Why does Ukrainian government allow sharing profitable enterprises out?

Author : 112 program Corruption League

Source : 112 Ukraine

Privatization was launched after Ukraine gained independence in 1991. Ukrainian privatization was opaque, non-competitive, and chaotic
09:31, 15 January 2020

Privatization, that is, the process of transferring state-owned objects to private, was launched after Ukraine gained independence in 1991. Ukrainian privatization was non-competitive and chaotic. Its results are often called one of the worst in the world. 

In 1992, 133,000 objects were denationalized in Ukraine. They were privatized for less than 11 billion USD. Then state-owned enterprises deliberately went bankrupt to sell them for very low prices.

On April 21, 1994, President Leonid Kravchuk signed a decree "On the introduction of privatization property certificates in cash." Large enterprises turned into joint-stock companies. People have got new currency – vouchers.

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Citizens simply received pieces of paper in the hope that they would profit from them, but in fact, they got nothing and saw how the others became oligarchs.

September 2, President Volodymyr Zelensky instructed Prime Minister Oleksiy Honcharuk and Minister of Economic Development and Trade Timofiy Mylovanov to begin preparations for major privatization and work to attract investors.

October 2, the Verkhovna Rada of Ukraine repealed the law with a list of objects of state property rights that were not subject to privatization.

The list of 800 objects for privatization included strategic enterprises: Ukrzaliznytsia (Ukrainian Railways), Ukrposhta (Ukrainian Postal Service), Oschadbank (State Savings Bank of Ukraine), Ukrspyrt (State Enterprise of Alcohol and Alcoholic Beverage Industry), Boryspil airport, a number of coal mines and some enterprises of the Ministry of Defense of Ukraine.

The Ministry of Economic Development announced the top 10 of them in terms of net profit in the first half of 2019.

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As of 2019, the most profitable of state enterprises are:

NAK Naftogaz of Ukraine JSC - 24.26 billion UAH (1 billion USD);

Ukrenergo National Energy Company - 1.76 billion UAH (73 million USD);

Ukrhidroenergo - 1.19 billion UAH (49,5 million USD);

Energoatom State Enterprise - 1.11 billion UAH (46 million USD);

Ukrzaliznytsia - UAH 1.07 billion (44,5 million USD);

Ukrposhta with an income of 475 million UAH (19,7 million USD).

The well-being of Ukrainians depends on the work of each of these enterprises, because they fill the state budget. However, ruling Servant of the People faction decided that bringing the state enterprises to the hammer, they will patch up holes in the budget. Indeed, in 2019, the budget deficit increased significantly compared to previous years. At the end of December, the state treasury did not receive 2,1 billion USD.

November 20, 2019, the Ministry of Economy initiated the transfer of the next package of enterprises to large privatization.

Prime Minister of Ukraine Oleksiy Honcharuk spoke about the advantages of the decision: “In fact, 339 out of 500 enterprises defined by the president as goals by the end of the year have already been transferred. This means that there are fewer state-owned enterprises and assets in the management of ministers and politicians. They are transferred to management "managers who must honestly see what they are and must prepare them for sale."

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And we are talking not only about unprofitable but also about those on which the state earns billions. However, Minister of Economy Timofiy Milovanov believes that enterprises would become more successful in private hands.

Obviously, they would. The only question is, what would the state get from this?

The intention to privatize instead of making enterprises efficient and overcoming corruption on them, experts consider the result of incompetence of the authorities.

Probably, it is about selling these enterprises to the right people! After all, there are few people who are able to buy billions of assets of Ukrzaliznytsia or Naftogaz. "It is unlikely that these oligarchs will regress society with a tribute to the state budget," said Yuriy Lisnychy, director of the Institute for Analysis and Forecasting.

Mykola Gordienko headed the State Financial Inspectorate of Ukraine from 2014 to 2015. The results of the audit of state enterprises were amazing.

"Over the year, 7,6 billion UAH (316 million USD) losses were revealed that were caused to the state. I want to say right away that this is only the beginning of our work," he says.

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By mid-2014, the State Financial Inspectorate checked the activities of the post-Maidan government. It turned out that the power of Poroshenko stole no less than his predecessors did.

Today, the State Financial Inspectorate of Ukraine has been renamed the State Audit Service of Ukraine, and the small staff that remains after the reduction is simply not able to verify all state-owned enterprises. But it seems that the current government is happy with this state of affairs.

Ukraine’s sugar industry is one example of state-owned enterprises privatization.

The fall of the Ukrainian sugar industry began in the nineties. When the government canceled the system of state orders for sugar beets and sugar and relieved itself of responsibility for the further development of this industry.

Vinnytsia region once had 39 sugar factories and hundreds of agricultural enterprises. Over the years, about 15 thousand residents lost their jobs.

However, not all sugar factories fell into decline. Enterprises related to the business of the family of then-president Poroshenko, on the contrary, were gaining momentum. In 2016, the Ministry of Agriculture issued them the largest quotas for sugar production for the domestic market.

