Vladimir Shlyomin

T

he first 100 days of Viktor Yushchenko’s Presidency have shown quite clearly the nature of the new Ukrainian authorities. They have turned out to be not so much democratic or liberal as it might have been assumed from election pledges. So far the core of their internal policy has been based on efforts to prosecute the country’s former state elite and those, who opposed leaders of the “orange” revolution. As far as the economy is concerned, the new Government could not have resisted the temptation of direct administration and has distinguished itself by such innovations as putting limits on retail prices for meat and gasoline. But the main intrigue has been evolving around property relations. This problem is clearly becoming the key to understanding the situation in the country and, to all appearance, it will have a decisive influence on Ukraine’s political and economic development for a long time to come.

Promised: there will be no re-privatization

A few days before his inauguration Viktor Yushchenko told the Spiegel magazine: "Most of the Ukrainian business, 98% of it, was set up within the current legislation". The new head of the State expressed doubts only about the Krivorozhstal integrated iron and steel plant as well as 9 ore mining and processing enterprises of Ukrrudprom and privatized, in his opinion, with violations of effective laws. A little later, at the Investment forum in Kiev, Yushchenko insisted that he would not allow a redistribution of property. At the same time, he promised to release soon "a final and complete" list of 20 to 30 enterprises, "which have been stolen from the people and which will be returned to the State".
Following that an ever growing number of rumors started spreading. For example, according to some of them, the authorities had a blacklist of two to three thousand companies. These rumors were stirred up, to a large extent, by officials’ statements. Speaking "on behalf of Viktor Yushchenko’s team" Secretary of National Security Council Petr Poroshenko said that the planned budget receipts from privatization tenders to be held again in the metallurgy sector would amount to about $2 billion.
Thus, it was obvious to pundits already in the first weeks of Ukraine’s "truly democratic" Government: the redistribution of property is a settled matter and nobody is going to drag out. What is more, as it turned out, the Government was going to get the most attractive assets back under the State’s control. So, the implication of Yuliya Timoshenko’s promise that "there will be no re-privatization whatsoever in Ukraine" became evident. There will be a nationalization, instead!
However, it is not sufficient to have just a political will alone so as to seize property from its owners. In order to ensure a legitimate return of enterprises "stolen from the people", judicial mechanisms should be used. The recognition of the fact that the Ukrainian privatization was nontransparent, nonpublic and uncompetitive means little in legal terms. The responsibility for it was on state institutions, not on owners. What is more, the interests of the latter are protected by the Constitution of Ukraine and the Convention on protection of human rights and main freedoms as well as by the system of legislative and normative acts, under which the privatization was conducted, and courts’ decisions that confirmed the legality of concrete privatization deals.

Nationalization by law… But law has yet to be passed

In accordance with Ukrainian laws there are two possible ways of returning privatized property to the State’s ownership. The first one is to cancel a purchase-and-sale agreement in case of buyer’s failure to fulfill investment obligations, if it has been one of the deal’s main condition (Ukraine’s law "On privatizing state property"). Another way is to declare a purchase-and-sale agreement invalid under the Civil Code of Ukraine. The reason for such an action may be, for example, a bribe given to an official in exchange for assisting to acquire property through restricting participation in tender by other buyers. In this case a court should establish the very fact of an illegal deal. However, so far there have been no reports of lawsuits in this respect.
When it became apparent that holding another nationalization (or "re-privatization" – whatever term one may like most) within the current legislation would be impossible, attempts were made to accelerate the whole process through adopting a special law. And in this connection there have been two bills introduced to the Supreme Rada (Ukraine’s Parliament): the one by socialist deputy Rudkovsky and the other one by communists Symonenko, Gurenko and Matveev.
Rudkovsky’s bill will hardly satisfy the Government because it is too liberal with respect to private property. It states that the nationalization goal is "to provide for defensive, economic, organizational and technical as well as other strategic needs of the State and the society" in times of preventing or overcoming consequences of "emergency situations of military, man-caused or uncontrollable nature". But even in emergencies the enforced amortization of property is conducted only on a condition of "the advanced and full compensation of property cost to owners". Under the draft law, there should be an agreement between an owner and Ukraine’s Cabinet representing the State that provides for payment of a fixed amount of money equal to the cost of property.
As one should have expected, communists were much more decisive in their action. Their bill allows not only the Rada but also executive bodies and local governments to initiate the property nationalization. They declare the following reasons for the nationalization:
- to ensure the State’s national, economic, ecological and defensive potential;
- to fulfill international obligations taken by the State;
- to secure an efficient use of natural resources, the exceptional economic zone, continental shelf, outer space, energy systems, transportation, communications;
- to satisfy public needs in vitally important products;
- to develop settlements and their infrastructure;
- to eliminate violations of anti-monopoly laws;
- to prevent mass unemployment and social conflicts.
In short, with such an extensive range of legal reasons available any private enterprise can be seized.

