Challenges in the Privatization of Ukrainian and Slovakian Large

CEU eTD Collection Challenges in the Privatization of Ukrainian In partial fulfillment of the requirements for thedegreeofMaster oftherequirementsfor fulfillment In partial and SlovakianLargeEnterprises: Special Department of International Relations European Studies RelationsEuropean ofInternational Department Focus ontheSteel Industry Supervisor: Professor Julius Horvath Julius Professor Supervisor: Central European University Central European Budapest,Hungary Submitted to 16 623words Diana Sabluk Word Count: Word of Arts 2010 By CEU eTD Collection surprisingly enough a good solution for the earlier state owned enterprises. countries. However, privatization bylocal business groups inUkraine hasalso been above bylarge transnational firms provedtobethemost efficientsolution forthetwo privatization processesmore transparent and Nevertheless,legal. privatization from when ithasfinally stepped ontheprosperity developmental pathandmade the privatization. Thegreat evidence of thishas beentheSlovakia’s breaking 1998, arguments aboutpathdependency and limit thechoices in when itcomes to whichend atthe resulted indifferent outcomes,which doesnotsupportthe Ukraine andSlovakia. two The countries have both undergone similar processes, played aspecifically important roleintheprivatization process in postcommunist finding myof thesisisthatinthestatement ofprivatization”, ”challenges as contrastedwell findings within the similar categories oftheanalysis. Themajor Using thecomparativeanalysis. analysis inmy as studyIhaveshown similarities privatization orderin tosee thepatterns even more clearlyandallow indepth Ukraine andSlovakia.focus Thereisaspecialsteelindustry’s enterprise onthe large the into problems ofprivatization practices and settings throughout post-communist controversy causedalotof anddebates.Mythesislooks andhave task toresolve The challenges of privatization in the post communist worldhave not been an easy Abstract i challenges CEU eTD Collection To allthepeople Iloveandcannot imagine mylifewithout… dedicated. made possible it for me toevencome tothisstage. moments theywere thedearest people whose infinite love andenormous patience more reasons tobelieve in my own strengths. be all rightworked as a best medicine. Their simplebut powerfulsupport gave me Mammadov andNatalie Kumechko, whose simple reassurance that everything will Demkiv, whoMykhaylo alwaysfoundaway toliftupmyaswell spirit, asJavid share all the good and bad moments. Iam especially gratefulto Sanja Hajdinjak and staff andtheirkind guidancethe not easyin learning process. for this valuable support and guidance. Iam gratefulalso to the IRES faculty and friends throughout the whole process of the thesis writing and I am extremely grateful thesis. TheAcademic CenterWriting and Robin Bellers especially have been my Greskovits, giving me averydetailed andconstructive feedback on Chapter 3ofmy topic, which otherwise would have been hard to fulfill. Julius Horvathforthekind directions which resultedinasuccessful mychange in were thatInevernoticed alwayssodelicate shadea slight of criticism. thank Ialso feedback. Healways cheeredmewhich gavememore up, Hisremarks confidence. process ofthesis writing, but always gaveme gooddirectionsandconstructive Acknowledgements anddedications I am I am thankful tomy becauseat family, the end of the day,inhardest I am to mygrateful who friends were always theretosupport, to comfort andto I thank everybody for the feedback on my writings; I especially thank Bela I thankmy supervisor Julius Horvath, who neverstressedme outduringthe ii CEU eTD Collection Bibliography...... 70 Conclusion...... 66 ...... 40 transnationalization coming from below and above Chapter 3 – Steel industryafter communism Ukraine andin Slovakia– Slovakia...... 16 Chapter 2-Challenges of large enterprises’ privatization independent in Ukraineand ...... 7 communism Chapter 1 - Historical approach to privatization in transitional economies after Introduction...... 1 Table ofContents oie...... 62 Kosice 3.5 Revenues and net income oftheSlovakSteel mill: Success ofthe USSteel ...... 57 3.4 Challenges of the domestically ownedenterprises 3.3 Successofthe Kryvorizhstal(ArcelorMittal Kryvyj Rih)...... 54 3.2 Revenuesand net incomeUkrainian ofthe steelmills...... 50 and theneedtorestructure...... 45 3.1 Thehistoricalsetting for privatization insteel industry in Ukraine andSlovakia ...... 33 2.7 Privatization inthestrategic sectors oftheeconomy ...... 31 Fund ofSlovakia (FNM) 2.6 Therole oftheState Property Fundof Ukraine (SPF) andNational Property ...... 27 2.5 Threatsandthe real examples ofre-privatization 2.4 Cronyism and favoritism usedas widely tools in privatization processes...... 26 lack2.3 The oftransparency inprivatization...... 22 ...... 19 2.2 Methodsofprivatization attheearly stages .17 2.1 Generaltrends privatizationin ofthe largeenterprises in Ukraine and Slovakia iii CEU eTD Collection be assessed, but it is anbe assessed,butitis on-going processwith important very implications. privatization is not something that has passed by and there are only theresults leftto recent focusonthere-privatization isofaspecialvalue intheresearch. Itshowsthat of all thecontroversy privatizationin in post-communist Ukraine and Slovakia. The steel industry willbe made. will enableto This deepenandenrich ourunderstanding privatization in both countries will beprovided, aswell asthespecial focus on the chosen countries – Ukraine and Slovakia. In depth analysis of the large enterprise This thesis willdealwiththe challenges in theprivatization processes inthetwo biggest scandals thehistory ofthesein countries. pressure on the business processes and economy general in resulted somein ofthe came The along. lack oftransparency, extensive corruption, tremendous political However, togetherwith privatization, manyserious and important negative issues werethe neveron agenda before –democracy, prosperity andthe ruleof law. countries’ movemarket towards economy. alsobrought Ithas aboutthe issues that Privatization hasplayed oneofthemost the importantin postcommunist roles Introduction ‘For anyassessment oftheresults ofprivatization, hard,look andevidence for 1 Frydman, Murphy andRapaczynski (1989) opposite conclusions can be found’ CEU eTD Collection 3 87-118 Kikeri, S., & Nellis, J. (2004). An Assessment of Privatization. 2 Strategic and International Studies (CSIS). 1 capitalist society. further arguesthat itwas fundamental drawing in between theline thesocialist and from non-existentmostbeing tooneof the influential sectorsthat formed GDP.He important changefor thecountries transition,in since hasshiftedit theprivate sector communist countries Anders Aslundargues that privatization hasbeen themost privatization is out there. One of the mainexperts in theprivatization matters inpost- privatization thein countries transition,in extensive amount ofliterature on A lothasbeen already done in order toassess thefirst steps and outcomes ofthe my research. issues, and huge financial and economic losses. This isthe mainarea Iwill cover in theirturned ownit in convenience which resultedintomain frauds,anti-democratic the people power in andtheleaders ofthe biggest business and interest groups countriesthat took it along time beforeitcould bemanaged properly. Before that, processes. Privatization has been such aunique phenomenon the post-communist in on thechallenges which privatization brought about and the “dark side” ofthese privatization onthenational economy needstobereconsidered. My thesiswillfocus Nevertheless, the established knowledge about themostly positive impacts of huge public debtsand incapablemanagement state owned enterprises. authors agree that privatization hasbeencrucialeliminatingin lossmaking, with enterprises andwelfare profitability. economy privatization hasbeenfundamental inestablishingthe efficiency ofthe Fries, S., & Lane, T. (March, 1994). Financial and Enterprise Restructuring. Enterprise and Financial 1994). T.(March, & Lane, S., Fries, Megginson andNetter (2001), Nash andMegginson(2000), Megginson, Nash andvan Randeborg (1994) in Aslund, A. ( 1992). Post-Communist economic revolutions: how a bang?big 1 Otherauthors further argue that thein competitive sectors of the 2 Intermsof largescale enterprises privatization, 2 World Bank Research Observer, vol.19, No 1 Washington, D.C.: Center for IMF Working Papers 3 ,1-28. , CEU eTD Collection However, theprocess ofprivatization in somemajor ascronyism, issues lower selling to betterefficiency andseparation oftheeconomic sector from interest. political study has confirmed thestylized knowledge that privatization atthe end contributes The main findingsofthe thesis ontheonehand, arenot surprising. First ofall, my even more valuable. have chosenitonthebasisofvery good compatibilitymakes which my results steel industry is oneofthemost important sectorsthatform GDP inbothcountries,I of thecommon communist legacies andthe concept of path dependency. Since the perfect examples ofthedivergentpathswhich were undertakenregardless ofthe fact the specific category of post communist countries; yet, the two countries are also My ofthecountries selection was ofperfectmade onthebasis comparability within form of thebuyoutaswell. form the takeover,transnationalizationof from below turnedoutto bequiteefficient argue that although transnationalization from above provedtobeamore efficient the exampleof thestrategically important sector both Ukrainein andSlovakia, I economic prosperity andseverely harm the political image ofthecountry. Finally, in dependency from the foreign irresponsible owners can lead tothe collapse of special attention andunique program for eachoftheseenterprises. Otherwise, the privatization. Besides, privatization of the strategic enterprises requires avery cronyism and favoritism, which inmany casesoutweighed the positive results from Union (FSU) countries resulted ina lack of transparency, big withissues corruption, outcomes ofprivatizationthe in Central Eastern Europe (CEE) and Former Soviet Mymain arguments include but are not limited tothefollowing. First of all, the 3 CEU eTD Collection concentrating on the differences between foreign anddomestic ownership. the changes with time, andtheir connection tothe particular events, but mostly and net income ofthe largest steelenterprises Ukrainein and Slovakia, observing For thepurposeofdeep analysis, Iquantify my research,assessingtherevenues obtain informationabout the legalproperty rights ofthelargest steelmills in Ukraine. enterprises as well asthe official datafrom the stock exchange market inUkraine to Statistical Committees inbothcountries, year reports in thecorresponding research the steelin industryspecifically Iusetheofficialdata from the national transitionaleconomies, as journal aswellarticles andmy own Forthe observations. privatization experts’ opinions, modern books and articles ontheprivatization inthe thein form of analyticalpapers, Property Funds’ officialstatements andbriefings, my studiesand are most suitablefor comparison. Ihavebrought upthenewest data comparative manner, singling out the categories, which serve the best purpose for To conduct the research in themost proper way, Ihaveanalyzed thedata a in implications ofthis step. business groups can also be beneficial fortheeconomy,matter no thepolitical the exampleare that,in steel industry, ofthe I haveshown thatprivatization bylocal position since thetime privatization started. The othermainand important findings path afteracertain time (1998) period and Ukrainehas been stuckinthe dependant overcomecommunist the legaciesandstep onthelegal andtransparent privatization above stated reasons. is furtherWhat surprising that is Slovakiahas managed to outcomes broughtby privatizationcould not be enjoyed bythese countries due to the have beenquite unsuccessful andtherefore notefficient. Most ofthepositive prices andconflict ofinterests largely contributed totheprivatization processesthat 4 CEU eTD Collection privatization inthe two countries. sectors’ privatization andwhatthechallenges and differenceswere performance in of affected the privatization process generalin andfinally,will I lookat the strategic role ofthemanaging bodies of theprivatization inboth countries andhow they nationalizationwith followingre-privatization anditsthreats for thetwo countries, the correction ofSlovakia after 1998,privatization andthe reversed processes – re- cronyism and corruption schemes whichwere common forthetwo countries, with a privatization processes which resulted in lowering the selling price ofthe enterprises, methods ofprivatizationwhich wereused in both countries, nottransparent development oftheprocess. the chapterWithin Idiscuss such categories as Slovakiaspecifically, emphasizing the common aswell asdivergent patterns in the The nextchapter dealswith theprivatization ofthe large enterprises Ukrainein and myin own research. negative outcomes cannotbeneglected andtherefore aregiventhespecial attention thatarguing nomatter thattheliterature is highly concentrated onpositive results, positive outcomes ofprivatization. I identify mywithin own position the literature, privatization, the arguments againstprivatization and their weight compared to the process, challenges privatizationin of the large enterprises, outside vs. inside transitional economies, speedof privatization anditsimpactthe success on of the Ukraine andSlovakia. Itsthematic structureincludes thereasonsfor privatization in the field withconstant emphasis onthecategories to be analyzed thein examplesof The structureofthethesis isasfollows: thefirst chapterreviewsmain the literature in 5 CEU eTD Collection can beplaced. research done with aspecific focuson the larger context, inwhich mymain findings end, Iemphasize allthe main findings aswell aspossiblebroader implications ofthe concluding thatprivatization from above stillisthebestformbuyouts.for large Atthe outcomes. Iwill identify the patterns withwhich thegiven enterprises were privatized; privatization, emphasizing thestrategic purposes itserved aswell themain as Finally, the last chapter willdeal with the steelindustry’s enterpriseslargest 6 CEU eTD Collection years later. In G. W. Saul Estrin, 6 5 4 argues that privatization was themost prominent changebrought by transition, since contributed totheworse results inprivatization inFSU than CEE.in governance, absence of the financial institutions andmacroeconomic policies largely state thatsuchthe lackof They reasons asincentives, ineffective lawoncorporate stagesprivatization hasmostly FSUatthefirst was andGodoy. in offeredbyStiglitz timesmore effective thanitwas inthe FSU block. The privatization effect in theCentral Eastern Europe(CEE) hasshown tobetwo ownership. Russia, where there was hardlyanydifference between thetwo forms ofthe Foreign Soviet Union (FSU) transitionaleconomies. Althoughthespecial casewas the privately owned enterprises than state owned; thestudywas conducted onthe Djankov andMurrell(2002) showed thatrestructuring wasmore totake likely placein thousands of smallfirms millions and ofhouses were privatized. of adecademore than15,000largeand medium sized enterprises, hundreds of Privatization processes inpost-communist countries were unprecedented. Inamatter a planned toitsmarket form,the questionofprivatization was placedontheagenda. Since thefall ofSovietsocialism forrestructuringand theneed oftheeconomy from after communism privatization intransitional economies Chapter 1-Historical approach to (Stiglitz, S. G. (2007). Growth, Initial Conditions, Law ans Speed of Privatization inTransition Countries:11 ibid (Djankov Murreland (2002) in Kikeri Nellis,and 2004) Transition and Beyond 7 (pp. 89-118).New York: Palgrave Macmillan,p.106) 5 Theexplanation ofwhy 4 The study of The 6 Still, Aslund CEU eTD Collection 9 Central Asia. 8 and stabilization in Eastern Europe. 