Large-scale privatisation in Ukraine is back, and so are its challenges

On 20 June, Ukraine’s president Volodymyr Zelenskyy signed a law to resume large-scale privatisation – a process that was launched back in 2018 and has since been halted twice: first, due to the COVID-19 pandemic, and then, after Russia’s full-scale invasion.

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The facilities planned for privatisation include Centrenergo, an operator of thermal power plants; Odesa Portside Plant, a fertiliser producer, and United Mining and Chemical Company (UMCC Titanium), a titanium miner.

A ‘victim’ of those wishing to make easy money

The Ukrainian government has been trying to privatise Centrenergo for ten years.

The company was one of the largest electricity producers in Ukraine, operating three thermal power plants in the Kyiv region, Kharkiv, and Donetsk region (the latter is now temporarily occupied by the Russians).

Attempts to make money from Centrenergo in various ways have led to huge debts.

During Viktor Yanukovych's presidency, it was the so-calle ‘family’, a group of people close to the fugitive ex-president. The coal for the power plants was believed to have been supplied by those close to Mr Yanukovych’s eldest son.

When Petro Poroshenko was elected president, Centrenergo fell into the orbit of oligarchs Ihor Kononenko and Vitaliy Kropachov, who became the main supplier of coal for the energy generation sector.

It was during Mr Poroshenko's term that Centrenergo incurred debts that could destroy the company. A lawsuit with Mr Kropachov's Ukrdoninvest for more than UAH 1.4 billion is ongoing. The reason is that Centrenergo did not fulfil the contract for receiving coal from Mr Kropachov's companies, which bought it from state-owned coal mining companies. The way the contract was concluded was that Centrenergo had to pay a fine for not purchasing the coal – even if it did not need it.

In addition, Centrenergo last year lost control of the Vuhlehirsk thermal power plant, in the Russian-held city of Svitlodarsk, and ownsUAH 1.01 billion to the government.

Since 2019, under the new leadership of the Ukrainian state property fund, Centrenergo has had management that was loyal to Ukrainian oligarch Ihor Kolomoisky. Thus, in January-March 2021, Centrenergo sold all the energy it produced to United Energy, a company of Mr Kolomoisky’s group, below the market price. A criminal investigation into the trader is ongoing.

Therefore, Centrenergo is going through a difficult time and is close to shutting down; selling such a company will be a daunting task.

Several sources have confirmed to that last year, Rustem Umerov, the head of the state property fund, offered the company for a nominal fee to Maksym Tymchenko, CEO of Rinat Akhmetov’s DTEK Group.

But he refused.

The chemical industry’s leader

Efforts to privatise the Odesa Portside Plant have been ongoing for over 14 years.

The OPP is one of the largest chemical industry enterprises, focusing on the production of ammonia, urea, liquid nitrogen, carbon dioxide, and liquid oxygen.

In addition, the plant operates a marine transshipment facility connected to the Togliatti – Odesa ammonia pipeline, currently out of operation due to safety risks (ammonia fumes are dangerous to people). The Russians, however, are demanding it be launched for the Black Sea grain deal to be extended

The privatisation of the Odesa Portside Plant began during Yulia Tymoshenko’s second term in office as prime minister of Ukraine. Back then, Ihor Kolomoisky wanted to buy it for USD 600 million.

New talks about the plant’s sale began after the Revolution of Dignity, when it was designated the ‘flagship’ of a major privatisation – but was never sold in the end. And since 2017, it has at times been in downtime because it was not able to pay for natural gas it uses to operate.

Since 2017, the OPP has been operating under the tolling scheme, meaning that a private company provides gas, which the plant processes into fertilisers and sells to the company.

While the plant did not turn a profit, there were no other options to save it. Gradually, the tolling scheme turned into a criminal scheme – the state property fund’s former head, Dmytro Sennychenko, tried to make the OPP sign contracts with Agro Gas Trading, a private company – and was uncovered this March.

In 2022, the Odesa Portside Plant was shut down due to Russia’s constant shelling. Now it is put up for privatisation again – but, given the state of the equipment and debts, its investment attractiveness is highly questionable.

A titanium giant

Two large mining and processing plants (GOK) that are part of United Mining and Chemical Company (UMCC Titanium) are being prepared for privatisation as well. Irshansky GOK and Vilnohirsky GOK produce ilmenite, zirconium, and rutile ores – raw materials used by the chemical and titanium industries.

The two plants used to be leased to Dmitry Firtash’s entities and supplied raw materials to his Crimean Titan in Russian-occupued Crimea. After 2014, the state cancelled the lease agreement, and set up UMCC Titanium to unite the plants.

The holding was headed by Ruslan Zhurylo, linked to Mykola Martynenko, the-then head of one of the parliamentary factions.

After Petro Poroshenko lost the 2019 presidential election, UMCC Titanium was headed by Peter Davis and then, Artur Somov. Mr Somov is one of the defendants in the case of the former head of the state property fund, Mr Sennychenko, that was mentioned earlier.

In 2021, UMCC Titanium was put up for privatisation thrice, and each time, it was postponed. Mr Sennychenko pinned the blame on the government, which he said could not "provide protection guarantees for foreign investors" who could pay.

However, according to NABU, Ukraine’s anti-graft agency, Mr Sennychenko managed to appoint "loyal executives" who deliberately entered into unfavourable contracts with private firms for the sale of raw materials.

UMCC Titanium board member Dimitri Kalandadze says there are fears the plant may not be of interest to external investors.

One of the problems of this asset is the lack of new special permits for mining, a potential problem for would-be investors. However, compared to Centrenergo and the Odesa Portside Plant, the privatisation of UMCC Titanium is more realistic.