Alcohol industry is at risk. November 15, the Verkhovna Rada supported in the first reading the bill on the demonopolization of the alcohol market from January 1, 2020.

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Ukrspyrt state-owned enterprise is the only producer of edible alcohol. The demonopolization of the alcohol industry means not only that all interested alcohol plants can produce alcohol, but also that the state can no longer control the quality of alcohol, which threatens the health and life of people. Currently, contraband alcohol also enters Ukraine. Ukrspyrt enterprise would be sold for 5 billion UAH (208 million USD).

However, there are no guarantees that Ukrspyrt would not abuse the monopoly, pay taxes, fight surrogate alcohol, and would not cooperate with counterfeiters when being in the hands of the oligarchs.

Russia. Vladimir region. Plant named after Degtyarev, which produces weapons.

Kalashnikovs, grenade launchers, anti-tank systems and rockets, which then go to war in Ukraine and kill our citizens, leave the conveyors of this particular enterprise. And the owners of this plant still have a huge business in our territory.

Tedis company is the only tobacco distributor in Ukraine. Until May 24, 2016 it was called "Megapolis". The era of this tobacco monopolist began in the time of president Yanukovych when all distributors were forcibly combined into one. Now, this is Tedis Ukraine. Six Cypriot companies are among its founders, as well as Odesa millionaire Boris Kaufman is one of the beneficial owners.

Links from Kaufman and the Tedis company lead Russian oligarchs Ihor Kesaev and Serhiy Katsiev to the Mercury Group of companies. They are the owners of the same plant named after Degtyarev, the flagship of the military-industrial complex of the Russian Federation.

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In 2011, when lobbying Yanukovych, the Antimonopoly Committee of Ukraine issued Tedis permission to conclude a number of contracts with wholesalers of cigarettes. These contracts stipulated that wholesalers would work for 10 years only with Tedis.

Since then, power has changed three times. And the tobacco market is still in the hands of the Tedis monopolist. In October 2015, the Antimonopoly Committee of Ukraine opened a case regarding the abuse of monopoly position by the Tedis Company.

However, Tedis appealed the decision to abolish the monopoly in court and, having reached the third instance, won the case. Thus, by a decision of the Supreme Court on December 12, 2019, the company received the right to a monopoly again.

State-owned enterprise Ukrzaliznytsia is an entire empire, a state in a state with its own factories and hospitals, paramilitary groups and educational institutions. The object of strategic importance.

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The government of Oleksiy Honcharuk plans to divide Ukrzaliznytsia into three companies and sell the part to private investors. One enterprise will be engaged in freight transportation, the second will deal with the passenger one. And only a third should remain in state ownership. It will deal with infrastructure.

The majority of Ukrzaliznytsia's passenger transportation is now unprofitable; they are subsidized by commercial freight transportation.

When in 2014, the State Financial Inspectorate of Ukraine visited with a check for Ukrzaliznytsia, hundreds of millions of losses were discovered there. Ticket prices are rising, but no service.

Naftogaz is the largest national company in Ukraine, and this is the largest taxpayer. Naftogaz is responsible for what kind of gas we receive and how much we pay for it.

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Naftogaz of Ukraine was created in 1999 by the decision of President Kuchma. The company combined state assets of the Ukrainian oil and gas industry.

The creation of Naftogaz was mainly an initiative of Russia. The motive was simple: we should have a subject that would accumulate all the debts of Ukrainian consumers of Russian gas. And so that these debts are guaranteed to be repaid, this company was made public.

20 years have passed since then, and the role of Naftogaz has not changed. Experts believe that he does not bear any useful economic sense. Only losses and corruption transactions.

The last audit has revealed considerable losses in 2014: “We conducted an audit at Naftogaz, at Ukrgasvydobuvannya and Ukrtransgaz. According to the latter, we have revealed 219 million UAH (9,1 million USD) losses at Naftogaz enterprise and 358 million losses (14,8 million USD) at Ukrgasvydobuvannya."

Every month, this state monopoly extracts millions from the state budget only for its own maintenance, for the fantastic salaries of the company's managers. The salary of Andriy Kobolev, Naftogaz CEO, is more than 342 million UAH (14,2 USD) per year, that is, the head of Naftogaz daily earns almost a million hryvnias. For these funds, one can build three large schools or dozens of kindergartens.

The Verkhovna Rada of Ukraine voted to pass the Naftogaz’s unbundling law - that is, to separate the natural gas transportation system from its production and supply. Consequently, now there’s not a single benefit from the multimillion-dollar gasket Naftogaz, however, we are spending millions every day on its maintenance.

In the 90s, Poland also experienced a period of great privatization, which was also called "shock therapy." Then the authorities promised the Poles that they would not lose their jobs.

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Workers protested, and yet the process continued. By the end of the 1990s, 80 % of enterprises were privatized, commercialized, or closed in Poland.

However, there they complain that in some cases, the quick sale of state-owned enterprises without an appropriate valuation was opaque and testified to corruption.

Obviously, Ukrainian privatization is designed specifically for the oligarchs. When some get rich and others lose their last livelihood.

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