Vladimir Shlyomin

I

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It looks like the Ukrainian President Viktor Yushenko and Prime Minister Julia Timoshenko who has ridden to power on the wave of "the orange revolution" in Ukraine will not hesitate to keep their election pledges. It was as soon as in the first week in office when information appeared that the newly elected government had compiled a list of more than three thousand Ukrainian companies subject to re-privatization. The biggest and the most talked-about company in the list was Krivorozhstal, a major Ukrainian iron and steel works. The Ukrainian State Property Fund has already been instructed to revoke the previous results of privatization of this company.

Ranking No. 26 among the biggest world steelmakers, Krivorozhstal employs 54 thousand people. The key products of Krivorozhstal including steel reinforcement, hot rolled rods, profiled and pig iron meet requirements of the customers and enjoy a great demand in the world market.

Until recently, Krivorozhstal had a status of "the state mining-and-metallurgical integrated works". However, in April 2004 it was transformed into a joint stock company. Specifically for this event Leonid Kutchma, who was the Ukrainian president at that moment, interposed his veto on amendments offered on November 20, 2003, by the Ukrainian Parliament for introduction into the Ukrainian law "On the List of State Property Objects not Subject to Privatization". Two months later another step was made, namely: a 93.02% stake in JSC Krivorozhstal was offered for auction at a start price of US$718 mln.

According to the auction terms and conditions the new owner of the stake was supposed to discharge until December 31, 2004, Krivorozhstal` s indebtedness under credits arranged against guaranties of the Ukrainian government and to implement a plan of technical reconstruction of the company` c production facilities. Moreover, the auction winner was obliged to keep all the jobs and existing labor agreements during the next six months. Only those companies were allowed to bid in the auction which had their own rolled iron production of not less than 2 mln. tones a year or used steel to produce not less than 200 thousand tones of finished steel products a year.

Both Ukrainian and foreign companies submitted their applications for participation in the auction. Start bid proposals made by them evidenced seriousness of their intentions. Thus, acting also on behalf of Arcelor and Severstal North America, Severstal in its bid proposal expressed readiness to pay Ukraine $US 1.2 bln for the shares of Krivorozhstal and to undertake a number of environment control and social responsibilities. At the same time spokespersons for Ispat Vigullia (Испат Вугилля), a Kiev-based consortium representing interests of LNM Group and U.S. Steel Corp., said that "it was their bid proposal which offered the most attractive terms and conditions".

However, by that moment serious doubts had already been cast upon transparency of the auction procedures. Alexander Abramov, president of EvrazHolding, professedly stated: "They will never admit us to the second round of the auction. No non-Ukrainian bidders will be admitted to". It is what really happened: out of six bidders only two companies – both Ukrainian ones – were actually admitted to purchasing the shares. Finally, Krivorozhstal shares were awarded to Kiev-based Investment- Metallurgical Union (IMU) which paid for them $US 800 mln.

Now the newly elected Ukrainian government does not want to recognize the results of this privatization. "We have initiated the process of bringing Krivorozhstal back to the state ownership to re-auction this company later", - said Julia Timoshenko. In the opinion of Sergey Terekhin, the Ukrainian minister of economy, it is much more advisable to keep Krivorozhstal stated owned. "Its managers are real professionals while prices for its products are trending upwards owing to favorable conditions in the world market", - contemplates the minister. However, Julia Timoshenko reminds that Ukraine needs financial resources. The Ukrainian budget deficit was rapidly growing to reach in 2004 a benchmark of 4.4% of GDP, a record high value over the recent five years. Moreover, the new government has to meet promises it gave the Ukrainian people in the course of the all-time tough and long lasted election campaign.

Besides the economic aspect there is a legal and political one. Sure, the newly elected pro-Western government of Ukraine would scarcely like people to associate its politics with such concepts as "nationalization" and "disrespect to owner` s rights". In addition, a desire to join the European Union, which intention President Viktor Yushenko was quick to announce, obliges his government to adhere to generally accepted legal standards.

Some observers, whose opinion is in particular supported by Financial Times, believe that determination of the current owners of Krivorozhstal to defend their ownership in court can seriously handicap the Yushenko government` s plan to re-privatize the company. By declaring the privatization auction results void, the Pechorski district court of Kiev cancelled its own decision to acknowledge legality of the deal on selling the 93.02% stake in Krivorozhstal to Investment- Metallurgical Union (IMU) and simultaneously canceled the adjudgement of the Supreme Court of Ukraine to confirm lawfulness of this act of privatization. As a result a legal collision arose. The aggrieved owners immediately went to law. Sergey Vlasenko, the lawyer who represented interests of the owners, called the latest rulings of the court non-legitimate and breaching a number of procedural rules saying that "to make such a decision is to plant a bomb under the basics of justice".

