Odesa Port sale is "litmus test" for investors in Ukraine

By Jason Corcoran in London May 12, 2016

The successful sale of Odesa Portside Plant (OPP) will act as a litmus test of whether Ukraine’s privatisation programme will succeed in attracting foreign capital, according to Citigroup's local country head.

“It’s very important for the foreign investment community and the banking sector to see a transparent and successful privatisation,” Steven Fisher, chief country officer for Citigroup Ukraine, told delegates at the EBRD Annual Meeting in London.  “Of course, the national budget needs these funds but we, as foreign investors, need to see that the privatisation process – which is just the first of many to come – has to be done transparently and set the stage for this to be a viable economic investment tool for the future.”

As part of the privatisation, the EBRD may acquire a 15-20% stake in Ukraine's state-owned OPP,  according to Francis Malige, the multinational lender's managing director for Eastern Europe and the Caucasus.

The EBRD is looking at possible participation in an auction that could come as early as June,  Malige said in an interview with Reuters Global markets Forum published on May 11.

Ukraine's State Property Fund (SPF) intends to announce a tender for the privatisation of the plant by the end of May, and to finalise the deal to sell OPP before August. The sale comes under a still to be launched privatisation drive this year that was initially planned for 2015.

OPP is a major chemical production company, which accounting for 17% of Ukraine's ammonium nitrate capacity and 19% of urea production capacity. Due to its strategic location on the Black Sea coast and its connections to chemical transportation infrastructure, the plant is export-oriented: export sales constitute up to 85% of output, mainly to the EU and US.

But OPP has felt the impact of the country's economic crisis and financial meltdown of the past two years. It reported a net loss of UAH418.649mn ($16.5mn) in January-March. The company's net income fell by 1.9 times to UAH1.719bn ($6.8mn) in the first quarter, while gross profit fell by 6.4 times to UAH99.935bn ($3.95mn).

Ukraine’s asset sell-off programme has been hampered by delays and political infighting. The government raised a paltry $7mn last year from sales compared to their goal of $778 million, according to data compiled by the State Property Fund.

Key figureheads driving the privatization programme have left the government in recent months, including Finance Minister Natalia Yaresko and Economy Minister Aivaras Abromavicious, who quit over what he said was meddling by vested interests.

Yaresko, was scheduled to speak on the EBRD panel on Ukraine on the second day of the Annual Meeting but was a no-show, as was President Petro Poroshenko on the forum’s first day.

The sale of the OPP flared up in a fierce public row between Ukraine’s Interior Minister Arsen Avakov and Governor of the Odessa region Mikheil Saakashvili in December last year.

The pair dragged the country's world image down another notch with a profanity-laden verbal clash and glass-throwing outburst during a filmed meeting of the National Reform Council.

On December 16, both politicians posted footage of the meeting two days earlier, during which Avakov accused the former Georgian president of having murky dealings with Russian business in the privatisation of a major Odesa chemical plant. Saakashvili in turn called the minister a thief with "millions and billions", to finally be told by Avakov that he would soon be called to account for his own wealth.

Fisher said Ukraine was so far scoring “zero out of five” for a scorecard required to get foreign direct investment to return to the country this year.

The five elements outlined by Fisher include the International Monetary Fund resuming disbursements “ASAP,” cancellation on the restriction of the repatriation of earned dividends overseas, creation and passing of new legislation simplifying the tax ministry, new laws preventing and punishment of smuggling and counterfeiting of goods, as well as the successful conclusion of the OPP sale.

“Perhaps the worst is over," said Fisher, whose bank has been in Ukraine since 1998. “We have had three quarters of positive growth - albeit feeble economic growth – but that doesn’t mean that good times are here yet."

"The challenge ahead of us is to convert this uptick in economic activity into a sustainable economic recovery. In order to do that, we need for a significant return of foreign direct investment and we need the banking sector to restart lending.”