VZCZCXRO9823
RR RUEHDBU RUEHIK RUEHLN RUEHPOD RUEHSK RUEHVK RUEHYG
DE RUEHKV #0785/01 1281704
ZNR UUUUU ZZH
R 081704Z MAY 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 7775
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

UNCLAS SECTION 01 OF 02 KYIV 000785 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EUR/UMB, EUR/NCE, EUR/ERA, EB/CIP, 
EEB/CIP/BA FOR WWITTEMAN 
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK 
 
E.O.:  12958:  N/A 
TAGS: ECON EFIN ECPS BEXP EINT UP
 
SUBJECT:  UKRAINE:  PRIVATIZATION UNLIKELY TO HELP CLOSE BUDGET GAP 
 
REF:  08 KYIV 447 
 
¶1.  (SBU) Summary:  Ukraine's 2009 budget foresees $1.1 billion of 
budget revenues this year, but the GOU is unlikely to earn anything 
near that amount from privatization of state-owned enterprises.  The 
IMF, in its most recent review of its Stand-By Agreement, now 
estimates that Ukraine will generate about $390 million from 
privatization.  The unfavorable market environment will make the 
sale of even well-prepared state companies difficult.  Two flagship 
state companies - fixed-line telecommunications giant Ukrtelekom and 
chemical giant Odesa Portside Plant (OPP) -- lead the GOU's 
privatization list.  While the State Property Fund (SPF) has made 
progress in preparing OPP for sale, Ukrtelekom looks to be less 
ready, and leading GOU and company officials continue to announce 
unrealistic timelines for the company's privatization.  In addition, 
the ongoing political squabbling between PM Tymoshenko and President 
Yushchenko over the legal basis for privatization, and over 
leadership of the SPF, continues to lame the privatization agency. 
End summary. 
 
Privatization Revenue To Fall Short of GOU Target 
--------------------------------------------- ---- 
 
¶2.  (SBU) The Ministry of Finance foresees $1.1 billion of budget 
revenues this year, but the GOU is unlikely to earn anything near 
that amount as it attempts to finance a ballooning deficit, which 
the IMF now expects to be about $4 billion (excluding costs of bank 
recapitalization.)  The IMF now estimates privatization revenues to 
be about $390 million, or 0.3 percent of GDP.  The ability to 
generate significant revenue from privatization will depend on 
whether Ukraine will be able to ensure the sale of two flagship 
companies still in state ownership -- Ukrtelekom and the Odessa 
Portside Plant -- which in turn will be contingent on reaching a 
political consensus on privatizations and the ability to find 
respective buyers in the current economic climate. 
 
¶3.  (SBU) Ukraine has had a dismal record of privatization in recent 
years.  In 2008, privatization revenues were only $95 million 
against planned revenues of $1.7 billion.  Privatization has been 
effectively blocked since the $4.8 billion sale of Ukraine's largest 
steel mill, Krivorizhstal, in 2005.  The political rivalry between 
President Yushchenko and Prime Minister has hit privatization hard. 
The two have waged an ongoing battle over the leadership of the 
State Property Fund (SPF) practically from the moment that 
Tymoshenko assumed office in late 2007 (reftel), a dispute that 
shows no signs of abating.  On May 6, Yushchenko suspended a recent 
CabMin resolution naming a new SPF deputy head and announced 
intentions to challenge in the Constitutional Court. 
 
¶4.  (SBU) The Prime Minister and President disagree on the legal 
basis for privatization as well. Last December Yushchenko issued a 
decree instructing the GOU to suspend the privatization of strategic 
assets until the adoption of laws on both the SPF and the 
privatization program itself.  In February the law on the 
privatization program failed in the second reading.  The Rada later 
did pass a law on the SPF, but Yushchenko vetoed it, arguing that it 
included some contradictory provisions. 
 
¶5.  (SBU) However, as the situation with the 2009 budget gets worse, 
there appears to be a change in the view of the President with 
regard to at least the sale of Ukrtelekom.  On March 25, First 
Deputy Head of the Presidential Secretariat Oleksandr Shlapak 
announced that the President would support the privatization of 
Ukrtelekom provided that the Cabmin coordinates the tender 
conditions with the President.  Shlapak also emphasized the 
importance of adhering to transparency requirements during the 
privatization. 
 
