Graham Stack in Kyiv -

Ukraine's sprawling state sector is an obvious starting point for the eager reformers staffing the country's new-look government. There is plenty to sell, but with local oligarchs hit hard by the crisis and foreign investors wary of instability, the question is: who is buying?

Ukraine's government surprised many on May 12 with an order on "fair and competitive privatisation in 2015" listing over 300 state-owned stakes to go under the hammer in 2015 – ranging from coal mining to agriculture to ports. But analysts believe the government will have its work cut out just to shift a few of the largest assets, not least because it was only on May 20 that the State Property Fund, which oversees privatisation, finally got a fully signed-up chief, in the person of former head of the State Fiscal Service, Ihor Bilous. The delay in appointing anyone to the post could be due to its importance – but also perhaps because of the short life expectancy of some occupants. In the course of the last two years, two notorious former heads of the property fund have committed suicide under mysterious circumstances.

The new man Bilous is himself controversial, since he was initially suspended and then dismissed from his post as head of the fiscal service, due to his alleged failure to clamp down on endemic corruption in the tax and customs services since being appointed in the immediate aftermath of the February 2014 revolution, which saw his predecessor flee the country. 

Bilous is regarded as having been backed for both positions by Prime Minister Arseny Yatsenyuk, who has initiated the privatisation campaign. "Those who are politically connected are immune to any repercussions from scandals, corruption allegations or poor performance," comments Zenon Zawada of Concorde Capital. "Instead, the connected politicians get recycled and appointed to other posts."

Government inspector

Ukraine's state-owned sector is vast and encompasses all walks of life – from horse-breeding to rocket-building. The 300 companies up for sale comprise less than 10% of Ukraine's state-owned companies, according to the first ever audit of state firms, released April 1 by the economy ministry.

But this first attempt at an audit had to admit defeat. After counting up to 3,350 state-owned companies with total workforce of 1.3mn, the economy ministry acknowledged that even this number "may be incomplete", given that the state has no up-to-date register of its sprawling holdings.

The size of the workforce at state-owned enterprises (SOE) is one of the few easily established facts about Ukraine's sprawling state sector. "The quality of the financial information from the SOEs is not high," laments the audit, with the majority of SOEs never being audited to international standards.

There is just as little clarity over the government's goal for the announced privatisation campaign:  is it the start of an ideological 1990s-style 'privatise everything' indicated by the 300-strong government list? Or is it a calculated attempt to raise funds for the budget backed by the finance ministry? Or is it even to attract strategic investors for major state companies, as suggested by the economy ministry?

"If the target is to get rid of all these assets – it’s doable. If the target is to get good money from the assets, it’s completely impossible. If it was possible, [President Petro] Poroshenko would have been able to sell his Roshen confectionary concern [as promised pre-election]," says Aleskandr Paraschiy, head of research at Concorde Capital.

A few jewels

"The potential value of the top five to ten assets probably accounts for 80-90% of total [potential revenues from privatisation]," believes Andriy Bezpyatov, head of research at Dragon Capital.

This means that, given time and organisational limits, as well as the dire situation on the market, privatisation in 2015 could boil down to a re-run of previous attempts in 2008- 2009 to privatize a few big names, such as the chemicals giant Odessa Portside Plant. OPP is Ukraine's largest producer of nitrogen fertilisers, with UAH4.2bn ($110mn) sales in the first nine months of 2014, according to the economy ministry audit.

"The government's privatization plan foresees a total income of UAH17bn ($830mn) from a sale of state assets in 2015. This plan could be met by selling OPP – along with some smaller enterprises," says Dmitry Churin, head of research at Eavex Capital.

Who could buy OPP? "In our view, business group Privat, affiliated with industrialist Igor Kolomoisky [co-owner of Ukraine's largest bank Privat Bank] is the most obvious bidder for OPP," Churin adds.

Ukraine's leading gas and chemicals oligarch Dmitry Firtash, having recently escaped a US extradition request in Austria, may also want to participate, analysts believe – if he can raise the funds and gain political support. Two of Firtash's plants in war-torn East Ukraine are currently idling due to the Russian-backed insurgency, and he is also under pressure from Ukraine's interior ministry over alleged collusion in embezzlement.

The prospect of a showdown between bitter oligarch rivals Kolomoisky and Firtash over the prize asset is mouth-watering, but other contenders should also turn up, possibly including foreign investors. "We do expect some foreign interest at least for jewels in the list like OPP," agrees Dragon Capital's Bezpyatov.

Ukraine's second largest thermal power generator Centrenergo is also a frontrunner for privatisation this year, according to the economy ministry's audit.

In the past, the obvious contender for Centrenergo – and a slew of other coal and energy plants on the government's privatisation list – would have been Rinat Akhmetov's thermal coal and power holding DTEK. But DTEK's current financial position is  poor, having been forced to restructure $200mn in Eurobonds. "DTEK have problems with funding and will not invest in the acquisition of additional assets," believes Eavex Capital's Churin.

This opens the field to newcomers, including international investors. "There are rumours that French energy giant GDF Suez has expressed an interest in participating in the Centrenergo privatization," says Churin. GDF Suez has yet to officially disclose any interest.

"Foreign investors might indeed consider the acquisition of Centrenergo," says Concorde Capital's Aleksandr Paraschiy. "Though much will depend on visibility of any reform in the power sector and solution of the crisis in Donbas – two out of three power plants of Centrenergo are designed to burn anthracitic coal, which is only mined in the occupied Donbas," Paraschiy explains.

Still, other analysts remain unconvinced by the government plans. "Even in peace time there were not many large investors interested in Ukrainian assets, not to speak of wartime," says Ihor Putilin, head of research at brokerage Art Capital. "Centrenergo made a loss of UAH230mn in the first quarter. No one would consider buying a loss-making company unless it is cheap."