Ukraine's privatization drive

By bne IntelliNews February 23, 2009

Ben Aris in Berlin -

Teetering on the edge of bankruptcy, the Ukrainian state will put some of the country's industrial jewels under the gavel this year. Investors are excited, as a large-scale privatisation effort has never seemed more likely, but no one is holding their breath.

After signing off on a $16.5bn International Monetary Fund rescue package in November, by February the Fund was threatening to withhold a second tranche because the government had skipped too many of the conditions it placed on the loan. To make matters worse, the state's budget revenues are plummeting as the trade deficit balloons. This forced Kyiv into the humiliating position of having to turn to Moscow, amongst others, in February for a multi-billion-dollar, short-term loan to see it through the mounting crisis.

Privatising some valuable state-owned assets, therefore, is one of the few ways left the state can raise serious cash fast. Re-starting the long-stalled programme could bring in $5bn this year and was one of the conditions imposed by the IMF.

Political football

Despite the seriousness of the mounting fiscal crisis, political infighting continues to stymie the process. The Ukrainian State Property Fund published the privatization schedule for this year at the end of January. The list included 232 companies, 40 of which are slated for sale in the first quarter of this year, including a 90.8% stake in cable maker Azovkabel in May and a 100% stake in Ukrainian National Airlines in June.

However, the list was most notable for the names missing, including the real jewels of the national telecommunication holding Ukrtelecom, Odesa Port Plant and turbine producer Turboatom. Still, analysts are more optimistic that most of the big companies will go on the block sometime this year. "Record-low valuations of Ukrainian corporations in combination with the huge depreciation of the hryvnia in recent months have made Ukrainian industrial groups' representatives in parliament more willing to support privatization, as cheap valuations increase their chances of winning the competition for assets," says Denis Shauruk of Alfa Bank.

Despite the interest in the sales by local oligarchs, Ukrainian Prime Minister Yulia Tymoshenko is expected to demand transparent auctions that could see foreign investors bid up the prices several-fold. The one attempt Ukraine has already made at a well-organised privatisation was a huge success: in 2005, the government netted over $4bn for the Kryvorizhstal steel works after nixing a fixed auction to a local oligarch who paid a mere $800m for the company.

The biggest prize on offer is a 67.8% stake in Ukrtelecom, the conditions for which are widely expected to be announced in March. Analysts say quite apart from the estimated $1.5bn the sale could bring in, the telecom company must be sold off if it's to stay in business. "Privatisation is crucial for the Ukrtelecom investment case, as the company needs new professional management and capital to face increasing competition in the domestic market," say analysts at Renaissance Capital. "Despite the fact that the current crisis might weigh on the valuation, delays in privatisation are likely to decrease the value of the company further, as Ukrtelecom continues to lose market share and will produce poor 2008 results."

The sale of Odesa Port Plant, a key piece of Ukraine's transport infrastructure, is also keenly anticipated and could raise about $1.5bn if an ammonia transshipment terminal is included in the deal. The port is actually more of a chemical play, as it is a leading ammonia producer. Turboatom's selling price is expected to reach $500m, as it is the monopoly producer of half-speed turbines for nuclear power stations in the CIS, with Russia's Atomstroyexport, Alstom and Energy Standard Group all interested in the sale.

Also on the list are stakes in four thermal generating companies (known as energos) and non-controlling stakes in several electricity distribution companies. A bit further out, talk of ending the moratorium on the sale of farmland - amongst the most fertile in the world - is also on the agenda.

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Ukraine's privatization drive

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