7 privatization was building of the market economy, whichrequired independent supposed to ensure thepath towards democracy and pluralism. The next goalfor included mostly political reasons (to separate enterprises from the state) which were Aslund andBornstein agreeonthepurposes ofprivatization processes. These the longrun. in become tocreate really agood management structure, andtocreate awelfare state choice andother aspects. Aslund further states thatthemain aim of privatization has state wishes to still influence the labor conditions, profileof the enterprise, suppliers’ often evenpossesses anobstacle tothe privatization processes. Bydoingso,the that thestate onlyis not incapable ofbeing agoodmanager oftheenterprises, but successfulenterprises, thantokeepitinthestatehands. property sothat it’s private, andthen toget tax revenues from the boomingand viewed asa toolfor covering thecosts oftransition. Therefore itwas better to sell the able to respond flexibly todemand, privatization thein FSUand CEE was often marketizationeconomy, ofthe is organized,badly becauseit distrusted, andisnot Aslund inhis later work argues,thatsince thestate is incapableof providing between asocialist andacapitalist society. one ofthemost important providers thatformed GDP. Itbecame afundamental line the private sector underwent adramatic change from being almost non-existent to ibid (Aslund, A. (2007). ( Roland. (1991). Political economy of sequencing tactics in transitionthe period. In L.Csaba, Washington D.C.: Cambridge University Press. p.143-164) 9 How capitalism was built:The transformation of Central and Eastern Europe, Russia, and Dartmouth., Aslund, 1992) 8 7 8 Aslund further explains Systemic change CEU eTD Collection Eastern Eastern Europe. strategies. In L.Csaba, 16 15 Sunita Kikeri, John Nellis, 2004) 14 13 12 11 andCentral Eastern Europe. Csaba, In L. consequences. economic 10 development andencourage entrepreneurship. also achieve innovation, andstructural reforms areneededinorder toboost Joseph Schumpeter his in turnargues that private ownership isnecessaryorder in to becamethe main oneof ideas in thepost-Soviet countries. nationalized private property. driving force was to re-establish justice towards theowners of the previously of theenterprise and,usually, efficiency as well. that in infrastructure sectors, privatization seemed toimprove thewelfare profitability been provenon many countries. correlation between predominant state ownership andthe authoritarian regime has the pluralist ownershipneeded. is He further identifies that there isapositive and resultsofprivatization. AsAslund argues, ordertoachievein thefull democracy, enterprises, andas Aslund putsit“theycould benothing butprivate”. a considerable impact ontheseparately privatized lonelyfirms. which will nothave amacroeconomic impact ontheeconomy. This, in turn, will have should beprioritized to,for example, theprivatization oftheseparate individual firms express ideas. similar (J.J.Welfens, P. (1994). Privatization and FDI in the East European transformation: (Bornstein inCsaba, theory, 1994) options and (Megginson and Netter (2001), Nash andMegginson (2000), Megginson, Nash and van Randeborg (1994) in (SchumpeterAslund, in 1992) (Aslund, 1992) (Bornstein1994) inCsaba (Aslund, 2007), Bornstein, M. (1994). Privatization in central Europe: techniques, policy options and Dartmouth.) Privatization, liberalization and destructuring. Recreating the market in Central and 15 Dartmouth.) Welfens in histurn in arguesthatprivatization scale onalarger Welfens Privatization, liberalization and destructuring. Recreating the market in 11 Achieving democracy has been one of the maingoals 12 Thatiswhy democratization through privatization 9 13 Other authors also support the idea 14 Morris Bornstein and others also 16 10 Thethird CEU eTD Collection 21 20 19 18 17 transitional economies don’thaveanexperience indoing these things, and if they The otherauthors who supporteddelayed privatization argued that thestates with confidence inmarket, andcausedthe lack of legitimacy oftheproperty rights. by the authors is that shock therapy resulted in major inequalities, undermined slump the in medium run –upto 10 years. Another important point which was raised the crosssectionin studyreported thatfast privatization contributed tothedecadal the anecdotal thingfor gradualism, andagainstshock therapy show in theirstudy that the privatization speed negatively affect growth, reinforcing Negative effects of thespeed privatization were alsofound byStiglitz andGodoy who choice was between earlyprivatization and no privatization. However, Aslund illustrated thatthe abovestatement contradictstheevidence –the the timing andpacedidn’t matter, whatmattered was thequality ofprivatization. little privatizationlittle (Ukraine). arguing thatthereal choicewas between fastprivatization (incaseofSlovakia) and argues against thepopularview that privatization canbedoneeither soonorlater, owners. their property rights, andthe possibility ofthem being takenaway from the new performed veryquickly, it may raisedoubtsfor thenew owners aboutthestability of successfulprivatization isstrongproperty rights. Therefore, ifprivatization is important issues. Aslund hisin earlier bookarguesthat prerequisite forthe The ongoingdebateabout gradualvs.swift (shock) privatization hasraised many (Stiglitz, Godoy 2007, p.105) (Stiglitz, Godoy 2007, p.103) (Aslund, 2007, p.179) (Aslund, 2007, p.178) (Aslund, 1992) 17 Opinions arechanging withtime, andinhis later book, Aslund already 18 Theotherpopular viewthatAslund isopposing isthat 10 19 20 . Theirfurther finding 21 CEU eTD Collection Havrylyshyn, 23 22 25 24 Fund, p. 179) the new enterprises establishment andstill “squeeze out the revenues from the dying There isalsoapopularview, thatratherthanprivatize,government the optfor should enterprise. considerably slows down theprivatization process and further restructuring of the This should bedone inorder tofacilitate the elimination of the debts burden, which least reduced inscaleand scope, and strengthened interms ofthefinancialcontrol. done because of the strategic importance of the particular enterprise, itshouldbe at highly bureaucratic management. Theyfurther statethatif thesemeasures cannotbe crucialto eliminate chroniclossmakingand stateenterpriseswhichoftenhavebad earliest stage. and old equipped and therefore inefficient enterprises should be eliminatedat the positive result. ofall, First de-monopolization andliberalization oftradeshould occur large enterprises happens, other essential measures should betaken to achieve a debated issue. Aslund inhisearlier publicationargues thatbefore privatization of Privatization ofthe large enterprises specifically isthe most controversial andhotly early privatization andno privatization” (seeabove). established. privatization shouldhave been postponed until the institutionalframework is should bedelayed. want privatization to be asmooth and a fair process, the very fact of privatization (Tandon (1995) in Nellis,J. (2001). Time to rethink privatization intransition economies? In S.M. Oleh (Grosfeld (1990) in Roland, in Csaba 1991) (Fries, Lane 1994) (Aslund, 1992) A decadeA oftransition :achievements and challenges. 23 However, aswe know already from Aslund, -“thechoicewas between 24 FriesandLanestronglyagree withthis issue,andargue that it is 22 Otherauthors, for example, (1995) Tandon argues that 11 Washington, D.C.: International Monetary 25 CEU eTD Collection Mark Flanagan, L. M. (2008). 30 29 28 27 26 privatization hasbeen primarily thesource oftherevenue. made byMackenzie, who argues that for manyof the transit countries’ economies much wasless thanit understood. Aninteresting point regarding theissue hasbeen dangerous for thecountry’s security. increase dependency ofthe countryfrom the foreign capital anditmight be investor hasalso beenongoing. There are views, thatprivatization byforeignowners The debate about whether the state should prefer outside owner ratherthan national start thenew enterprise establishment. strong market general sectorin andencourage privatebusinesses, itwaspossible to which aim was nottoboost efficiency of the separate enterprises, buttocreate a enterprises since therewere no means todoso.Quite contrary, Czechoslovakia,in and tocovertheolddebts.Therefore for itwas impossible Ukraine tostartnew for Ukraine, sincethe maineconomical goal ofprivatization was tofillin thebudget available effective methods ofprivatization. they did not allow for the new enterprise establishment or choosing freely between all property, political power,legal andadministrative capacity –mattered somuch that option formany ofthecountries, since starting conditions – likeinitial claims on enterprise”. more effective, andbybringing the FDI, foreign ownersinvolve management skills, which emphasize thepositive impact oftheforeign ownership, ittendstobe since (Kornai (1990) Rolandin in Csaba (1991) (Aslund, 2007, p. 143-164) Mackenzie, G. A. (1997). (Aslund, 2007, p.179-180) (Aslund, 1992) 26 Inhis laterbookAslundstates, that this wasactually not afeasible The macroeconomic impact ofprivatization. Ukraine: Selected Issues. 30 However, much more common aretheviews 29 12 Washington D.C.: International Monetary Fund. 27 Therefore the feasible options were IMF. 28 This was especially true Thiswasespecially CEU eTD Collection 34 33 32 31 capital andtechnicalknow-how. benefited the small amount ofthe citizens – managers, stackholders, domestic and and intheeconomya asawholein long run. Theyfurther arguethat privatization experiencing layoffs and worsening laborconditions onthefirm the shortrun level in transparency and privatization’s fairness. Authors point out, thatfirmswere The major criticism towards privatization isexpressed in terms ofshifted privatizationwere immediate inCEE,buttookyearstoemerge inFSU. became, was thebreakthrough alwaysscale privatization, large positive results of than theoriginal managers, theearlier the privatization tookplace –thebetter it better than completely stateowned, thenew outside managers perform much better insiders perform almost as badasthestateowned, privatized partially firmsmuch do privatized by insiders, foreign ownership ismostly beneficial, firms privatized to perform the best, firms thatare privatized by outsiders perform better than the ones the followingarguments. Private firms perform better than the state owned, startups To sum up allthecomparative aspects ofprivatization raised above, letme restate asset stripping, therefore foreign ownership is preferred. access tofinances the owners (mostly domestic)would beprobably engaged in the investment. ownermeant onlytheform of revenuefor the statebudget, andnot theforeign times, itwasnottheactofforeign investment, ofthe thesale enterprise tothe foreign privatization bytheforeignowner createdconfusion meaning. inits Mostofthe (Aslund, 2007, p. 172-181) (Stiglitz, Godoy 2007, p.104) (Aslund, 2007, p.143-164) (Havrylyshyn, McGettingan, 2000) in Aslund, 2007,p. 145-50) 32 Stiglitz and Godoy find yet another correlation, arguing that without 31 Nevertheless, Aslund himself statesthat 13 33 34 CEU eTD Collection 37 36 35 not matter. state ownership; ifenterprise ismanaged successfully, the typeofownershipdoes mostFSU countries.in ofthe Finally, public interestdoes notnecessarily require the controlpresupposes the strongstate which wasnotandstill notthepossible is option Furthermore, theassumptionof the better resultsbecause of theincreased state whomuch showed better results inefficient enterprise management thanthestate. nationalizationcould threaten offthe private, whichalso are oftenforeign investors suggestion ispurelynegative,since what Tandondidnottakeintoaccount, that re- is enterprises forthe satisfaction ofthepublic interest. of increasedstate control andfurther re-nationalization, whichwill return the argues thattheenterpriseswere that already privatizedneed toberethoughtterms in Tandon’s opposition toprivatization indicates yet anotherimportant aspectof it. He increased dramatically, whenprivatization processes first occurred. claim, sincethecompetitiveness didnot exist with thestateownership andithas the changeof ownership. happened duetotheincreased competition anddemonopolization, andnot due to Stiglitz (1999)argued thateven if morecouldbe observed efficiency over time, it In addition, some ofthebiggestcondemners ofprivatization Bogomolovand (1996) willreduce. major restofpeople –tax payers, consumers andworkers therefore the total welfare foreign investors, whilethe consequences of privatization would beborne bythe Tandon (1995) in Nellis in Havrylyshyn, Nsouli, p. 179) (Bogomolov 1996, Stiglitz 1999 in Aslund (2007)) (Kikeri and Nellis 2004) 35 36 However, theempirical evidence does notsupport this 14 37 My own evaluation of this CEU eTD Collection privatization’s results looksquitepositively and inspiring. the impact of privatization thein countries oftransition, the general picture of short run.Nevertheless, regardless ofthefact that therearesome precautionsabout including corruption, lackoftransparency and worseningof the labor conditionsthe in However, thosewho opposed privatization, also find legitimate arguments todoso, nationalsof the post Soviet countries. Moreover, privatization has broughtabout justice, whichwas striven for bysomany formation ofthemarket economy, replacing the old regime oftheplanned economy. stock market was stepandresultnextlarge ofprivatization. Ithasall ledtothe elimination ofthe loss making enterprises, and finally, raising thecapital through the previous management, cutting thecosts, decreasing thescalein andscope, positively affected the economy. Enterprise restructuring, including replacement of natural resultof it, there was anincreased competition onthemarket, which depoliticizing thepropertywas amajor also consequence ofprivatization. Asa brought byprivatization. Separation ofthe property from the statetherefore dominance oftheprivate sector. Democratization was next veryimportant result, privatization, however major concentration efforts were necessary to get the of theprivate sector has been recognized asabig andmajor achievement of privatization have agreed on, are the following. First of all, emergence and expansion To sum up, thebiggest achievements ofprivatization, whichthe all supporters of 15 CEU eTD Collection 39 38 transition towards more democratic processes and better transparency. speeds upthemove towards adeveloped economyas immediately aswell ensuring contradiction witha general thatidea privatization necessarily brings prosperity and Property Fund ofSlovakia (Fond Národného Majetku -FNM).find thisin I privatization scandals