Forging Ahead

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Steel companies don't usually help spark political revolutions. But then Ukraine's Kryvorizhstal is no ordinary steel firm. With annual production of about 7 million tons, it is by far Ukraine's biggest steelmaker, accounting for 20% of output, and one of the country's most valuable companies. Last year, it became a powerful symbol of the nation's crony capitalism. In a privatization widely decried as rigged, Kryvorizhstal was sold last June by the state to Viktor Pinchuk, the son-in-law of then-President Leonid Kuchma, and coal-and-steel magnate Rinat Akhmetov, for $800 million, less than half the amount offered by outside firms. The case stirred public outrage and quickly became a rallying point during Ukraine's orange revolution. Viktor Yushchenko, the former opposition leader who was elected President in December after street protests forced a rerun of the vote, denounced the Kryvorizhstal sale as "theft" and made the issue a central plank of his campaign.

Now that Yushchenko has taken power, Kryvorizhstal has emerged as an early test of his resolve. Yushchenko and Prime Minister Yuliya Tymoshenko say they will re-examine the privatization of the company and dozens of other formerly state-owned firms, many of which were sold off to Kuchma allies over the past six years. Last week, Ukraine's Supreme Court upheld previous decisions to undo the Kryvorizhstal deal; Pinchuk and Akhmetov are appealing. The giant steel mill could just be the first reprivatization. Potentially, some of the largest and most profitable companies in Ukraine could be up for grabs, including two big aluminum plants, and a major mining firm worth as much as $1.5 billion that was sold for just $100 million, also to a consortium linked to Pinchuk.

Rotterdam-based Mittal Steel, for one, is excited about the prospect. Its joint bid last year with U.S. Steel for Kryvorizhstal included $1.5 billion for a 93% stake in the plant, plus promised investment of $1.2 billion to raise production and improve quality. The offer was blocked on technical grounds that Mittal and others attacked as spurious. Now the company is hopeful it will win out. "If they do annul [the sale] and ask for bids again, we'd definitely be very, very interested," says the company's owner Lakshmi Mittal. He adds jokingly: "In fact, instead of going through a new process, this government should declare us the winner."

While nearly everyone agrees that some of the business deals of the past were underhanded, undoing them is a tricky task virtually without precedent in Central and Eastern Europe. A full-scale reversal of past privatizations would likely give rise to a host of legal challenges that could swamp the government. Pinchuk has said he plans to defend his businesses, which include a huge Soviet-era pipe plant, four national TV stations, Kryvorizhstal and many others. Reprivatization could potentially scare away foreign investors, too, and, depending on which deals go under the microscope, may even hurt some Yushchenko supporters who benefited from previous privatizations, such as Petro Poroshenko, now head of the National Security and Defense Council, and Petro Yushchenko, the President's brother. And if the President is perceived to be unfairly targeting his opponents, the scheme could raise unwelcome comparisons with Russia's Yukos, the energy company many believe was driven out of business by the Kremlin for political reasons. Another concern is that regional and local officials might use reprivatization to settle old scores. Even Yushchenko and Tymoshenko potentially have big axes to grind. Tymoshenko spent 42 days in jail in 2001 on bribery and other charges, which the Prosecutor General's office has since dropped as groundless, relating to her years as head of the gas-and-oil trading firm United Energy Systems.

Perhaps because the agendas are so complex, the official line has sometimes been confusing. Yushchenko has spoken of re-examining 30 or so cases of privatized firms, while Tymoshenko — who describes corruption as "a cancer tumor" that needs to be removed (see interview) — has said that as many as 3,000 companies could be reviewed. First Deputy Prime Minister Anatoly Kinakh, the head of a government commission on reprivatization, describes the previous sale of state assets as "a cynical carve-up and snatching of economic and material assets." But he simultaneously pledges that there won't be a witch hunt. "We won't allow another redistribution of property in Ukraine outside of law or rules of market competition," he says. At most, a few dozen firms could be affected: "There is no Yukos specter over Ukraine. There is no threat to the investment climate."

International firms and investors hope he's right. Ukraine is a promising new frontier for business development. Its economy grew by an impressive 12% last year, helped by strong demand from Russia and China for steel and other commodities that constitute the core of its industry. While that pace may not be sustainable — growth is expected to fall to about 6.5% this year — Ukraine continues to run up sizable trade surpluses. Some big consumer-goods firms, including the Swiss food giant Nestlé, already have plants in the country and are eager to build up their market share.

But compared to its neighbors, Ukraine remains relatively poor and deprived of investment. Measured by per-capita gross domestic product, Ukraine's 48 million inhabitants have just one-fifth the wealth of Poland's 38 million. And because Ukraine was late in starting a large-scale privatization program, and is nowhere near completing it, the amount of foreign direct investment into the country — about $1.4 billion last year — is just a fraction of the amount that has flowed into Poland, Hungary and the Czech Republic since the early 1990s.

Thus, how Yushchenko's government handles firms such as Kryvorizhstal is a "critical issue," says Julian Exeter, a senior economist and Ukraine specialist at the European Bank for Reconstruction and Development (ebrd) in London. "There's a need for some clear criteria about what cases they are going to review and why."