Financial Times

September 3, 2007

Ukraine's wealthiest man, Rinat Akhmetov, has significantly increased his
interest in a large electricity generating company through a controversial
debt-for-equity transaction that has cast a shadow over Kiev's ability to
privatise state assets transparently.

With snap parliamentary elections just weeks away, the deal has taken on
political overtones. Opposition parties have cried foul, alleging the sale
was fixed in favour of a businessman close to Ukraine's premier, Viktor
Yanukovich, and have pledged to challenge it.

Foreign investors who had their shares diluted through the deal are also
upset.

The deal is not expected to scare off the record amounts of foreign
investment flowing into Ukraine in recent years. However, it has left many
wondering if Kiev will improve its record on privatisations and put foreign
investors on an equal footing.

Officials representing the state's interest in Dnipro-energo agreed last
week to a 52 per cent share capital increase, boosting Mr Akhmetov's
interest more than four times to about 40 per cent. The stake has been
valued at $400m to $500m.

In return, energy companies controlled by Mr Akhmetov agreed to cover
$200m of Dniproenergo's debt to creditors, mostly state enterprises.

The government's interest in Dniproenergo was diluted by a third to 50 per
cent. Minority shareholder interests were also diluted.

Proponents of the deal, including Mr Yanukovich's government, point to
the need to pay off Dnipro-energo's debts.

A top manager at Mr Akhmetov's DTEK energy holding said the transaction was
"completely transparent" and legal, adding that his company would invest an
additional $200m into the debt-ridden company.

Critics argue the deal was conducted exclusively in the interests of Mr
Akhmetov. Some analysts said the government could have covered
Dniproenergo's debts and raised funds for state coffers by selling shares in
an open tender.

Tomas Fiala, director of Kiev-based investment bank Dragon Capital, said:
"It's kind of an inside deal and not very transparent. Mr Akhmetov was
allowed to buy at $100 per share, a big discount to the market price."

Opposition politicians, with an eye on the snap parliamentary elections at
the end of September, have said the deal illustrates how Mr Yanukovich's
government kowtows to the interests of allied business tycoons. Mr Akhmetov
is an influential member of Mr Yanukovich's Regions party.

"We see how this government is working in tandem with business," said Yulia
Tymoshenko, a former prime minister and leader of the opposition BYuT bloc,
which trails closely behind Regions with 25 to 30 per cent of voter support.

The government has denied giving preferential favour to Mr Akhmetov, who
was not available for comment.

Viktor Yushchenko, Ukraine's pro-western president, has sharply criticised
Mr Yanukovich's handling of privatisation.

The Dniproenergo transaction is the latest in a string of controversial
privatisation tenders through which domestic and Russian businessmen have
grabbed prized assets at fire-sale prices.

Ms Tymoshenko's bloc warned that the government might tender prized
assets to allies through rushed sales during the political campaign before
being swept out of power.

The government has recently announced plans to sell several large
enterprises this autumn, including a vast chemical plant valued at $1bn and
minority stakes in six electricity utilities.

Ms Tymoshenko said her party would seek to reverse bogus sales as she did
during her brief 2005 tenure as premier following the Orange Revolution,
when her government reversed the sale of Ukraine's flagship steel mill,
Kryvorizhstal, sold controversially in 2004 during Mr Yanukovich's first
tenure as premier.

Mr Akhmetov and a partner bought the Kryvorizhstal mill for $800m in a
tender process that excluded foreign bidders. It was resold in 2005 to
Mittal Steel for $4.8bn.