andcorruptionfights arestill ontheagendaofNational although more transparent privatization was established after 1998, the major Ukraine (SPFU)isstill incapableofsuccessfulprivatization conduct.InSlovakia, groups. InUkrainethese processes are continuous andtheState Property Fund of point ofview didsomostly duetotheprivate interests of large influential business and – error method and some privatization projects havefailed from the economic and economic inefficiency. These processes has often been made throughthe trial – often controversialprocesses, which resulted intomajor with issues transparency Privatization ofthe enterpriseslarge in both countries hasgone through hard and Slovakia privatization inindependent Ukraine and of largeenterprises’ Chapter 2 -Challenges undertaken inUkraine andSlovakia. Themajorbe ontheprivatization focuswill of want toshow the controversiality and somenegative effects of privatization being Therefore, since most ofthescholarsfocus on thepositive effectsofprivatization, I persists between groups. ideological terms there is much supportfor privatization; in politicalreality fight Thiswording has beensuggested by Julius Horvath See,for example, Aslund, 1992,2007; Mackenzie, 1997; Nesh and Meggison, 2000 etc 39 16 38 In CEU eTD Collection currency depreciations, the objects were privatized at the fire price. The state’s the transparency and legality, since rightafter thefall of communism and huge During thefirst stages ofprivatization inUkraine, therewere somemajor with issues Slovakia and Ukraine in enterprises large of the privatization in trends 2.1 General were performance in ofprivatization inthe two countries. look atthestrategic sectors’privatization and what thechallenges anddifferences countries andhow they affectedtheprivatization process ingeneraland finally, Iwill countries, therole ofthemanaging bodies of theprivatization processes in both processes –re-nationalization withfollowing re-privatization anditsthreats the twoin countries, with acorrection ofSlovakia after 1998,privatization andthereversed were privatized, cronyism andcorruption schemeswhich were common forthetwo processes which resulted into loweringthe price ofthe enterprises for which they of privatization which wereusedinbothcountries, un-transparent privatization privatization Ukrainein and Slovakia, based on theconcrete categories, as methods The chapter is structured the followingin reviewway: Iwill theprocesses of my main argument. media, known scholarsaswellas officialProperty Funds’ management toillustrate mostly on theviews rely ofprivatization expertsUkraine in andSlovakia, views ofthe to theprivatization ofsmalland medium sizedenterprises. Inmy research,Iwill large enterprises only, since ithas had the biggest impact ontheeconomy compared 17 CEU eTD Collection European University Press University European 40 good planforlargeenterprises privatization. a partofsuccessful reform implementation. UnlikeUkraine, Slovakia initially hada Privatization there became oneofthe most urgenteconomic priorities and served as Slovakia joined therapid privatization processes at the rather early stages. viewpoint, privatizationstimulation inthecrisis times goesagainst the logic. business groups in Ukraine areto be preserved. Nevertheless, from the efficiency never knownforsure, butisalmostthe always clear that interestsofthe biggest theprivatization of strategic objects.privatization stays behindthese ideas What is government andanew managementSPF areinitiating andjustifying theneedof the ownership. The very current trends show that, even during the crisis period, a new massfor a privatization ofthestrategic objectsstill thatare leftinthestate the needfor effective management ofthestateowned enterprises ratherthan opting Riabchenko, Karmazin, Paskhaver turned against privatization, therefore stressing Property Fund atthe time, andsome oftheleadingeconomists including During thenext stage,which was intheearly 2000s,themanagement oftheState independent state received lower profitfrom privatization than otherwise could. interests were toa large extent neglected; therefore during mid-to late 90s a young samemistakesmajor asUkraine also did. Slovakia success tobealarge at thefirst stages anddidnotprevent itfrom doing from returning. However, the speed did notensure privatization processes in enterprises more regulated,and what ismost importantly, toprevent thecommunism prevent further asset stripping, to make the links between the state and the (Frydman, R. (1998). Capitalism with aComrade's Face: Studies in the Postcommunist Transition. ,60) 18 40 Slovakia has done so order Slovakiahasdone in to Central CEU eTD Collection 44 43 http://www.internet.sk 42 of transition : achievements and challenges. 41 processes asPoland andHungary did. so on.Therefore the state if not yet is ready toprivatize, betterit is todelay such and hostility to the external investors, more protectionfor the minorshareholders and have beenalso different with less insider ownership anddomination, less resistance would havebeenapproached from morethe deliberateviewpoint, theresults could harsh manner. Return of communism was not sucha big threat, and if privatization Looking back,we seethatprivatization could havebeenperformed notsucha in as auctions andpublic competition. Ukraine, already atthefirststagesincluded advancedmethods ofprivatization such been performed. InSlovakia they were clearly defined and prescribed and unlike in stillbut they differedinterms ofsuccessfulness andtheresultsafterprivatization has The methods of large enterprises’ privatization were quitesimilar in bothcountries, stages early at the ofprivatization 2.2 Methods privatization ofthelarge enterprises. overcoming thecommunist legacies andmove toanew more– advancedstage in privatization method inboth countries. Unexpectedly enough, themanagement employee privatization was a verypopular toled theimplementation oftheRussian scheme anyways. the privatization methods preferred was going onfor such a long time, thatitfinally follow the Russian exampleof voucher and insider privatization, butthe debate over (Aslund, 2007, p.157) Yekhanurov 2000 in Aslund 2007, p.180 Mikloš, I. (1996). (Nellis, J. (2001). Time to rethink privatization in transition economies? In S. M. Oleh Havrylyshyn, PRIVATIZATION IN SLOVAKIA DURING 1991-1995 Washington, D.C.: International Monetary Fund, p. 188) 42 Fornationalist reasons Ukrainedidnot want to 44 41 Nevertheless, through this method, most of However, what Slovakia was able todois 19 . Retrieved 0520, 2010, from 43 A decade CEU eTD Collection 49 48 47 46 Institute forInternational Economics, p.81 45 very slow restructuringprocess, since insiders had little incentiveto restructure. administrate. Nevertheless, it created problems with efficiencyof the enterprise and advantages: it wasfast, created legitimate property rights and was easyto The insider privatization, whichwas verypopular bothin countries, hadsome major just ascam. realpossibility for the employees toacquire their property share, it turned out to be possible. Therefore, Ukraine,regardless the just asin factthatitfirstlookedlikea used bypoliticians to gainpolitical loyalty or tomake theprivatization bymanagers lobbied by the certain business groups. Theterm ”employee privatization” was often not readasadistinct category. Theamalgamation ofthesetwo categorieswas In Slovakiaemployee privatization included both employees andmanagers anddid privatelyowned enterprises even in 1999. the employee’s stock. As a result, there was no big difference between thestate and manyother countries.However, inreality, themanagers controlled thebiggestpart of the shareofemployees in Ukraineowning the enterprises was much morethanin privatized industrial enterprises was 17.5%to 47%. managers. the property Ukrainein was soldfor“next tonothing”the employees and (Aslund, 2007, p.162) Brzica, D. (2000). Estrin andRosevear (1999) Aslundin 2009, p.81 ibid Aslund, A. (2009). 45 In1998,the ratio ofmanagers and employees shareofthe stock of 48 Privatization in Slovakia: The role of employee and management participation. How Ukraine became a market economy and democracy. 20 47 46 This is very since surprising, Thisis Washington D.C: Peterson ILO 49 CEU eTD Collection 54 53 52 51 50 restructuring, relieving theenterprise from past debtsandineffective its be legitimatemethods ofprivatization, which would allow fast andeffective of itwas understood and usedwrongly. Bankruptcy and liquidationwere supposed to method asbankruptcyprivatization. Itbecamea verypopularone, butthewhole idea What was uniqueabout privatization methods inUkraine, that it employed such Slovakia,facilitated that it bigindustrial restructuring. forminimum the plus costs. was particularadministrative What important also in recognized asthetoolfor fastest,more transparent and biggest privatizationmethod management theft. countrieswas blamed fortheunrelated problems like insider privatizationor investors voucher privatization, but theyjust fadedaway, offering no benefitto many their small Ukrainian people. voucher privatization officially endedinthemid1997, nevergaining popularity among privatization was accusedoftheineffective corporate governance. auction, tenders, orInitialPublic Offerings (IPO).Nevertheless, this form of privatization wasmuch costly, than less many otherforms such ofprivatization, as major privatizationmethodSlovakia, in but soon itlost attractiveness.its Voucher whole population benefitting from such form of privatization. Initially, itbecame the Voucher privatization wasof liberal anidea economists with thegoodintentions of (Aslund, 2007, p.161) Stiglitz (1999) in Aslund 2007, p.161 Pistor and Spicer(1996) in Aslund 2007, p.161 (Aslund, 2009, p.81) (Aslund, 2007, p.160) 52 . Generally, voucher privatization inbothcountries aswell asotherCEE 51 Voucher fundsemerged asasupporttoolforregulation of 53 Nevertheless, looking back,voucher privatization was 21 54 50 InUkraine CEU eTD Collection 56 55 measures…” (O.Riabchenko, a leadingeconomist, HeadoftheState Property Fund companies competing honestlywith oneanother without taking anypreventative conduct this sale inaclassic way through a tender andthat there would be five business group, aspecific sale.it is “You should notthink thatitwould bepossible to advised that state-ownedif a enterprise isactuallymanaged byacertainbig viewed byeconomists aspremature and not ready for changing ownership. Itwas privatization program for thebiggest ore mining enterprise, Ukrrudprom, which was The exampleof un-transparent and ineffective privatization inUkraine canbethe nothing. for the privatization through competition, and wouldbe privatized forthe next to schemeswould havebeenperformed onthose enterprises which were getting ready shade privatization. If legal privatization wouldhave really stopped, thebankruptcy This stepwould havealmost surelydeveloped illegal machinations and stimulation of 2004in Ukrainian President proposed amoratorium on theprivatization inUkraine. suggests, un-transparency schemes quitedifferently. canbedeveloped Forexample, biggest scandals the in history ofprivatization inUkraine andSlovakia. Asevidence lowering theselling price ofthe enterprise, which caused significant losses and ledto Un-transparency in Ukraine andSlovakiahas resulted intothesimilarproblem – privatization in oftransparency lack 2.3 The schemeswithinsider and business groups taking advantage ofsuch imperfection. management. Chechetov, M.(2004). (Aslund, 2007, p.163) 56 55 This nevertheless This hasturned intovery un-transparent privatization Privatization of the state property on the sum of 2.7 bln UAH is real. 22 SPFU CEU eTD Collection http://www.rbc.ua/ukr/newsline 58 state Property Fund. 57 a new law, privatization will take place only through auctions to make ittransparent, since thisistheway “shadow privatization” takes place.Herother claimwas thatwith procedures with illegal bankruptcy of the enterprise should bestopped by a new law, was noticed bythe also former Prime Minister Tymoshenko, who statedthat get soldat alow pricethe to interested business groups, seem to come true.This Fund in2004about schemesillegal thatbankrupt thestate enterprisefirst and later until now. Thepredictions which Mykhaylo Chechetov made asahead ofProperty The currentevents suggestthat theseproblems have notbeenovercome Ukraine in scandal. agreement andcompensation tothese countries may leadto the international deputy Karmazin transferring argues, this enterprise intoprivate ownershipwithout countries are made, onecannotstart privatization process of this plant.Otherwise, as question ofprivatization ofthisplant through thediplomatic channels with these Germany, Romania Slovakia, andBulgaria. Therefore, before negotiating the irresponsibility. This plantwas with theinvolvement built countries, ofother suchas be apartofUkrrudprom when privatized, is anotherexample ofgovernment were tofollow soon. Kryvorizhzhya, an oreenrichment plant, which was supposed to The bigger impacts oftheabovedescribeddeal,this time ontheinternational arena presidential elections to finance thecandidate Yanukovych. and itwas suspected thatmoney outofthe wasdeal tobespent onthe upcoming since March2010). RBC-Ukraine.(2008 ). Reprivatization will not be allowed.Yurij Karmazin . Yatsenko,N. (2003,January 21-31). Oleksandr Riabchenko: can One only set upa privatization agency at the 58 Zerkalo Nedeli 57 Nevertheless, 2004privatizationin ofthis enterprise tookplace 23 Informational agency , CEU eTD Collection 61 60 http://www.expres.ua/articles/2008/01/23/23206 Healing Spas,NCHZ - NovákyChemicalCompany, company Slovnaft -theoil and PSIS –FirstSlovak Investment Company, Slovenské lie scandals asprivatization ofBu In Slovakia thebiggest examples offraudandunlawful privatization include suchbig excluding thebest interest ofthestate and its people. non-transparent processes, which being are adjusted totheprivateinterests, they will besoldbyother thanauction, methods. have been formed packagesof 10-15 mines asasingle privatization object, besides mines. ofthestate Alot owned mines announced are to go bankrupt and now there 59 wereannounced seemingly togobankrupt. for Ukraine, such asagricultural grain, was undertaken when thestate enterprises privatization bysome business groupsintheveryimportant interested exportsector Serhiy Teriohin, thevice headoftheMinistry ofAgriculture andProperty argues,land processes areperformed with ofalltheseviolation rules. Forexample, a asadeputy, These good intentions donothold true,taking intoconsideration thatprivatization therefore the package of bankrupted enterprises sold together will beavoided. final claim was thatprivatizationwill beperformed underindividualschemes; exclude thepossibility ofahundred owners which willfight among themselves). The property complexes ofenterprises” aresold, andnotjust some partsofit–this isto only themajority holding will beputupfor auctions (to make surethat“integral Lopukh, I. (2010). Such mines cannot be sold? . Kovalenko, I. (2010, Apr 16). Ukrainian bread was about to get privatized. get to about was bread Ukrainian 16). Apr (2010, I. Kovalenko, Pravda, U. (2008). The procedure of the mock bancruptcy will beprohibited. will bancruptcy mock of the procedure The U.