Leading Local Firms Eye Kiev's Prize Assets

Leading Russian companies are eagerly eyeing the Ukraines prize assets as Russias southern neighbor launches a major sale of state enterprises.

Local companies are particularly drawn to Ukraines petrochemical and aluminum sectors, despite the fact that enterprises in those sectors are heavily debt-ridden.

Ukrainian Prime Minister Victor Yushchenko said Russians were the main buyers in Ukraines privatization auctions over the past eight months, Vedomosti reported.

On Monday, a Russian firm walked away with yet another prize. No.1 oil firm LUKoil was declared the winner of a tender to set up a joint venture with Ukraines largest chemicals factory Oriana. LUKoil and the Ukrainian government will each own 50 percent stakes in the venture.

The Oriana holding comprises 14 factories that produce chemical products.

LUKoil was particularly attracted by Orianas ethylene and propylene plant, built in 1997, which is the newest in the Commonwealth of Independent States, United Financial Group said in a daily report. That acquisition will consequently allow LUKoil to almost double its ethylene capacity.

Ethylene is a gas used in plastic and resin preparation, in welding and cutting metals, and as an anesthetic, a refrigerant and a fruit-ripening accelerator.

The Oriana venture is part of LUKoils plans to diversify its operations into the petrochemicals sector. LUKoils president Vagit Alekperov has identified petrochemicals as an area for future growth for the company.

LUKoils production of petrochemical products in 1999 was worth $345 million. The company intends to triple that amount over the next five years.

The other contenders in the Oriana tender included the petrochemicals holding Sibur, which plans to merge with Gazprom and Alfa-Nafta.

Gazprom had expected to get Oriana as part of the payment for Ukraines gas debts to Russia, said Konstantin Reznikov, an oil and gas analyst at Alfa Bank. Now LUKoil will probably allow Gazprom to participate in the joint venture, he said.

Alfa-Nafta withdrew from the tender after the second phase.

"It was not profitable for Alfa Group. Better conditions were probably offered to LUKoil," Reznikov said.

LUKoils Ukrainian subsidiary, LUKoil-Naftokhim, has promised to pay off $1 million of Orianas debt and invest at least $37 million in technical upgrades.

LUKoil will also assist the holding restructure its debts of 240 million German marks ($103 million) to German banks and $200 million to other creditors.

The joint venture marks a further step in LUKoils plans to expand its presence internationally.

"Oriana will give LUKoil a foothold in Eastern Europe," said Steven Dashevsky of Aton brokerage. Oriana has a technical link with the Hungarian chemical plant Tiszai Vegyi Kombinat, in which Gazprom has a stake.

LUKoil already owns the Odessa oil refinery, the Romanian factory Petrotel and a Bulgarian oil refinery. A LUKoil official announced on Oct. 18 that the company is considering buying Serbias Novi Sad oil refinery.

Tyumen Oil Co., or TNK, made its largest investment outside the borders of Russia on July 19, when its Ukrainian subsidiary purchased a stake of 67.41 percent in the Linos oil refinery in the Lugansk region. As part of the investment terms, TNK was obliged to pay off the refinerys debts to the Ukrainian state budget totaling $63 million.

A 25 percent stake in the former Soviet Unions largest aluminum plant Nikolayev Alumina will be sold off in three tenders before the end of this year. The first tender, for 5 percent, will be declared Thursday. The remaining two tenders will be of 10 percent each.

Kamil Goca, the director of research at the Ukrainian investment bank Dragon Capital, predicts that Siberian Aluminum, which already holds a 75 percent stake in the plant, will be the only serious contender.

"No one else is likely to be interested," he said.

On Wednesday, Ukraines State Property Fund announced a tender for the controlling stakes in the regional energy-supply companies, Kievobloenergo, Zhitomiroblenergo and Rovnooblenergo. The stakes being offered range from 70 percent to 75 percent.

No Russian firms have expressed their intention to participate in the tenders for the Ukrainian energy suppliers.