Clearer Picture

Nikopol Felloalloy Plant re-privatization

Back in 2007, then-U.S. Ambassador William B. Taylor wrote in a cable that “like the subsequent sale of the Kryvorizhstal steel plant, it was apparent that the two Nikopol Ferroalloy Plant tenders [in 2003 and 2004] were rigged in favor of [Viktor] Pinchuk, the son-in-law of then-President Leonid Kuchma, for a cut-rate price.” Production

Dniproenergo acquisition

Billionaire Rinat Akhmetov’s acquisition of Dniproenergo, a large electrical power generation company, was seen by U.S. diplomats as “another example of problems besetting Ukraine’s ‘deeply flawed privatization policy.’” The U.S. ambassador then also believed that

Church regrets supporting Yanukovych

According to a U.S. Embassy cable leaked by Wikileaks, a high-ranking official in the Ukrainian Orthodox Church of the Moscow Patriarchate acknowledged to an Embassy official that the church’s support of the candidacy of Viktor Yanukovych during the

Gas intermediaries in Ukraine

Former U.S. Ambassador William B. Taylor described in 2008 the controversies and operations of two natural gas trading intermediaries that were co-owned by billionaire Dmytro Firtash (left). The U.S. government believed that such intermediaries served no useful purpose and should be removed in the gas trade

The U.S. government was among those publicly happy for the triumph of the 2004 pro-democracy Orange Revolution, hoping it would spark a break for Ukraine away from corruption and towards better governance.

But diplomats and officials were privately critical of the policies and style of governance under President Viktor Yushchenko and his two prime ministers, Orange ally Yulia Tymoshenko and Orange foe Viktor Yanukovych.

Cables from the U.S. Embassy in Kyiv, recently released by the WikiLeaks whistleblower organization, paint a clearer picture of how the American representatives viewed Ukraine’s political and business leaders.

Diplomats describe a kleptocracy in which insider deals were brokered to dole out valuable state assets to favored oligarchs at cut-rate, bargain-basement prices.

U.S. officials do not to comment on the cables unearthed by WikiLeaks., while Ukraine’s four presidents have defended their records, including privatizations, as complying with Ukrainian law.

With many of the same influential oligarchs still around and looking to acquire more state assets in a new round of privatizations, the disclosures renew questions about how transparent state sales will be under Yanukovych, president since Feb. 25, 2010, especially given his track record as prime minister during some of the questioned deals from 2002-2004.

Steven Pifer, a former U.S. ambassador to Kyiv and now a senior fellow at the Brookings Institute in Washington, said the failure of the Orange Revolution leaders to establish a firm rule of law meant that history could repeat itself.

“One of the opportunities that was missed during the five years following the Orange Revolution was the opportunity to strengthen rule of law, so that you would not have this sort of insider deals not to Ukraine’s advantage,” Pifer said.

He added that “the system [in Ukraine] has not changed much” and that he would not be surprised to see such injustices happening again.

Gas intermediaries

One of the main revelations of the new batch of released cables has been the strong U.S. opposition to intermediaries in the Russia-Ukraine natural gas trade that, officials said, made enormous profits for private owners at the expense of state-run companies.

In one January 2008 cable, then-U.S. Ambassador to Ukraine William B. Taylor described the controversies surrounding two gas intermediaries then operating – RosUkrEnergo and UkrGaz-Energo, a joint venture between RosUkrEnergo and state energy monopoly Naftogaz.

The cables detail the U.S. government’s public and private position, questioning the transparency of such gas intermediaries in the multi-billion-dollar bilateral trade between Ukraine and Russia.

Seeing no transparent role for them, the U.S. called for privately-held intermediaries appointed by top officials to be removed, noting that this goal was relentlessly pursued by Tymoshenko as prime minister.

But she is on trial for alleged abuse of office in a 2009 gas deal with Russia that removed RosUkrEnergo from the gas trade.

Critics see the criminal charges as retaliation by her enemies, including RosUkrEnergo’s billionaire co-owner, Dmytro Firtash. He is close to Yanukovych’s administration, which denies any interference in the judicial process.

In the U.S. cable, UkrGaz-Energo is accused of making money from the lucrative gas trade at the expense of Naftogaz – and its owners, the Ukrainian taxpayer. “Its profitability came at the expense of Naftogaz,” reads the cable.

“Reportedly, UGE has yet to pay 2006 dividends to Naftogaz, even though Naftogaz owns a 50 per cent share.”