(2008). Pravda, þ ina Zvolen –enterprise oftherenewableenergy, Express 24 60 Anotherexampleof this isthecoal 61 Such processes clearly Suchprocesses indicate Express Express þ ebné kúpele –Slovak , 59 CEU eTD Collection 65 64 Institute 63 62 efficient form of changing ownership. procedures; speedprivatization stopped being theself-aim and transformed into enterprise. Privatizing the objects atavery high pace,Property Fund stillkeeps the restructuring state-owned assetsto prevent mismanagementmisuse and ofthe the political control,was established. The other important aspect monitoringis privatization. The close controlon the privatization procedure, which isseparate from bidding. opportunities, giving anequal rightfor the foreign companies toparticipate in formsmethods, and thepace of privatization, and preservation ofthe equal NationalProperty Fund has developed schemes which itregulates privatization in to fulfill, although during therecent times ofprivatization processes Slovakia,in as taxationwell regulations toprevent money laundering. lawful tenders as a method ofprivatization, prevention of the conflicts of interests as became adjusted tothelegislation, withof attracting thegoal more investment, using (1998), the privatization processes became muchmore regulated and lawful. They Slovakia.After the changing ofthe government under theruleofMikuláš Dzurinda radical changeinthetransparency issues duringthe secondperiod ofprivatization in Nevertheless, while Ukrainein theseprocesses seem to becontinuous,there was a the lackoftruthful information andpublic awareness. others. Nevertheless, these precedents didnot findresponse inthepublic because of Ibid Ibid Autner, R. (2006). Mikloš, 1996 64 These measures These help to prevent corruption schemes andillegal The National Property Fund and Privatization in Slovakia: lessons learned. 65 25 62 63 This notaneasytask is This Jefferson CEU eTD Collection 69 68 67 66 and other major parties’ priority. regime people, the control over the privatization processes was completely the ruling developed by theprevious government were revoked. privatization processes, and itsmanagement consisted ofthe loyal totheMe Since theNational Property Fund ofSlovakia was theonlybodyresponsible forthe of theseenterprises’ privatization will beexamined indepth. Kryvorizhstal withthesame outcome. Inthenext chapterthechallengesandpatterns perfectly compared first tothe time privatization ofthelargeststeelplant Ukrainein – Me In Slovakia, thebiggest example ofthefavoritism in privatization during theyears of the materialsupply, while Slovakiahas moved forward withthe issue. dependent onthecertain business groups, because theyaremonopolists interms of Ukraine even in thecurrent times itself finds aposition, in whenenterprises are the bothcountries’ political reputation and their economic health.Nevertheless, number onecriteria forthepotential owner. Thisobviously hascaused abig harm on duringespecially the first stageswhen was it performed, political favoritism was the Cronyism wasa commoninbothcountries. disease cameit When toprivatization, processes privatization in tools used as widely favoritism and 2.4 Cronyism experienced attheend of2004, Ukrainewent through atthe beginning of2008, which was sold forless than a market price tothepolitical allies. (Mikloš, 1996) Mikloš, I. (1995). CorruptionRisks in thePrivatization Process. (Mikloš, 1996) Yatsenko, 2003 þ iar wasthe iar story withthe largest steel mill inSlovakia –VSŽ, abig stake of 68 Someprivatization schemes which were 26 Windsor klub 69 This situation which Slovakia 67 66 This can be þ iar’s CEU eTD Collection 71 70 talks abouttalks possible re-privatization ofmanyother enterprises which were privatized more In2008,V. popular. Semenyuk –former HeadoftheProperty Fund initiated During therecenttimes, talksaboutre-privatization inUkraine becomemore and potentialside of investors. privatization, just asmuch itcancause harm on thecountry’s reputation from the Property Fund canboost the profits from the re-nationalization withfurther re- proportional impacts onthe country’s economy As andreputation. much as the enterprises which were earlier wrongfully privatized, usually has inversely Re-privatization, which intends toredeem justice andmake alegal privatization ofthe re-privatization of examples real the and 2.5 Threats foreignowned. scalelarge objects and isveryit rare inUkrainian history thatthe object becomes still aregoing on Ukraine,in where domestic groups business control most ofthe which favored thedomestic investor rather than foreign.Similar processeswere and particular object ispurposefulor not.This was anothersign ofpoliticalfavoritism also inthecompetence ofthegovernment todecidewhether foreigncapital inthis As for allowing theforeigncapital enterthe privatization market inSlovakia, that was than executed, and thecronyism measures prevailed. privatization on thecompetitive basis was becomingmore andmore formal rather when Tymoshenko government tookexactly thesamemeasures. Hajko, J. (1996). Privatization in 1995 Dominated by Direct Sales to Domestic Buyers. (U. Pravda, 2008) 71 27 Trend 70 Therefore CEU eTD Collection 74 73 http://zik.com.ua/ua/news/2005/05/25/10735 72 production and it belongs to thestrategic branchesofthe economy, orif privatization was made with violations of the law, or,the enterprise stopped The other important reasons for re-privatization include legalaspects, such as if really bankruptenterprises. announced as being potentially bankrupt and placed under the same condition as the experience and other subjective reasons, theseenterprises are wrongfully imperfections, badfinancial management, theabsenceofrestructuring reforms pay thedebts and successfullyfunction further. However, due tothe legalsystem’s financialtroubles, andunder the condition of restructuring or reorganization, they can announced bankrupt. Nevertheless, there are many enterprisesthatare intemporary reasons, since bythe end of 2008 every second privatized enterprise inUkraine was The claims aboutnecessityofre-privatizationmademostly are duetobankruptcy 1997 which nowis considered as“acrime the population”. against time, ideas of mass re-privatizationwere the result of the voucher privatization before were expressedbyformer Yushchenko, President andhisminister Kinakh.At that Minister Tymoshenko was threatening toamass re-privatization, later similar ideas not aprecedent, andtheideaofre-privatization isnotnew. In2005former Prime workers indeedwere notsatisfied with theirinvestor –Cuman. enterprise. Theexample worth thatis mentioning isSambirFurniture Plant, where that insome casesre-privatization was demanded bythe workers themselves atthe seemingly with great violations of the law. She backed upher decision by the fact Deev, O. (2008). Reprivatization-2008:cure for the economy or a soap bubble for the SPF? the for bubble a soap or economy the for Reprivatization-2008:cure (2008). O. Deev, 2.5 thousand of the stockholders demand the re-privatization of the Sambir Furniture Plant. (2005). Plant. Furniture Sambir of the re-privatization the demand stockholders ofthe thousand 2.5 Refine. (n.d.). Retrieved 0518,2010, from Restructuring and reorganization of bankrupt the enterprises 74 28 72 Nevertheless, this is this Nevertheless, 73 Today ZIK , CEU eTD Collection 77 76 75 might be interestedinthebudgetdeficit, since itwillforce thegovernment tosell being talked about. On the other hand,Ukrainian investors –big business groups, the maingoal of the government, itisnot interested thein re-privatization schemes crisis timewillbring zero profit tothebudget. And since filling thebudget seems tobe even without badreputation unfavorable prices on theprivatization market, andinthe Ukraine, which nothigh inanycase.Astheis most case–itwill pragmatic lower, as nationalwell investor, andnegatively will influence theinvestment climate in However, eventhe talks andthreats of re-privatization canscare offthe foreign as privatization. back totheprivate owner. Therefore it cannot beconsidered a“finished” case ofre- to beavery incapable owner ofthe control shareand never ableto sell theshare for theplant. withother stakeholders, which aretwo large business groups, and in aconstant fight state ownership.back inthe However,ineffective thestateturnedoutto be indealing intended tobereturned into stateownership, although only a50%shareendedup plant, which was privatized in 2004, but for alower than market price. privatization. Another examplewhich approaches Kryvorizhstal isNikopol ferroalloy remains theonlyexample ofits scale whichwent through the process ofre- to bere-privatized can bere-privatized. Nevertheless, the enterprise Kryvorizhstal Practically, meansalmostit Property that that inthe Fund’s anyenterprise is interest management oftheprivatized enterprise does notfulfillthe contract conditions. Umanskyy,(2006). S. Re-privatization must come to the legal end. UNIAN. (2005). Yushchenko decided to re-privatize Pinchuk only? Semeyuk,V. (2002). 77 Atthe end,re-privatization never took place,since thestate turnedout The Law of Ukraine about Pe-privatization of the property in Ukraine 29 Dzerkalo Tyzhnya Express 76 Itwas 75 CEU eTD Collection 81 80 79 78 privatization contract. implementation of their investment program which was negotiatedunderthe not bereached, since Enelstated thatthey were already thein process of order tomeetin Maastrichtcriteria tojoin the euro zone.Nevertheless, the dealcould it would haveset the price controls forelectricity. It was important forthe government Observers noticed that theif government would havebeen ableto re-nationalize SE, came upduetotheprediction of the energy prices rising by around 20%that year. buying-back of theshares. suspectedIt is thatthe ofthedealidea to berenegotiated Takingfrom there, the next year the Slovak government initiated the process of property." the biggest'roguery' thatthestate couldpossibly havemade inthesaleofits correct, from the pointofview of theircontents, however, thesaleofshares was defended the deal,explaining that “while the privatization dealwas performed legally agency reported that theSlovak Economy Minister Lubomir Jahnatekambiguously a transparentprivatization process.“Tlacova Agentura Slovenskej newsRepubliky” more enterprises bankrupt tothem. power station inItaly Enel. the stake in the dominant energy utility Slovenske Elektarne(SE) from majorthe a certainpoint, theSlovak government indicated that it wantstore-nationalize 66% of sectors. Two casesinthe oiland gassector, aswellas energy sector confirm this. At In Slovakiathere are also precedents in re-privatization, especially strategicin privatization. EIU.(2006). International, U. P.(2009). Slovakia defends energy privatization. EIU.(2006). Iam thankful to Julius Horvath forthis idea 80 Energy & electricity: Slovakia. Energy & electricity: Slovakia. 81 Nevertheless, in order toendure fiscal transparency, the 79 Thedealof selling 66% of the SE was made in 2006 as The economist. The economist. The 78 Nevertheless, neither party is interested re- in 30 UPI.com CEU eTD Collection 85 84 83 82 management was initiated. 2008 thelaw, whichstated that onlyState Property Fund is incharge oftheproperty state property was alargely uncontrolled process. Startingwith the point, thatonly in role inthe history of privatizationSlovakia, in since inUkraine privatization ofthe Slovakia, thiswas probablyoneofthestabilization steps that played animportant responsibilities considering theseissueswere prescribed andstrictly defined. In Slovakia–were created atthe early stage.Unlike Ukrainein though, all the privatization –StateProperty Fund Ukraine in andNational Property Fund in In bothcountries specialized institutions for theproperty management and (FNM) of Slovakia Fund Property National and (SPF) Ukraine of Fund Property State ofthe role 2.6 The bankrupt. sale ofitsstakeinordertoprevent theRussian courtfrom declaring thecompany the buying backprice exceeded the saleprice by51mlnUSD. Yukos announced the Yukos. share intheSlovak oil transit company Transpetrol from the Russianoilcompany In thegassector, theSlovak governmentmanaged tore-nationalize 49% of the have theright toauditthe SE. contract of privatization included that bothstakeholders (Eneland theProperty Fund) not lead tosuccessfulnot lead the privatization processes. management thatoften had conflicting interests inthe privatizationmatters which did (U. Pravda, 2008) ibid EIU.(2006). Petroleum and Gas: Slovakia. International, U. P.(2009). Slovakia defends energy privatization. 83 Thereisnoofficialconfirmation the on agreed price, butsources saythat 84 82 85 Beforethatthere were numerous centersof The Economist 31 UPI.com CEU eTD Collection – Minister of Ukraine. 88 87 86 influence the National Property Fund. decided tounderminethe importance ofthe Ministry ofPrivatization tobe ableto – NationalProperty Fund and the Ministry ofPrivatization, Slovak government privatization. Having two national bodies toregulate the property relation in Slovakia increased un-transparency thein management sphereduring thefirst stagesof attempted tobenegotiatedinUkrainerather late becamepart ofthereason a The institutional changes, which underwent inSlovakia rather soon, and were owner fornow, what isthepurpose then to sell?” remaining share oftheproperty cannot besold foratrifle. “If thestate an is effective opposing privatization for this matter, backing up its decisions by claims thatthe small, and amounted onlyin 21%. The management oftheSPU atatime was However, asof 2008 the share of the state property in Ukraine was already quite the governmental personal needs. of thethe be sold,will Ministryidea will automatically loseits initialpurposeserving in budget. Andafter allthestrategic objects whichbringa will lot ofprofit tothebudget have takena long time.meanwhile, Inthe there was astrongneed tofill inthe occurred. In order to do that, many laws would have to be changed and that would the Ukrainian government. Nevertheless, the implementation ofthis plannever have beendirectly subordinated totheCabinet ofMinistry –the executive branch of the same purposeof being able tohave more control over its activities, since wouldit was to initiated reform the State Property Fund intothe Ministry ofPrivatization for SPFU. (2008). Skoryk,A. (2008). Privatization2008. (Mikloš, 1995) Valentyna Semenyuk. “Firing of the Head of the SPF – this is the next crime, done by the Prime SPFU Glavred 87 86 InUkraine theopposite lawwas planned.It 32 88 ValentynaSemenyuk also CEU eTD Collection 91 90 management of the state property and not only about privatization”. 