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Gov UA – What cost obligation and reputation?

October 4, 2016

Much has appeared in the blog regarding Government Ukraine’s obligations and reputation with regard to investment and the international arena.  Too little prose has been written regarding the obligations and reputation of Government Ukraine with regard to what occurs domestically.

It is perhaps overdue to raise such an issue once again.

Having written on numerous occasions about the privatisation of Odessa Port Side, to continue on a familiar theme for regular readers, there were, and remain, both domestic and international parties interested in its purchase – and by international that means genuinely international companies rather than Ukrainian owned internationally registered companies such as Dmitry Firtash’s Group DF.

With Ihor Kolomoisky’s claims toward Odessa Port Side now dealt with, the most prominent hurdle for privatisation to a foreign investor/company is most certainly the legitimate $251 million gas debt to Dmitry Firtash’s chain of companies.  (That is on the presumption that debt is truly to Dmitry Firtash and not ultimately to Gazprombank to which he is indebted to the tune of several $ billions.)

If (a significant if) Mr Firtash can write of the debt to himself, then Odessa Port Side will be a very cheap acquisition for Group DF – but perhaps he cannot.  Despite Ihor Kolomoisky’s long interest in owning Odessa Port Side, the bankrupt (in all but legal proclamation) position of PrivatBank, and equally questionable health of his MAU (Ukrainian Airlines) probably rules him out of any acquisition.

It is the question of legitimate debt to Mr Firtash that may very well force international investors to think and rethink any bids for Odessa Port Side.

Which (mostly European) international companies want to buy Odessa Port Side and be forced to write a cheque to “Mr Dmitry Firtash, marooned oligarch in exile, Vienna” for $251 million, when Mr Firtash is wanted by the USA and extradition attempts to get him will never end?    There are issues of corporate reputation at stake.

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The Ukrainian government has acknowledged the debt as legitimate and the opening bid price for Odessa Port Side has been radically reduced to acknowledge this.  Having done so, and recognising that some domestic bidders will have no consideration for reputation, the Ukrainian government are surely aware that some otherwise solid international bidders have such reservations.  If Gov UA is not aware of such reservations, then this blog certainly is.

For the sake of coalition survival within the Verkhovna Rada, the sale of Odessa Port Side to Dmitry Firtash is a non-starter.

Why then has the Ukrainian government not arranged the purchase of Odessa Port Side in a way that will save any external purchaser the reputation issues associated with giving a man wanted for corruption by the USA, $251 million?

It is not beyond competency or legal structuring of a purchase for Gov UA to assume the Firtash debt, receive and accept a good bid in full and then use part of the sale dividend to settle the Group DF debt without any reputational damage to an international buyer.

The US, as does everybody else, knows full well that Odessa Port Side has to be privatised.  It will also be well aware of the reputation issues many potential international buyers have with being forced to settle directly with Mr Firtash.  Whilst US patience with the current Ukrainian leadership is clearly thinning rapidly, there will be no issue with Gov UA settling with Mr Firtash if it would facilitate a successful international privatisation.

The US is also keenly aware that the Ukrainian government simply does not have the unallocated funds to settle the Firtash debt prior to privatisation.

To be absolutely clear, the Ukrainian government has little option but to sell Odessa Port Side – whether a reader considers Europe’s biggest fertilizer manufacturer a strategic asset for Ukraine when considering the scale of its agriculture, or not.

Gov UA simply cannot afford to continue to subsidise Odessa Port Side as it does to the tune of UAH billions.  The only reason it has to subsidise what would be a clearly profitable entity otherwise is due to the nefarious hands that make it unprofitable knowing the plant will be subsidised.

As is usually the case, regardless of the desire and recognition within the Cabinet of Ministers of the financial need to get Odessa Port Side off of the State books before next year’s budget, there are many influential hands within the Verkhovna Rada that require the privatisation to fail in order to maintain the dodgy deals and nefarious revenue streams from which they benefit lavishly.

