The Odessa fight

By bne IntelliNews May 16, 2008

Luke Coleman in Kyiv -

Relations between President Viktor Yushchenko and Prime Minister Yulia Tymoshenko reached a new low on May 13 as legislators from the Tymoshenko camp blockaded parliament to protest the "sabotage" of government policies and prevented the president from giving his annual address, an act unprecedented in Ukraine's 17 years of independence.

Though the Tymoshenko deputies were protesting over three bills designed to counter inflation that had been derailed by the president, the main battlefield between the tow leaders is the long list of companies, including the Odessa port's petrochemical facilities, due to be privatised this year. The privatisation programme is particularly important, because the state needs to raise money to plug a growing hole in the current account deficit and each of the main items on the list would bring in several billion dollars. The current account deficit was $3.5bn at the start of May, or 9.4% of GDP. But what's really at stake is the presidential elections slated for 2009.

"The fighting boils down to a very simple fight for supremacy in Ukrainian politics," says Geoffry Smith, chief strategist at Renaissance Capital in Kyiv. "Both Tymoshenko and Yushchenko want to be the most powerful person in the country. It has been ongoing for four years now, and will only be resolved when Ukraine alters its constitution."

Tymoshenko announced a tender for the privatisation of the Odessa Portside Plant, which specialises in shipping ammonia, and set May 6 as the date for the sale, only to see it cancelled on April 24 by the State Property Fund of Ukraine Chairwoman Velentyna Semeniuk-Samsonenko.

The government struck back and Tymoshenko tried to fire Semeniuk-Samsonenko by decree, who was appointed by the previous administration, and give the job to a member of her own party, Andrei Portnov. However, the whole wrangle descended into farce after Yushchenko suspended the PM's decree with one of his own. The result is that Ukraine now has two heads of the State Property Fund, as both Semeniuk-Samsonenko and Portnov claim they are the rightful holders of the post.

Portnov has rescheduled the tender for May 20 and announced May 13 that four companies had expressed interest in bidding for the plant, which has a starting price of €404m. But Semeniuk-Samsonenko remains implacably proposed to the auction - and the row has got personal: Semeniuk-Samsonenko recently accused the cabinet of attempting to sell a fertiliser factory that is part of the port complex to companies connected to the PM.

Wider war

The fracas over the port's privatisation is little more than a proxy for the long-standing rivalry between Yushchenko and Tymoshenko that began almost from the day Yushchenko was swept into office by the Orange Revolution in January 2005. The president has been wary of his charismatic ally of the barricades from the start. "This is a natural and legitimate rivalry," says Smith, "but unfortunately the constitutional checks and balances in Ukraine encourage weak government. The only way to resolve the matter is the restoration of clarity at the State Property Fund. There will be no winners, only losers. The loser is the country in what is a very unedifying and internationally embarrassing situation."

The fight over the job of chairman of the State Property Fund has destabilised the already finely balanced Ukrainian political equilibrium; Tymoshenko has a razor-thin majority of two seats in the Rada, the lower house of parliament. If the stand-off continues, the ruling coalition could collapse and the country would be forced to go to the polls yet again. "The courts will have to decide, although the constitutional court has refused to make a judgement. Of course, if it goes all the way to the Supreme Court, it could take a very long time, as it is such a legal grey area," says Bogdan Kochubay of Millennium Capital.

And who heads the State Property Fund is only one of several rows the courts are being asked to rule on. Odessa municipal council deputy Oleksandr Honcharenko filed against the privatisation plans at the Economic Court of the Odessa region, claiming a mandatory ecological audit must be held. The first hearing was held on May 5, but Portnov didn't turn up and the hearing was delayed until May 16. "I think Portnov is right when he points out that such a decision cannot be taken by a local court - that the administrative court in Kyiv must rule on such a matter as this," Kochubay says.

The legal wrangling is likely to continue for a while. Yushchenko also claims that there's a law prohibiting the privatisation of the infrastructure of the port and only the chemical plant can legally be sold. The pipeline that takes the ammonia from the plant to the port is considered a strategic asset and should remain in the hands of the state, argues the president.

However, some analysts believe the legal status of the pipeline is a red herring that the president is using to distract from the real reason for the row. "The Odessa Portside Plant is downstream from the pipeline of Styroil and no one prevented that privatisation," says Kochubay. "The bidders would have no problem in theory with the pipeline being separate from the plant, as they would continue to have access. However from a management point of view it would be a nightmare to disassociate from the plant, as the plant sits physically on the pipeline. In any case, it is clearly determined that the company that becomes the owner of the plant should give access to third parties according to the intergovernmental agreement that has been signed as half the pipeline capacity is allocated to Russian firms as the pipeline originates in Russia."

It's not clear what will ultimately happen to the port. Semeniuk-Samsonenko warned investors against taking part at a press conference on May 5, "In this situation, engaging investors in buying the target is dangerous because it will be challenged in court," she said, adding that investors may lose their $400,000 deposit.

This is the sort of statement that irate minority investors usually make in a disputed privatisation and is not the sort of thing they expect to hear from a government representative that's trying to attract investment to Ukraine.

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