89 Socioeconomic Development Committee the in PresidentSecretariat of Ukraine. One veryimportant aspectthis strategicin privatization was raised by theheadof whether andhowmuch oftheseenterprises are tobeprivatized havebeen ongoing. Strategic sectorswere always ofa special matterfor privatization and large debates economy ofthe sectors strategic the in 2.7 Privatization (UKRTELEKOM, Odessaseaport yard, atomic enterprise Turboatom, regional power the strategically important enterprises that areoffered to be privatized hasfallen The currentHead ofSPFU, Riabchenko, agrees thatduetothecrisis, thevalueof rather than privatization. expressed theopinion thatthe emphasis should begivenon leveling upstatecontrol, President, P. C. (2009). Against the privatizational "sale" . Yatsenko, 2003 SPFU. (25.01.2007). Committee in the President Secretariat. the Ukrainian nation. Roman Zhukovsky – the Head of Socioeconomic Development taken into consideration…. In any other case, privatization would turn to be a disaster for for the economic branch development as well as the situation on the market should be slowly. Before initiating any privatization processes of the certain object, the clear vision plans are still not approved by the government, the work in this direction is moving very take place on the basis ofthe development plans ofthese branches. However, these Privatization ofthe enterprises in the strategic branches ofUkrainian economy has to at the time Riabchenko, the current Head ofthe SPF, advisor in the privatization processes foreign investors, thus the money can go directly to the enterprise. Oleksandr management [ofstate-owned enterprises]. It canset up joint ventures with Property Fund can conclude avery rigid and specific agreement for the the means of production. Now, we do not have this goal any longer. The State 1990s; the goal was to close the door upon any return to astate monopoly of sales volumes must be reported. This was the political objective of the mid haveWe been obsessed with the idea that everything must besold off and the 90 Valentyna Semenyuk. “I am glad that Ministry isnow abouttalking the effective 89 91 33 Express SPFU CEU eTD Collection Steelworks. 94 93 Radiosvoboda.org 92 anyway, howthenthe statecanbeconsidered aneffective owner? considered for privatization. Since the state does not have money tosupport them they needthese investments evenmore.Therefore these enterprises aretobe are enterprises that needconsiderable capital inflows, time andin ofeconomic crisis enterprises). But it does not mean thatthe privatization processes should stop. There improvement” highest among Central Europeancountries, with showing thetrend little the late 1998.in Theirregularity ofloansinSlovakia was labeled as"among the has This crisis. forcedMoody'sfinancial service toloweroftheSlovakcreditranking capital was notfreely Slovakia, allowed in ithasfacedthepotential ofthefinancial meanwhile, thebankingsector lacked capital inflows. Onthisbasis, when theforeign strategically important sector,therefore not a subject toafullprivatization. Inthe economy. without anyresearch ofthe strategic importance of thesector for theSlovak privatization ofthebankingsector Slovakia,in which was veryrapidly and initiated Ukraine or Slovakia.in Avery pronounced exampleof this canbenamed Nevertheless, noschemes forthesector’s development were developed either in this manner nobodydoubts. prices fortheobjectsdrop will evenmore. Andthefact that the crisis willdevelop in time, thegovernment admits thatifthe economic develops crisis as doesnow,it the ( (Mikloš, 1995) Naboka,& Sherstyuk,M., (2008). N. The hope for privatization: Selling of state enterprises.the Financial Times Central Europe Review 93 Thebanking sector was treated byMe 94 , 29April 1999 in Kopanic, M. J. (2000). Corruption: Stealing Easternthe Slovak ) 34 þ iar’s governmenta as 92 Atthesame CEU eTD Collection Express 98 97 96 95 case, thePresident fixed the waterline. merged one national into without a right tobe further soldto foreign investors. Inthis President created the national electricity company where alltheregionalcompanies Shortly afterthe expressed Russian interest the Ukrainian in energysector, the at atime, when theyarehighly indebtedwas veryinefficient for Ukrainian interests. the President atthetime refusedsince hesaid thatprivatization oftheseenterprises companies came order in toprivatize theenergy branch ofthe Ukrainian economy, Ukraine wasagenda placed intheenergysector. first onthe Russian When The ideaof creating some sortofawaterline inthe strategically important sectors in hoping toappointa person from her political party)could initiate and decide onthe was eveninitiating thenew law, underwhich theProperty only Fund (where shewas Head of the government, Tymoshenko’s prerogativewas filling inthe budget, she the PrimeMinister, andnottopreserve theUkrainian strategic But branch. since as a opposing it Tymoshenko arguedinthefavor ofprivatization, theYushchenko was asmuch slight consensuson privatizationits even among thepowerbranches. Asmuch as The greatdebates rose aroundthe privatization of Odessa port.There was nota business partner ofSurkis and Medvedchuk – two oligarchs. Ukrainian Russian businessman,who hadverycloseties with PrimeMinister Putin andwas the however turnedouttobeperformed ontheRussian order–Aleksander Babakov, a were totheSlovak state sold utility company –SlovenskeElektarne (SE). open international tenders four outofsix regional electricity distributional companies Interfax. (2009). Constitutional Court decided to not help Yushchenko stop theprivatizationof Odessa port. Ibid (Aslund 2009, p.141) (Chechetov, 2004) 98 , andmost likely, due to political reasonsand personalcontroversy with 95 Nevertheless, before that, in 2001, through 35 97 96 This CEU eTD Collection 103 102 101 100 99 sector isalready under thewater, asChechetov states. But in thesituation when enterprises –Kremenchuh -theforeign capital exceeds 40%. “Halychyna” and “Naftohimik Prykarpattya” and oneofthemainin oil processing is already deeply embedded, and has a 25% share of such enterprises as In otherUkrainian strategic sectors,suchas oil andgas,forexample, foreigncapital private owners. controlling theenterpriseany case,then in it better, completelyis ifit belongs to logical finish. It is nonsensical tokeep states ownership, when the state is not ownership. It theprocess of privatization started, this process should now come toits already privatein ownership, there isnosense keeping in thesmallshare of state The others are rightly pointingout that since thebiggest shareof Turboatom is security, anditisstrongly recommendedanalysts by toleave itinstateownership. enterpriseTurboatom yetanother whichis is strategically importantthe country’s for catastrophe. and without proper preventive measures, it may leadtothe anthropogenic support hestates, that the if enterprise will notbehandled in respectofall therules very important one, and argues that Odessa port cannot be sold byany means. In plan. privatization, since theysee it asabudget fill andfulfillment oftheprivatization namely former two HeadsofSPFU –BondarandChechetovare supportin ofthe matters ofprivatization sothatshecould bypass President’s prohibitions. (U. Pravda, 2008) (Chechetov, 2004) (Skoryk, 2008) (RBC-Ukraine, 2008 ) (Skoryk, 2008) 100 DeputyYuriy Karmazin shows theother aspect of this privatization, and a 101 102 36 103 Thewaterline ofthis 99 Others, CEU eTD Collection players asRuhrgas, NaftaGbely was sold for500mlnSlovak Koruna (SK) atthe mysteriously created concern Druha Obchodna. Despite theinterest ofsuchmajor share ofNafta Gbely -averyprofitable natural gasstorage company tothe 1998 Property Fund hassoldthrough the direct sales the46% of non-privatized Privatization in the gassector inSlovakia camewith differenttypes ofchallenges. In willWhat really happen Ukrainein is100%subordinance to its Russian headquarter. two companiesbecome will averyimportant part oftheenergy security inEurope” diversify thepathsofRussian gassupply toEurope. “Iam mergersure that ofthe Miller further states,that there arealsoplans tobuild newtransition linesand inevitable. 106 Express 105 Express 104 processed. such cooperation, thelaw that removed thebantoprivatize oil andgassystem was merged by100%withRussian the oil andgas system. Shortlyafter the initiation of Recent developments thesector in arethatUkrainian gasandoilrefineries will be possess oilresources, this waterline security wassinking quiteinevitable forUkraine. Ukrainian oil processing business is totally dependent onRussian companies, which Ibid Interfax-Ukraine. (2010). Russian Gazprom's take overof the NaftogazUkraine - is pure pragmatic decision . News, U. (2010). The new law about privatization of the gas transportation system is being processed. the Head of Gazprom. all know, that any pipeline is a very valuable asset only if itis filled by gas. Olexiy Miller – transporting system is created for the transporting theof Russian gas toEurope. And we development of the common system of gas delivery from Russia. Ukrainian gas that modernization ofthe system in Ukraine should be closely tightened to the transporting complex, which was created back in the USSR times. Therefore itis natural mutual development of the gassystems of our countries, including the common gas This idea 104 (offered by Russian Prime Minister V.Putin -author) TheHead of Gazprom in Russia Olexiy Miller argues that this stepwas 105 37 was determined by the 106 . CEU eTD Collection Ashgate p. 33 107 During the first period, the most important characteristic was political favoritism, In Slovakia wecan seethe two verydifferent periods in privatization processes. interests of the state asa whole,and not the separate business group only. something left tobeprivatized, sothat it can be performed with inclusion ofthe best common vision of the privatization process should be developed while there is still countless andtheprofits made fromprivatization arenotunlimited. That is whya true ifwe takeintoconsideration thefact that objects tobeprivatized arenot definitelyprivate owners is nottheway toeconomic prosperity.This is even more to go.Theshort term vision ofselling all thepotentially attractive objects tothe situation andfill the budgetin rather thanboost enterprises’ efficiency, isnottheway Privatization processes Ukrainein made order in to improve the macroeconomic of Slovakia after 1998. followingthe privatizationprocesses both Ukrainein andSlovakia, withthecorrection Politicalfavoritism, groups’ business influence andotherdiseases were closely greater efficiency and transparency withthe changingownership intoprivate hands. was aswasprojected notassmooth andasefficient by many predicting scholars, In this chapterI have shown thattheprivatization process Ukrainein and Slovakia the Slovak President) and Marian Huska. The other co-owners were people also from HZDS the – IvanGasparovic (whoisnot Movementboard ofthe Slovakia– HZDS(leadbyMe forDemocratic the owner ofthe unknown company was VladimirPoor, chairman ofthe regional timewhen itwas worthmore than3.2blnSK.Consequently, itwas pointedoutthat Haughton, T. (Burlington). Constrains andopportunities of LeadershipPost-Communist in Europe. 107 38 þ iar) inTrnava. iar) 2005: CEU eTD Collection in orderin tofight thechallenges andprevent the processes from irreversibility. privatization processes. Nevertheless, thecontrol mechanism must workconstantly privatization agenda. Slovakia hasmanaged tofinally employ lawful means inthe of thegovernment, considerable change and improvement appearedonthe Slovak economy forbetter restructuring. During the second period, after the change equality ofchances, which resulted thein lackofforeigncapital flowing into the privatization favored the people who were closeto government. There was no pricing ofthe enterprises fitfor privatization. Non-transparent and uncontrolled controlof the privatization processes by the leading parties, tremendous under- 39 CEU eTD Collection 109 Budapest:Magyar Nemzeti Bank 108 up with thewesternworld. economies, export structure theis bestpathway togrowth,prosperity and catching structure. For theEastern European countries withsmall andusually open Ukraine and Slovakia specifically since ithascontained thebigger part of theexport The sectoritself isveryimportant inthepost socialist countriesgeneral, in and in among themost andmost urgent controversial projects inboth Ukraine andSlovakia. Out ofallprivatization projects inthestrategic sectors, thesteelindustry has been and above transnationalization coming from below communism inUkraine andSlovakia – Chapter 3 –Steel after industry few heavy sector productions there,80% of the outputgoes forexport. The steelindustry hasalways beenastrategicsector inUkraine, since of the it isone the economic growth ingeneral. makes share thebiggest inthe economies of thetwo countries, is so important for remainsit small regardless ofthebigterritory. Therefore, the steel industry, which third oftotalexports of goods. Steel isevenmore important, sincemany other industry provides about 12 percent ofUkraine’s national income, andmore thanone- wholeeconomy isdependent onthesteel sector.Tomeasure directly, thesteel fact that economic growthofUkrainemerely depends on the export performance, the EIU. (2008, Nov 6). Munkacsi, Z. (2009). Economic performance: Steel output plunges. Export structureand export specialisation in Central and Eastern European countries. 108 EvenifUkrainianeconomyby thedefinition, isnotsmall 40 Country Report - Main Report - Main Report Country 109 Due to the CEU eTD Collection European University Press University European 114 113 112 Development and Reconstruction 111 110 housing andsocialstructure oftheoccupied territories. centers. They arethemain sourceofemployment, financially andarealso supporting territorial system,metallurgical enterprises fulfill thefunction ofthe city-creating economic activities andindustries dependon the steelsector performance. be its restructuringbe its agenda” a leading sector,the flexible businessless andlaborare,themore its will difficult restructuring. Iadopt Greskovits andShafer’s framework, andarguethat “the heavier they underwent torestructure, andwhat difficulties were posedinterms ofeconomic development andperformance ofthetwo countries, it isimportant tolookatthepaths both countries. Sinceit hassuchan immense onthe influence economic Slovakian export. third place after machinery, electricalequipment to andvehicles compose the In Slovakiasteel industry makes abigger share ofthe export structure, it ison the other economic activities. concluded that patterns thesteelprices arein closely totheperformancelinked of restructuringmight not happen atonce. equipment,defined largely infrastructure andnon-transferable laborskills, the total sector earnings. wholemetal industry in Slovakia is USSteel, which accounts for more than10% of keeps growing duetothe bigamount ofFDI flaws. Themost important player ofthe Greskovits, B. (2003). Beyond Transition: The Variety of Post-Socialist Development. Sami Humala, P. H. (2008). CIAFactbook 2009 Pashaver,O. (2004). Hofman, D. (March2009, Volume 46, Number1). Metal Fatigue. 112 Development of the metallurgical sector in Ukraine . Steelsectorhasbeentraditional the Slovakin economy, andit , 1-24, p. 5 Manufacturing in Slovak Republic. 