Ukrainian steel giant sold for $4.8 billion (10/30/05)

Ukrainian steel giant sold for $4.8 billion

by Zenon Zawada
Kyiv Press Bureau

KYIV - In what pro-Western forces consider the Yushchenko presidency's biggest success so far, the Ukrainian government on October 24 sold its most valuable industrial asset, Kryvorizhstal, to Mittal Steel Co., the world's largest steel maker.

The Netherlands-based multinational firm paid $4.8 billion for a 93 percent stake in the Kryvyi Rih plant, more than five times the $804 million paid by Rynat Akhmetov and Viktor Pinchuk at a rigged June 2004 auction that denied billion-dollar offers from several foreign firms.

A court stripped the two businessmen of ownership in April this year.

"If all of Ukraine's enterprises went through a relatively fair auction such as this one, Ukraine would be incredibly rich compared to where it is today," said Ivan Lozowy, president of the Kyiv-based Institute of Statehood and Democracy, which is exclusively financed by Ukrainian business donations. "This shows just how Ukraine's potential has been lost over the past 14 years."

Mr. Yushchenko and Prime Minister Yurii Yekhanurov hailed the sale as a victory for the Ukrainian people that will bring at least $1.4 billion to the national budget and restore confidence in the nation's business climate among foreign and domestic investors alike.

"The transparent auction would not have been possible without the 2004 revolution," Mr. Yushchenko said in a statement released by his press office.

"It demonstrated that our policy, supported on the maidan, was irreversible. Due to your steadfastness, the mill was legally returned to the state," the statement noted.

In fact, both Mr. Yushchenko and former Prime Minister Yulia Tymoshenko sought to maximize their public relations gains from the auction, which many hope will become a turning point in Ukrainian enterprise.

Rarely does a business deal capture a national audience, but Channel 5 TV opted to nationally televise the Kryvorizhstal auction on a live morning broadcast.

Ukrainians watched businessmen representing Mittal Steel compete with Luxembourg-based steel powerhouse Arcelor SA and Smart Group Ltd., which is controlled by Russian businessman Vadym Novynskyi.

Arcelor had partnered itself with the Industrial Union of the Donbas, led by Serhii Taruta, the only Ukrainian oligarch present at the auction.

In the same room as the competing businessmen sat a chipper Ms. Tymoshenko accompanied by National Deputy Andrii Shkil. Ms. Tymoshenko was at the forefront of reprivatization efforts, and it was obvious that she wanted to share the spotlight.

Mr. Yushchenko also got his television appearance, as he was shown in a separate room watching the auction with Mr. Yekhanurov at his side.

Each company submitted their starting price, and the bidding commenced with the competitors flashing white placards to raise their offers to buy the mill in $20 million increments.

Smart Group dropped out early, making its final bid of about $3.5 billion.

The two remaining firms fought a duel throughout the remainder of the auction, pushing Kryvorizhstal's price far beyond what industry analysts had expected.

After 45 minutes, when Mittal Steel was declared the winner with its $4.8 billion bid, Ukrainians saw an ethnic Indian man pumping his right fist in delight.

Mittal Steel is led by Chief Executive Officer Lakshmi Mittal and his son, Chief Financial Officer Aditya Mittal. They represented the German-based branch of the publicly traded company.

Among the first to congratulate the Mittal businessmen was Ms. Tymoshenko, who spearheaded the reprivatization drive that President Yushchenko later characterized as too aggressive.

The sale set a new standard for Ukrainian assets on international markets, Mr. Yekhanurov said.

It even "signifies the end of the oligarchs' era," said Volodymyr Polokhalo, editor of the website Politychna Dumka.

The $4.8 billion is equal to 6 percent of Ukraine's GDP, analysts said. It compares with $1.5 billion in foreign investment to Ukraine for all of 2004.

"Now the main mission of the government is to defend transparency of payments and defend the transparency and clarity of the rights of ownership of the new investor," Economics Minister Arsenii Yatseniuk said on October 24.

Prime Minister Yekhanurov said he remained firmly against any further reprivatizations of Ukrainian enterprises that were sold at unrealistic or illegitimate prices during Leonid Kuchma's presidency.

Instead, Mr. Yekhanurov has stated that he supports a privatization policy in which the government buys back those unfairly purchased assets directly from the corrupt businessmen themselves.

"Instead of punishing these people and putting them in jail, Mr. Yekhanurov is talking about paying these people back the money they paid," Mr. Lozowy explained.

Mr. Yekhanurov led Ukraine's State Property Fund between August 1994 and February 1997 under President Kuchma, when many questionable sales of state properties were just starting to take place.

In fact, more than $800 million earned from Kryvorizhstal's sale will go to compensate Mr. Pinchuk and Mr. Akhmetov, said Viktor Pynzenyk, Ukraine's finance minister and a member of the Reforms and Order Party.

Revenues from the sale will also help to realize capital improvement projects to metro systems and airports, and increase capitalization of government banks, Mr. Pynzenyk said.

