He Hotel Ukraine, a 14-story symbol of Soviet kyiv, has witnessed first-hand the last six decades of the country’s history, from the celebrations for the fall of the Soviet Union to the Euromaidan protests that ended with the overthrow of Viktor Yanukovych. In 2014, in fact, it became a protagonist: its facilities became a morgue and a field hospital at the same time, and from its upper part snipers fired at Independence Square.
Now, more than two years after the start of the Russian invasion of Ukraine, the maintenance of the hotel is a burden on the country’s war economy. The state-owned property, built in 1961 under the name Hotel Moscow, is one of the 3,100 public companies inherited from the USSR. Of these companies, barely half of them are in operation and only 15% generate profits. The rest are an obstacle that eats public money: Only five companies cost the public more than 50 million dollars annually. The Hotel Ukraine alone accumulates a debt of one million dollars.
Therefore, the Government of Volodymyr Zelensky has resolved to privatize as many companies as possible and thus not waste a single hryvnia from the state coffers for the war. The hotel is already up for auction, with a starting price of 25 million dollars. Along with him, the privatization plan has started with another twenty companies. Among them is the United Mining and Chemical Company (UMCC), one of the largest titanium producers in the world, which the Government tried to auction three times without success due to the lack of bidders in the face of the pandemic and the war.
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Strengthening a war economy
In addition to raising money for a state budget that is short $5 billion for military spending this year, the privatization plan Zelensky’s plan aims to strengthen the flagging Ukrainian economy by attracting investments that make the country more self-sufficient over time.
Michael Lukashenko, a partner at Aequo, a law firm that has advised companies on privatizations, told the New York Times in a reportage: “The State desperately needs money. If we don’t sell now and raise money, soon there will be nothing to sell because the property will be destroyed or occupied.” Oleksii Sobolev, Ukrainian deputy economy minister, added: “The budget is in the red. “We have to find other ways to get money to keep the macroeconomic situation stable, help the army and win this war against Russia.”
There is an organization, the State Property Fund, whose current objective is precisely privatize as many companies as possible, and retain only a hundred of them for the State. Its director, Vitali Koval, told the New York newspaper earlier this week that he would take advantage of the Ukraine Recovery Conference (URC) which took place on Tuesday and Wednesday in Berlin.
One of the four pillars of the URC, to which Zelensky himself attended, was mobilize the private sector for reconstruction and economic growth. Investors and businessmen met in Berlin this week with the aim of strengthening the commitment of the private sector. “Important issues include business opportunities in key sectors of the Ukrainian economy, state support instruments, international support in access to finance and a green and digital transition,” the organization explained in a statement.
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The strategy seems to be working. Unlike previous attempts to sell UMCC, this time there are already seven investors interested in the mining and chemical company before it is even put up for sale. The bidders know the risks they run: another of the companies up for auction is Centrenergo, the main producer of electrical and thermal energy in central and eastern Ukraine—the regions invaded by Russia. In April, a Russian missile attack left the Centrenergo thermal power plant in Trypillia, in the kyiv Oblast, out of operation.
“Ukrainian officials and experts recognize that, given the risks posed by the conflict, it is likely that assets are sold at lower prices than before the war. But they hope privatizations will help shore up the economy by creating more jobs and tax revenue, as well as attracting more investment. They say the situation is urgent,” says the Times.
Beyond external threats, there are other factors that investors should be careful about. The main one of them is the corruption. Previous privatizations have often allowed large assets to fall into the hands of oligarchs at low prices, or have been delayed for years due to unfavorable market conditions and legal disputes over the payment of companies’ debts. Therefore, the Government is faced with the challenge of acting as a Responsible seller capable of giving guarantees and compensation to potential buyers.
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