113 Therefore steelindustry Therefore comprises the sector leading in 114 . Since the steel industry possesses itsspecific the steelindustry . Since 41 Finpro Czech Republic Czech Finpro IMF working paper Kyiv: International bank for the for bank International Kyiv: 111 Therefore canit be Budapest. Central 110 In the CEU eTD Collection 118 117 116 115 being foreign-led large-scale capitalism. Applying Greskovits’s model, the steel industry inSlovakia canbecharacterized as restructuring and expansion natural resources, labor and entrepreneurship forthe purposes of the enterprises’ form of nationalbased enterprises established before, itallowed them to securelocal positions. Sincetransnationalcorporations hadpartners indomestic business the in practices. well asintangible resources such asadvanced marketing and management be thattheybothcould notcountontheflows offoreigncapital andtechnology, as the heavysector industry was limited andnot successful. The reason for that could Throughout the analysis Ishow casesthat inboth thestates’ capacity torestructure skilled labor,whichresulted intoalargersuccess story. which heavily usestheforeign capitaland technology, butalso adds domesticits or thetrue transnational actor.Slovakia hasopted forthe steel industry development, transnationaltakeovers. It is possible in the form of eitherdomestic business groups and iron export, it now makes aconsiderablemove inthe direction of the inherited “the“heavy-metal” legacy ofstate-socialism” from above ArcelorMittalKryvyi Steel Rih.At thebeginning, although Ukraine has capital intensive complex manufacturing, as is inthecase of the transnationalized scale capitalism. Bothemploy capital-intensive basic manufacturing, as well as capitalist development. InUkraine wemix and canseethe offoreign national large- intensive complex manufacturing, which proves tobe an efficient form to the Ibid Ibid, p.4 Greskovits, 2003, p.3 Ifollow Greskovits (2003) in the definitions of the leading sectors 117 Incasesoftransnationaltakeovers, TNCswere the most in favorable 118 . Although,asmentioned byGreskovits andwhat can 115 42 Itbecame possibleby means ofcapital 116 , withalargeshare ofsteel CEU eTD Collection produce around 85% of the world's steel world's ofthe 85% around produce members Steel World institutes. research steel and associations, industry steel regional and national companies), 120 119 circumstances time consumingand painful process, highly dependent on the specific stakeholders in national development didnot occur automatically, but wasit rathera be observed asthe empirical evidence thein Ukrainian case, such coalitions of case, since theother two, Slovakia Steel Mills, andIntersteel Slovakia have smaller steel mill Slovakia in withthe biggest share in themarket.good Itisa representative evaluate Slovakian steelindustry thelargest cameis sinceUSSteelKosice naturally, by the as assessed SteelAssociationWorld domestically ownedthat are ranked among the 80largest steel makers ofthe world, Ukrainian steel industry, Iwill look atthefive enterprises, oneforeignand four industry influences the world’s market. Inorder toassess the productivity ofthe steel industry inthe two countries; stressing the extentto which these countries’ steel The chapter structuredis inthefollowing way: first, Iwill make overview abrief of the which oftenhave foreign origins) turned outto perform better. from above (takeoverbythe TNC)or below (privatized bythe local businessgroups current performancedraw Iwill conclusions onwhich transnationalization pattern– two countries,the stage when it gotprivatized, thetype of private owners, and the transnationalizationpattern. Lookingat how the industryhistorically developed the in analyze theprocess of restructuring ofthis industry in both countries and observe the performancethe industryboosts of immensely. To illustratethesuccess, Iwill Nevertheless, I further show that once transnationalization happened, the World Steel represents approximately 180 steel producers (including 19 of the world's 20 largest steel largest 20 world's 19ofthe (including producers steel 180 approximately represents Steel World Ibid 119 . 43 120 . The choice ofthecompany to CEU eTD Collection incomes oftax evasion. theissues in ownershipas well asaninterest ofUkrainian enterprises tohide their in therevenues. The reasons behind such trends I attribute to the transparency behind the in incomes, stillperform rather welleconomically, showingsimilar trends Nevertheless, Ifurtherstate that domestically owned enterprises although lagging both in Ukraine and Slovakia perform better under the foreign ownership. particular example ofthesteel industry. Based onthis, I arguethatsteelenterprises foreign companies’ capacity to restructure thefixed assetenterprises onthe Finally, Iwill applythetheoreticalmodel of Greskovits andassessthe stateand owned bytheUS Steel. comparemy findings to the Slovakian case, where I take one largest steel enterprise, results thatare shown byforeign owned enterprise and the domestic ones. I will and relevant events, butmostly concentrating onthe differentiation between the (BusinessDictionary.com) 122 (BusinessDictionary.com) deducted are expenses or costs any before of firm operations main the with 121 revenues will at theperformance look ofthelargest steelenterprises inUkraine, assessing the the purposesof Then, for in-depth analysisof the steelindustry inthetwoI countries, information tomy casestudies. shares inthe market, andwhile alsoforeign owned,willnot addsignificantly different Net income - Total revenue in an accounting period less all expenses during the same period same the during expenses all less period accounting an in revenue - Total income Net Revenue - Amount generated from sale of goods or services,or any other use of capital or assets, associated 121 andnet income 122 ofthem, observing forthechanges in particular years 44 CEU eTD Collection 126 125 124 123 products, Ukraine hadasolid baseto become ametallurgical hub. dolomite, cokingcoal intheDonbass region, anthracite and a range of other mining well ashighconcentration ores, manganese, metallurgical limestone, kaolin, Having awiderange ofnaturalresources, including, butnot ore,limitediron as to, torestructure need the and Slovakia and Ukraine in industry in steel privatization for setting historical 3.1 The recovery in the mid-90s. volumes from mid-1980sthe onwards, theindustry started showing some signsof undergo its post-communist transition. crude steel, producing upto57Mt ofcrudesteel, beforethe countrywas preparing to Twenty yearsago, Ukraine was one oftheworld'stopfour producers ofpig ironand (VSŽ) was signed. 1959 the foundation ofthemodern metallurgic factoryVýchodoslovenské železiarne technique of iron and steelproduction underwentmajor improvements untilfinally in the east, depended upon the extraction of ironstone. During the 18-19 centuries, the production Slovakiain is one of the oldest industries. Itsdevelopment, especially in accordingto theSteel Association, World one ofthelargestand most dynamic cycle from materialextractionraw tosemi-finished andfinished metal products.Now, presented afully integrated iron andsteelcluster, having the completeproduction Finally now the transition times arebehind and the industry has finally emerged and and slow process, and the shadows from this period still echo thein present times. ibid (Couronne 2004, Oct 1) U.S. Steel Košice is Aware of Its Position - Slovak Steel Giant. (2009, Apr 12). (Couronne 2004, Oct 1) 124 126 Reorganizing the industry Ukrainein was avery difficult 125 45 Despite the steep decline in production SK magazine 123 Initsturn,steel CEU eTD Collection privatization history. In 1995,VSŽ hadannual salesof49.8billion Slovak Koruna has beenprivatized it has become ofthegreatest success stories in Slovak 16% oftotalSlovak production and26% ofits export. European University Press University European 130 129 128 127 Slovak exporter (14%). largest CentralEuropean Company andthesecond largest employer andthe biggest time, VSŽ alone accounted for almost 8% of GNP of all ofSlovakia. Itwas the 14th elections in Me favorites during theMe much than less hasit been worth, due to the factthat Rezeš has been among the one oftherichest men inSlovakia. Alexander Rezeš,who purchasedthecontrolling share oftheVSŽ hassoonbecame foreign led, therefore VSŽ Kosice presented a special pride to thenation. economy,was owned bySlovak nationals. Before that, all thecompanies were big enterprise, namely VSŽKosice, which wasa strategicplant inthe Slovak Slovak-run business. This has been agreat successstory since it was thefirsttime a Slovakia, by aSlovak run family andithas represented thecronycapitalism of a 2000, when theUS Steel tookoverVSŽ Kosice. Itwasonce successful steel millin In Slovakia,transformation thebig and positive shift inthe industry happened in world’s largest producers of crudesteel. industry associations intheworld, Ukraine2009 earnedthe8 in Frydman, R. (1998). Capitalism with a Comrade's Face: Studies in the Postcommunist Transition. ibid (Kopanic 2000) This has beensuggested by Julius Horvath þ iar's party, theMovement foraDemocratic Slovakia (HZDS). At that ,60 129 þ iar’s times andwas preparing tobecome acandidatefor According to the other source, at some point, VSŽbrought 128 Heacquiredthe sharefor theminuscule price, 46 130 Duringthefirst yearsafter it th positionamong the 127 Central CEU eTD Collection 133 132 131 occurred right after the non-transparent privatization process under the Premierat defaulted. This situationwas causedbyfalling steelprices, badmanagement and banks called for35million USD loan which VSŽwasto repay notable and therefore and very low efficiency. VSŽhasfacedhuge financialtroubles in1998when the By 2000, when VSŽ finally got privatized, the plant was onthe edge of bankruptcy one ofthe most powerfulmen Slovakia. in whom he constantlyrewarded with allkindsofluxury goods.Hehadsoonbecome most processbyestablishing decision-making personalties with leading managers, the Czech Republic, Hungary, andtheNetherlands. Rezešmaintained control of interests companies andbanksacrossSlovakiain and inforeigncountries suchas By 1998, VSŽ underRezeš hadbecome ahugeholding company withcontrolling Insurance), which was amonopolist insurance company ontheSlovak market. period oftime. alargeshareofSlovenská poistov Ithasalsoacquired Slovakia's topthree banks.VSŽ acquired ahugefinancial empire inaveryshort 1996 itbought a 40% share ofInvesti banka andPostovábanka. VSŽ’s financialacquisitions continued later aswell, andin anumber Slovakin bankssuchas ofleading Priemyslná Košice,Dopravná banka successandVSŽ backedupits secured buying has easy creditby controlling interest number oneamong Slovakia'stop 100companies. (SK) (USD1.66 billion) and the Slovak business newspaper Trend ranked as it Ibid Ibid (Kopanic 2000) þ ná rozvojová banka(IRB), which was among 47 133 131 Ė a (Slovak 132 CEU eTD Collection enterprise hasnotfailed the test, comes from the factthatrightafter privatization in company’s position inthe CentralEuropean steelmarket, andthe signthat the 138 137 136 Casebook 135 resources thein new era ofglobalization”. CentralEastern Europe,seeking tomarry Westernbusiness skills with regional corporate trouble, became atestforwestern companies which joined forceswith VSŽassessed bysome “asymbol Kosice, analysts, of post-communistbeing opportunity aroseand 2000 VSŽin became partofthe large USSteel group.Aswas final step which had to be made was tofind areliable foreign investor. Such banking and insurance before thecompany ranoutof money. managementwas investing intoaseries of unrelated activities, suchasfootball, 134 banks towhich VSŽ was indebted about possibility of the debt restructuring. dominant Czechfootball club Sparta Prague. Talks have also been started with the businesses were sold,such asnational daily newspaper Narodna Obroda and First ofall, under anewmanagement byEichler,unrelated to the steel making to betaken orderin tosave the enterprise from outgoing ofbusiness. approaching 8percent of the Slovak GDP. before 2000, theplant aloneaccounted for14 percentofSlovak export andturnover core business –making Nevertheless, steel. VSŽ couldnotaffordtofail, since were involved intheabove mentioned unrelated businesses, getting away from its structure hasalso beenvery opaqueexactly duetothefactthatstakeholders ofVSŽ the time, VladimirMe Forging a new Europe: US Steel saves Slovakia steel factory from bankruptcy. jan (2001, 2). ibid ibid Done, K. (1999). Slovak Steel Group seeks fresh Mould. In P. A. Wickham, Official web site Slovensko (pp. 398-399). Financial Times, Prentice Hall . (n.d.).. Retrieved 0514,2010, from http://www.slovensko.com/investor/us.htm þ iar. 134 Anotherreason for the VSŽ failure was that the 48 136 138 Therefore some urgentmeasures had The grounds for optimism lay in the Financial Corporate Strategy 135 Itsownership Starbanner 137 The CEU eTD Collection and other manufacturers. world’s steelproduction forthebigger supply volumesmakers totheEurope'scar investor meant gettingout ofthebankruptcy as wellas corneringbigger share the in happened mostly becauseofstrategic purposes, sinceselling totherichforeign Slovakian largestandothersmaller steelmills. InSlovakia transnationalization steel industry transformed from above, large worldcompanies steel took over the force behind the privatization was imperialist ambitions. Unlike inUkraine,Slovakian groups and other private owners. Following theSoviet legacies, themaindriving of Kryvorizhstal, takenover byArcelorMittal, theNetherlands), bylargebusiness say that transnationalization in Ukraine camemainly from below (with theexception foreign-led companies which was notausualscenario inUkraine. Therefore we can owners, enterprises belonged totheprivate Ukrainian business groups as well as 141 140 139 Kryvorizhstal andZaporizhstal willneedmorethan half ofthissum. makes USD, andonly 25-28bln two outofmore than15metallurgical plants– sources informs, thegeneralneed financing in ofmetallurgicalassets modernization conditions, but the main goalwas always to increase efficiency. As one of the official In Ukraine, astrong need to restructure enterprises came from different initial Transparency has become anewand dominant idea thein Slovak plant. the Kosice enterprise was to introduce a modern waybusiness. ofdoing operations of151million USD, or62USD aton. when headquarter, its U.S. SteelGroup, during thesame time reportedaloss from (USSK) reportedincome USD, of41million or55USD profitpertonatthetime, November 2000took place, in the first quarter of 2001, Ukraine, I. (2010). Akhmetov lacks money forZaporizhstal buy out? Hundley, (2001). T. East Europe Steelworks enjoys Americal revival. Slovensko.com site web Official 49 139 US Steel’s main contribution to Economic truth Chicago Tribune U.S. Steel Kosice s.r.o 141 , 1-3 Interms ofthe 140 CEU eTD Collection Slovakian dataset, thefollowingtrends can be observed: as transforming thedatatoEURO currency inorderto make itcompatible with Based onthecountry’s yearly data,showing theirrevenues and net income, aswell my studyIconsider itdomestically owned. owned, with asmall share ofBritish investments; nevertheless, for thepurposes of Azovstal, Ilyich Mettallurgy Plant. The remaining Zaporizhstal mostlyis domestically three othercompanies aretotally domestically owned Mettalurgical -Alchevsk plant, out to be the most successfulone. Others can be grouped in the following way – Kryvyi Rih. This hasbeen the biggest takeover inthehistory of Ukraine, and turns ArcelorMittal Duisburg GmbH, Germany, andnowownsa new – ArcelorMittalname the onlyexample oftheforeignowned company with95% share belonging to economically thantheothers.Outofall Ukrainiansteelcompanies, Kryvorizhstalis Slovakia tendtobe more transparent, and therefore perform much better findings arethattheforeignowned Kryvorizhstal inUkraineand USSteelKosice in steel millsUkraine, in aswellthe foreign as owned Slovakiansteelmill, the main performance ofonelargeforeign owned enterprise, andfourdomestically owned companies the using available datafor theexamined period.Basedonthe transnationalization, Ianalyzeandcompare therevenuesandnet income ofthe In order to assess the performance of the transformation, brought about by mills steel Ukrainian the of netincome and 3.2 Revenues 50 CEU eTD Collection trends asthis may haveananswer tothe question. What happened to the steel industry andin after 2007? Let us look atthe global development duringthegiven time until period 2007,when revenuesstarted falling. almost without exceptions. There is acommon trend positive fortherevenue From the figure 1 we canobserve rising revenues over time forall thecompanies http://www.pfts.com/en/ Author’sSource: own calculations,based on the differentyear’s Ukrainian at reports stock exchange. Figure 1Revenue ratedofthe 5largest Ukrainian SteelCompanies 2001-2008 OANDA