Rinat Akhmetov

Taylor also wrote that “it is completely murky what financial flows and dividends move between” RosUkrEnergo and UkrGaz-Energo, essentially echoing Tymoshenko’s accusations of “shady schemes” coming at the expense of Ukrainians.

The intermediaries have repeatedly denied wrongdoing and defended their roles as helpful in the bilateral gas trade.

Privatization cloud

Concerns were raised by the U.S. ambassador in 2007 regarding non-transparency in the privatization of state assets and the nation’s weak judiciary.

The U.S. was severely critical of the government’s sales of the state-owned Kryvorizhstal steel plant and Nikopol Ferroalloy Plant, both privatized under the presidency of Leonid Kuchma, who governed from 1994-2005, and then-Prime Minister Yanukovych, in power between 2002-2004.

Back in 2003, Ukrainian billionaire Viktor Pinchuk paid less than $100 million in a controversial privatization tender to seal his control over the prized state-owned plant.

The market value was $1 billion, the diplomat wrote. “Like the subsequent sale of the Kryvorizhstal steel plant, it was apparent that the two Nikopol Ferroalloy tenders were rigged in favor of Pinchuk, the son-in-law of then-President Leonid Kuchma, for a cut-rate price,” reads the cable.

Kryvorizhstal was sold in 2004 to Pinchuk and Rinat Akhmetov, the billionaire backer of Yanukovych and the pro-presidential Party of Regions, for $800 million.

In 2005, however, Tymoshenko returned the company to state ownership and subsequently sold it during a competitive and transparent tender to Mittal Steel (now ArcelorMittal).

This repeat Kryvorizhstal privatization tender fetched a whopping $4.8 billion for the national treasury – the highest amount ever received for a state asset.

In fact, this sale alone accounts for a majority of what Ukraine has raised from privatization deals. Such transactions helped Akhmetov accumulate a net worth of $30 billion, while Pinchuk amassed assets worth billions of dollars.

At some point, according to the cables, Pinchuk allegedly told U.S. diplomats that he is willing to reimburse the government for the price difference.

Spokespeople for Pinchuk and Akhmetov had not responded to Kyiv Post requests for comment by Sept. 1, but have always previously denied wrongdoing.

Government attempts to re-privatize the controlling share of the Nikopol Ferroalloy Plant dragged on in courts for several years before the state lost its case and a peace agreement of sorts was reached.

Since then, the plant is controlled under a murky ownership structure believed to involve Pinchuk and billionaire Igor Kolomoisky, who had for years been trying to gain control over the plant from Pinchuk.

According to the cable, the failed re-privatization attempt also demonstrated shortcomings in Ukraine’s judicial system, with Pinchuk defending his interests by taking “advantage of the jurisdictional ambiguities in the Ukrainian judicial system, winning court decisions to counter other court judgments against him …

The episode underscores that in Ukraine’s business world, as in its politics, problems are solved through deal-making between powerful individuals, not through the manipulable court system,” Taylor summarized.

Viktor Pinchuk

According to a December 2007 cable, U.S. Embassy officials were also suspicious of the acquisition of Dniproenergo, a large power generation company, through the issuance of shares bought by Akhmetov, allegedly below their true value.

Akhmetov spent $200 million for up to 40 percent share of the company while some estimated the market value of the entire company between $1.5 billion and $2.2 billion at the time.

While the company remained in the hands of Akhmetov, its transaction was seen by U.S. diplomats as “another example of problems besetting Ukraine’s “deeply flawed privatization policy.”

Taylor wrote: “The Dniproenergo case is not an isolated one, as Ukraine’s history is marred with non-transparent privatizations that have benefited a few well-connected insiders.” Akhmetov denied the transaction was illegal and added that he paid a fair price for the share.

What comes next?

The sobering picture of Ukraine’s past raises concerns about the upcoming sale of state assets, including Odesa Portside Plant, which produces chemicals, and several regional energy producers.

Firtash has shown interest in the Odesa chemicals plant. Akhmetov appears to be eyeing majority stakes in energy companies, including Dniproenergo.

Maksym Boroda, analyst at the Kyiv-based International Center for Policy Studies, said the system of governance remains essentially unchanged.

“Everyone knows that courts are corrupt and politicized and controlled by the ruling political elite, but the previous Ukrainian leaders were not against such a system either,” Boroda said. He said neither the government nor the political opposition feels public pressure for change.

Kyiv Post staff writer Yuriy Onyshkiv can be reached at onyshkiv@kyivpost.com.