"In any case, we cannot earmark this money to finance social spending, but only for one-time projects that would heat up the economy," he said.

The sale of Kryvorizhstal will not only bring needed revenues into the government's coffers, Mr. Lozowy said. Mittal Steel will provide Western management skills and know-how to the plant, which will help to ensure that it develops as a growing business, he added.

The televised auction demonstrated Ukraine's newly adopted high standards of democracy, President Yushchenko said. It represents one of the biggest foreign investments in the former Soviet Union, he said, and it was the largest price ever paid for an integrated industrial enterprise.

Moreover, Mr. Yushchenko said he hopes that foreign investors will no longer fear the business climate in Ukraine, a panic triggered when Ms. Tymoshenko mentioned early in her term that the government could seize about 3,000 businesses.

Not all Ukrainians were happy with the sale of Ukraine's most valuable assets to foreigners, however.

Outside the State Property Fund's offices, about 40 protesters, mostly from the Communist Party, chanted anti-Yushchenko slogans and held banners that read, "Ukraine is not a commodity."

Also demonstrating against the Kryvorizhstal sale was a group of about a dozen students led by Vadym Hladchuk, the chair of Youth - Our Hope, an activist youth group that launched the Sprotiv website. (www.sprotiv.info)

Youth - Our Hope wanted Kryvorizhstal to remain under government control, and Mr. Hladchuk said he was particularly disturbed that Russian businessmen were given the opportunity to potentially gain control of Ukraine's largest industrial asset.

Mr. Novynskyi of Smart Group has close business links to Viktor Chernomyrdin, the Russian Federation's ambassador to Ukraine.

"American and European investors, in all about 12 companies, weren't allowed," Mr. Hladchuk said. "Among the bidders is an enterprise from the Russian Federation involving Mr. Chernomyrdin. We fought against Yanukovych, who represented Russian capital ... and it turned out that it's all the same for Viktor Yushchenko. This offends us."

The Verkhovna Rada on October 20 passed a resolution forbidding the sale of Kryvorizhstal.

However, State Property Fund (SPF) Chair Valentyna Semeniuk said she was required by a decision of the Cabinet of Ministers to carry out the sale.

Ukraine's Socialist Party, led by Oleksander Moroz, was most vocal in its opposition to the sale of Kryvorizhstal, which they said should have remained under government ownership. Keeping the plant would have brought more revenues into the national budget than selling it, Mr. Moroz said.

"The declared sum of money could have entered the budget in the form of taxes during the next two years," he said. "I'm not even talking about the direct profit from the state enterprise that could be $5 million annually."

Such an assertion is ridiculous, Mr. Lozowy commented. "Keeping Kryvorizhstal in state hands is a 100 percent recipe for corruption and stealing money from enterprises," he said. "It guarantees that nothing from Kryvorizhstal would go into the state's tax collection."

SPF Chair Semeniuk, herself a Socialist Party member, was not present at the auction because she said she had fallen ill several days earlier and was hospitalized.

On October 24 she submitted a letter of resignation to Mr. Yushchenko in protest against Kryvorizhstal's sale. The president rejected her resignation and commended her work at the SPF as "irreproachable."

Former presidential candidate Viktor Yanukovych said selling the plant to Westerners will give them too much influence in Ukrainian politics. Economic dependence will lead to political dependence on them, he said.

"They will come and buy up Ukraine," Mr. Yanukovych warned.

After the sale, however, those who opposed the auction suddenly began making their own suggestions and demands on how the money should be spent.

In a political move to boost its meager popularity, the Social Democratic Party of Ukraine - United (SDPU) suggested that the government compensate the millions of Ukrainians who lost their savings in the hyperinflationary period of the early 1990s.

SDPU Chairman Viktor Medvedchuk said it wasn't his party's initiative, but an attempt to fulfill a promise made by the government.

Mr. Yushchenko vowed to use the money to launch programs that will modernize the government, public utilities and the military, support farming and develop high technology and science.

The Cabinet of Ministers is working out a mechanism to use the money, Mr. Yushchenko said.

Meanwhile, Mr. Pinchuk and Mr. Akhmetov are still fighting the privatization of their property. They are currently appealing the April court ruling that allowed the Ukrainian government to retake possession of Kryvorizhstal.

One appeal is pending in the Ukrainian Supreme Court, while the other appeal is in the European Court.

Prior to the auction, Mr. Pinchuk and his entourage had been threatening the mill's potential buyers that they might be wasting their time and money on a property to which he still might have legal claim, Mr. Lozowy said.

"I'm glad the Indians avoided the threats of these spoilers Pinchuk and Akhmetov," he said.

However, another signal arrived on October 26 indicating that it might be too early to celebrate.

Standard and Poor's rating agency warned that it may lower Mittal Steel's long-term corporate credit rating. "Mittal Steel's purchase of Kryvorizhstal demonstrates a more aggressive strategy to growth and financial policy as compared with the basis of its current rating," its report said.

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