EUR '000 http://www.oanda.com/currency/converter/ 1 000 000 1 500 000 2 000 000 2 500 000 3 000 000 3 500 000 500 000 0 , and correspondent, and exchange rate UAH-EUR, generated fromcurrency converter 2001

2002

2003 Revenues

2004

2005 51

2006

2007

2008 Zaporizhstal Alchevsk Ilyich Azovstal Kryvorizhstal CEU eTD Collection 143 142 peaking levels inAugustsame year. affected. Totheend of2008,steel prices had fallenmore than80percentfrom their limited opportunities inconstruction activity, addedtosteel beingparticularly badly The processes thatfollowed -decreasingcar salesall around theglobeaswellas crisis, positive pattern ofrecentyears the in commodity unexpectedly prices ended. grew by anaverage of7 percent ayear. as impressivewell GDPgrowth: between and2007,theUkrainian 2001 economy rising, greatly addedtoUkraine’s favorable export conditions andperformance as economy. Thetime of2000–08, period when thesteel priceswere almost constantly Generally, Ukraine’s strong link tometals’ prices previously helpedtoboostthe SteelPricesFigure 2 2003-2008,World real GDP rateinUkraine (Hofman March 2009, Volume 46, Number1) Mark Flanagan, L. M. (2008). Ukraine: Selected Issues. 143 Most ofUkraine's steel plantswere reported 142 52 Atthebeginning ofthe global economic Washington D.C.: International Monetary Fund CEU eTD Collection sustainable? 147 146 144 very pessimistic, but theyare thesame foreverybodyon themarket. However, the The abovedrawn trendsinthe steel industry and steelprices intherecent times are period. to see how Ukrainian steel industry will be sustained by the end of the crisis capacitycrisis utilization rate of90-95%.This an optimisticis figure, now it isonlyleft predicted in2009that it willtake2to3yearsforUkraine’s mills toreturnpre- totheir Company, whichspecializes in thedesign and manufacture ofsteelcomponents, plants, aredown by50%eachyear.Yetanotherindustry analystatAstrum domesticmarket, andthemain consumers Ukraineof thesteel –construction in to support the industry. The reason for this is thatonly 20%of the output goes to the 9%. by economic general, performanceand inthelast in quarter of2009,GDPhastightened 145 Report - Main report. for theUkrainian steel industry. losing their comparative advantage – low production costs, which reflects dull picture and investment projects dropped.Also,Ukrainian steelmakers seemed tostart unfavorableprice conditions. Global demand thatconsisted ofthe large construction problems werelargelycaused by asharp decline in external demand and The fall down ofsteel prices has affected Ukraine hard. Themetals sector's current possible close down productionin because ofalack of orders. to work atonly70-80%oftheircapacity, andsome ofthem have evennotified ofa (2009, Aug 24). (Hofman March 2009, Volume 46, Number1) (2008, Oct 2). (2008, Nov 6). 147 146 Ifexports don’t recover in the close future, domestic demand willbe unable EIU publication Economic performance: Industrial output contracts year on year in August . Economic performance: Steel output plunges. CIS: Steel salvation? The big CISsteel producers are starting to recover—but is it 145 Thesetrends gotimmediately reflected on the 53 EIU Country Report -MainReport. 144 EIU Country CEU eTD Collection foreign ownedcompany, interested itis inshowing profits forthestatistical its and ArcelorMittalunderwent avery transparent process, andbecauseKryvorizhstal isa boosted considerably. Building onthis only case, Iargue thatthe takeover by the Being asignificant outlier, Kryvorizhstal’s income aftertransnationaltake over Rih) Kryvyj (ArcelorMittal Kryvorizhstal ofthe 3.3 Success http://www.pfts.com/en/ Author’sSource: own calculations,based on the differentyear’s Ukrainian at reports stock exchange. Figure 3Net income5 largest ofthe Ukrainian SteelCompanies four otherdomestically owned enterprises (see figure 3). difference in performance therefore are between theforeignowned Kryvorizhstaland net income trendsarenotthesame fortheUkrainian largest steelmills andthe OANDA http://www.oanda.com/currency/converter/ , and correspondent, and exchange rate UAH-EUR, generated fromcurrency converter 54 CEU eTD Collection http://www.neurope.eu/articles/88991.php 148 competition unfairly and used shadow mechanism to compete against other foreign Kyiv basedIntepipe, controlled byPinchuk –Kuchma’s son-in-law - won the Management (SCM), runbythewealthiest man UkraineRenat in Akhmetov, and the new businessowners -local alliances – Donetsk basedSystem Capital for nationalization and further re-privatization of theenterprise. Itwas claimed that privatized, theState Property Fund ofUkraine (SPFU) hasexpressed theintentions privatization didnot come asasuccessstory.Only oneyear afterithasbeen Privatization ofKryvorizhstalmany wasastorywith Firstattempt layers. of 2005in and 30.6percent more than in2006. effective incomemade in2007has 18.8 billionUAH which 70.2percent more is than iron, 8.1 million tonnes of steel and 7.1 million tonnes of commercialstock. Net numbers, theproduction attheArcelorMittalKryviy Rihwas7.2million tonnes of cast Ukrainian market byprofits andproduction volumes. According tothe2007 immense growthterms in ofincome. Itisdefinitelyan unquestioned leader onthe more production efficient process.Kryvorizhstal, peaking in2007showed an companiesforeign are owned which accounts forbetter transparency and therefore Kosice gotsuccessful. Nevertheless, all these reasonsgobacktothe factthat the reasons fortheenterprises’ successoriginate from reasons ofwhyVSŽ the same Kryvorizhstalto boost its productivity, as well asbettermanagerial expertise. The world’s steelmarket,technological further innovations thatwerein invested access totheinternational markets was ArcelorMittals’ securedby position onthe obviously other reasonsthat contributedto its success.Among theeasier others, accountingpurposes, order in tobetransparent for thestockholders. There are Koretskaya,Y. (2008, July 2, Issue 791). State property fund to denationalize Krivorojstal. 55 148 Newseurope , CEU eTD Collection short run, isthatenterpriseshort run, simply stopped hidingitsprofits. Therealistic storyisthat boost productivity, and second explanation that ismore tobeshown likely inthe two reasons.First, that foreign owners are more likely toinvest intorestructuring to enterprise. AsIhave argued before, this mighthave occurred soimpressively due to after which we cansee the dramatic increase ofthe revenues and profits ofthis we returnbacktothe figure 1 and3,we can seethat2005 is thedatewhen, and 153 of "Kryvorizhstal’" shares to the as agreement 152 producer steel largest world's 151 150 149 times 24.2 billion UAH (4.81 billion USD), which exceeded the predicted price by 2.5 and also, Kryvorizhstalwas soldfor avery high price. The winnercompany offered occurred through thefairauction, where othermajor were bidders presentaswell, of 93.02%stake inKryvorizhstal. of Kryvorizhstal. owners ended up payingfor the acquisition 4.5 times lessthan the realmarket price based firms thatalsoshowed aninterest in takingover theenterprise. Thenew announced Mittal SteelGermany GmbH (Germany) be themost successfulandtransparent case thehistory in ofUkraine. SPFU In October2005re-privatization ofKryvorizhstaltook place, which was announcedto threelast years, two ofthem, profitably,Ukraine”. in produced at least onemillion tons ofcoke and twomillion tons of rolled steelfor the both Ukrainian, which submitted tenderscould meet therequirement ofhaving present at the auction, itwas concluded that “only these two ofthesix companies, ibid Ukraine, S. P. (2005, Oct 28). SPFU and "Mittal Steel Germany GMBH" have signed the sale and purchase Mittal Steel Germany GmbH is part of the Mittal Steel international holding (the Netherlands), (Aslund 2009,which p. 163) is the Couronne, Caroline,Oct 1, 2004 153 , andthisbecame sum the historyofprivatization thelargest in Ukraine.in If 149 Regardless the fact,that four otherforeign companies were 152 Itwas atransparent operation, since privatization 56 150 151 awinnerofthetender forsale CEU eTD Collection two groups. system; we still, seethe dramatic difference inthe income tendencies between the similar sins, for using their internal mechanisms of transfer prices, internal loan sameclimateexternal thedevelopment. in TNCs canobviously be accused the in might be thecase why the group of four kept the tendencies it did, no matter the groups. The complicated and often muddled process of privatization and governance problems with transparency with theenterprises owned bydomestic business shores for the purposes of tax evasion. Another reason might bethatthere are restructure. Domestically owned companies maytheirbe hiding incomes intheoff two possiblecauses,not connected tothe production capacity orother capacities to income decreasing is while theirrevenues increasing. Thiscan be attributed tothe could expect, based on the data from the revenues figure. It shows thattheir net owned firms showothercommon tendencies(figure 3),notreflecting theresults one Quite the contrary to the privately foreign owned Kryvorizhstal, all domestically enterprises owned domestically of the 3.4 Challenges ownership which helped the enterprise toboost theproductivity rates. From makethat I conclusionsthatboosts in theincome reallyduetothe is foreign can seedramatic increase profitabilityin since theyear enterprise was privatized. goal oftheTNCsisto increase theirincome andprofitability, andfrom 3wethe figure about increasing efficiency and productivity. Nevertheless, knownit is thatthemain for thepurposes oftax evasion, on theother hand, TNCs areusually concerned TNCs often use intheir businessactivities donotfavor revealing all theirrevenues it was a mix of thetwo. Ontheonehand, the mechanism of thetransfer priceswhich 57 CEU eTD Collection from http://markets.ft.com/tearsheets/businessProfile.asp?s=DZ8:GER 155 154 integrated IT systems andredeploy the sales andmarketing activities. which thenewtechnology was goingtoboost management performance, improve at the end turned to the foreign investor - Germany's SMS Demag,with thehelp of not finding thedomestic sourcesoffinancing therestructuring, Azovstal management productionold workshops intomodern andmoreefficient steel making After facilities. of steelannually. In2003Azovstalfaced the urgent needrestructure andreshape the whichAzovstal, used to becountry’s largest steelproducer, wasproducing 5.340Mt out Azovstaland Zaporizhstal. of different business groups inthe steelenterprises. Among theseenterprisesIsingle processes within this structure.It oftenhardis toclarifytheownership and theshares had averycomplicated governance structure, which contributed toun-transparent criteria ofwhy being non-transparent. For example, thetwo outoffourcompanies Regarding thedomestic companies, theycan begrouped basedon thedifferent Trading House owns 44.84% of its shares, System ManagementCapital (Donetsk) madeThis is complicated,cross through privatized ownership, where Azovstal Ukrainian business group –System Capital Management (SCM),basedinDonetsk. through complicated integrated schemes onecantrace theownership backtothe 21% which has74%share, and Metinvest IntlSA, based Switzerland,in withshare a of Azovstal isownedbythetwo –Metinvest companies B.V, the Netherlands, basedin surprisingly, was notreflected in theincome indicators. whendramatic we seethe increase ofrevenues inAzovstal, which, probably not Financial times. (n.d.). Couronne, Caroline,Oct 1, 2004 155 . Althoughat first sight it looks like the companiesare foreign owned, going Company profile - Metalurhiinyi kombinat Azovstal' VAT 58 . Retrieved May 31, 2010, 154 This is CEU eTD Collection Million To UAH 1,405.5 Million For Takeover Of Azovstal Trading House. Trading 157 Azovstal Of Takeover For Million UAH1,405.5 To Million 156 158 Group –22%,Gals-Invest –17%, Zaporizhstal, Zaporizhzhya –17%,Midland Capital current investors are:Ukrainian stock deposit with ashare of26%, Kyiv Securities mostly groups bythebusiness with represented oftenconflicting interests. The As forthesecondcompany acluster,Zaporizhstal, in hasit many which are investors the owners todiminish them. boosting, onecannot reflected seethe incomestatistics, sinceitisintheinterest of business groups need to be preserved, therefore although the revenues are investment. Through this complicated structure, becomesit clear, that the interests of enterprise’s efficiency bymeans productivity and ofincreased human capital In thestrugglefor ownership one loses themainreason forprivatization– increased System Capital Management, owns 90%ofthe shares in thecompany. the largeUkrainian business groupSCM. RenatAkhmetov, who thepresident is of companies thatareinthedomestic private ownership, 75%ofitisinthecontrolof weldedpipes industries. Therefore, Metinvest is a Ukrainian based group of Group (System Capital Management) in coalmining, andore coke,steelmakingand managementperformsstrategicturn of Holdingthe its Metinvest in of assets SCM are generally accepted tobe owned bythe same person,RenatAkhmetov. Leman SA Commodities is aSwiss trading company separatefrom SCM, but they Capital Management own 95.9%of the sharesin Azovstal House. Trading (Cyprus) 11.01%, and the Metinvest Holding 4.34%. Atthesame time, System owns 29.38%, Leman Commodities S.A. (Switzerland) owns 13.71%, SCM Limited Iron & Steel - Owners emerge in Ukraine. (2003 Nov, 20). Kuzmin, D. (2006, May, 29).UPDATE: Azovstal Decides To Increase Its Statutory Capital By UAH 491 (Kuzmin 2006, May, 29) 59 Metal Bulletin plc. Ukrainian News 158 157 156 CEU eTD Collection 161 160 159 to source highquality automobile sheet Ukraine.in investments forthebetter performance. ismade This toattracttheleading carmakers efficiency of every unit. The company isalso starting a number ofotherurgent investing 66.5Million USD torenovateitsblastfurnace andimprove theenergy the company. investing forincreased is Zaporizhstal performance: isforinstance it steep growth starting with2003 canbeexplained by the major investments made by ISD acquired ownership of Alchevsk Metallurgical Plant Ukrainianshare, aswell as stocksdeposit with44%share.2001waswhen ayear by Ukrainian Business GroupIndustrial Soyuz(Union) ofDonbass (ISD) – 56% also interestedis inhidingitsincome. ownedPlant, which AlchevskMetallurgical