KyivPost

Monopolies thrive as toothless state bows to moguls

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March 19, 2010, 1 a.m. | Business — by John Marone

A view inside the Kryvorizhstal steel mill. (UNIAN)

Ukraine’s Anti-Monopoly Committee is supposed to be the country’s watchdog against oligarchs disdainful of healthy competition, but the dog doesn’t have any teeth, and it isn’t fed well either.

The exterior of the Azovstal mill. (UkrInform)

These oligarchs, many of whom have cultivated a benign international image since their opaque beginnings in the 1990s, continue using their stronghold over political power to play with a stacked deck at home, monopolizing entire industries. In doing so, they fill their deep pockets with millions-to-billions in profits. This comes at a hefty price for the health of Ukraine’s economy and its cash-strapped citizens.

Investigations, and indeed the overall ability of the government’s anti-trust agency to effectively combat monopolization of entire sectors in Ukraine, have been securely muzzled by legislation and starved of financing. Moreover, the very definition of a monopoly in Ukraine is so legally watered down that powerful business groups can wiggle out of an investigation by claiming competition from abroad.

Nowhere is oligarchic excess in controlling markets more blatant than in the nation’s metallurgical industry, which accounts for 40 percent of exports. And it’s here that even the largest of foreign investors feel the pains of stifled competition, all consequence of an oligarch-captured economy.
Jean Jouet, chief executive officer in Ukraine for ArcelorMittal, the world’s largest steel producer and Ukraine’s biggest investor, decried the situation with ferroalloys during a press conference on March 16.

“The ferroalloy situation in Ukraine is monopolistic, and we are against monopoly,” he told journalists, referring to ArcelorMittal’s legal clashes with Ukraine’s three ferroalloy plants – all controlled by the Privat Group of billionaire Igor Kolomoisky.

When the London-based steel giant paid a whopping $4.8 billion for Ukraine’s largest steel mill in a showcase 2005 privatization sale, it expected Ukraine’s metallurgical business to be reformed and cleaned up of monopolies, or at least for them to be regulated properly. But, according to Jouet, ArcelorMittal has struggled to purchase ferroalloys – a key ingredient used in steel-making – at a competitive price from the Ukrainian group which single-handily monopolizes the lucrative sector.


Shady privatizations still haunt

The main reason for continuing monopoly in the metallurgical sector of Ukraine is that not all companies had equal access to assets during privatization, Ivan Kharchuk, senior analyst at investment company Troika Dialog Ukraine, said.

Kryvorizhstal, the biggest of the country’s big three steel makers, was bought by Mittal Steel (which later merged with Arcelor) after now former Ukrainian Prime Minister Yulia Tymoshenko wrested the prized asset away from oligarchic control. As prime minister in 2005 after the Orange Revolution, she cancelled a previous auction of Kryvorizhstal conducted under the presidency of Leonid Kuchma, which was widely regarded as being rigged in favor of well-connected billionaires.

Rinat Akhmetov, Ukraine’s richest man, and Viktor Pinchuk, Kuchma’s son-in-law, acquired Kryvorizhstal for about $800 million in a 2004 tender despite much higher bids made by foreign companies, including Mittal Steel. Later, in 2005, Tymoshenko reversed this sale, and held a nationally-televised repeat auction that netted a record-breaking $4.8 billion.

While that tender was cancelled, others conducted in 2004 and in previous years have not. As a result, much of Ukraine’s metallurgy business remains locked up in the hands of a limited group of billionaires.

In ferroalloys, for example, Kolomoisky and his partners control all three of Ukraine’s lucrative plants and two strategic ferroalloy ore suppliers.
In addition, Kolomoisky’s Privat owns about 40 percent of Ukraine’s major oil producer, but largely controls management and decision-making even though the state owns a 50 +1 percent stake.

In steel making, Metinvest, Akhmetov's metallurgical holding, has a monopolistic position over production of the country’s iron ore. According to Troika, Metinvest and its Russian-Ukrainian partner Smart Group control over half of the country’s iron ore production (over 37 million out of more than 66 million tons produced), leaving other major steel producers to rely on ore imports as an alternative.

Privat and Metinvest acquired these and other strategic multi-billion-dollar assets for fire sale prices (tens-of-millions of dollars) in the closing months of Kuchma’s tenure.