Ukrtelekom Revenue Later This Year? 
----------------------------------- 
 
¶6.  (SBU) Even if the political will emerges to move forward with 
Ukrtelekom's sale, it is not clear whether the privatization can be 
conducted quickly enough to generate meaningful funding for the 2009 
budget deficit.  Ukraine has tried to sell the land-line monopoly 
since 1997, and has routinely announced unrealistic timelines. 
Earlier this year, for example, Transportation Minister Yosyp 
Vinskiy expected that a tender would be conducted in the first half 
of this year.  Media reports have quoted officials as saying that 
the tender could take place in October.  However, by all accounts, 
little progress has been made to prepare the company for 
privatization. The need to restructure Ukrtelekom, to separate it 
from the government's communication service, and the requirement to 
conduct an international audit of the company will all influence the 
timeline.  Ukrtelekom is Ukraine's largest fixed-line operator and 
 
KYIV 00000785  002 OF 002 
 
 
has 70 percent market share, or 9.7 million subscribers.  It also is 
a leader in providing internet broadband connections, serving more 
than 10 million households.  However, given the tough competition in 
the sector Ukrtelekom risks loosing large part of its market share, 
justifying the need for fast privatization of the plant. 
 
Companies Purportedly Voice Interest in Ukrtelekom 
--------------------------------------------- ----- 
 
¶7.  (SBU) On February 11 the GOU passed a resolution aimed at 
selling a 67.8 percent stake in Ukrtelekom this year. On March 18, 
acting head of the SPF Dmytro Parfenenko announced that 10 companies 
were interested in participating in the privatization.  He mentioned 
Deutsche Telekom and its Hungarian subsidiary Magyar Telekom, 
Turkish Turkcell, Russian RosTelecom as well as Systema Group (owner 
of MTS and Komstar Ukraine).  Some commercial and investment banks, 
including Bank of New York, UBS, Nomura, Russian Alfa Capital, 
Austrian Raiffeisenbank, Credit Suisse, and Merrill Lynch have 
reportedly expressed interest.  To our knowledge, however, none of 
the companies mentioned by the GOU have independently and openly 
expressed interest.  Some of the conditions announced in tender 
plans in 2008 were viewed as a deterrent for investors.  A ban on 
cutting Ukrtelekom's bloated workforce, for example, was seen as the 
primary obstacle to modernizing the company. 
 
Ukrtelekom's Price Probably Lower This Year 
------------------------------------------- 
 
¶8.  (SBU) Estimate of Ukrtelekom's worth vary widely. 
Transportation Minister Vinskiy said the GOU could fetch $3.25 
billion, while the SPF estimates that Ukrtelekom is worth only $970 
million.  The company's market capitalization is about $630 million 
(seven percent owned by management and employees is listed on 
Ukraine's stock market) reflecting the recent abrupt decline in 
share prices, as last year's capitalization was $2.35 billion. 
Concorde Capital analyst Oleksandr Parashchiy estimated the starting 
price to be $936 million, and thought the company could eventually 
be sold for $1 to $1.9 billion.  Roman Zhukovskiy, a social and 
economic policy advisor to the President, estimated that the GOU 
will most likely get about $1 billion as compared with $3 billion 
last year if it had sold the Ukrtelekom stake last year. 
 
Odessa Portside Plant Could be Privatized More Quickly 
-------------------------- --------------------------- 
 
¶9.  (SBU) The privatization of the Odessa Portside Plant (OPP), 
Ukraine's largest ammonium producer, could be swifter, since the 
company underwent significant privatization preparations in 2008. 
Commentators put the price for OPP at about $1 billion, far lower 
than the price expected for 2008.  Higher prices for Russian gas 
made the plant less attractive, as gas accounts for about 45 percent 
of the plant's costs.  Media reports have said that companies that 
are interested in the privatization may include those that have 
access to their own sources of gas, such as Russian Sibur, Eurochim, 
or Ukrainian company IBE Trade, which is the owner of Stirol plant. 
Local press have speculated that Dmitriy Firtash, owner of other 
chemical plants in Ukraine, such as RivneAzot, no longer has access 
to cheap gas and would not be interested in OPP. 
 
¶10.  (SBU) Other companies scheduled for privatization include 
stakes in five oblenergos and controlling stakes in plants like 
Makeyev coking chemistry plant and Horlovka machine-building plant. 
However, the SPF had to recently cancel the tender for a 25 percent 
stake in one oblenergo due to a lack of bidders.  The plan also 
includes privatization of 22.39 percent of aviation company 
Aerosvit.  The interest in these privatizations is likely to be 
limited to existing shareholders of the companies and the cumulative 
value of the packages is not expected to exceed $500 million. 
 
¶11.  (SBU) Comment:  The sale of Ukrtelekom or the Odessa Portside 
Plant will require political consensus and at least medium term 
planning.  The latter is not common in Ukraine's political world, 
with its short horizons, and it remains to be seen if the former 
will be possible as the presidential election campaign intensifies 
later this year. 
In any case it appears increasingly unlikely that privatization will 
contribute more that a modicum to the financing of Ukraine's budget 
deficit this year.  End comment. 
 
TAYLOR