But what to do if a confiscation…?
The bill on nationalizing strategically important enterprises of Ukraine’s mining and metallurgy complex stands apart from legislative initiatives. It has an apparent political orientation as well as a concrete address. The bill’s authors, communist deputies Petr Symonenko and Vladimir Matveev set a task to overcome "the clannish oligarchic nature of the economy" (as they say) and, to this end, they propose to nationalize strategically important enterprises (Krivorozhstal and Ukrrudprom in the first place) without any compensatory payments to owners.
The idea that there is no need to hurry with payments to owners seems to get a positive response in the Government as well. For example, some members of the Cabinet regard as "debatable" even a minimal compensation, i.e. within amounts paid by owners of iron and steel enterprises for their controlling stakes. However, the categorical refusal to provide these payments would make the property amortization procedure look too much like a confiscation. That is why Minister of Economy Sergei Terekhin has had a reservation: money will be returned but later and they will be paid out from proceeds received as a result of reselling property.
The problem of a fair cost is of interest not only to owners of privatized enterprises but also to the Government, which believes that many state ones were sold for prices much lower than their actual cost. That is why Prime Minister Yuliya Timoshenko proposed to pass a bill on revaluating large enterprises without waiting for a nationalization legislative base. In her opinion, this would let hold auctions again with a fair cost being established. After that owners would be provided with an exclusive right to make up for the difference between this new cost and amounts that they paid before.
However, the plan of the Prime Minister failed to get judicially realized. The very first bill aimed at implementing it was sharply criticized by the Parliament’s deputies. They were confused by the mechanism of compiling a list of enterprises "to be revaluated". Deputies compared a commission, which was to deal with this delicate matter, to Stalin’s "troika" (the tribunal that had the right to conduct extrajudicial investigations and pass death sentences).

Owners are waiting

Moving ahead of legislators with respect to working out new legal mechanisms the country’s judicial system itself starts to develop the Government-proposed scheme that favors the State.
The Zaporozhsky aluminum plant (ZAlK), Ukraine’s only producer of primary aluminum, was the first one to get punished. Kiev’s court on economic matters took a decision to cancel the purchase-and-sale agreement on the acquisition of a 68.01% stake in this enterprise by Russia’s ZAO AvtoVAZ-Invest. Head of the Ukrainian State Property Fund Valentina Semenyuk confirmed that this decision would permit to get ZalK back to the State’s property. In her words, only "some judicial nuances" remained to be taken care of before the stake would be returned to the State. The situation is special because of one peculiarity: AvtoVAZ-Invest is propped by nothing else but the SUAL Holding and this company was practically the first one to respond to President Yushchenko’s call addressed to the Russian business: to make investments in Ukraine’s economy. Now the company has to deplore its unwarranted trustfulness.
The interesting situation is developing around Krivorozhstal, the leader of "the Ukrainian re-privatization". In the opinion of Valentina Semenyuk, the head of the Ukrainian State Property Fund, its former owner will hardly get the full amount of money paid for the stake in the enterprise. It is proposed to deduct from this amount "the lost profits" of the State and different industries of the national economy. Reminding that since the privatization of Krivorozhstal the price for a ton of steel went up by $200 Semenyuk promised to get the enterprise back to the State’s property as soon as possible.
However, the state ownership differs from the private one by that that officials care more about the budget, while businessmen are interested in enterprises themselves.
For example, in the last six years the current owners of the Inguletsky ore mining and processing enterprise, one of those belonging to Ukrrudprom, have invested $300 million in its development and they are prepared to go on doing this. "There is a need to replace a hundred mills in the next five years, each of them costs $0.5 million. But if today shareholders are to make "additional payments" instead of investments, then, in a few years there will be no production at all", says Vladimir Pyven, the enterprise’s director.
Shareholders of this and other enterprises with the Damocles sword of re-privatization hanging over them are facing the choice: either to continue making investments relying on the prudence of authorities, which should be interested in keeping up efficient owners, or to strenuously pump out profits and manage to earn as much as possible, while their property "is not taken away yet".

Photo caption:
Inguletsky ore mining and processing enterprise