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. Last Updated: 07/27/2016

Investors See Storm Brewing Over Kiev

KIEV -- When Viktor Yushchenko campaigned for president of Ukraine last fall, he promised to investigate the dubious privatization deals that characterized the administration of his predecessor, Leonid Kuchma.

Deep-pocketed investors from both Russia and the West cheered Yushchenko's victory in the hope that his government would unlock opportunities once believed to be closed deals.

Now, however, the very zeal with which Yushchenko's new team has tackled past privatizations is placing the country's investment climate at risk and may stir up new troubles with Russia.

Last week a public debate erupted between Yushchenko and his prime minister, Yulia Tymoshenko, after she said that more than 3,000 companies are under investigation. That number was 100 times higher than the approximately 30 companies mentioned by Yushchenko earlier in the week.

"There will not be a review of 3,000 privatizations," Yushchenko said in an interview with Agence France Presse on Friday. "I go by the principle that -- in all likelihood -- there will be only a few dozen companies concerned. The list, once established, will be definitive."

The inability of the government to speak on the issue with one voice risks putting a cloud over the business climate at a time when the country has been attracting major interest from international investors, analysts said.

"Investors are worried about the massive privatization issue," said Andriy Blinov, chief economic analyst at the International Center for Political Studies in Kiev. "Even the discussion is dangerous for the country and the investment climate."

Reprivatization need not create instability, but the government needs to be straightforward about its plans, said Alexei Novikov, analytical director at Standard & Poor's in Moscow.

"Maybe [reprivatization] is the right thing to do," he said on the sidelines of an investors' conference in Kiev last week. "But there should be some clear set of rules. The clarity of these rules is the main precursor to investment."

Some also said the exchange between Yushchenko and his fiery prime minister signals the opening of a political rift in the new administration.

Andriy Kuznichenko, a political analyst at the Institute for Political Strategies in Kiev, said the president and the prime minister appear to be playing to different audiences. Tymoshenko's announcement looks like a warning shot aimed at domestic elites, while Yushchenko seems to be trying to reassure foreign investors, he said.

"This 3,000 figure is not realistic," Kuznichenko said. "It's a way of putting pressure on certain business and political elites who have not yet decided whether they support the new administration. In a certain sense, I'd say it's a kind of political blackmail."

The authorities say they are still working to produce a comprehensive list of companies whose privatization will be reviewed, although a few deals have already been singled out by top officials.

During the course of last year's presidential campaign, Yushchenko promised to overturn privatizations in which state properties were sold off for less than market value, or in which auction winners did not make additional investments required by the terms of tenders.

The Ukrainian government has promised not to use the reprivatization campaign as a witch hunt against political enemies. Undoing fraudulent privatizations cannot be likened to the Russian authorities' legal assault on Yukos, said Deputy Prime Minister Oleh Rybachuk, because businessmen's political loyalties will not be a factor in drawing up the list of companies to be reviewed.

"What we are saying is: We do not care who the guy was [if] the law was outrageously violated," Rybachuk said in an interview last week. "If there are cases of ... businesses who are loyal to us, they should also be there [on the list]. That is clear."

The government's move to review privatizations is already setting off alarm bells in Russia. On Friday, the State Duma ordered an investigation into how Kiev's actions might affect Russian investments in Ukraine.

"It is necessary to understand the degree to which the list of enterprises being prepared for deprivatization could affect Russian interests," Duma Speaker Boris Gryzlov said, Interfax reported.

In the bitterly fought presidential election campaign, the Kremlin openly backed Yushchenko's opponent, Viktor Yanukovych.

Viktor Pleskachevsky, chairman of the Duma Committee on State Property, said that Moscow should be prepared to take "adequate" steps to protect its economic interests, AFP reported.

Iosif Diskin, co-chairman of the Council for National Strategy in Moscow, charged that the reprivatization issue is being turned into a political weapon by Yushchenko's government.

"No liberal adherence to ownership rights stopped the leaders of the Orange Revolution, on purely economic grounds, from saying: 'We will destroy the economic foundation of our political enemies,'" Diskin told reporters at a presentation Thursday, The Associated Press reported.

Numerous enterprises that government officials have indicated will be up for review are controlled by powerful businessmen who opposed Yushchenko during the election and are closely associated with Kuchma.

Properties belonging to Viktor Pinchuk, Kuchma's son-in-law, and Rynat Akhmetov, Ukraine's richest man, are in the new government's crosshairs, officials said. Pinchuk and Akhmetov led the consortium that purchased Kryvorizhstal, Ukraine's biggest steel mill, for $800 million last year. The deal was annulled by a Kiev court last week.

Other properties likely to be reviewed include the Donetsk Botanical Gardens, where Akhmetov's house is located, said Rybachuk's spokeswoman, Kateryna Kyrychenko.

Yushchenko has also criticized the sale of the ore mining and processing enterprise Ukrrudprom, which was sold to a group connected to Pinchuk.

The Dynamo Kiev soccer club could also come under review, Deputy Prime Minister Mykola Tomenko said Friday, the AP reported. The club's president, Ihor Surkis, issued a sharp reply calling Tomenko's statement "incompetent." Surkis' brother, Hryhoriy, is president of the national soccer federation and belongs to the party of Viktor Medvedchuk, formerly Kuchma's chief of staff.