered capacity for 18 million tonnes of crude oil per year and costing US US$208 million has shown a rapidly stooping business performance over the last 3 years. Back in 1997 LiNOS had profitability rate of 31.69%, while in 1998 this ratio halved to amount to 16.5%, and bisected once again to 6% in 1999. As of the first quarter of 2000, profitability rate climbed to 7.1%. In 1998 this refinery found itself below the breakeven point, namely, after earning 31,319,800 Ukrainian hryvnyas of gross revenues in 1997. In 1998 it incurred 182,954,400 hryvnyas of financial losses. Accounts payable by LiNOS almost tripled against the 1997 payables of 178,342,400 hryvnyas. Idle time of LiNOS amounted to 87% of the total business hours in 1999. Utilization of capacities was at the Ukraine’s absolute low of 3.3%.
Having gone public in 1993, LiNOS turned into a public joint-stock company with a share capital of 9,887,420.74 hryvnyas. There were made two attempts in 1998 to sell a 40% interest in LiNOS, but the tender miscarried twice because of no bids made. In early February 2000 public JSC Tyumen Oil Company mentioned that it was willing to acquire state-owned stakes in LiNOS and Oriana in one piece. Back then, Mikhail Fridman, chairman of the Board of Directors with Alpha-Group syndicate, assured that the syndicate was ready to fully redeem accounts payable of both companies in exchange for the stakes (in fact, payables of LiNOS alone total US US$250 million, thus exceeding the book value of this company’s assets). Furthermore, Tyumen Oil Company proposed to supply at least 4 million tonnes of crude oil per year to LiNOS, though this is only one fourth of what this company actually needs. So, on February 17 the Ukrainian government declared its intention to put a 67% interest in LiNOS up for sale on a commercial tender under investment commitments. Alpha-Group syndicate confirmed its willingness to take part in LiNOS privatization on the very next day.
In late April the State Property Fund of Ukraine announced a commercial tender for a 67% interest in LiNOS at the starting price of 48,518,000 Ukrainian hryvnyas. Besides, the officials have set up a long list of investment requirements. For instance, within a matter of 60 days after signing share acquisition contract, the tender’s winner should pay off 400,000 hryvnyas of refinery’s payables to the Pension Fund and 3.8 million hryvnyas of wages and salaries payable to refinery’s employees; contribute 13 million hryvnyas to replenish current assets of LiNOS; discharge a 10.7-million-hryvnya debt to the country’s budget within 180 days; repay a debt to the Ministry of Finance, which had squared up a EURO 19 million portion of an overdue loan issued by Germany’s Westdeutsche Landesbank under guarantee of the Ukrainian authorities. In addition, the new owner should invest 60 million hryvnyas in technical reconstruction of the refinery’s manufacturing facilities within 5 years after registering the purchase. Finally, the purchaser should present documentary evidence that it holds the necessary rights to annually extract and sell at least 4 million tonnes of crude oil during the upcoming 5 years. In a word, a potential purchaser simply must have a firm current and future financial standing to meet all the requirements specified.
Meanwhile, right in the heat of the tendering, Yuri Boiko, director-general and chairman of the board with LiNOS, certified that the Russian oil & gas investors simply had no other alternative at that moment. Then he specified that Tyumen Oil Company was the most likely (in fact, the only one) contender for the 67% interest in LiNOS. Firstly, this Russian company has enough crude oil to make full use of refinery’s capacities; secondly, it has already negotiated the terms of redemption of all the refinery’s outstanding payables, such as the unpaid Westdeutsche Landesbank loan, taxes payable, wages and salaries payable, and accounts payable for fuel and power consumed. Since March 2000, Tyumen Oil Company has been pumping crude oil to LiNOS, which now treats up to 220,000 tonnes per month. Now, efforts are made to renew benzene output in the refinery’s workshop that had been idle for 6 years, and to put production of Ai-98 gasoline in order. Mr. Boiko stressed that, "We hope that LiNOS privatization will be over and that we will get a true owner who has enough resources. As long as Ukraine extracts 2.5 million tonnes of crude oil per year, we haven’t got a chance to make use of all the 6 Ukrainian refineries on our own".
So, four companies made their bids for the LiNOS stake, namely, TNK-Ukraine (a subsidiary of Tyumen Oil Company); Prodintorg; Ukrgazbank that acted on behalf of SibUr (Gazprom’s subsidiary company); and Naftoinvest Ukraine. Bids of the latter two firms were turned down, and TNK-Ukraine and Prodintorg were the only ones to participate in the tender. The winner was TNK-Ukraine that bid the greatest amount of 50 million hryvnyas. One should keep in mind that TNK-Ukraine itself has neither the raw materials, nor manufacturing facilities and financial funds. It is just that the company is backed by the prosperous Tyumen Oil Company. Being a member of the Alpha-Group consortium, public joint-stock company Tyumen Oil Company ranks the top fourth corporation in contemporary Russia extracting 24 million tonnes of crude oil per year and making US US$3 billion of annual sales. Alpha-Group holds a 25% interest in Tyumen Oil Company, while Alpha-Group’s affiliate Noviye Prioritety owns 49% of this oil company. Alpha-Group has acquired Ukraine-based Kievinvestbank and Ostra insurance firm. It is such a pity that Russia’s new Pres. Vladimir Putin disrelishes precisely those Russian businessmen who are related to the Alpha-Group consortium somehow or other.
Answering the question of InvestGazeta’s correspondent on whether things with LiNOS could go like they had done in case of Odessa Oil Refinery (not too long ago, the latter refined no oil, while later on crude oil supplies were completely suspended for three consecutive months), chairman of the Ukraine’s State Property Fund mentioned that, "When running privatization of Odessa Oil Refinery we had not a chance to forecast the political situation in Russia". These words were spoken after the tender’s winner had been proclaimed. Having signed an acquisition contract on a 67% interest in LiNOS on July 18, vice president of Tyumen Oil Company Ayub Hadjiev was asked whether the Lisichansk-based crude oil refinery could be held hostage of the Russian political games, just like Odessa Oil Refinery. Mr. Hadjiev responded that his company is quite confident of the uninterrupted future business and does not treat the actions of the Russian General Public Prosecutor as something of a ‘political offense’.
COMMENT
Alexander PASKHAVER, Ukrainian President’s advisor on economic policy
– During the last couple of months Russia’s lawmen have been exerting serious pressure on the most prominent Russian businesses. There are plenty of examples, viz. Gazprom, United Power Systems (Obyedinyonniye energeticheskiye sistemy), Norilsk Nickel, Sibneft, Tyumen Oil Company, LUKoil, Avtovaz, and so on. Do you treat all these events as a new repartition of the market influence, introduction of the new rules, or a simple show of strength?
– I believe that today’s pressure on the large Russian businesses is more of a political matter than an economic one. It stems from the change in the Russian paradigm of power, namely, Pres. Yeltsin had his style of rule, while Pres. Putin has a completely different approach. In the main, Pres. Yeltsin refrained from disturbing anyone, while Pres. Putin, apparently, wants to show that this is not the way to put the things in order. At the same time, I doubt that the current events would do serious harm to Russian business giants. The point is that Russian authorities treat the capital with rather due care, always remembering that the capital means not only the repugnant people disliked by certain officials, but also the proper economic order. I suppose that the Russians fully comprehend that devastation of the top capitals would directly damage the economy. I think Russia would do nothing like this.
– Some of the companies on the Russian blacklist co-own important Ukraine-based enterprises. Firstly, I mean the two owners of Ukrainian oil refineries, namely, Tyumen Oil Company and LUKoil; secondly, it is the Siberian Aluminum that has recently acquired Nikolayev Alumina Plant and can possibly partake in privatization of Zaporozhye Aluminum Smelter. This is why the present events in Russia are rather alarming.
– Most likely, the fuss is all about making wealthy Russian capitalists obey. That is what I believe. Therefore, if my hypothesis is correct, Ukrainian companies belonging to large Russian corporations have nothing to be afraid of.
– Meanwhile, the latest events make me think that this whole matter is not just some local inquiry, but rather a speeding up large-scale campaign that involves quite a few lawman agencies and forces of the Russian Fed. The mass media, including authoritative foreign press, have given much response to this campaign, perhaps, because the Russian President sometimes goes too far, like in case of the deadlock situation with the administrative reform and the Council of Federation. For the sake of logic, let’s try to analyze what will happen in the second alternative, i.e. if the things go bad.
– In this case, the main issue would be whether Ukraine depends on Russia so strong that the disaster in the RF could threaten our country. Well, in fact, Ukraine is truly dependent on Russia and our economies are so tied up that misfortunes of the one inevitably affect the other. We already have such an experience, that is to say the financial crisis of 1998. Back then Ukraine also suffered, though the damage done was smaller than in Russia, because the Ukrainian economy was not that developed, had only the superficial relations with the international market, while the Ukrainian capital was conservative and inelastic. Thus, speaking about the forecasts, everything would be pretty much like this at present.
– It is known that Russian companies operate via both resident and non-resident undertakings in Ukraine. If the events evolve unfavorably, what differences will there be between the standing of these two types of firms? Shall we expect Russian capitals to be exported to Ukraine via resident companies if the pressure heightens?
– As a matter of fact, this has already happened once ago. Right before Yeltsin’s election, some Russian capitals fled to Ukraine. Yet, I think this process will not be that important for Ukraine. At least because Russian money would try to find its place somewhere else, like in Uzbekistan or Kazakhstan. Unlike a weak democrat, any dictator pays very well. I would like to remind once again that things would go like this only in the unlikely case of a calamity, which could make the capitals leave the country. Meanwhile, Russian capital develops the Ukrainian economy very actively and systematically.
– Well, is this business trend favorable for Ukraine?
– It is my personal opinion that Russian capital is not the best alternative for certain economic reasons. Firstly, Russian capital is worse than any Western money for managerial concerns. Secondly, Russian money is more adaptable to bribery. Western investments grant Ukraine a hope that our local bureaucrats would be a little more restrained. Thirdly, Russian capitals are more exposed to the political factors. Therefore, speaking on a global scale, I would prefer wider expansion of Western, not Russian capitals in Ukraine.
– What are the odds of Ukraine attracting considerable Western investments? Perhaps, quite a few market segments are habitually treated as the ones assigned for the Russians. In other words, what preconditions should be set in place for Western capital to force out Russian money?
– The State’s ability to consistently meet its commitments is the most important thing. Tens of millions of US dollars can be raised if it is so, namely, if the State steadily meets its engagements and makes sure that the others act the same way (this implies proper judicial branch and essential laws backing ownership rights and contract execution). True support of free competition is the second condition. If the State arbitrarily gives monopoly rights to one or the other manufacturer or intermediary business (as a rule, to local ones), greater investment risks come up.
Russian investors deal with the Ukrainian economy because Russia and Ukraine have about the same risk levels. This means that switching from country to country leads to no considerable risk increments; thus, investors undertake such projects. Meanwhile, entering the Ukrainian economy, any Western investor runs into much greater risks. Therefore, the westerners urge greater potential returns on their investment than the Russians do.
– What do you see as a key risk factor in the Ukrainian economy?
– Unpredictability of the consequences of Ukrainian politics is the major risk here. The political games are rather well predictable themselves, whereas their economic consequences are extremely vague owing to lack of the common rules of play.
– Not too long, the authorities approved a long-term national privatization program and Ukraine entered the time of so-called large-scale privatization. Evidently, Russian investors will take the first lane in this process in the near future. Yet, the government has most likely generated some strategy on attraction of the optimal investors suiting the needs of each market segment. What is your perception of the coming sales?
– Russian investors are not that bad. They are definitely worse than the Western ones, but they are better than nothing. Besides, Russian investors have several advantages over the Ukrainian ones. As a rule, Russian investors represent large capitals that feature stability and special behavior resting on long-term business interests.
One should not underestimate the large capitals because they are the only ones that can rival multinational corporations. Therefore, I believe that along with attracting foreign investors, the Ukrainian government should take due care of formation of large private capitals within Ukraine for these are crucial for true independence of the country.