KYIV BLOG: ArcelorMittal steels itself for more hassle in Ukraine

By bne IntelliNews March 10, 2011

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After successfully fighting off what it called an attempt to renationalise its Ukrainian steel mill last October, ArcelorMittal must have breathed a sigh of relief. But the respite, it seems, was only temporary.

The numbers revealed by the country's largest steel plant, ArcelorMittal Kriviy Rih, at the end of February speak for themselves: UAH2.3bn (€208m) owed to the company by the state in value-added tax (VAT) refunds; UAH1.2bn paid in taxes in advance by the end of last year; and 591 inspections by state bodies, almost two per day.

These are all sobering figures for a government that, coming to the end of its first year in power, is struggling to convince foreign investors that it has significantly improved the country's business climate. But the problems stemming from VAT and state inspections are all too familiar to many businesses.

Waiting for Godot

The problem with VAT refunds is an old story. The current government last year issued special VAT bonds to cover large debts on repayments. It also created a new mechanism that should have made refunds automatic. But experts say the system is overly complex, and ArcelorMittal doubts it'll get anything back from the government. "We get the impression that VAT will not be returned to ArcelorMittal Kryviy Rih automatically. We'd be glad for our concerns to be proved wrong," Volodymyr Tkachenko, government relations adviser for the company, tells bne.

Rinat Starkov, head of ArcelorMittal Kryviy Rih, had earlier complained at a press conference on February 14 that the failure to return VAT was a serious problem for the company for the whole of 2010. "And, unfortunately, we don't yet see any serious improvements in this matter, or even the desire of the government to do something about this situation," he said.

Starkov also claimed the company was also hosting zealous state inspectors an average of twice per day, and was considering establishing a new department to deal with the constant checks, which grew by 40% in 2010 from 2009.

The government, on the other hand, claims it's making every effort to smooth any problems in its relations with ArcelorMittal.

ArcelorMittal's troubles had appeared to be over in October when Ukrainian prosecutors suddenly dropped a case claiming the firm had violated the terms of its purchase agreement when it bought the Kriviy Rih steel mill for $4.8bn in 2005. The decision to withdraw from the case came after it was raised during a meeting between President Viktor Yanukovych and French President Nicolas Sarkozy in Paris in October.

Iryna Akimova, the president's deputy chief of staff, said in February that the government had begun "gradually to remove" the majority of "sore spots" in relations since the end of last year.

If that's the case, ArcelorMittal says it isn't feeling much relief. "This situation can't be considered normal, given that it substantially undermines the attempts of Ukraine to create the image of a country with an attractive investment climate," Starkov said.

Speaking in an interview with the Kyiv Post, Starkov went further, arguing that Ukraine was worse than Russia, where he had worked previously, as exemplified by the reaction of the authorities when his company was accused of smuggling coal. "[In Ukraine], law enforcement authorities open a criminal case as soon as you disagree [with the authorities] on tax issues... No [Russian] state official would rush to have a press conference and announce 'we have caught a major smuggler,' only to realize later they have made a mistake. But nobody held a press conference and apologized for their mistakes," he said.

There are two possible readings of what's happening with ArcelorMittal. Either the inspections and failure to return VAT are part of a coordinated plan to squeeze the company; or local inspectors from state bodies are running out of control, casting a long shadow on the government's claim that it is bringing "stability" to the country.

Sadly, what ArcelorMittal is experiencing isn't an isolated case. Foreign grain traders have in recent weeks raised complaints about the non-transparent allocation of grain quotas (which excluded international heavyweights such as Louis Dreyfus Commodities and Cargill) and about a draft bill they say will push them out of the market in favour of a state monopoly.

The long-awaited privatization of fixed-line monopoly Ukrtelecom turned into a one-horse race after firms more than 25% government-owned - such as Deutsche Telekom and Telenor, which had both earlier expressed an interest - were excluded from taking part. With only one firm in the running - Epic, an Austrian investment company - an appraiser set the price at just $10m more than the $1.3bn starting price set for the tender. Local investment banks believe Ukrtelecom could have brought in $1.8bn in an auction.

Despite government bombast and glossy promotion of stability and reforms - including some fawning reporting on CNN's "i-List" series last month - the reality on the ground tells a markedly different story.

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