Graham Stack in Kyiv -
The bungled freezing of shares in 12 Ukrainian companies at the end of May saw millions of dollars wiped off their market capitalisation and has damaged the stock market's credibility. And the murky manoeuvring behind the move will only hurt Ukraine's investment image further.
Ukraine's securities commission quietly announced it was freezing trading in the shares of 12 companies belonging to the Donetskal steel holding on May 24. Whilst few found out about it until five days later, it took the depositories a week to act, by which time a sell-off had hit the two most liquid stocks for up to $80m.
The weekly gazettes published by stock market regulatory commissions are not known as riveting reads, but it's usually assumed that at least some - such as the depositories, which are legally bound to do so - will read them. But not in Ukraine apparently.
When on May 24 Ukraine's Securities and Stock Market Commission (SSMSC) gazette published 12 decisions freezing the shares as of May 20 for 12 months, there was no reaction whatsoever from market participants. Not until Friday lunchtime on May 27 did a user called Bekstitser post a reference to the decree on the most-popular traders' forum in what was suspiciously his debut post. "A great shout went up," says Agshin Mirzazade, head of research at Foyil Securities, recalling the moment his traders read the news. Although it had taken them four days to learn about the decision, they were quicker off the mark than both the UX exchange and the very depositories to whom the SSMSC decision was primarily addressed.
Thus trading in all 12 stocks continued through to the following Friday afternoon. Only on the following Monday, May 30, a full week after the original publication, did the depositaries actually enforce the decision, and freeze circulation. By end of trading on Friday, May 27, the two most liquid stocks - coal companies Pokrovskoe Mining and Yasynivsky Coke - had plunged 45% and 35% respectively, wiping $30m-40m off their respective market caps.
At the same time, there is now a huge question over the validity of all the trades that week. Donetskstal has filed a lawsuit against the decision. There is a chance, say analysts, that the commission will cancel the decision, which would mean all trades will remain valid. That of course would be bad news for those who rushed to sell their holdings. It would also wipe out any suspicion that market manipulation was behind the delay in broadcasting the decision loud and clear.
The whole mess is clearly damaging for the credibility of Ukraine's fledgling stock market. "It's an outrageous decision," says Mirzazade. "It really damages the market. It's the first time the commission has acted this way, and there are two very strange things about it. Firstly, the commission gave no warning of the suspension of trading to the depositories, and did not even communicate the decision itself asides from the 'publication'. Secondly, the freeze on the stock related to the whole stock including minorities, which is unprecedented."
However, insult was only added to injury when people tried to get at the reasons behind the decision, originally taken on May 20. The SSMSC announced that the move was prompted by a letter it received dated May 19 from an unnamed member of parliament, which referred to an as-yet unknown ruling by a court in Cyprus on a Donetskstal shareholder dispute and complaints from a disaffected shareholder. The letter also suggested vaguely that the dispute represents a "threat to state interests," which provides the SSCM with the legal grounds to freeze the shares.
It is now widely believed that the disaffected shareholder and the MP are one and the same person: Party of Regions MP Gennady Vassiliev. Vassiliev was Ukraine's Prosecutor General in 2003-2004 under former president Leonid Kuchma, whilst at the same time his brother, Aleksandr, was head of the Donetsk regional tax administration.
Head of the SSCM Dmitry Tevelev, a surprise appointment in 2010, is also a Donetsk man, having held prior management posts in energy companies controlled by Ukraine's richest man, steel magnate Rinat Akhmetov, and with no previous experience of stock market regulation.
Vassiliev is said to have played a key role in the creation of the Donetskstal holding during his spell as Prosecutor General, but understandably in a largely unofficial capacity. Newspaper Kommersant quoted a Donetskstal source as saying, "all these years he's been saying he's a shareholder, but he's never produced anything on paper to prove it." The coal and steel group is thought to be controlled by oligarchs Viktor Nusenkis and Leonid Baisarov, with Vassiliev assumed to be a "partner."
Yury Ryzhkov of Astrum Capital suggests the businessmen may have had a falling out provoked by current negotiations over debt restructuring. "What may have happened is that the creditors demanded to see a list of Donetskstal shareholders, and when it was produced, the MP's name was not on the list. This may have prompted him to take such action as a bargaining chip." In this case, argues Ryzhkov, the issue is likely to be resolved speedily, because the shareholders will be keen to push on with the rationalizing its debt burden.
However, Ryzhkov allows for a second scenario that is connected with Pokrovskoe Mine. Ukraine's largest coking coal plant is a key supplier of coke and manganese to the holding's steel producers, but is also an attractive asset thanks to its profit margins. The analyst suggests that one of the large shareholders in the mine may have tried to sell their stake to a Russian concern. Given the strategic importance of Pokrovskoe to the entire Donetskal holding, however, the existing shareholders would be keen to have first dibs on the stake. "If the holding loses control of Pokrovskoe, it is finished," says Ryzhkov.
Letter of protest
The next step is for market participants to send an official letter of protest to Prime Minister Mykola Azarov and President Viktor Yanukovych, Mirzazade says. Most investors won't be holding their breath on that one though; the government is adept at saying all the right things about improving the investment climate, while doing the exact opposite.
For instance, the same day the SSMSC quietly published the decision in its gazette, it also issued a press release quoting a speech by its head Tevelev at a recent conference on the country's investment climate in Kyiv. "The SSCM is resolved to become the advocate of investors in Ukraine," Tevelev insisted. "Investors need reliable protection, and such protection has to be guaranteed by the state."
The reality appears to be very different, and the idea of the stock market regulator reduced to a weapon in internecine corporate wars will strike terror into the heart of any investor. But all is not yet lost: on June 21, a court of first instance overturned the ban on trading stocks of the company PJSC Donetskstal, although not the ban on trading the other 11 companies in the holding. The SSCM is set to appeal the decision.
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