It is no coincidence that former Prime Minister Yateseniuk appointed two people very close to Mykola Martynenko to sit on the board and manage the plant.  It is also no coincidence that another board appointee was a former assistant of Alexander Granovsky, who is close to Ihor Kononenko (President Poroshenko’s leg-breaker within the Verkhovna Rada).  Unsurprisingly the exceptionally odious Sergiy Pashinsky and dubious Sergiy Tishchenko also have vested interests in Odessa Port Side.

To be blunt Messrs Martynenko, Granovsky, Kononeko, Pashinsky and Tishchenko have no reason to welcome the privatisation of Odessa Port Side.  This is a particularly powerful group of individuals, all of whom do very well from existing schemes to the point where the plant records losses rather than the profits it would otherwise make.  Privatisation to a foreign corporation would end those lucrative schemes.

Nevertheless, it seems somewhat incredulous that Gov UA has not insulated the reputation of any foreign buyer from having to directly pay an oligarch in exile $251 million that is (and will remain) wanted by the USA for corruption.

To pluck another example from Odessa that shines a dim light upon Gov UA and its internal reputation and obligations, during the Yanukovych regime a major water treatment works project was commissioned and delivered in full by an engineering company from Odessa.

(Full disclosure, the blog is acquainted with the owner.)

It was a major project that included closing the cooperation of Turkey in closing the Bosporus Strait whilst pipe was brought through as the below YouTube clip displays.

It doesn’t take a civil engineer or quantity surveyor to realise that such a project costs many, many $ millions, nor that the project brought with it a tangible benefit to Odessa and the Black Sea environment.

This is a company that can deliver major projects and manage international supply chains.  It operates in Africa and the Gulf States too.  Such private Ukrainian contractors are few and far between.

It will not be working for or with the Ukrainian Government again any time soon however.

When the Yanukovych regime and government fled, it fled with unpaid contractors all over Ukraine – the above engineering company being one such contractor.  This Odessa company was and remains owed in excess of $20 million.

Unlike many such contractors, this company from Odessa is owned by a man with sufficient influence to sit in the Prime Minister’s office and raise the issue of The State’s unpaid debt.  When a contract is with the State, it is with The State and not whomever is currently in power.  If Gov UA can recognise as legitimate the $251 million owed to Dmitry Firtash (which it is), then there are a lot of other contractors with claims against the Ukrainian State which are equally as legitimate.

The answer given to the owner of this engineering company by Prime Minister Groisman was apparently “Ask the Americans”.

There is no way that the USA is going to undertake to repay Ukrainian State debts to contractors it has failed to pay.  It is simply a non-starter.  Indeed unless the Ukrainian leadership really start making strides (rather than tip-toe) with real and effective reforms US patience will expire sometime in 2017, just as the European patience will.  Real support will ultimately be reduced to little more than that surrounding territorial integrity and sovereignty.

It is for the Government of Ukraine to honour its obligations as “The State” to its unpaid contractors.  It may very well decide to use US backed guarantees to begin to fund such an effort – for as long as the US is prepared to issue such guarantees, and that will not be for much longer if the current leadership continue as is.  It may have to find other ways to pay them.  Whatever the case, the reputation of Gov UA will continue to suffer domestically so long as it fails to even recognise its obligations, let alone arrive at a strategy to honour them.

Quite what the State debt to unpaid contractors amounts to is probably a very scary number – and as it is unlikely that there is even $20 million unallocated cash available to settle even this single case.  Undoubtedly the Government of Ukraine will continue to ignore such issues rather than reach some form of accommodation with the domestic businesses, including those rarities capable of delivering large infrastructure of international standard.

As long as that situation continues, such contractors are not going to be enthusiastic about other opportunities with Government of Ukraine.  Instead the “bodge it and scarper” companies will be used.

Perhaps yet worse with a long term view, the contractor in this example has numerous clearly beneficial projects to both Odessa and the environment already drawn up – but it will not approach City Hall, the Oblast Administration, nor Gov UA with them unless it can be sure of a third party (EBRD or a sovereign investment fund) that provides some faith in contracts being fully honoured.

As such The State reaps as it has sown – and will continue to do so.

President Poroshenko is unquestionably the most PR aware president in Ukrainian history, thus a reader may well ponder quite why there is such disregard for reputation and obligation toward those with which the State engages (or hopes to engage).

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