Ukraine Plans Privatization Push to Help Fund War Effort

Towering over Kyiv for six decades, Hotel Ukraine has witnessed some pivotal moments in Ukraine’s recent history.

Crowds gathered on the square in front of the 14-story hotel to celebrate the fall of the Soviet Union. Popular uprisings on what was later called Independence Square toppled Ukrainian leaders. Today, blue and yellow flags cover lawns near the hotel, serving as a reminder of the many lives lost in the war between Ukraine and Russia.

Now, Hotel Ukraine is up for auction as part of an effort to sell off some large state assets to help fund the military and bolster an economy battered by a grueling war that has drained the country’s coffers. The starting price for Hotel Ukraine is $25 million.

Beginning this summer, the government will auction some 20 state-owned companies, including Hotel Ukraine, a vast shopping mall in Kyiv, and several mining and chemical companies.

The privatization push has two main goals: to raise money for a state budget that is short $5 billion this year for military spending, and to strengthen Ukraine’s flagging economy by attracting investment that will, officials hope, make it more self-sufficient over time.

“The budget is in the red,” Oleksiy Sobolev, Ukraine’s deputy economy minister, said in an interview. “We need to find other ways to get money to keep the macroeconomic situation stable, to help the army and to win this war against Russia.”

Still, the privatization will only go so far, and faces considerable challenges for a nation at war, with many citizens worried the sales could be subject to Ukraine’s pervasive corruption.

Ievgen Baranov, the managing director at Dragon Capital, a Kyiv-based investment firm, said that privatization would work only if the government “acts as a responsible seller who’s able to give guarantees and indemnities to prospective buyers.”

Mindful that investors may be put off by the conflict, the government has set itself a modest target of selling a minimum of about $100 million worth of assets this year — a sum that pales in comparison to the multibillion-dollar military aid packages sent by Western allies.

Ukrainian officials and experts acknowledge that given the risks posed by the conflict, assets are likely to be sold at lower prices than they would have been before the war. But they hope the privatizations will help prop up the economy by creating more jobs and tax revenue in addition to bringing in more investment. The situation is urgent, they say.

“The state is in desperate need of money,” said Michael Lukashenko, a partner at Aequo, a law firm that has advised companies on privatization. “If we don’t sell now and raise money, soon there will be nothing to sell because the property will be either destroyed or occupied.”

After the Soviet Union collapsed in 1991, Ukraine inherited many poorly managed and debt-ridden state enterprises. Today, it owns some 3,100 companies, with less than half actually operating and only 15 percent generating profits, according to official figures.

Last year, the five most unprofitable companies cost the state more than $50 million. “This level of cost is unacceptable, especially during wartime, when every expenditure must be carefully controlled,” Vitaliy Koval, the head of Ukraine’s State Property Fund, which manages state companies, said in a recent interview at the fund’s headquarters in Kyiv.

On the wall of his office hung a map of Ukraine with pins representing some 30 state-owned distilleries. Only four are operating, Mr. Koval said. The goal was to remove all the pins, he said.

Mr. Koval said he and the State Property Fund were advertising the privatizations at a conference in Berlin this week focusing on Ukraine’s recovery.

A former construction and transport entrepreneur, Mr. Koval said he saw state-owned companies as a “breeding ground for corruption and other illegal activities.” His fund was now conducting “triage” to determine which enterprises should be privatized, liquidated or kept under state control. “Privatization is synonymous with cleansing,” he said.

The government’s ultimate goal is to retain control of only 100 companies.

Mr. Koval said Ukraine did not currently have enough weapons to prevent its factories from being destroyed or captured by Russia and needed to quickly sell off assets to “buy more shells and air defenses” to protect them.

“Investing a few thousand dollars into shells today is more prudent than risking assets falling into Russian hands in the future,” he said.

Past privatization efforts have often been ill-conceived, economists say, allowing large assets to fall into the hands of oligarchs on the cheap, or have been delayed for years by unfavorable market conditions and legal disputes over the payment of company debts.

The government says the auction system will make the process more transparent. But it remains to be seen if the debt disputes can be successfully resolved.

One of the biggest assets up for sale is United Mining and Chemical Company, known as U.M.C.C., one of the world’s largest producers of titanium, a metal used in aircraft and medical implants. Three auctions were canceled before the war, though amid the pandemic and the threat of a Russian invasion, because of a lack of bidders.

The Ukrainian government is now hoping that a fourth auction, scheduled for the fall, will actually happen. Vitaliy Strukov, a managing partner at BDO Ukraine, the financial firm advising the government on the sale of U.M.C.C., said seven investors had already expressed interest in the sale, which will start at around $100 million.

In Kyiv, many people have mixed feelings about the privatization push. Some said that “every hryvnia counts” in supporting the war effort, referring to Ukraine’s currency. But they also expressed fears about potential corruption.

“Where this money goes, nobody knows,” said Olha Kalinichenko, 36, who was having breakfast recently in the restaurant of Hotel Ukraine, enjoying a view of Independence Square with the golden domes of cathedrals rising between Soviet-era buildings on the horizon.

Ms. Kalinichenko said the hotel held a special place in her heart since it was the site of many battles for Ukraine’s sovereignty.

“I myself came here during the Maidan revolution; many volunteers stayed at the Hotel Ukraine,” she said, referring to the popular uprising that ousted Viktor Yanukovych, a pro-Russian president, in February 2014 and foreshadowed the current conflict with Moscow.

Alla Sheverieva, an employee of the hotel for more than 30 years, said she remembered seeing Ukrainian riot police officers violently dispersing crowds that had gathered on the square during the Maidan revolution. Snipers also fired on the crowd from the top of the hotel.

“I heard shooting and there were crazy screams in the hallway as they started bringing in the dead and the wounded,” Ms. Sheverieva said, recalling how the hotel’s lobby was turned into a makeshift hospital, its marble floors smeared with blood.

Mr. Koval, the head of the property fund, said the hotel had accumulated $1 million in debt, and that the government should not hold onto it for its history. Many Soviet-era businesses were now “relics of the past,” he said. “Today we have to break free from this legacy.”

Ukraine is especially eager to attract foreign investors “to show that private investment is possible even during the war,” said Mr. Baranov of Dragon Capital.

But Ukrainian officials and economists admit that wartime conditions will make luring investors a challenge.

In April, Russian missiles destroyed a power plant operated by Centrenergo, one of the companies Ukraine had hoped to privatize. “There isn’t much to sell now,” Mr. Baranov said.