Sure, re-privatization of Krivorozhstal and other companies, which in the opinion of the new Ukrainian government were privatized breaching the law, could help Ukraine to bridge some gaps in its budget. However, experts who analyze the "re-privatization" on the whole propos to take into account not only the short-term benefits it may bring. Actually, re-privatization is no more than a change in the game rules introduced post factum by one of the players. Acting this way the new government gives business a message that the state won` t play the game by the yesterday` s rules. Anyway a precedent has been set. Are there any guarantees that the next government will not undertake another revision of the game rules?

As a rule an owner replacement entails changes in raw material, commodity and cash flows which are difficult to optimize shortly. In particular, the current structure of Krivorozhstal is organized in such a way as all its commercial and procurement links are under control of entities managed by an external owner that is IMU. Thus, distribution of Krivorozhstal` s products is controlled by a company of the Leman Commodities group, while supplies of iron ore, coal and coke are made by companies affiliated with System Capital Management. Though there is no problem with replacing the traders, it would be pretty difficult to re-arrange anew stable supplies of raw materials especially now that demand for them is constantly growing.

On the other hand replacement of shareholders would inevitable retard the investment process. Prior to investing in reconstruction and development of the enterprise any new owner will need some time to get an insight into the situation, to estimate prospects and to consider possible options. This is more than just a loss of time. With the momentum lost, one can miss a favorable moment as the investment appeal Krivorozhstal has now is directly linked to favorable conditions in the world steel markets.

Finally, we should not leave out of consideration a peculiarity typical not only of Ukraine but also of other CIS countries. The institution of private ownership is still pretty new and has not yet been well established here. Some people bear resentment of being unfairly treated and for good reason: in most cases the used-to-be "national" companies got privatized by private owners bypassing direct and transparent competition. A large-scale revision of the results of such a privatization (here we are talking about hundreds and thousands of companies) would re-instigate "privatization" wars outcome of which will be directly dependent on how close to the effective state power this or that business group is, that is one but step to corruption.

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Reference:
OAO Krivorozhstal, an open joint stock company, is a legal successor with regard to all the rights and liabilities of the Krivorog State Mining-and-Metallurgical Integrated Works (Krivorozhstal) which was founded in 1934.

The company` s independent steel production loop from mining raw materials to rolling finished steel products ensures lower product costs and permits profitable operation even under unfavorable world market conditions.

As a major steel maker in Ukraine (20% of the domestic market) Krivorozhstal employs 54 thousand people to rank No. 26 among thirty world biggest makers of metallurgical products and.

Krivorozhstal incorporates a blast-furnace process, steel making, rolling, mining and ore processing operations, including an underground mining management subdivision. The company` s raw material production is represented by sintering operations which produce 8.1 mln. tones of sintered iron ore a year. The company also has 2.854 mln tones of coke a year from its coke and by-product process, 7 mln tones and 6 mln. tones of steel products from its steel making and rolling operations respectively. Iron pig production, the key business of the company, includes six blast-furnaces to the total capacity of 7.8 mln. tones of pig iron a year.

Currently this is an up-to-date company which features high-tech technologies, a high level of automation and production. Producing steel reinforcement, hot rolled rods, profiled and pig iron as key products, the company is the biggest reinforcement steel maker in Ukraine capable of meeting any requirements of the customers under any standard (DSTU, ASTM, BS, DIN etc.). As a result, the company` s products are in great demand in the world market.

Krivorozhstal exports more than five million tones of steel products to 84 foreign countries mainly to Algeria, Italy, Syria, Philippines, Tunis, Thailand, Lebanon, Cyprus, Iran and Israel.

The company owns 118,806 objects in fixed assets, net book value of which as of December 1 2003 (the year in which the company was privatized) was estimated at about $US500 mln, and 361 objects in intangible assets to the total amount of US$520 mln. and 177 objects of uncompleted construction estimated at US$67 mln.

In the margin:
Investment - Metallurgical Union (IMU) consortium is under control of two major Ukrainian business groups, namely: System Capital Management (56.25%) and Interpipe (43.75%).

In the picture:
Krivorozhstal JSC – Blast –furnace No.9 is considered the biggest one in Europe.