Shops Go on Block as Ukraine Privatizes : Reforms: The program envisions selling off 60% of small state businesses by the end of this year.

After seven months of delay, Ukraine’s massive program to sell off state businesses to private owners lurched off the starting block Saturday at an auction of 17 small shops in this provincial western Ukrainian city near the Polish border.

Holding aloft the auctioneer’s hammer, Volodymyr Pilipchuk, head of the parliamentary committee on economic reform, declared to the applause of an invited audience of several hundred: “We begin a new era. The value of this hammer I’m holding is many times the value of the property we are selling.”

Ukraine’s privatization program is a crucial part of Western attempts, backed in part by U.S. government financing, to guide the former republics of the Soviet Union to the free market.

Ukraine’s program will be smaller than Russia’s, which is already moving to sell off giant plants employing thousands of people, but it envisions selling off 60% of small state businesses by the end of this year. Minutes after the opening speech, Lot No. 1, the Sofia Shop--a run-down outlet by Western standards that sells mainly imported clothes and cigarettes--went under the hammer.

The Sofia Shop’s starting price was 150,000 Ukrainian karbovanets ($75). To gasps of amazement, it was ultimately bought by the shop’s manager for 25 million karbovanets ($12,500).

The next shop, offered for 250,000 karbovanets, went for 110 million ($55,000).

“From small beginnings we hope to encourage an irreversible move to the market,” said Roberta Feldman, the Lvov auction’s project manager for the International Finance Corp., the private-sector arm of the World Bank.

Feldman said the prices, which exceeded the conservative hopes of the IFC, were proof that “there is a lot of money locked up in the (Commonwealth of Independent States). The cash may be under mattresses, or it may be in banks, but wherever it is, it wants somewhere to go.”

The total sale price for the 17 properties offered Saturday was 784 million karbovanets, just under $400,000.

Many buyers came from the work collectives of the stores themselves, and got special advantages on payment terms, although some represented joint ventures. Oleg Gorbachuk, a businessman who manages a Lvov sausage factory, celebrated his first buy with a shot of vodka.

“The outlet is opposite the foreign students’ dormitory so we hope to get a lot of hard currency sales,” he said. “We have the money to buy another five.”

Another buyer, Valery Kobits, flashing his gold teeth in satisfaction, said that he had bought three shops, one costing 28 million karbovanets. “I’d like to buy all the shops on sale,” said Kobits, who runs a U.S.-Ukrainian joint venture from his wife’s home in Chicago.

According to Ukrainian law, the money raised by the auction will go to fund further sales of state property.

Although the Ukrainian program has started well, it is not only late by the standards of the country’s neighbors but there is some doubt about whether legal privatization, sponsored by the IFC and other Western institutions like the European Bank of Reconstruction and Development, can produce the snowball effect needed to move Ukraine from socialism to stable capitalism.

Up to now, a key feature of economic life in Ukraine has been what Russians call prikhvatizatsia , or grab-ization, whereby former Soviet managers and their shady contacts mark out shops they consider their property and prevent their being auctioned.

THe IFC team in Lvov said they are confident that the recent governmental changes in Ukraine augur well for real privatization.

The delay in Ukraine’s program was caused by a mixture of central government intransigence and local corruption. In contrast, an IFC team that oversaw privatization in the Russian city of Nizhny Novgorod was in and out in less than two months.

“It now appears that we have finally got the political backing that we were hoping for. We have reached agreement that Lvov will move immediately with further auctions,” said Anthony Doran, the IFC manager for the Commonwealth of Independent States, which includes most of the former Soviet republics.

The stance taken by Ukraine’s recently appointed prime minister, Leonid Kuchma, was one of the key reasons behind the republic’s change in attitude.

“Prime Minister Kuchma is very positive about privatization,” said Edward Nasim, IFC’s European director, who met with the Ukrainian leader last week.