4/12/08 – Updated with the responses of President Yushchenko and Rinat Akhemtov below
|Ukraine’s Supreme Court ruled in favor of PM Tymoshenko on the Dniproenergo ownership struggle – From dniproenergo.ua|
Yesterday Ukraine’s Supreme Court ruled that the ownership restructuring and debt consolidation plan that significantly boosted Rinat Akhmetov’s share in Dniproenergo last fall was illegal. This decision supported the complaints of the financial conglomerate Privat while paving the way for Prime Minister Yulia Tymoshenko’s privatization plan for the major electricity generator.
The decision confirms Tymoshenko’s assertion that the state-owned Electricity Company of Ukraine (EKU) owns just over 75% of Dneproenergo. The controversial restructuring plan that was struck down saw the state’s share lowered to 50%+1 through a supplementary stock issue that resulted in magnate Akhmetov’s Donbass Fuel and Energy Company (DTEK) gaining control of about 44% in Dneproenergo. DTEK, in turn, agreed to pay about $10 million, take on the company’s loans totaling around $200 million, and provide another $200 million in investment.
The shareholders had accepted this agreement and it was recognized by the government’s securities and stocks commission. However, Dniproenergo’s registrar, Ukrneftegaz, refused to amend the company’s shareholders’ register. Ukrneftegaz is controlled by Privat, a key owner of which recently expressed frustration at the manner in which Dniproenergo’s share issue had been handled.
A Privat-affiliated company and minority shareholder in Dniproenergo (owning 257 shares, or 0.00655%) launched the lawsuit against the restructuring plan, culminating in the latest Supreme Court ruling.
While the state now regains legal authority of around 76% in Dniproenergo–with Tymoshenko hoping to sell 60%+1, according to her privatization plan–the electricity company once again finds itself in financial problems as a result. This is underscored by the subheading of Kommersant’s article on the ruling, which reads “Dneproenergo is once again bankrupt.”
DTEK apparently remains the holder of Dniproenergo’s debt, giving it potential influence while the company is in a state of bankruptcy. This will likely complicate efforts by EKU and the government (and possibly Privat) to install new management for Dniproenergo and continue on the privatization plan.
DTEK criticized the ruling and promised to turn to European courts and appeal the decision (my translation):
“Unfortunately, the court in this case did not rule solely by the letter of the law, but acted in the interests of the Privat Group, which has organized a mass raiders attack on Dneproenergo…
The raiders, acting with one goal and attracting to their side some government officials from EKU and the Ministry of Fuel and Energy, attempted one thing — to return Dneproenergo into bankruptcy and under the guise of protecting the interests of the government, insert into the genco’s [electricity generating company] ranks of leadership managers loyal to the Privat Group…
We expect that today’s decision by the Supreme Court will be disputed in European courts, which are not subject to pressure and influence and are hopefully protected from the lobbying of financial-industrial groups.”
Indeed, the details of the Supreme Court’s decision, as relayed to Kommersant by a court source, raise suspicion of undue outside influence.
On Monday, Deputy Minister of Justice Evegeny Korniychuk met with each Supreme Court Justice separately for a closed-door meeting to discuss the Dniproenergo decision. Korniychuk had stated in late March that the Supreme Court “must make a decision” [“обязательно примет решение”] on the cancellation of the share issue. (The Kommersant article seems to imply that he was urging for a decision that would rule the restructuring illegal, but this is a bit up to interpretation.)
Kommersant also notes that the court seemingly came into the case with a preordained decision (my translation):
Curiously, the hearing on Dneproenergo yesterday lasted not more than 40 minutes. “The judges listened to the arguments of both sides, deliberated for about 15 minutes and then came out with their already-prepared decision laid out in a few pages,” said Dneproenergo board member Dmitry Tevelev (who was present at the court session). According to Andrei Astapov, a partner at the law firm Astapov Lawyers, such a quick announcement of a decision is only possible when the result is known in advance.
If such machinations are true, this emphasizes the paucity of rule of law within Ukraine even at the highest levels, despite being the focus of many international aid efforts. It also casts doubt on the decision, regardless of whether or not it was legally sound. Abnormalities in the manner in which the ruling was reached obviously reflect poorly on that eventual decision.
Last fall’s original restructuring plan drew criticism because the government, under then-PM Viktor Yanukovich from the Party of Regions (Rinat Akhmetov is a fellow Regions parliamentary deputy), essentially signed off on a deal organized solely in back rooms.
Tymoshenko has pushed for the cancellation of the deal and sees a privatization tender as a way to let potential investors compete and draw in more funds. “We decided to begin a clean privatization of thermal [i.e. coal and gas] electricity generators. This step should interest serious investors,” she said of her electricity sector privatization plan.
And while Dniproenergo’s shares surged 6% yesterday on news of the decision, there is speculation that this rise was essentially engineered by Privat in an attempt to show that investors agreed with the Court’s ruling. Since February, Dniproenergo’s capitalization has dropped by about $250 million.
Despite an ostensibly admiral goal of Tymoshenko, the methods being taken and the tactics being resorted to–by all sides (the parliament’s Committee of Justice, led by a Party of Regions deputy, was lobbying just as hard for DTEK)–paint the entire Dniproenergo issue in a rather poor light.
Update (4/10/08): “I respect the court’s decision,” says Akhmetov. “We have two roads: we can challenge it, or if the supplementary stock sale is illegal, then we have payed more than UAH 1 billion ($200 million) and the government should return that. Soon we will publicly say, which way we will choose.” (4/12/08 — Taras at Ukrainiana has video of Akhemtov’s quote uploaded. Thanks.)
Update (4/12/08): President Yushchenko has stepped into the fray, signing a decree on Friday that suspends Tymoshenko’s privatization plans for Dniproenergo and three other gencos. He (via his secretariat) has been critical of the government’s privatization docket, particularly the electricity companies. Yushchenko has implied that Tymoshenko is planning to use the sales in order to reward her political backers.
The two politicians have feuded over the fate of the head of the state property fund committee, the key organ in privatization procedures. Yushchenko has also used anti-trust reasoning in past attempts to suspend the sale of other assets, like the Odessa chemical plant.
As quoted by the Reuters article on the story, this decree attempts to find constitutional justification for the presidential-ordered suspension:
“The decisions and orders of the cabinet do not comply with the first part of Article 17 of the Constitution of Ukraine, according to which ensuring economic security is one of the most important functions of the government.”
Tymoshenko is relying on a full slate of privatizations this year in order to pad the government’s budget and fund her populist program of returning lost Soviet-era savings. Less controversial sales may yet continue, as progress is being made on the plan to privatize nearly 70% of Ukrtelekom. The starting price was recently set at $2.4 billion.
Any major privatization would likely be seen as a win for Tymoshenko, and she may be better off pushing for whatever she can get at this point.