is group. Therefore, there are noconflicts of interest there; nevertheless, the enterprise described enterprises have;difference owned business isonlythatit bythesingle two companies with onecorrection. Ithas similar problems thatthepreviously Alchevsk Metallurgical Plant canbe also put in thesame grouping astheprevious profits, since they already havetoshare among themselves. complicated structure andunwillingness of different business groups to reveal the between therevenues andnet income oftheplant,which goes back to the otheras in domestic ownedenterprises can be observedinterms ofinconsistency of Zaporizhstal's export sales andenormous influence over its production. Investments Ltd,GreatBritain.Midland, with only11% share has exclusive allocation Management, Kyiv–11%,andhas12% of foreign ownership ofGlobal Steel 2007, which isamajor successamong others.Evenincome after2007, increased can seecontinuous growth. This istheonly enterprise thatshowed growthevenafter (Iron & Steel - Owners emerge in Ukraine 2003 Nov, 20) Couronne, Caroline,Oct 1, 2004 (Iron & Steel - Owners emerge in Ukraine 2003 Nov, 20) 60 160 Nevertheless,the same picture 161 , and since that time we 159 The CEU eTD Collection employees receiving alltheshares inthecompany2000. in 162 incapability ofthestate to restructure inthese times. strong roleintheprocessofprivatization, which supportsShafer’sideaofthe status quo even hardin times. pressure of theorganized andconcentrated labor, therefore aimingat maintaining in theheavy sectors, largefirmsmore are dependenton thecapability ofcollective scale privategroups, company hadtobeprivatized. stay competitive and get access to the raw materials in a competition with other large structure, stillit is abletosurvive, andeven keeps itssolid market share.Inorder to immense amount ofworkers (around 70 thousands). Inheriting Soviet organizational steel makers the companyable tokeepthemarket still among is position theworld’slargest80 remaining the company, thatmaintained the Soviet production style. Nevertheless, Ilyichstal creates the group of own,its beingprivatized by its own employees, and due tothefulfillment oftheprivate interests of the owners. growth, thenumbers arehardly significant. The seemingly lowered numbers may be nevertheless, the company startedwith verylow numbers, andevenshowing the 164 163 166 Press University 165 p.4 Topsteel producers 2008. (n.d.). Frieden,J. (October1988). Classes, Sectors, and Foreign Dept inLatin America. Couronne, Caroline,Oct 1, 2004 (Iron & Steel - Owners emerge in Ukraine 2003 Nov, 20) Shafer, M. (1994). Winners and Losers. How sectors shape the developmental Prospects of States. , p. 13 162 byshowing largeproduction volumes aswell asemploying an The World Steel Association Steel World The 164 Thestate in this situation was unable toplay a 61 163 ButaspredictedbyFrieden, 165 166 It all resulted in Ilyich's Comparative Politics Cornell , 1-20, , CEU eTD Collection 167 iron in2008, Large volumes ofproduction atthe USSteel Kosice reached 4.5 million tons of pig years, different from Statements http://www.usske.sk/corpinfo/fin-e.htm Financial Kosice Steel US on based calculations, own Source: task toaccomplish. Thesteadygrowth which canalso ratescanbeobserved, that thesenumbers even increased compared toprevious years,which was a hard Figure 4US Steel Kosice revenue and netincome, 2005-2008 performance hasbeen extremely consistent and growing. Analyzing the SlovakianUS Steel Kosice data (figure 4), we cansee that its Kosice Steel the US of Success mill: Steel Slovak of the netincome and 3.5 Revenues (US Steel Kosice Financial Statements from different years n.d.) 167 which areconsiderable numbers, especially taking intoconsideration 62 CEU eTD Collection 170 169 168 happened Ukrainein and Slovakia theirin major –steel. industry TheSlovak case To conclude, Ihaveshown theway ofdevelopment inwhichtransnationalization had tobe done in order to attract more investments. important role inbuilding an infrastructure, and providing incentives, doingwhatever not predict aclear timetablefor when willit happen. The government also played an which definitely inspired the investment. USSteelhascounted onit,although could degree, and US Steelhad a strategic vision of the further car investors’ presence, at. interesting tolook sectors isvery leading sector in Slovakian economy. Theinteraction between the two leading steel tothecomplementary industry,namely, carindustry, which theis other major itssteelin industry, since allows,theit ashasbeenmentioned above, supplyofthe income growthmakemore and it transparent. Slovakia seems alsotobesuccessful being so transnational, Slovak US Steel ableis toput in line the revenues and net cases where localbusiness groups have a lotofpower. Exactly tothe due reason of capacity andtheopportunities thanthelocalcompanies, themost unlike in Ukrainian state proved unable torestructure. InSlovakia we doseethat MNC has a bigger small country, which may choosetransnational over nationalprecisely because the takeover ofaheavy leading sector requires domination byMNC The Slovakian case seems toperfectly support the argument that transnational experience on the steel world market. large extent tothefactthat it hasbeenacquired bytheTNCwhich hasamajor partially be attributed to a strong currency and incentives from the EU side, but to a Interview with David Lohr, president of U. S. Steel Košice. (29 Aug 2005). Greskovits, 2003, p.14 Shafer, 1994, p. 12 169 Thecar companies already were theretoa 63 170 The Slovak Spectator 168 , especially in a , especially in CEU eTD Collection 172 171 better performance terms in revenues ofits andespecially, incomes. Nevertheless, This supportsmy argument initial thatyes, transnational foreign ownerdoesshow a contributing to the decreasing unemployment, aswell as boosting productivity. elements oftheindustry, utilizingthe local skilled labor, creating newworkplaces and economy supported theofidea transforming the leasteffective and inflexible Conversely, thefindings fortheSlovak foreign-led large-scalecapitalist political of theenterprises futurecan bemade. development industry ofthe after thecrisis is over andthen theclearer assessment steel market arenotso optimistic, but itimportant towait andseethepath still keepagoodshare ontheworld steel market.The current trends ontheworld arena. It to seethis theis hard yetsince companiesshowing are good results and as squeezetheir statusquoaswell themore successfulrivals outofthemarket coalition between inflexible andpowerfulbusiness andlabor” transnationalization from below has failed interms trapped by“conservative ofbeing moreout tobea successful storyforUkraine ingeneral tooearly tosaythat too,itis transnationalizationthere, and although the transnationalizationfrom above turned capitalism came trueprecisely, since we observed two different forms of In thecase of Ukraine, it isnotsoclear that thefinding for thenational led large complicated,under andoften nottransparent mechanisms. underwent complicated restructuring schemes involving different typesofownership the industry restructuring. InUkraine privatization of steellarge enterprises turned out tobemuch easierinterms ofclearownership andcomprehensive way of Greskovits, 2003, p.7 Greskovits, 2003, p.14 64 171 , which aim to retain 172 CEU eTD Collection avoiding thetransparent and competition.fair to boostimmensely theirown creating profits, thecheatingmechanismsand further developing their own mechanisms tostaycompetitive onthe market, butmost ofall, very specific conditions in order tobe more transparent. That iswhy theyare and meanseconomic forthesuccessful expansion, although theyfind themselves in as Ihavefurther argued,domestically lednational owners have also thecapacities 65 CEU eTD Collection winners and loserswinners and intheprocess. expertise. Therefore there no black is andwhite privatization pattern with pre-defined brought about certain levelofinnovationto these enterprisesas managerial aswell statistics to avoid larger tax deductions. However, thechange of the ownership domestic businessgroups were interested in the lowering their official revenue revenues stayed low. Itmeans that the owners ofthe enterprises privatized by revenues and profits ofthe enterprise, although theprofits were increasing, the off inanycase. There was stillalack transparency,in since after analyzing the no matter thatit is thedomestic owner, private ownership makes theenterprise better groups turned outtobenotbad either. Their profitability alsolargely increased, since Surprisingly enoughtheresults ofother being companies privatized by business local above aswell asre-stated the positive effects from the foreignprivatization. Steel Kosice have enhanced our understanding of the transnationalization from the two main examples Ukraine in and Slovakia – ArcelorMittal Kryvyj Rih and US cronyism deceases ofthepost-communistand other Inthesteel legacies. industry therefore contributed tothe large non-transparent sales ofthe strategic enterprises, suggests that large scale privatization has gone through a lot ofcontroversy, and looking intothesteel industry, theconclusion isasfollows. First ofall, theevidence After thein depthanalysis of thelargeenterprise privatization, aswellas specifically Conclusion 66 CEU eTD Collection support in mysupport in The veryideaaboutnegatively research. affects this thecountry’s thinking interms ofre-nationalization of earlier privatized enterprises did notfind arguments aboutincreasing state control overtheenterprises andpossible re- these processes arecomplementary and notmutually exclusive. Tandon’s competitiveness increased proportionally with theprivatization schemes, therefore and demonopolization thatmattered andnot privatization donot hold true, since However, arguments ofBogomolovand (1996) Stiglitz (1999) aboutcompetitiveness bodies. of interestbystrictly establishingthe level ofauthorityFNM and thegovernmental enterpriseslarge stillexists, while Slovakia hasmanaged toovercome suchconflict Ukrainein theprocessesofcontroversy and notunitestrategyonprivatization of privatizingin them.major the which difference of is interest in my that casestudiesis was notonly incapable inmanaging theenterprises, has oftenit possessed obstacles interesting findings byscholars thatcorrespond with theonesIfound thatis thestate and itkeeps its fiscal rolein filling thebudget and covering the debts until now.Other the costsoftransition turned outtobeavery relevant issue forUkraineespecially, made that in some byscholars, countriesprivatization hasbeen used forcovering assessing theprivatization oflarge enterprises inUkraineandSlovakia. Findings enterprises are still present andvisible. This isalso what Ihave found interms of with thelaw violations, thepositive results ofitcomparing tothestate owned 1998, Aslund (2002) who arguedthat regardless thefact that privatization occurred are similarin onefields anddiffer others. in For example, (Barberisetal., Earle 1996, Comparing tothefindings of scholars inInternational political economy myresults 67 CEU eTD Collection communist countries intransition followed either “the Ukrainian” or “the Slovak” path, There are also broader implications of my research.Since many ofthepost studies themain challenges posed by privatization. deeper understanding oftheprocesses, and identify andanalyze within the case scope as well asthespecific sphere –steel. This hasbeen done in order to facilitate However, Irecognizethe limitations ofmy with research regards tothecountries’ positions thein future. results, andwith some clearance ownershipin shares, might alsotake the leading managed andtaken over by large business groupsalso show quite satisfactory the topof largest steelproducers’ list. However, theenterprises which are better management, betterpolitical environment aswell asplacing the enterprises on privatization from above by foreign giants in the form of increased profitability and Steel Kosice andArcelorMittal Kryvyj Rih show the undisputableadvantages ofthe should be developed. The mainargument inthesteel privatization is thatthe US and aclearstrategy the privatizationin of the strategically important enterprises strategic enterprises should beapproached with extensivecare andspecialattention management, whichhave been arguedby many scholars.Privatization in the results from privatization asmore efficiency, increased profitability, better transparency andother negative issues inprivatization canoverride many positive To sum up, my argumentsmain canbe expressed asfollows. The lack of withsuch policies simplyis highlyunsafe. image andmoreover, investors, sincethey feelthat doing business in thecountry 68 CEU eTD Collection be considerably huge. limited toMacedonia, Albania, Montenegro, Serbia andBosnia andHerzegovina can implications forthe countries, the still process in ofaccession, including butnot understanding ofthechangemore ina detailedmanner. Therefore possible matterwouldbe very usefulto conduct, since it would haveenhanced the Upon the greater time availability the in depth analysis of the legal aspects of the obligations andconditions to beableto become afullmember oftheEU in 2004. the aim of theEUaccession,countryhas put alotofeffortsinfulfilling thelegal of transition. Since themaindriving force behindthe radical change Slovakiain was there are a lotof lessons to be learned byother countriesthat still are in theprocess thechange in efficiency and profitability after politicalchange in 1998 Slovakia,in consideration theprivatization paths inUkraine andSlovakia,the and dramatic can beplaced back into the larger context thefollowing in way. Taking into transition orstill areintheprocess oftransition. 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Valentyna Semenyuk. “Firing oftheHead of the SPF –this is the next Valentyna Semenyuk. “I amgladthat Ministry is nowtalking aboutthe , byGrzegorz Kolodko, MilicaUvalicW. Saul Estrin, 89-118. New , 2006:http://www.dt.ua/2000/2060/52302/. , March, 1994: 1-28. Company profile -Metalurhiinyi kombinat Azovstal' VAT. , byDavidFolkets-Landau, Timothy LaneGerard Caprio, Cornell University Press The Law of Ukraine about Pe-privatization ofthe Express 74 Building SoundFinance inthe Emerging , 2008. The WorldSteel Association , 1994:1-48. Interview, SPFU, 2008. Glavred Transition and SK magazine , 2008: Dzerkalo IMF , CEU eTD Collection 76. of privatization against appeal to Holding "Smart Yurii. Vinnychuk, 75. years." different from Statements Financial Kosice Steel "US 78. a up set only can One Riabchenko:"Oleksandr Nataliya. Yatsenko, 77. while." a for last Ukrtelecomwill"PrivatizationYarmoshchuk, of the Tetiana. 74. only?" Pinchuk re-privatize to decided "Yushchenko UNIAN. 73. verystep." dangerous a privatizationtheis of UNIAN."Blokade 31, 2003: http://www.mw.ua/2000/2060/37429/. Kryvorizhstalafter presidentialelections." http://www.usske.sk/corpinfo/fin-e.htm. http://www.expres.ua/articles/2005/10/06/2066. privatization agency atthestate PropertyFund." http://www.radiosvoboda.org/content/article/1799346.html. Radio Svoboda 27, 2009.http://www.ukranews.com (accessed 0515, 2010). http://www.expres.ua/articles/2008/04/18/25781. 75 Ukrainian NewsAgency. , 2009: Zerkalo Nedeli Express Express , January21- November , 2005: , 2008: