President Viktor Yushchenko says Ukraine's government will not re-privatize enterprises that it believes were sold unfairly under the previous administration. Yushchenko told Emerging Markets in an exclusive interview that if any transactions are found to be flawed, then the country's courts rather than the government would decide the final outcome.
"We are not talking about re-privatization," he says. "We are conducting an administrative review of those privatizations of state property conducted with procedural violations, which resulted in state property being transferred to private hands without competitive tenders, objective valuations and other machinations.
"If there are such privatizations, court actions and arbitrations will be filed to resolve discrepancies in privatization procedures."
Flawed privatization is the most sensitive issue affecting investor sentiment, according to Moscow Narodny Bank (MNB), a Russian-owned UK financial institution. One of the problems has been that different members of the Ukrainian government have made contradictory statements over the past few months.
Last week, for example, Kommersant, one of Russia's biggest daily newspapers, reported that Anatoly Kinakh, first vice-premier, presented a final a list of 29 privatizations that would be reviewed again. Prime Minister Yulia Tymoshenko, however, denied the existence of such a list. Yushchenko declines to be drawn on such matters.
He says, though, he is confident that the government will raise Hr6 billion ($1.2 billion) through privatizations this year. But Paul Timmons, an analyst at MNB, says that the privatization process is stuck in limbo until the sale of Kryvorizhstal is resolved.
The controversial sale of a 93% stake in Ukraine's biggest steel producer is seen as an important test case for Yushchenko's privatization strategy. The stake was sold by the previous government to a family member of former President Kuchma for $800 million compared to reported offers of about $1.5 billion by foreign companies.
The dispute caused widespread discontent among the population urging both Yushchenko and Tymoshenko to commit to a reversing of the privatization. However, little progress has been made and with the year halfway through, Timmons says that the government's revenue forecasts are looking optimistic.
Another problem facing Yushchenko is the state of public finances. The president faces a fiscal deficit of 3.4% of GDP – a figure that he has promised to cut to 1.6% this year. At the same time, he has committed to raising childcare benefits and pensions. Some analysts are sceptical about the government's chances of achieving both goals.
"The populist measures undertaken to secure a solid platform for the forthcoming [parliamentary] elections [in March 2006] have substantially raised the social component in the budget and against a backdrop of optimistic privatization revenue projections, the budget deficit is expected to underperform this year," says a May 17 report by MNB.
Yushchenko says that a crackdown on corruption will help cut the deficit. "Analysts believe assumptions are optimistic because they cannot imagine the vast amount of budget revenues siphoned off by shady deals in industry sectors where the dominant player was the state monopoly," he says.
"This includes sectors such as transportation, energy, telecommunications and the post, to name a few. Here alone we've been able to close the budget deficit by several percentage points."
In addition, he says his administration will cut waste and will introduce independent and transparent tenders for the state's purchases of goods and services. "By increasing revenues and reducing waste, we are confident budget deficit margins will be reduced and managed effectively."
Yushchenko is also hopeful that foreign investment will return to Ukraine over the next few years. The country received only $1.6 billion in investment inflows last year. One concern is that Ukraine suffered from capital flight during the controversial election process. Yushchenko says he is committed to turning the situation around.
"We will stop the outflow of capital and increase the volume of foreign investments significantly, having improved the country's investment environment," he says, adding that he wants FDI to reach $5 billion a year within the next two-three years. "Creating economic conditions that stimulate businesses to operate legally and transparently is one of the greatest means of fighting against capital flight."