The highly-controversial auctions were approved by the Anti-Monopoly Committee.

Oligarchic monopoly in Ukraine has often been a source of frustration for Western businessmen otherwise keen on investing in the country.

Jose Manuel Pinto Teixeira, the European Union’s top official in Kyiv, threw up his hands before journalists on Nov. 30. “Corruption, red tape, administrative obstacles of every kind – these are only things that serve the interests of those who today control the economy because they do not want competition. They are allergic to competition,” he said.

Ukrainian businessmen with less-than-oligarchic clout have also been vocal. Volodymyr Boyko, the general director of top-three Ukrainian steel maker Ilyich, has repeatedly accused oligarch-backed competitors who, in his words, monopolize the ore market, of unfairly charging his mill inflated prices for this key raw material. Akhmetov’s Azovstal mill, Ukraine’s other top three steel maker (in addition to Ilyich and Kryvorizhstal), has an unfair advantage, Boyko had argued.

Troika’s Kharchuk agrees that Ukrainian steel makers lacking sufficient ore of their own suffer from pricing set by their competitors.

“They are therefore compelled to buy ore in Russia at essentially global prices in order to avoid full dependence on domestic producers,” he said.


Not enough teeth

So, why don’t Ukraine’s anti-trust regulators crack down on such infringements? Insiders say it’s because the oligarchs, who so control Ukraine’s politics in the first place, don’t allow them to do so. Neither are the oligarchs interested in raising attention to the issue. Metinvest’s press service and a spokesman for Privat’s assets failed to reply to Kyiv Post requests for commentary.

Oleksandr Melnichenko, acting head of the Anti-Monopoly Committee, acknowledged in an exclusive interview to the Kyiv Post that there are markets in Ukraine “distinguished by a certain degree of domination, but these sectors, as well as other sectors, especially those being dominated, are being carefully watched by the Anti-Monopoly Committee.”

When asked to specifically address the situation in Ukraine’s metals sector, he said: “The committee is conducting an investigation on its own initiative.”
But legislation drafted in Ukraine’s oligarch-dominated parliament fails to arm regulators enough.

For example, regulators “consider a company a monopolist if its market share exceeds 35 percent, [but] since the committee doesn’t count Ukraine separately but countries of the Commonwealth of Independent States altogether, there are no companies with more than 35 percent market share,” said Kharchuk.

Worse still, even if the committee does discover a lack of competition, it has to ask permission to use this information in a case against the offender.

“If the committee receives information, and our entrepreneur wrote that it’s confidential, we cannot divulge that information,” said Melnichenko.

In other words, Ukraine’s anti-monopoly law is effectively powerless against the country’s leading oligarchs.

“The law allows us to open criminal cases and investigate on our own initiative, but you understand that when we enter the market on our own, we are sort of going against the market. The committee must have friends not just among public opinion of millions of consumers,” Melnichenko said.

Andrew Mac, managing partner of Ukrainian law firm Magisters, said that the Anti-Monopoly Committee can be no more effective than the feeble laws that it has to work with.

“Relevant laws and international conventions do not provide the committee with substantive and independent investigative ability in relation to such matters as beneficial ownership of Ukrainian assets via offshore holdings. To this extent, the committee can only search public databases and/or rely on information market participants provide. Accordingly, there may be violations of antitrust law that many suspect exist,” Mac said.

Melnichenko said the committee has drafted a legislative concept on reforming the current system, but its further development ultimately depends on parliament.
The toothless government agency is further kept in check by limited budget resources.

Melnichenko said Anti-Monopoly Committee staff used to total 1,500 people, but now numbers only 800. Investigations in the pharmaceutical sector alone are currently handled by only three employees, he said. At the same time, the number of appeals received by the committee increased 22 percent, from 4,000 to 6,000, in the last two years.

And the Anti-Monopoly Committee's technology is behind the times.

“Computers are wearing out. I was at a territorial unit and they had a computer over 10 years old. You cannot even work on it,” Melnichenko said. “If the state wants to have strong state anti-monopoly control in the sphere of big and midsized business, and support of fair business, the state must think of developing this system,” Melnichenko added.


Kyiv Post staff writer John Marone can be reached at marone@kyivpost.com.
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