Apparently transparent...re-privatization?

Back to Articles

The intentions of the new government to open all doors to foreign capital have sparked considerable interest amongst foreign investors in Ukraine. In recent months, they have been actively acquiring shares of national companies that are up for sale. The shortage of supply of such shares is becoming more and more evident these days.

Since the beginning of the year, the stock market has been seeing unprecedented activity. Now practically every trading session on the PFTS ends with a new record on the exchange?s indices. Prices for practically all blue chip stocks have reached their equitable levels. In our opinion, the market has somewhat overheated,? says Svitlana Dryhush, an analyst for Foyil Securities New Europe. The growing demand for shares in Ukranian companies makes the ever-existing shortage of liquid securities on the stock exchange an even more serious problem. For example, in PFTS trading on February 4 the total demand exceeded supply by over Hr 40 mn (the total capitalization of Ukranian companies that are quoted in the system does not exceed US $10 bn - Kiev Weekly).

In the future, the shortage of supply will be even more substantial. Information about the beginning of a large-scale expansion of potential investors onto the Ukranian market provides solid grounds for drawing such a conclusion. At the moment, over 10 commercial funds with the objective of making portfolio investments into Ukraine are being formed in the financial centers of Western Europe and the U.S. At the same time, the European Bank of Reconstruction and Development promises to allocate US $1 bn through its programs. At present, it seems as thought Ukranian and Foreign analysts are competing in giving assessments of Ukraine?s new investment potential and are providing different points of view.

For example, according to First Vice Premier Anatoliy Kinakh, Ukraine could attract US $6-7 bn in 2005 alone. NBU Council member Ihor Yushko said, ?Our economy is not ready sufficiently heated, and is not ready to accept volumes of investments. In other words, if last year we had US $ 1.5 bn investment, this year we will not have US $20bn.?

Dryhush added, ?One should not overestimate the volumes of assets Ukraine has, since their market values still have to catch up to world levels. A positive step in this situation would be if foreign investments volumes double over the year.?

Because of this investors are already beginning to pay attention not only to shares of the largest and most attractive enterprises, but also to securities at a lower level. ?We predict a considerable growth in the number of investors in shares of the second grade. The favorite sectors this year will be machine engineering and light industry.? According to Serhiy Oksanych, the president of the Kinto asset management company, 2005 will become the year of second grade shares in the metallurgy industry and provincial energy suppliers. However, not all experts see a simple change in investment priorities as the solution to the current situation. MFK Ltd. Director Mykhailo Klyuchnikov believes that significant, but investors are actively seeking out new issuers.

The government has assumed the obligation to provide ?fresh blood? on the stock market. The Ministry of the Economy has already suggested that the government use privatization as the key mechanism for the attraction of investments. Instead of the traditional sale of state-owned shares in large companies as a single package on tenders and auctions, the ministry proposes to sell them on stock exchanges. The ministry also proposes to first put up for sale small 10-15% share packages. The list of companies to be included in this experiment includes the open JSC Ukrtelecom, power-generating companies, the Odesa Portside Plant, Azot and TurboAtom. Tekt-Brok Analytical Department Chief Ihor Putilin explained, ?Small packages could interest both portfolio and strategic investors. The resent acquisition of a 7.59% share in LukOIL by ConocoPhillips is solid evidence of this. As for the stock market, its volumes could grow considerably. For example a 10% stake in Ukrtelecom will cost Hr 3 bn.? It now appears that the new Cabinet has decided to consider this possibility.

Nevertheless, skeptics are expressing concern that such great interest in Ukranian shares in temporary, and that the current heated demand is likely to cool down fairly quickly. For example, eight years ago everybody wanted to acquire Russian shares and now those who did are questioning how they have got themselves into such a mess. Oleh Boyko, the President of the Center for Social and Political Studies explained. ?The Russian example is not a very good one. This colder stance towards the domestic market is largely explained by political factors. And the Yukos case has shown everybody how important these factors really are.? For Ukraine, the reality of these risks is quite relevant. Whether the government keeps its promises about creating an investment paradise largely depends on how transparent the process of re-privatization of a number of companies will be.