You're reading: Prized Kyiv monopolies target of insider wars

With Kyiv’s eccentric and controversial Mayor Leonid Chervonetsky now serving a mainly ceremonial role, the lid is being lifted on some of the deal that happened under his rule – and what’s beneath is proving very murky.

The new city administration – led by pro-presidential appointee Oleksandr Popov – is battling to reclaim through courts prized city assets after it emerged that one company, Novy Region, had acquired large stakes in several leading municipal companies that were never officially, or at least transparently, privatized by the city.

But concerns have been raised that shares in the lucrative and prized city-owned companies, including utilities with monopolistic positions on the market, could be resold to insiders close to President Viktor Yanukovych’s team at below-market prices, as happened when he was prime minister in 2006.

Experts said municipal companies that provide everything from electricity, heat, water and sewage services desperately need investment and could benefit from private ownership.

But they warn that stocks sold in shady deals to well-connected businessmen could bilk a cash-starved city budget, while generating big profits for the new owners without improvement in services.

The news that some of Kyiv’s biggest companies no longer belong to the capital city has been announced in a steady trickle of statements posted on the city administration’s website since last summer.

They reveal how from May 2009 to spring 2010, a company called Novy Region bought stocks of several of the largest municipal companies:
28.46 percent of city gas provider Kyivgas,
25.4 percent of water supply and drainage company Kyivvodokanal,
80 percent of construction company Kyivmiskbud and 51 percent of the biggest chemical fiber manufacturer in Ukraine, Kyivhimvolokno.

Later the shares in Kyivmiskbud and Kyivgas were sold to Cyprus offshore companies.

Kyiv Mayor Leonid Chernovetsky (left) and city administration head Oleksandr Popov are together on June 15, 2010. (Ukrainian photo)

Each valued at least in the hundreds of millions of dollars, these companies were never put up for privatization in a transparent manner.

The deals were made as usual in Ukraine – behind closed doors.”

– Denys Moskal, deputy head of the Kyiv city council’s property commission.

Moreover, politicians and analysts are pointing the finger for the dodgy deals at Chernovetsky, the ultimate city manager whose supporters in recent years also enjoyed a majority in the city council.

“The deals were made as usual in Ukraine – behind closed doors,” said Denys Moskal, deputy head of the Kyiv city council’s property commission.

He added that in some instances, the deals were carefully concealed through innovative means. Ukrainian legislation requires them to be announced publicly through statements published in newspapers.

But somehow, when the deals were revealed through such statements, all copies of the municipal newspapers announcing them were purchased by insiders early in the day, effectively leaving no copies available for the public to read and learn about the transactions.

Experts say that Novy Region looks like a classic front firm. According to the State Statistics Committee, it was founded in June 2008 as a publicly traded company.

Mykhailo Pirotsky is registered as the head of the company, but a call to a number registered as his contact was answered by a young woman who says she is a student and has never heard of Novy Region or Pirotsky.

There is no sign of the company in the building where it is registered, Barbyusa St. 40 in Kyiv, and neighbors say they have never heard of it.

Chernovetsky’s opponents on the Kyiv city council allege that the company is linked to the mayor’s son-in-law, Vyacheslav Suprunenko. He is also a member of city council.

Soon after being elected Kyiv’s mayor in 2006, Chernovetsky faced rising accusations by opponents of corruption. One of the most prominent cases involved a flurry of land auctions, where valuable plots were sold by the city council at privileged prices to companies whose ownership remains hazy.

Several of his high-ranking subordinates from the city administration are being investigated by prosecutors of involvement in corruption dealings.

Suprunenko could not be reached for comment while Kristina Chernovetska, his wife, has previously denied “any criminal allegations” against him.

Through a spokesperson, Chernovetsky declined to comment.

The mayor himself has yet to face any charges, and many doubt he will.

There are not even any documents signed by [Leonid] Chernovetsky” himself in suspicious dealings.”

– Volodymyr Sivkovych, a lawmaker from the Party of Regions.

“He is a smart man. With a loyal majority in the city council, he made sure all decisions were voted there,” said Volodymyr Sivkovych, a lawmaker from the Party of Regions who initiated a parliamentary investigation into Chernovetsky earlier in 2010.

“As far as I know, there are not even any documents signed by Chernovetsky” himself in suspicious dealings. The new city administration seems determined to get the stocks back. Since September courts have recognized all of the deals as illegal, and ordered the shares in the companies to be returned to municipal ownership. However, according to deputy city mayor Oleksandr Puzanov, current stock owners have no intention to surrender: “In some cases appealing processes are in progress, in others they are about to start,” he said.

In a country where most privatization deals are conducted with little transparency, many fear that the stocks saga is not over.

The new administration has appeared less keen to chase down the 12.73 percent it used to own in Kyivenergo, the monopolist for generating, transmitting and distributing heat and electrical power in Kyiv.

The stake was sold in a complex deal in 2007, apparently not an official privatization, then resold several times, finally ending up controlled by Trelodia Investments, a limited company registered in Cyprus.

“We figured it is meaningless to try to return these stocks. 12.73 percent doesn’t really influence that much,” says Puzanov, adding that instead the city is trying to “find a compromise with the shareholders.”

According to Puzanov, the state owns 50 percent plus one share in Kyivenergo, with the rest controlled by three Cyprus-registered companies, including Trelodia.

The city administration appears unwilling to get back the 12.73 percent of Kyivenergo.

Meanwhile, the DTEK energy holding of Ukraine’s richest man, Rinat Akhmetov, a pro-presidential lawmaker, announced late last year that it had boosted its stake in Kyivenergo.

But it did not make clear where it acquired the stake.

DTEK, an Akhmetov-owned company, announced on Dec. 9 it had increased its stake in Kyivenergo from 24.9 percent to 40 percent.

A spokesman for DTEK refused to reveal where the stock was purchased.

Puzanov said he didn’t know how this purchase affected the other owners’ stakes.

In developed countries, monopolies like Kyivenergo, Kyivvodokanal and others are either owned by the state, the city or a public company with thousands of share holders. But as long as the state is weak, large and mostly shadowy companies will continue to rule the country.”

– Ivan Plachkov, a former head of Kyivenergo and ex-energy minister.

Ivan Plachkov, a former head of Kyivenergo and ex-energy minister, claimed Akhmetov controlled Trelodia.

According to two other sources in the energy business that declined to be identified because of the sensitivity of the subject, Akhmetov owned the shares before through offshore companies, and the transfer to DTEK was a way to formalize ownership.

A spokesperson for DTEK said the company will not comment on its possible links with Trelodia.

General Prosecutor Viktor Pshonka says an investigation is underway into the recent share dealings involving Kyiv’s municipal companies. He has promised to reveal who was behind the “shadow privatization” in the “very near future.”

Meanwhile, for millions of Kyivans the news of municipal companies passing back and forth between owners via nontransparent deals shows that a lack of oversight exists over companies that provide services crucial to their daily lives.

Analysts say it also means that tariffs will grow as owners try to boost profitability to cover past losses incurred through murky deals, or milk the companies flat out, while doing little to improve services.

And so, the lack of transparency in the privatization process and ownership does directly affect citizens, according to Plachkov.

He added: “In developed countries, monopolies like Kyivenergo, Kyivvodokanal and others are either owned by the state, the city or a public company with thousands of share holders. But as long as the state is weak, large and mostly shadowy companies will continue to rule the country.”

Kyiv Post staff writer Svitlana Tuchynska can be reached at [email protected].