ANALYSIS: Kyiv divided on how far to go with reprivatization (05/29/05)

ANALYSIS

Kyiv divided on how far to go with reprivatization

by Taras Kuzio
Eurasia Daily Monitor

Foreign investors are showing more interest in Ukraine since the Orange Revolution took place. Nevertheless, they remain cautious because of uncertainties surrounding the threat of re-privatization. Until this issue is resolved - something President Viktor Yushchenko supports but Prime Minister Yulia Tymoshenko opposes - Ukraine's positive international image will not generate additional foreign investment.

Potential foreign investors have been alarmed by the manner in which the government threatened TNK-BP and OASO Lukoil with the re-privatization of the refineries they acquired in the 1990s. To stem inflation, caused partly by continued high social spending, the government ordered oil companies to not raise prices or else face the re-privatization of their Ukrainian refineries.

The Yushchenko team did little to assure their commitment to a market economy by appointing Valentyna Semeniuk as head of the State Property Fund. While she has experience as head of the parliamentary Committee on Privatization, Ms. Semeniuk and her Socialist ties will add to the populism of the Tymoshenko group within the government. Like Ms. Tymoshenko, Ms. Semeniuk backs a more extensive investigation into the privatization deals of the 1990s. Both Ms. Semeniuk and Ms. Tymoshenko have hinted that Kryvorizhstal, which oligarchs Viktor Pinchuk and Rynat Akhmetov purchased for a third of its real price in June 2004, should remain in state hands.

The Yushchenko team faces divisions on re-privatization and other issues because it is an extremely broad alliance that stretches across the entire political spectrum seen in any European democracy. The alliance includes left-wing social democrats, business representatives, liberals and populist right parties.

The main fault line runs between Mr. Yushchenko's Our Ukraine and Anatolii Kinakh's Party of Industrialists and Entrepreneurs. Both parties include medium and small businessmen and back liberal market economics. These more liberal, free marketers are more inclined to minimize the number of companies subjected to re-privatization. They also favor offering re-privatized companies for tender.

A second group represents a more populist, anti-oligarch orientation grouped on the left (Socialists) and the right (the Yulia Tymoshenko Bloc). These populists are in favor of reviewing a far longer list of privatizations and, in some cases, keeping firms under state control.

According to Prime Minister Tymoshenko, "If an enterprise brings profits to the country, it is not necessary to sell it into private ownership." Such comments do little to allay fears that she is more a populist than a free marketer. She has already ruled out the privatization of companies that are "essential for the country's viability or national security" (Dzerkalo Tyzhnia, April 16-22).

As a result of these mixed messages, the Yushchenko team has had to issue "a lot of contradictory messages," according to the head of Renaissance Capital Ukraine. This, in turn, "creates all kinds of uncertainties." The Carnegie Endowment's Anders Aslund has warned, "Members of this government right now are going in very different directions" (Wall Street Journal, May 4).

The government's inconsistent message is partially the fault of President Yushchenko himself, who occasionally launches into anti-oligarch populism. Upon nominating Ms. Semeniuk, Mr. Yushchenko ordered her to work on returning "everything that was stolen to the state," which would require a full inventory of what had been privatized (Ukrayinska Pravda, April 18). Ms. Tymoshenko asked the Procurator General's Office to examine all privatization deals by mid-February in order to evaluate the legality of the deals.

Based on this still-undisclosed list, Ms. Tymoshenko wants the courts to contest 3,000 privatizations. She reported that the Procurator General's Office opened criminal investigations into 2,000 of them (Ukrayinska Pravda, March 2). The executive soon quashed this massive review, as it would have undermined foreign investor confidence.

Mr. Yushchenko publicly registered his opposing view by announcing that only 30 to 40 companies would be re-privatized. Unlike Ms. Tymoshenko and Ms. Semeniuk, Mr. Yushchenko believes that 90 to 98 percent of Ukraine's privatizations followed the laws then in effect.

Hoping to calm foreign investors, President Yushchenko called in February and again in April for a final roster of companies subject to re-privatization. On April 28 he gave the government only 10 days to finalize the list. Ms. Tymoshenko opposed the idea of drawing up a final list. First Vice Prime Minister Kinakh at first supported her but then shifted to Mr. Yushchenko's position (Ukrayinska Pravda, May 4, 5).

Three factors have fueled the government's populism.

First, it is tempting to be selective about which of the 30 to 40 (Yushchenko) or 3,000 (Tymoshenko) companies would be investigated and re-privatized. Parliament Chairman Volodymyr Lytvyn (who was head of the presidential administration during six of President Leonid Kuchma's 10 years in office) has indirectly defended the illegality that pervaded Ukraine at that time. According to him, nearly everyone broke a law at one time, because the legal system was so inconsistent (Silski Visti, October 8, 2004).

Second, the volume of corruption uncovered since President Yushchenko's election has hardened the left and right populism within the government. During the last two years of the Kuchma presidency, the authorities launched a de facto free-for-all that handed out choice state assets to loyal allies. Theft from the budget and international aid was widespread. "When we came to office, we discovered that all public life in Ukraine had been corrupted," lamented Economy Minister Serhii Teriokin (Washington Times, April 15).

Third, Ms. Tymoshenko has an eye on the 2006 parliamentary elections. Her anti-oligarch populism has made her highly popular - perhaps more popular than President Yushchenko.

National Security and Defense Council Secretary Petro Poroshenko has explained that re-privatization would only be undertaken in cases where there was only one bidder, the tender was not transparent, the price was not fair, or the investor did not fulfill his obligations. Yushchenko ally and First Vice Prime Minister Mykola Tomenko advised that at a government meeting they banned use of the word "reprivatization" (Ukrayinska Pravda, February 17). Unfortunately, Ms. Tymoshenko and Ms. Semeniuk seem to disagree.

Dr. Taras Kuzio is visiting professor at the Elliot School of International Affairs, George Washington University. The article above, which originally appeared in The Jamestown Foundation's Eurasia Daily Monitor, is reprinted here with permission from the foundation (www.jamestown.org).

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