Ukrainian Privatization: Corruption Threats, Titanium and U.S. Interests

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Written by Hannah Bergstrom

Following the Ukrainian Revolution in 2014, Ukraine has been in the slow-moving process of privatizing state-owned industries in an attempt to create transparent markets free from corruption. Ukraine has grappled with corruption since the fall of the Soviet Union, and in 2014 the government and then President Yanukovych, were overthrown in an effort to move away from Russian influence, fight corruption, and have closer ties with the European Union.

In the aftermath of the revolution, the International Monetary Fund (IMF) has funded Ukraine with billions of dollars with the contingency that Ukraine will transfer state-owned resources to independent industries. But progress has only yet inched forward—the first attempts of selling state-owned enterprises in 2016 were unsuccessful. Now, in order to secure needed aid from IMF, Ukraine passed a new privatization law this past January—which aims to make the process of privatizing 3,000 state-owned companies faster and more transparent. Prime Minister Volodymyr Groysman has promised that this new law will secure economic growth, create jobs, and eradicate corruption. Despite these apparent moves toward privatization, however, Ukraine continues to face the threat of corruption—and this eminent threat is looming over Ukraine’s titanium industry.

Titanium is a critical material for aerospace and military industries worldwide, and is a vital material in other industries such as healthcare and technology. In particular, titanium sponge is a material used to create parts such as alloys and ingots for aircrafts, spacecrafts, missiles, and other machinery. The world production of titanium lays in the hands of six countries (China, Russia, Japan, Kazakhstan, Ukraine, India), with Russia being a dominant leader in titanium exports.

Ukraine’s major titanium manufacturers are United Mining and Chemical Company (UMCC) and Zaporozhye Titanium and Magnesium Combine (ZTMC). UMCC exports industrial materials to more than 30 countries, including the EU and the United States. ZTMC is the only manufacturer of titanium sponge in Europe. Both of these entities are on the list of government-approved companies to be privatized in 2018.

UMCC is the biggest supplier of titanium to a Russian company called VSMPO-Avisma. The company is a subsidiary of Rostec—one of Russia’s leading defense companies that manufactures military weapons. As the Ukrainian-Russian violent conflict in Donbas rages on with 10,000 casualties, it seems particularly vexing that Ukrainian-supplied titanium is subsequently used to make Russian weapons.

That’s not the only scandal UMCC has faced. In January 2018 the National Anti-Corruption Bureau of Ukraine (NABU) revealed that officials at UMCC were involved in an embezzlement scheme. According to the report, the officials “organized a criminal scheme of purchase of ilmenite, routine, zirconium and salmonite concentrates extracted at the PJSC UMCC at low prices. According to the scheme, the products were realized to the intermediary companies, registered in Austria and Latvia and related to the UMCC officials, at low prices. Then the abovementioned companies were reselling it to international companies at market prices. As a result, the SE UMCC suffered losses of more than 12.87 million USD.” The OECD reported in September that corruption is one of the biggest challenges that Ukraine faces when pushing for reform, and this is certainly demonstrated by UMCC’s venality.

Corruption and Russian influence in the titanium sector will not only affect Ukraine. In the United States, titanium manufacturers such as TIMET are experiencing a shortage of material, and the United States depends on imported material for about 79% of their titanium. In the late 90s to early 2000s, the National Defense Stockpile of titanium was entirely sold off, and as this material is absolutely critical in the United States’ defense and aerospace industries, they now heavily rely on exports from companies like Russian-owned VSMPO-Avismo.

United States-Russia relations have been perplexing in the last two years, and tensions between the two increased in April when newly imposed sanctions were placed on Russia. Because of these sanctions, Russia threatened to halt titanium exports to the United States. With a growing dependency on titanium, the result of this would be ruinous for the United States defense industry and for aircraft manufacturers such as Boeing.

To further complicate the matter, The United States has historically supported “Ukraine’s sovereignty and territorial integrity in the face of Russian aggression”, according to The United States Department of State. The complexity of these relationships raises the question: If Ukraine’s titanium sector is vulnerable to Russian manipulation, what will that mean for the United States export-reliant titanium industry?

Ultimately, Ukraine must move forward with privatization in order to mitigate corruption. And even though the IMF has wanted to expedite this process, there is a concern that the same mistakes will be repeated if this process is rushed. “If Ukraine will not be able to solve the outstanding issues such as debts to sanctioned entities or energy sector pricing reform, the attempt at privatization may facilitate yet another redistribution of assets from Yanukovych’s weakened oligarchs to the new generation of oligarchs” says author Oksana Bedratenko. Some experts have pointed out that involving foreign investors in the process could disrupt this pattern and help modernize the Ukrainian economy.

The issue of privatization in Ukraine is complicated and has moved at a slow pace since the 2014 Revolution. On one hand, it is becoming increasingly imperative for Ukraine to follow through with privatization, with the threat of corruption and Russian influence in the titanium sector being evident. And on the other hand, this process must be deliberate and careful so as to not repeat past mistakes.

The titanium industry is indispensable for markets around the world; it is also entangled in politics, corruption, bureaucracy, and power. And although corruption has been a pervasive issue for Ukraine, corruption in the titanium industry poses a particular threat to the United States, who is dependent on titanium exports, and to the IMF, who is investing billions of dollars into Ukraine’s privatization efforts.

Editorial note: A previous version of this article references Dmitry Firtash and Group DF in relation to privatization efforts in Ukraine, which were inaccurate. For that reason, Diplomatic Courier has removed all those references.